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Yanzhou Bids for Felix Resources Case Solution

Solution Id Length Case Author Case Publisher
1441 1352 Words (6 Pages) Michael Moffett Thunderbird School of Global Management : TB0279
This solution includes: A Word File A Word File and An Excel File An Excel File

The Chinese economy is growing day by day and China consumed 43% of the global coal resources in 2008 as compared to 7% of global resources in the year 2007. In the year, 2008 the demand for thermal or steam coal and coking coal rose drastically. Steam coal or thermal coal is used for the generation of electricity. In China, 80% of electricity is generated by coal. Coking coal is used for the production of steel. As per a survey, the demand for Thermal coal was expected to grow at a rate of 3.5% per annum till 2035 and coking coal demand to rise at a rate of 2% per annum.

Following questions are answered in this case study solution

  1. What economic and political forces are driving Chinese coal companies to look outside China for new resources?

  2. Is Felix Resources an attractive target? How so?

  3. Is this a friendly or hostile acquisition?

  4. What is Felix worth? What is the company worth according to various valuation methods commonly used in the coal industry?

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Case Analysis for Yanzhou Bids for Felix Resources Case Solution

During the same time as the demand for coal rose the government but a ban on the export of coal .In February 2008, an export tax of 13% was levied on existing commitments to export coal. Meanwhile, the Chinese government had ordered people to close 15000 small coal mines as a huge amount of deaths had occurred due to the unsafe working conditions. China itself produced 14% of the global coal and the remaining coal deposits were extreme north or west of China which were not easily accessible.

Apart from strict conditions to export coal and taxes on exporting and closing down of many coal mines demand continued to rise which led Chinese producers to move towards new markets for coal.

2. Is Felix Resources an attractive target? How so?

Felix Resources Limited of Austalia (FLX.AU) was the 12th largest coal mining firm in 2009.Felix was expected to earn a profit of AUD 260 Million and total sales were expected to be approximately AUD 680 Million. As Australia has an excess of production of coal that it requires most companies like Felix had sold their production to export markets like South Korea, Japan and now ,China.

Exhibit 2. Felix Resources Coal Reserves

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserves (million tonnes)  Remaining

 

 

 

Mines Under Operation

Interest

Proved 

Probable

Total

(years)

Coal Products

 

Ashton open-cut coal mine

60%

29.2

19.9

49.1

17

semi-soft coking coal

 

Ashton underground coal mine

60%

23.5

23.9

47.4

14

semi-soft coking coal

 

Minerva open-cut coal mine

51%

13.6

15.2

28.8

11

thermal coal

 

Yarrabee open-cut coal mine

100%

26.1

1.4

27.5

10

pulverized coal inject, thermal

 

 

 

 

 

 

 

 

 

Mines Under Development

 

 

 

 

 

 

 

Moolarben open-cut coal mine

80%

40.4

237.3

277.7

20+

thermal coal

 

Moolarben underground coal mine

80%

44.1

35

79.1

20+

thermal coal

 

 

 

 

 

 

 

 

 

Total

 

176.9

332.7

509.6

 

 

 

Equity Volume

 

132.3

253.3

385.5

 

 

 

Exhibit 2 above shows that most coal in the Felix coal mines is coking coal and thermal coal that is highly in demand in China .Apart from that the coal from Felix has a low content of sulphur that will help to reach the goal of reducing carbon emissions in China by 40% till the year 2020.

Appendix 1. Felix Resources Limited, Income Statements

 

 

 

 

For the year ended 30 June (000s AUD)

2008

2009

 

 

 

Revenue

451,870

755,548

Other income

124,331

18,269

Changes in coal inventory

8,372

10,654

Raw materials and consumables used

(67,031)

(83,533)

Employee benefits expense

(45,366)

(67,568)

Depreciation and amortisation expense

(28,639)

(31,374)

Transportation expense

(63,289)

(64,171)

Contractual services and plant hire expense

(88,966)

(104,376)

Government royalites expense

(25,277)

(56,646)

Changes in overburden in advance

7,521

5,074

All other operating expenses

(10,709)

(8,755)

Finance costs

(8,521)

(4,303)

Share of net profits/(losses) of associates

(17)

21

Profit/(loss) before income tax

254,279

368,840

 

 

 

Income tax (expense)/revenue

(65,819)

(101,222)

Profit for the year from continuing operations

188,460

267,618

 

 

 

Profit is attributable to:

 

 

Members of Felix Resources Limited

188,261

267,428

Minority interest

199

190

 

 

 

 

Cents

Cents

Basic earnings per share

95.92

136.18

Diluted earnings per share

95.85

136.01

Dividends paid per share

9.00

73.00

 

 

 

Source: Felix Resources, Ltd., Annual Report, 2008, 2009.

 

In Appendix, 1 attached above you can compare the performance of  Felix from 2008 to 2009 .If you see the revenue increased from 451,870 in 2008 to 755,548 in 2009 which is a growth of 69% .The profit has also increased to 267,618 from 188,460  by 42% from the previous year.

The balance sheet also shows a positive outlook on the business where investments in derivates have been taken out and liquidity position has also improved .Moreover, the retained profit amount has also improved which can help in investing further.

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