Analysis And Recommendation Report: Comparison Between Newcrest Mining And Orica Limited

Loan analysis

1. The relevant data is shown below

 Let the extra fund required would be taken from the same bank and thus, it can be concluded that there is no need to maintain the conditional amount in the bank. Because, the total final fund would be credited in the account only and it would be considered as a total security on the financial assistance taken.  

 Interest paid on rate of interest would be given as

The total interest paid after three months of the loan period would be determined as Based on the above computation it is apparent that the total interest paid after three months of the loan comes out less and thus, it is classified a good option. 

Expected return on market portfolio on shares

 Market portfolio beta on shares

Graph – Security market line along with share portfolio

Line equation can be obtained by applying CAPM model.

The security market line would have intercept of 7 and slope of 8.5.

Three shares that would be classified as the winner are given as

1. Harvey Norman Limited
2. Qantas Airways Limited
3. BHP Billiton Limited

Two shares that would be classified as the losers are given as

1. National Australia Bank
2. Origin Energy Limited
3. Even though from the given data, some of the stocks have been identified as winners and losers but in reality going ahead this may not be true as the future returns may be independent of the past performance. Also, even if the company internally continues to remain sound, the performance is also to a large extent driven by external factors beyond the control of the company (Payne & Gullifer, 2015).

The given report intends to provide direction in relation to the better investment between the options presented i.e. Orica Limited and Newcrest Mining by considering the past performance and the expected performance going ahead considering the investment horizon of the investor.

For the shareholders, returns would essentially be derived in two forms namely dividend proceeds and capital appreciation (Damodaran, 2010). The recent performance of the two stocks in this regard needs to be briefly discussed. For Orica Limited, there has been a steep decline in dividends in the last couple of years which indicates that the profit generation capacity of the business is adversely impacted. However, for Newcrest Mining, things are worse in relation to dividend as the company has not paid any dividends in the last three years (Yahoo Finance, 2010).

The lacklustre performance of the companies on dividend front may be attributed to the general slump observed in mining sector as a result of the falling prices of various metals and minerals as global demand has declined (Orica, 2016). In terms of capital appreciation, in the year FY2016, the performance of Newcrest Mining has been far superior when compared with Orica Limited (Yahoo Finance, 2017).

However, this difference in performance to a great extent stems from the business model differences. Newcrest is a gold mining company unlike Orica which provides explosives to mining companies. Gold unlike other metals and minerals has not witnessed a steep decline as it is also used for investment especially when the other asset classes are underperforming (Newcrest, 2016). As a result, Newcrest stock has outperformed Orica stock.  In the attached annexure, the intrinsic prices of the two companies have been computed which reflect that Newcrest stock is higher overvalued primarily on account of the recent rally in the stock while Orica is comparatively near to the intrinsic price (Payne & Gullifer, 2015).

The future potential of the two stocks also needs to be discussed. The Orica stock seems to have higher upside potential in comparison with the Newcrest stock with the investment horizon of ten years. This is because during this period the commodity prices would surely recover and so would the mining companies which would lead to creation of incremental demand thus enhancing the earnings of the company. On the other hand, gold prices are not expected to post any spectacular rally especially as the global economic climate is gradually improving led by the US. Thus, it makes sense for the investor to choose Orica Limited over Newcrest Mining for investment.

References

Damodaran, A. (2010) Applied corporate finance: A user’s manual (3^rd ed.). New York: Wiley, John & Sons.

NewCrest (2016), Annual Report FY2016, Retrieved on April 17, 2017 from https://www.newcrest.com.au/investors/reports/annual/2016-annual-report 

Orica (2016), Annual Report FY2016, Retrieved on April 17, 2017 from https://www.orica.com/Investors/company-reports#.WPOFjUWGPIU 

Payne, J. & Gullifer, L. (2015) Corporate finance law: Principles and policy (4^th ed.). Oxford, United Kingdom: Hart Publishing

Reuters (2017), Company Quote, Retrieved on April 17, 2017 from www.reuters.com/finance/stocks 

Yahoo Finance (2017), Historical Prices, Retrieved on April 17, 2017 from https://au.finance.yahoo.com/historical.