Экономические науки / 9. Экономика промышленности

Zh. Saikenova, L. Sorokina

D. Seribayev East Kazakhstan State Technical University

Impact of industrial specifics on the business value of mining companies

Mining is one of the most important sectors of the economy because the mineral resource potential of any state determines the efficiency of all industries and levels of development of the social sphere, defining the country's place in the world economic system [1].

Scientific and research policy of the Republic of Kazakhstan nowadays is focused on the concentration of resources on priority areas of the economical development, determined by the priority state scientific and technical programs [2]. The implementation of these programs is aimed at improving the efficiency of the economic potential, overcoming the raw orientation of industry, strengthening the export expansion of the country and consolidation of its position in the international market. Also they are aimed at the development of import substitution industries on the basis of active innovation, improving the technical level of production, the formation of a complete process cycle with the release of the finished product. Strategic objectives for the next decade include the maximum use of the traditional advantages of Kazakhstan, which include the development of mineral resources.

The Republic of Kazakhstan has commercial reserves of 3 ferrous metals, 29 color metals, 2 precious metals and 84 kinds of industrial minerals and energy sources [2].

The relation of the world economy to the raw material component of the national economy is not negative. This is clearly seen from the fact that from the 200 largest companies in the world to the commodity sector belong 90, they accounted for more than 80% of total sales of products [2]. The largest countries in the world, belonging to the leaders of the world producers of minerals are the United States of America, Australia, South Africa, Canada, China and Russia. High level of economic development in most of these countries achieved through intensification of production and processing of their own natural resources (Canada, Australia) [1].

Mining and Metals continue to be among the most effective global sectors in the equity, but problems such as «imminent recession», «decline in demand», «lack of resources» are confusing investors. Nevertheless, in recent years the importance of mining in the world became apparent, as both commodity and stock prices exceeded all expectations. It must be remembered that investments in commodities more attractive as long-term investments, as they are a haven in times of economic crisis and provide protection against currency devaluation. Therefore, it is useful to know how to evaluate the metals and mining company.

Forecasting the cost of mining is a complex issue. There are various methods for the valuation of the company, but many of them do not apply in the assessment of mining companies. The reason is the specificity of the mining industry. In addition, to the usual risk financing manufacturers of mining and exploration companies funding, there are also the notion of cyclicity, ongoing changes in operating and capital cost structures.

Consequently, even the traditional methods such as discounted cash flow, method of real options cannot be applied without some adjustments and demarcations. Also be aware that the use of different methods of business valuation of commodity companies is a complicated process because of the high cyclicity of mining industry. In the practice of the enterprises of this sector there are two cycle: cycle «The price of raw materials» and «economic cycle». First feature is that commodity companies (mostly) collect data on the prices of minerals, except for nickel and ferrum manufacturers since such companies can determine the price of raw materials by changing the amount of their production. They are characterized by high volatility of income and cash flows for several years because of the large changes in the prices of mining products company [3].

The evaluation results will largely depend on the economic cycle. When the price of raw materials in the growth phase or boom phase, all producers have their profit, while the economic recession or a prolonged phase of low commodity prices negatively affect even the best companies in the business. Consequently, companies are subjected to cyclical commodity risk, which is difficult to control.

On the cost of raw materials affect not only the price of raw materials, but also the expected volatility in commodity prices. Raw materials companies experience greater price volatility than producers of goods or services. This leads to a decrease in revenues, profits and cash flows of commodity companies. Another feature is a high fixed cost, so even during the crisis mines will work. The reason for this is the extremely high cost of closing and reopening the mine. It must be remembered that the mining industry has long-term administration to reach new capacity. The process of developing the mine is very specific and usually takes an average of 5 - 10 years or more. The consequence of extended periods mining projects is the sufficiently large number of different risks, depending on the specific project situations.

The most serious risks are:

- Financial risks: own or loans (interest rate hedging, requirement of creditors);

- Issues related to geology (the size and grade of the extracted ore body);

- Metallurgy (often underestimated how much metal can be restored, which recovery method is preferable, or whether there are impurities associated minerals);

- The economy (metallurgy market forecasting , transportation costs, interest rates);

- Macroeconomic risk (country), in particular:

a) political risk (internal policy of the country, the legal framework of the state, environmental policy);

b) the economic risk (currency stability, foreign exchange restrictions);

- Social risks (corruption, the presence of workers and local labor laws, ethnic or religious differences, etc) [2].

In practice of evaluation activity known three business valuation approaches that are used for three main categories of reservoir properties (for exploration, field development and production of raw materials).

Exploration work on the mine means works which have not been demonstrated economic viability of a mineral deposit. The real value of intelligence is the ability to detect the existence and economically viable mineral deposits. Only a very small number of deposits eventually lead to production raw material and therefore, while mine is not well developed, they have a high cost.

Development of mine demonstrates the economic viability of deposits, technically and economically justified but that still is not funded or in stage of development. Usually those are mines that have already been developed or are at an advanced stage of development.

Efficiency of the mining enterprise is largely due to a successful combination of economic and geographic factors, resulting in rental income nature of the enterprise. Due to the fact that stocks of mine can be determined accurately only on the completion of mining production relates to business risk. It can be identified as common to all enterprises factors and specific due to the characteristic mineral deposits among the factors of the cost of mining enterprise: the quantity, quality and accuracy of evaluation used method and mining technology, geological characteristics of the deposit, the life of the deposit, annual production, the price of the resource capacity of the market and demand for the resource market, the state subsoil use.

Since the lifetime of a mining enterprise is finite, the use of traditional valuation models can not be of continuing value. Discounting the annual cash flows should be made for the entire period of life of the mining enterprise. To simplify this procedure is permissible to share the life of the period and the remaining detailed forecast period, accounting for the residual period enlarged forecast.

To account for the optional features undeveloped mine, a combination of methods to assess a business associated with the extraction of developed reserves, evaluate traditional methods of assessment, the business associated with the extraction of undeveloped reserves, considered as an option to delay and use it for evaluation methods of real options.

Using a comparative approach the main criteria for comparing are types and subtypes of the mineral, mining method, the stage of economic life and financial condition. Particularly useful are the multipliers for calculating revenues and profits from sales, calculated on the capital invested. Sectoral multipliers are mainly use for reference [3].

Application of the cost approach is characterized by the fact that within its framework determined by the value in use due to the lack of an active market for major property assets of the enterprise, as well as the fact that the industrial estate has reduced liquidity (or characterized by its absence) in isolation from the field.

The most important asset of a mining enterprise is the right to use subsoil due to national peculiarities of accounting largely underestimated. As a result, there is a problem before the appraiser determine the market value of intangible assets, a decision which significantly hampered by the lack of economic turnover subsoil rights. Preferred routes evaluation of these rights is to use the results of economic evaluation of reserves held by the auditors of mineral resources, if it is missing a self-assessment inventory by compiling economic balance based on the results of the income approach to valuing a business.

All of the above leads to the conclusion that in modern conditions to assess the mining enterprise most preferred methods are the methods of evaluation of the income approach, as they allow to take into account the influence of factors of value, due to specific mineral deposits.

Literature sources:

1 Brebner / Tanners / Snowdowne, UBS Investment research, June 2008.

2 Seidaliev AS, Lazarev, EA, IA Semiletova Current state in mining and metallurgical industry of Kazakhstan: Anal. review. Almaty: KazGosINTI, 2010.

3 Capinski M., Patena W. Real options Realistic valuation, 2011.