Metal, Mining and the Consumer Industry: A Top -Down Valuation Process

4126 words 17 pages

The report uses a top-down valuation process to examine the Australian economy, the metal and mining and consumer industries and analyses BHP Billiton Limited and Woolworths Limited. Variables affecting the Australian economy are inflation and interest rates; the gross domestic product; the exchange rate; and economic risks. The metal and mining industry is the largest sector in Australia and the consumer industry is the third largest sector. The present value of the dividend model and the present value of the operating free cash flow were used to evaluate BHP Billiton Limited and Woolworths Limited. Based on the dividend model and the present value of the operating free cash
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However, the underperformance of this industry is only short term around a positive long term outlook. The CEO of Rio Tinto, Albanese (cited in Stewart, 2012) and Rumble (2012), both agree the long term demand for commodities will be unchanged due to the expansion of emerging markets, which are key importers of Australia's commodities such as China and India, after the Global Financial Crisis (GFC) linked to the urbanisation and industrialisation. In addition, it is expected that advanced technology adopted by many local miners will lead to cost reduction and higher efficiency (Heber, 2013).
The mining industry is a cyclical industry since its performance is close to the economy situation (Robinson, 1991). Therefore, it is an appealing investment opportunity for investors who seek greater than average returns when the economy is booming. In addition, the capacity of the Australian mining industry increased to $260.8 billion in April 2012 (BREE, 2012). This trend will keep increasing by 11% per year during 2013 and 2014 (Janda, 2013). Subsequently, the supply will improve in order to match the higher future demand. Also, the cash rate remaining at 2.75%, which may be cut further by the RBA, is the lowest since the GFC. This will benefit the metal and mining industry in terms of cost reduction as the industry requires more


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