You are required to study the information provided below concerning a Namibian listed company called Deep Yellow
You are required to study the information provided below concerning a Namibian listed company called Deep Yellow Limited, that operates in the mining industry. You should compile a report based on your analysis of the case study below. The objectives of your analysis and the report are:
- To analyse the financial status of the company, with the help of the latest available annual reports (In this case, conducting the analysis based on annual report published in 2019).
- To analyse the statements of financial position (SOFP) and profit or loss (SOPL) for 2019
- To analyse the different financial ratios for 2019 and 2018.
- To estimate the weighted average cost of capital of the company for use for the evaluation of proposed capital projects.
- Data source: source of data for this report is the annual reports of the company which is a secondary source.
- Industry analysis.
- Statistical Techniques: For your analysis, please use the different kind of graphs to depict trend.
- The period under consideration is 2019: meaning that for ratio analysis, you look at two-year data. Should any additional reports be required for your analysis, then you can include and indicate which reports you used.
- You should make use of only publicly available information such as the Namibia Stock Exchange and the Websites of the companies to aid the case below.
THE CASE OF DEEP YELLOW LIMITED
Deep Yellow Limited (ASX:DYL) is a specialist uranium company implementing a new strategy to grow shareholder wealth. This strategy is founded upon growing the existing uranium resources across the Company’s uranium projects in Namibia and the pursuit of accretive, counter-cyclical acquisitions to build a geographically diverse asset portfolio. In parallel to its expansion objectives, the Company has a cornerstone suite of projects in Namibia, a top-ranked African mining destination with a long, well regarded history of safely and effectively developing and regulating its considerable uranium mining industry. Deep Yellow holds four contiguous Exclusive Prospecting Licences (EPLs) covering 1,730km2 within the heart of what is a world recognised, prospective uranium province of high significance. The tenements are strategically located amongst the major uranium mines of this region – 20km south of the Husab/Rössing deposits and 40km southwest of the Langer Heinrich deposit. Previous exploration has delineated a current resource base of 50.1Mlb U308 @ 245ppm (palaeochannel related/Langer Heinrich style deposits) and 45.1Mlb U308 @ 420ppm (alaskite related Rössing and Husab style deposits). The belief of current management is that these resources can be enhanced significantly and the 2018 exploration programme has already achieved a new discovery.
Since the appointment of John Borshoff as CEO and Managing Director in October 2016, the Company has set a new direction built around a robust strategy to grow shareholder wealth. This realignment is designed firstly to establish the true potential of its Namibian projects and secondly to take advantage of prevailing depressed uranium market conditions to opportunistically acquire value adding projects and it has already delivered tangible results. The first pillar of the new strategy is to grow resources across Deep Yellow’s existing uranium assets in Namibia and a number of significant achievements have been made in this respect. This includes a landmark $4.5m earn-in joint venture by the Japanese group JOGMEC and importantly, the discovery of a new uranium deposit (Tumas 3) in April 2018 during the early stages of a 10,000m drilling programme on Deep Yellow’s 100% owned ground. Numerous new targets remain to be tested along a 100km highly prospective palaeochannel system that has been identified. The second pillar of the Company’s strategy is to establish a global, multi-project, geographically diverse uranium platform through the pursuit of selective, value accretive acquisitions. The Board believes long-term shareholder value can be created by adopting a counter-cyclical approach in the current low uranium price environment.
Mining sector has remained the bedrock of the Namibian economy in all conditions of the economy – in good times and in turbulent times as seen in the last 2 yrs. The mining sector recorded a healthy growth in 2018 (12.2%) on the back of a combination of a rebound in commodity prices and an increase in production of diamonds, gold and uranium. New mines being developed are smaller in nature. However, their combined contribution will make a positive impact, particularly in spin offs to rest of the economy. There is a major potential for growth of mining input and service industry in the upstream linkages with lucrative local procurement spend. Industry has sustained a local spend in excess of N$ 11. billion/year in the last 3 years. Industry commitment to supporting local suppliers of goods and services and growing the job market. Outlook for commodity prices is extremely positive; 2019 opened with the gold price breaching US$1,300/oz, copper breaching US$7,000/mt and zinc above US$3,400/mt. Electric motor vehicles and renewable energy storage solutions are driving demand for commodities. The battery component of electric motor vehicles is made from an array of minerals, namely; cobalt, lithium, graphite, rare earths and nickel. Copper requirements in such cars are 20% more than conventional vehicles. This is extremely positive in that it will drive Namibian exploration for years to come.
ANALYSTS OPTIMISTIC ABOUT MINING
The outlook for the mining industry is generally positive, although some downward risks still exists, says the senior manager of research and development at FNB, Daniel Motinga. He says the risk will mainly come from the slow down in the Chinese economy which has a deflationary effect on commodity prices. The second risk will come from domestic sources such as industrial action at some of the major mines. Independent economist, Klaus Schade said that he expects output from diamond mining to stay the same as last year while copper production will increase after the resumption of copper mining at Ojtihase and Matchless mines last year. Motinga, however believes a significant share of the mining sector’s contribution to GDP will probably come from the uranium subsector. He said while it is difficult to quantify the full benefit of uranium to the economy at this stage, he estimates that uranium output will increase by around 10% this year. Schade, like Motinga is optimistic about the increase in uranium production, compared to last year’s low production which was largely as a result of the adverse weather conditions and industrial action. He says uranium production is also expected to increase after the completion of Stage 3 of the expansion of the Langer Heinrich Uranium Mine. Although mining companies have been hit by the fuel increments effected since the beginning of the year, Motinga said mining companies are taking out fuel hedges to manage this risk. “On a positive note, we are seeing a decline in international oil prices which bodes well for energy/fuel intensive producers,” he says to ensure that Namibia continues to be globally competitive, the FNB economist suggests that the country needs to provide a conducive and welcoming investment climate. Schade also says that it is important to provide investors with a stable and predictable policy environment. “We need therefore to engage the business community through their associations in the development of new policies to maintain a conducive policy environment,” he advises. Schade reasons that macro-economic stability and fiscal discipline remains Namibia’s biggest assets despite relatively high budget deficits currently owing to expansionary budgets. He says the constant upgrades of our infrastructure, transport, communication, energy and water will ensure that we stay competitive. “The link to the West African Cable System will improve our communication infrastructure, the planned expansion of the Walvis Bay harbour will ensure that the port can handle all incoming and outgoing shipments efficiently.”Schade stresses on the need to improve the skills of the local workforce in order to attract more investment and the need to start investing into skills that will be required by offshore gas and oil exploration companies if they discover deposits. “We need to look into our labour laws and balance workers protection and workers rights with the degree of flexibility and labour productivity expected by investors.” The figures below are in million of dollars.
Statement of profit or loss for the year ended 31 December 2019: 2019 2018
Sales 80 000 120 000 less:
Cost of sales Opening inventory 25 000 22 500
Add: Purchases 50 000 91 000 75 000 113 500
Less: Closing inventory -15 000 -60 000 -17 500 -96 000
Gross profit 20 000 24 000 Less: Depreciation 1 000 3 000
Other expenses 90 000 -10 000 6 000 -9 000
Profit for the year 10 000 15 000
Statement of financial position as at 31 December 2019 2019 2018
Non-current assets Equipment at cost 10 000 20 000
Accumulated depreciation -8 000 -6 000 2 000 14 000
Current assets Inventory 15 000 17 500
Receivables 25 000 20 000
Bank 5 000 45 000 2 500 40 000 47 000 54 000
Equity: 42 000 44 000 Capital 38 000 36 000
Profit for the year 10 000 15 000
Drawings -6 000 -7 000
Accounts payable 5 000 10 000 47 000 54 000
Deep Yellow Ltd issued corporate bonds with a coupon rate of 8.0%.
The face value is N$100 and the bond is stated on the statement of financial position at its total par value of N$80m. The bonds are currently trading at a price of N$94. Interest is payable annually in arrears. The maturity date is in five years’ time.
The company has also issued variable loan finance of N$10m at a current interest rate of 9.0% per year. The company has 200 000 preference shares at its N$95 – per – share par value. The cost of issuing and selling the preference share is expected to be N$5 per share. Preference dividends are payable annually in arrears. The non-redeemable preference shares are currently priced at N$106. The dividend rate is 7.8% and the company has recently paid the preference dividends for the current year.
The company’s equity beta is 1.15 and the risk-free rate is 6%. The company uses a market premium of 6.5% as this is the average between 5-8 which is the range of the market risk premium recommended by some analysts. The current share price is N$3.20 and the company has 30 million ordinary shares in issue.