Implied Exchange ratio analysis : Essentially you assume an all-stock transaction and divide the targets price per share by the acquirers price per share. Out of the mines and Into the molehill? Q: so what should our readers look at if theyre interested in metals and mining? A: For starters, the Bloomberg command mett go provides mining sector news. Financial Times, The Economist, wall Street Journal, and the book fisher Investments on Materials are all good resources. Going beyond the usual suspects, big four accounting firms such as Ernst Young do publish thought pieces on the sector. In terms of industry newsletters, you should look at Metal Miner, metal Bulletin, and Platts. If you want something from an investment bank, run a search for hsbc metals quarterly.
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What really drives valuation for mining companies, though? You see there are a lot of approximations around how much of a mineral a mining company can produce, and thats because theyre using the visit production levels to approximate cash flow. The values of these individual mining projects contribute to the total value of the company. If you are going to acquire a mining company, youre essentially buying land, equipment, and the management know-how to tap resources assuming, of course, that the top brass stays essay at the firm following the integration. A press release on the discovery or confirmation of a mines potential will lead a companys stock price to pop. Q: Got pitch books? A: Sure, here are a few you can look at: Also, refer to the following valuation letters and fairness opinions: As you can see in the Alpha natural Resources / Massey energy pair of fairness opinions, the valuation metrics can be very similar to those. Youve got ev / ebitda and Price / eps. To the list of valuation approaches, you could add: Illustrative future Stock Price : Start with Historical Enterprise value / ntm ebitda, and find out the average share price. Use a multiple to find the future enterprise value, and from there calculate the average share price again. Convert it into todays currency using the cost of Equity (see: page 105 of Alpha natural Resources / Massey energy).
Development CapEx Then there are different ways of looking at transaction metrics for both mining projects and mining companies. For mining projects, you might look at Precedent Premium Analysis (for 1-month, 1-week, 1-day, and so summary on). The numbers there would be affected by the Approach hostile deals usually have higher premiums than Friendly deals the Stage (development, Production, or Mix) you would pay more for a more certain cash flow stream and the commodity (Copper, gold, Aluminum, etc.). The following metrics and multiples are specific to company acquisitions : Tangible Asset Backing: Corporate acquirers use this framework to determine the value-add of what was acquired. This approach assumes the targets machinery is still in use. Multiple of Net Assets Market Price / Gross Cash Flow For the diversified companies, it may be useful to compare the npv (asset sum taking out debt and cash) to a sum-of-the-parts analysis. Ive seen a couple variations on the latter; some analysts like to compute a dcf value for each division (NB: use ebitda capex as a proxy for fcf while others like to collect a set of trading comparables and multiply their range by the ebitda. Q: Wow, i cant imagine that anyone will actually mine for more metrics or multiples after all that.
Technical reports are based on Reserves because they are more conservative, but investors also look to resources for a truer picture of what the companys assets might be worth. Its similar to what oil gas companies do with their reserves, but there are more categories and sub-categories the here because theres more subtlety with determining whether or not mineral resources are truly viable and there may be more steps to complete when extracting them. Operating Metrics for Mining Projects include: Mineral. Grade: Essentially the concentration of the desired mineral. Its just the ratio of the amount of mineral desired / (amount of mineral desired unwanted ore). Stage: How far along the mining project has progressed. If youre interested in equity capital markets, or equity origination, less certain projects might be of interest to traders and speculators; more stable projects are of interest to institutional buyers (ex: endowments, pensions funds, etc.). The stages include Scoping Study (for early-stage projects includes inferred resources Pre-feasibility (Stricter calculation requirements and includes reserves and resources feasibility, construction, and In-Production. Average mineral Production Reserves and Resources Composition Cash Cost of Net Product Sold, by product (Currency / Mineral This is similar to cost of goods Sold for manufacturing or retail companies it would include all of the expenses for producing each unit of mineral, plus.
7) : Portfolio summary of what a mining companys business entails. Reserves and Resources : Reserves are minerals that are more certain to be extractable and to hold value thats confirmed by an assessor. You go through a process of converting metals into equivalent units so you can compare, for example, a copper producer to a gold producer. And you would use the following multiples for Reserves and Resources: Enterprise value / Mineral. copper Equivalent) Reserves Enterprise value / Mineral. Resources With mining, there is also a distinction between Resources and Reserves reserves are more likely to be extracted from the ground. Reserves can be split into measured and Indicated categories (often abbreviated to m i, how fitting while resources can be split into measured, Indicated, and Inferred.
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The applications for gold include investment and fabrication (ex: jewelry and decorative uses). Gold owned by governments, corporations, and individuals contribute to the gold supply supported by mining operations. Silver: (key players: Silver Wheaton, pan American Silver Corp, coeur DAlenes) The demand for silver is fueled by its most common uses coins and awards, household wares, industrial uses, and photography. Q: That was a pretty thorough walkthrough of your coverage universe. But the name of the game is metals and mining where are diamonds in all this? Were and they stolen in a heist?
A: Some banks have a coverage team devoted to this area. You know how San Francisco is home to technology investment banks, and New York has plenty of financial institutions groups (FIG) bankers ; south Africa is where its at when it comes to diamonds. Standard Chartered actually has a team there devoted to diamonds and jewelry coverage. Mining Equipment Equivalents: your Transferable skills Q: so how do analysts and associates compare mining companies or mining projects to each other? A: Lets start with a few trading multiples and operating metrics: Comparable company metrics include: Price / nav (Net Asset Value with this one, you value the mining companys assets (gold, silver, etc. subtract its liabilities and divide by the share count to get navps. Price / npv: (Shown as a percent) dividend yield Commodity Exposure (see.
Not surprisingly, diesel, coal, natural gas, and electricity are important inputs. Copper demand reflects construction and industrial production. Mining operations output and recycled scrap material contribute to the supply of copper (source: Newmont Mining company filings). Copper is a dominant component used in infrastructure and electrical applications (source: Brook hunt). Iron/Steel: (key players: Arcelor Mittal, gerdau, nucor) These producers compete on quality, cost, and innovation (research for new uses of the minerals). The demand-side factors, as with any industrial item, include inventory levels, currency fluctuations, and import/export activity.
The raw materials here include iron ore, sinter ore, coal, coke, and steel scrap (source: us steel company filings). Flat rolled products are a dominant component used in automotive parts and construction products. Tubular goods are heavily used in oil/gas operations. Nickel: (key players: Norilsk nickel) Applications include the production of stainless steel and in the creation of alloys. Compared to other base metals, nickel is a dominant component used in consumer durables and industrial equipment. Zinc: This mineral can be used in batteries or in the creation of alloys; its also used as a catalyst and in the production of white paint. Compared to other base metals, zinc is a dominant component used in construction. Precious Metals: Gold : (key players: Barrick, goldcorp, newmont Mining) This might come as a surprise to you, but the end product of a gold miner is not gold, but doré bars. These items are made of gold, silver, and other minerals, and are then sent off to refiners to be finished into what you and I would expect to see.
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Moving to a broader perspective, the universe can be divided into these sectors: diversified: (key players: Glencore, vale, bhp billiton, Anglo American) bmo capital Markets noted that holding companies such as Glencore trade at a discount to the sum of their asset values due. (NB: For an in-depth overview of the market for any of the following minerals, please refer to the us geological Surveys Mineral Information ) Base metals: Aluminum : (key players: Alcoa, uc rusal, China Aluminum Corp chalco) Historically, producers in this area have selected capacity. In the case of alumina, proposal the input costs include fuel oil, natural gas, caustic soda, and bauxite. For primary aluminum, the inputs are alumina, electricity, carbon, and materials (source: Alcoa company data). Compared to other base metals, aluminum is a dominant component used in transportation and packaging. If youre asking about the price of aluminum, youll need to refer to the london Metals Exchange. Copper : (key players: Freeport McMoran, southern Copper) In contrast essay to aluminum, the new York mercantile Exchange (comex) and the Shanghai futures Exchange (shfe) also influence the price of this mineral.
And there are plenty of other examples such as a us marine corps officer joining an aerospace/defense banking coverage group. Really, the sky is the limit when it comes to your story, so put on your thinking cap and summary learn to spin your way into sounding relevant. Metals and Mining 101: Scoping the Project to Assure value q: so what does your coverage universe look like? And where do you find metals and mining groups at banks? A: my group can be found in the industrials group, the natural resources group, or in a team called basic materials so really, we could turn up anywhere. Geopolitical factors aside, the main demand-side factor with any mineral is end use, while supply-side factors include operational issues, production constraints, and capacity. Production constraints arent a limit on machinery; its a limit imposed by a sort of collusion among producers. For example, if theres too much aluminum in the market, producers will agree to limit production to prevent further declines in the minerals price. Its similar to what opec does for oil, only it doesnt seem as controversial since aluminum prices attract less attention.
topics, including operating and valuation metrics for both companies and mines. Life after getting out of the most underground banking department, now, off to the mines, out of the Classroom and Into the mines. Q: Where do metals/mining bankers come from? Most people in my group were placed here through the campus recruiting process, and some of the senior bankers lateraled over from other banks m a departments. One guy i know was even recruited from the. Colorado School of Mines. The backgrounds here really run the gamut, and a geology background is neither necessary nor sufficient. It may help to shape your story, but that can easily be accomplished with other means (ex: extracurriculars). I read an article about how a senior financial institutions banker was inspired to pursue the calling based on her familys ownership of a private banking business.
A colleague of mine once put it more colorfully: Im not a big deal. I just close them. Most bankers would agree that they got into the field to affect great change in a sector through strategic decisions (e.g. Mergers and acquisitions) or at least, thats what literature they told the interviewers. And its hard to beat the basic materials sector if you want to make big changes: where else could you buy and sell entire gold or diamond mines? Basic materials refers to discovering raw materials and processing them; the 3 main sectors are i) metals and mining, ii) paper, packaging and forestry products, and iii) chemicals. Its sort of like a collaboration between industrials and natural resources, with an emphasis on cross-border transactions.
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