ECONOMIOC ANALYSIS OF THE COPPER MINING INDUSDRY OF
IRAN
Kazem Oraee, PhD
Professor, Stirling University, Stirling, UK, E-mail: sko1@stir.ac.uk
Arash Goodarzi, MSc
Research Fellow, Ministry of Labor and Social Affairs, Tehran, Iran, E-mail:
arash_good@yahoo.com
Nikzad Oraee-Mirzamani, LL.B., M.Sc., D.I.C.
Research Student, Imperial College London, London, UK, Email: N.Oraee10@imperial.ac.uk
Abstract
Mining of copper ore and the related
industries play an important role in Iran’s
economy. Copper ore production in Iran
accounts for 75% of the total production in the
Middle East. All activities related to copper, that
is, exploration, production, refinement etc are
owned and managed by state owned companies.
Decisions have been made to privatize all these
activities. To assess the success of this
privatization process, different components of
the industry must be subject to economic
analysis. In this paper, the cost estimation of all
operations has been carried out. The total
potential and attainable revenues have also been
estimated using historical data available from the
industry. Risk is a major factor in all mining
activities and the copper industry of Iran has
been subject to risk factors arising from many
internal and external variables. These variables
have been recognized and their effects evaluated.
The effect of risk on the economic feasibility of
the operations in the industry has also been
analyzed.
Keywords: copper; economic analysis; Iran
Introduction
Iran is a developing country with a
transitional economy, bases on to export raw
materials. It is widely accepted that the existing
public enterprises and large state-owned market
players are no longer the most efficient way of
running the economy and that a wide-ranging
reform is necessary across Iran’s economy. Most
of the developing countries have begun
privatization in their public enterprises. Iran has
also engaged in a large privatization program
since 2005 and so far has privatized several state
economic enterprises and some joint ventures,
which in the current context are companies
owned jointly by the private and public sector.
A convincing body of evidence was
advanced which suggested that private
enterprises could not only perform all the
operations and functions that public enterprises
were responsible for but could also perform
these activities with greater efficiency. As a
result, privatization has become a major
phenomenon in many countries in the world.
Iran has examined as a country in the process of
switching from growing state enterprises to
privatizing too. Although theory, accountability,
efficiency and financing are all reasons for
creating state enterprise, financing is the most
prevalent driver of privatization.
It is widely believed that if current
governmental organizations are privatized they
will need to become more efficient. At present
many are not profitable. This is widely thought
to be due to large-scale unnecessary recruitment
in order to reduce domestic unemployment rates.
True privatization will inevitably lead to many
unpopular job cuts. Furthermore, many of these
1
companies receive subsidies and grants from the
government.
The history of National Iranian
Copper Industries Company
Iran has large copper resources and
numerous copper porphyries occur in an arc belt
extending from northwest Iran, southeast into
Pakistan. These deposits are estimated to contain
2 billion tons of copper, comprising around 3.5%
of the world’s known copper resources, from
which some 20 million tons of pure copper can
be obtained. The world’s copper reserves amount
to 57 billion tons. In addition, Iran has the 17th
largest copper reserves in the world.
Kerman Sarcheshmeh Mines Company was
established in 1972 following the nationalization
of Iranian Mines. The company became the
partner of the US Anaconda Company a year
later. Finally, the Kerman Sarcheshmeh Mines
Company changed its name to National Iranian
Copper Industries Company (N.I.C.I.CO) in
1976. The activities of N.I.C.I.CO include
exploration, exploitation and the processing and
distribution of raw materials in order to produce
the final copper products.
Economic analysis
Economic analysis is a systematic approach
to determining the optimum use of scarce
resources, which involves comparing alternative
ways for achieving a specific objective under
given conditions and constraints. It is necessary
for making decisions concerning investment
activities in every business. Financial resources
are limited and therefore any investor must
choose the best investment opportunity from
those available to him. Before stakeholders
spend capital it has become essential to ensure
that the proposed outcomes are well researched
and cost effective.
Economic analysis takes into account the
opportunity costs of resources employed and
attempts to measure in monetary terms the
private and social costs and benefits of a project
to the community or economy.
A popular strategy for firms is profit
maximization or at times the minimization of
losses. There are many tactics for achieving this
goal. In Iran investing on mining projects in the
stock exchange is thought to be a positive step
since approximately one third of the economy is
dependent on the activities in the mining sector.
Therefore for the purposes of N.I.C.I.Co raising
capital through the sale of its shares in the stock
exchange is thought to be a positive step since it
is a large corporation and is bound to provide
attractive investment opportunities.
Investment opportunities will have different
rankings according to their level of predicted
profitability. Even if the investor faces one
investment opportunity, it must be compared to
other profit-generating activities. Thus the
concept of the opportunity cost has to form an
integral part of every economic analysis.
Generally, balance sheet, profit and loss
accounts and other financial statements
published by public companies present raw, and
in some cases meaningless numbers without
much analysis. The balance sheet and profit and
loss account of N.I.C.I.Co are presented in table
1 and table 2 for the recent triennial fiscal years.
Sale analysis
Sale analysis is the process of breaking a
complex topic such as sale into smaller parts to
gain a better understanding of it. A sale analysis
is an investigation of a market that is used to
forecast the next sales, according to past
experiences and prediction of future conditions.
Sale analysis is vital when perfect competition
prevails in a market, whereas it is not so
important in cases of a monopoly producer. The
market for the production of copper in Iran is a
pure monopoly market. Furthermore a company
enjoying monopoly power is not subjected to
competitive pressure from the market. Many
clients have had to endure long delays before
being able to buy products from N.I.C.I.Co in
Iran. According to Sale (Import & Export)
analysis for the previous two fiscal years, the
company has allocated sixty percent (60%) of its
sale to the domestic market and the rest have
been exported. Cathode copper, wire rod and the
concentration of copper are the most valuable
products. They comprise some eighty five
percent (85%) of the company’s total sales
value. The sale of cathode copper accounts for
approximately forty five percent (45%) of the
total revenue (Tab 3, 4).
The prediction of price
Pricing and breakeven analysis will
determine the impact of a price change on the
2
business. Copper is a finite resource, but, unlike
oil, it is not dissipated and therefore can be
recycled. Recycling is a major source of copper
production in the modern world. As consumption
in India and China increases, copper supplies are
becoming scarcer. The price of copper has
quintupled from the 60-year low in 1999, rising
from 1,320 USD per ton in June 1999 to 8,780
USD per ton in May 2006. Prices subsequently
dropped to 5,290 USD per ton in February 2007
before rising again to 7,710 USD per ton in April
2007. By early February 2009, however,
weakening global demand and a steep fall in
commodity prices lead to a drastic fall in prices
to 2,540 USD per ton. Some reports however
forecast an increasing demand in the near future
as the global economic growth resumes. A rise in
raw material prices, especially in the metals have
been occurred in recent months and the prices
rose above 8,300 USD per metric ton in the tenth
month of 2010.
However notwithstanding the reviving
economies, constraints in the production of
copper are likely to contribute to the shortfalls
and thus the copper price is likely be driven by
the rules of demand and supply instead of mere
investor speculation. In 2011 the price is
estimated to peak at more than 7,500 USD per
metric tons on its way to averaging 6,500 USD.
Figure 1. The average price of cathode copper
from 2001 to 2010
Cost estimation
Costs as well as revenues must be
calculated. Costs are the monetary value of
expenditures for supplies, services, labor,
products, equipment and other items purchased
for use by a company or other accounting entity.
Cost is the total money and resources associated
with an activity. A cost is the value of money
that has been used up to produce something.
The global recession and collapse of copper
prices has forced the closure of many high cost
mines and adversely impacted on project
development.
The rapid pace of change in the copper
industry makes it even more important for
producers and industry observers to truly
understand the drivers on cost and profitability,
as well as the implications for future copper
mining.
In N.I.C.I.CO, overheads comprise the
largest group of costs which amount to around
40% of the total costs. Overhead costs include
the ongoing operational costs. It is usually used
to group costs that are necessary to the continued
functioning of the business, but which do not
directly generate profits. Overhead expenses are
all costs on the income statement except for
direct labor and direct materials. They include
energy, depreciation, transport, rent, repairs,
supplies and other such costs (Table 5, 6).
Calculation
The values that a project will have in the
future, and indeed its value in the past, are
different from its value in the present. Therefore
in order to assess the profitability of a potential
investment opportunity, one must compare the
present value of a project with the value derived
from other investments. Calculating the Net
Present Value (NPV) is a useful method for
economical evaluation; it is computed as the sum
of discounted values of all future returns less
initial investment. It is a standard method for
using the time value of money to appraise longterm projects. The discount rate that makes the
algebraic sum of future returns and initial
investment equal to zero is called the Inter Rate
Ratio (IRR).
The cash flow table is formed according to
the balance sheet and the profit and loss account
(Table 7). The total assets in 2008 were assumed
as cash our flow for year 0 and the summation of
net profit and depreciation in 2009 were assumed
as cash in for years 1, 2, 3, 4, 5, 6, 7, 8, and 9.
In sensitivity studies, different values of
PVIF (Present Value Index Factor) are examined
and NPV is calculated in each case.
3
Net present value is computed for
PVIF=15%, 20%, 25% and 27.8%. The NPV is
positive for 15%, 20% and 25% and IRR is
27.8% where the amount of NPV becomes nil.
Where inflation and risk are not accounted
for, Net Growth is 10% and is therefore an
acceptable rate. If however inflation is taken to
be 20% in average (as it has been in Iran during
the past 25 years) then PVIF = 10 + 20 = 30%.
In addition if the level of risk is taken into
account, say of around 10%, then PVIF = 30%.
Therefore a project where the IRR is 27.8% will
be uneconomical.
Privatization in Practice
A special governmental body has been
created tasked with ensuring the correct
implementation of the First Chapter of the 4th
Economic, Social and Cultural Development
Plan of Iran (2005-2009). It is called the Iranian
Privatization Organization and is tasked with
divesting the shares of N.I.C.I.CO. Forty percent
of the shares were offered to the public on two
occasions, 20% each time.
In 2007 the first 20% of the company was
sold for 1.1 billion USD. The investors were
mostly other state-owned companies including
pension funds and the state broadcasting
industry. All shares were sold in less than 7
minutes. In almost every recent case of
privatization in Iran, other state-owned entities
and companies have been seen to be the main
investors.
These
include
state
banks,
government-linked investment and pension
funds. None of the companies which have
recently raised capital through public stock
offerings have been proven profitable.
Nevertheless in every public offering case these
shares were sold in a matter of minutes.
Therefore it seems that even where investment
opportunities in Iran are not deemed profitable,
state-owned companies with low profit margins
can still sell their shares rather easily.
private sector then other market players will be
encouraged to enter that market and begin to
compete with the incumbent seller. This will
increase competition and in turn will drive the
firms to produce at a lower cost to the final
consumer.
In Iran copper is currently produced by
N.I.C.I.CO which enjoys monopoly power in the
market for copper producers. The absence of
adequate competition in this market has lead to
shortages of supply and an inflated price, which
inevitably affects the overall inflation rate in the
economy.
It has been shown, using N.I.C.I.CO’s annual
report and financial accounts that the company
runs inefficiently and that it will therefore profit
in the long run from privatization.
N.I.C.I.CO has offered 40% of its equity to the
public in an attempt to privatize the market for
copper production. However other governmental
bodies comprised the majority of the new
investors. Effectively therefore the company is
now shared between more governmental bodies
than before.
Economists believe such stock offerings will
only help in making these industries even more
inefficient.
References
1-
Oraee Kazem, 1998, Analysis
productivity, Tehran: Ketab Marv.
2-
Oraee
Kazem,
2001,
Engineering
economy, Tehran: Hormozgan university.
3-
Oraee Kazem, 2002, The Economics of
Mineral Resources: Mashad: Ferdousi
university.
4-
Oraee Kazem, 2006, New Methodologies
in Technological Economics: Tehran: Poly
technique of Tehran.
5-
Oraee Kazem, 2007, Economics for noneconomists, Tehran: Poly technique of
Tehran.
Conclusions
6-
It is a long-standing rule of economics that when
the provision of commodities is concerned, in
most cases the private sector will have a greater
incentive to produce the goods in the most
efficient method possible. Should the production
and the sale of a commodity be profitable in the
Oraee
Kazem,
2008,
Quantitative
Management:
Linear
Programming,
Tehran: Poly technique of Tehran.
7-
Oraee Kazem, 2009, Minerals: The most
important sector of the Iran economy,
Tehran: Poly technique of Tehran.
4
of
8-
Azmudekaran CPA. , 2009, Financial
reports of N.I.C.I.Co , Tehran.
5
Table 1- Balance sheet table of National Iranian Copper Company for the recent triennial fiscal years
Assets
Last year
Two last year
Three last year
Debts and Shareholders’ Equity
Last year
Two year ago
Current assets
(Rials)
(Rials)
(Rials)
Current debts
(Rials)
(Rials)
Three year ago
(Rials)
Cash balance
1,112,048,045,784
2,254,574,829,079
1,090,658,155,539
Commercial revenue accounts
419,231,506,644
176,477,150,180
60,022,251,787
Short-term investments
1,460,967,000,000
361,167,000,000
0
Other revenue accounts
2,172,837,092,268
2,034,031,253,941
4,686,455,143,828
Commercial revenue
accounts and deeds
Other revenue accounts
1,624,724,513,034
2,806,723,299,106
1,862,048,785,274
Deferred credit
34,788,236,906
43,968,923,752
463,080,605,939
750,681,040,410
614,664,417,691
978,883,540,948
Tax saving
1,246,041,812,928
1,004,365,130,068
674,155,931,207
Materials and goods in hand
4,379,530,786,573
4,140,831,718,813
3,605,208,488,549
Payable dividends
522,998,395,253
35,841,718,505
425,124,612,289
Orders and prepayments
973,398,023,007
782,212,397,791
481,099,447,933
Received financial facilities
674,287,183,167
645,291,147,609
713,277,632,011
Total current assets
10,301,349,408,808
10,960,173,662,480
8,017,898,418,243
Total current debts
5,070,184,227,166
3,939,975,324,055
7,022,116,177,061
Non-current assets
Non-current debts
Tangible fixed assets
11,639,058,374,275
11,189,170,159,898
11,319,554,456,748
Long-term payable accounts
27,629,900,539
27,629,900,539
27,629,900,539
Non-tangible assets
207,244,879,333
206,704,028,854
107,822,088,338
1,346,692,523,274
1,866,791,202,037
2,552,485,407,534
Long-term investments
205,340,753,000
5,340,753,000
5,340,753,000
Long-term financial facilities
received
Employees’ retirement bonus
saving
737,021,810,603
517,726,909,082
286, 315,139,707
Other assets
1,478,726,761,828
1,326,410,318,591
1,667,652,658,080
Total non-current debts
Total non-current assets
13,530,370,768,436
12,727,625,260,343
13,100,369,956,166
Total non-current liabilities
2,111,344,234,416
2,412,148,011,658
2,866,430,447,780
Total liabilities
7,181,528,461,582
6,352,123,335,713
9,888,546,624,841
Capital
5,789,644,600,000
5,789,644,600,000
5,789,644,600,000
Legal reserve
1,373,419,817,418
1,060,315,334,990
617,745,473,925
Other reserves
125,913,843,901
125,913,843,901
125,913,843,901
Accumulated profit
9,361,213,454,343
10,359,801,808,219
4,696,417,831,742
Total shareholders’ equity
16,650,191,715,662
17,335,675,587,110
11,229,721,749,568
Total liabilities and
shareholders’ equity
Disciplinary accounts party
23,831,720,177,244
23,687,798,922,823
21,118,268,374,409
3,798,121,790,622
4,048,697,909,500
6,904,574,923,609
Shareholders’ equity
Total assets
23,831,720,177,244
23,687,798,922,823
21,118,268,374,409
Disciplinary accounts
3,798,121,790,622
4,048,697,909,500
6,904,574,923,609
One billion Rials is equal = one hundred thousand U.S. Dollars
6
Table 2-Profit/Loss table of National Iranian Copper Company for the recent triennial fiscal years
Last year
Two year ago
Three year ago
Rials
Rials
Rials
Net Sale
16,276,087,326,723
19,540,079,282,969
16,921,725,830,321
Cost of finished products
8,059,075,456,030
8,039,174,375,235
7,192,984,227,117
Gross profit
8,217,011,870,693
11,500,904,907,734
9,728,741,603,204
Sales, administrative, public
expenditures costs
757,133,201,302
1,130,865,898,589
1,261,823,121,261
Other income and operational costs
160,023,023,215
54,526,138,409
222,108,154,810
Operational profit
7,299,855,646,176
10,315,512,870,736
8,244,810,327,133
Financial costs
264,576,648,367
292,452,035,757
404,358,420,622
Other incomes and non-operational costs
50,172,807,984
192,779,832,251
14,544,660,791
Profit emanating from normal
activities before deducting taxes
7,085,451,805,793
10,215,840,667,230
7,854,996,567,302
Profit tax of normal activities
823,362,157,241
1,227,485,555,886
590,227,668,625
Net profit
6,262,089,648,552
8,988,355,111,344
7,264,768,898,677
Description
7
Dividends of each share-Net
1,082
1,529
1,187
Table 3- Sale (Import & Export) analysis for the last fiscal year
Production
For
Import
For
Export
Total
For Import
For Export
Total
%
Weight (ton)
Value (Rials)
Sulfide’s ore
223,202
0
223,202
13,415,467,984
0
13,415,467,984
0.08
Concentration
of copper
0
193,606
193,606
0
2,644,795,430,992
2,644,795,430,992
16.25
Cathode
copper
75,519
57,766
133,285
4,094,238,351,642
2,994,225,259,668
7,088,463,611,310
43.55
Concentration of
Molybdenum
3,953
494
4,447
1,088,999,829,022
180,778,449,556
1,269,778,278,578
7.8
Concentration of
gold & silver
329
0
329
228,313,445,630
0
228,313,445,630
1.4
Wire rod
73,624
1,494
75,118
4,294,952,661,985
120,176,011,931
4,415,128,673,916
27.13
Slab
644
0
644
27,648,469,889
0
27,648,469,889
0.17
Low grade
copper
2,694
50,944
53,638
24,590,172,878
560,625,412,226
585,215,585,104
3.6
Sulfuric acid
4,988
0
4,988
3,328,363,320
0
3,328,363,320
0.02
9,775,486,762,350
6,500,600,564,373
16,276,087,326,723
100
(60%)
(40%)
(=100%)
Total
Table 4- Sale (Import & Export) analysis for the two fiscal year ago
Production
For
Import
For
Export
Total
For Import
For Export
Total
%
Weight (ton)
Value (Rials)
Sulfide’s ore
0
0
0
0
0
0
0.00
Concentration
of copper
Cathode
copper
0
133,111
133,111
0
2,522,266,904,355
2,522,266,904,355
12.91
64,102
57,726
121,828
4,500,609,471,987
4,123,437,339,955
8,624,046,811,942
44.14
8
Concentration
of Molybdenum
6,300
184
6,484
1,785,700,543,380
53,761,498,283
1,839,462,041,663
9.41
Concentration
of gold & silver
213
0
213
164,294,421,809
0
164,294,421,809
0.84
Wire rod
73,070
302
73,372
5,125,759,081,059
20,618,575,619
5,146,377,656,678
26.34
Slab
4,405
0
4,405
319,423,085,020
0
319,423,085,020
1.63
Low grade
copper
Sulfuric acid
0
63,531
63,531
0
924,208,361,502
924,208,361,502
4.73
0
0
0
0
0
0
0.00
11,895,786,603,255
7,644,292,679,714
19,540,079,282,969
100
(60%)
(40%)
(=100%)
Total
Table 5- The table of finished products cost for the fiscal years
For the last fiscal year
Description
For the two fiscal year ago
Rials
% to cost finished products
Rials
% to cost finished products
Wages (Direct)
-1,506,423,748,633
18.7
-1,333,080,749,178
16.6
Consumption material and parts
-1,073,018,067,705
13.3
-917,484,289,872
11.4
Overhead
-3,673,113,246,636
45.6
-3,326,289,808,041
41.4
The costs have not been
expended to cause halt in
production
+65,697,358,618
-0.8
+186,092,354,686
-2.3
Total of production costs
-6,186,857,704,356
77.0
-5,390,762,492,405
67.1
The cost of wastage in process
production
-674,104,594,512
8.4
-278,906,342,353
3.5
The purchase of scrap &
concentration copper
-1,326,543,739,579
16.5
-2,795,493,914,671
34.8
The purchase of cathode copper
-95,542,767,686
1.2
0
0.0
Recovery of sulfide’s ore
+106,806,569,947
-1.3
+135,579,702,624
-1.7
Production (inventory) value
increase
+117,166,780,156
-1.5
+345,508,237,027
-4.3
The purchase of oxide’s ore for
leaching operation
0
0.0
-55,099,565,457
0.7
Cost of finished products
-8,059,075,456,030
100
-8,039,174,375,235
100.0
9
Table 6- The table of overhead cost for the fiscal years
For the last fiscal year
Description of costs
For the two fiscal year ago
Rials
% to total overhead
cost
Rials
% to total overhead
cost
Depreciation
1,173,023,114,105
31.9%
1,209,131,558,071
36.4%
Stripping
853,813,024,062
23.2%
772,939,703,161
23.2%
Energy
238,774,384,580
6.5%
232,850,611,345
7.0%
Light transportation
213,504,291,906
5.8%
146,703,044,051
4.4%
Cleanliness &
horticulture
200,695,300,508
5.5%
150,836,222,704
4.5%
Equipment maintenance
188,433,192,393
5.1%
199,956,340,263
6.0%
Rent of truck
146,163,826,695
4.0%
53,958,517,626
1.6%
Engineering services
113,386,152,683
3.1%
102,329,053,628
3.1%
Rent of mining
equipment
107,614,727,275
2.9%
78,072,839,081
2.3%
10
Depletion
72,839,449,439
2.0%
85,049,300,665
2.6%
Health aids to personnel
64,650,128,537
1.8%
53,275,337,469
1.6%
Ore haulage
59,895,995,434
1.6%
45,643,440,874
1.4%
Personnel nutrition
46,606,110,529
1.3%
39,340,458,463
1.2%
Drilling
46,035,309,296
1.3%
5,370,526,531
0.2%
Non cash aids to
personnel
45,780,992,263
1.2%
41,437,217,102
1.2%
Other costs
44,041,157,684
1.2%
51,090,183,194
1.5%
Rent of office &
guesthouse
Gathering of the
wastage copper
23,418,903,495
0.6%
22,685,312,405
0.7%
21,378,818,507
0.6%
16,284,101,666
0.5%
Heap embankment
13,058,367,245
0.4%
19,336,039,742
0.6%
Total overhead cost
3,673,113,246,636
100%
3,326,289,808,041
100%
Table 7- The economical evaluation of N.I.C.O.CO for next 10 years
Cash
in
Cash
out
NCF
Billion
Rials
Billion
Rials
Billion
Rials
0
0
24,000
1
7500
2
DCF
PVIF
DCF
(20%)
PVIF
(25%)
(25%)
(27.8%)
(27.8%)
1.000
-24000.0
0.250
-6000.0
1.000
-24000.0
6521.7
0.833
6250.0
0.250
1875.0
0.782
5868.5
0.756
5671.1
0.694
5208.3
0.250
1875.0
0.612
4592.0
7,500
0.658
4931.4
0.579
4340.3
0.250
1875.0
0.479
3593.1
0
7,500
0.572
4288.1
0.482
3616.9
0.250
1875.0
0.375
2811.5
7500
0
7,500
0.497
3728.8
0.402
3014.1
0.250
1875.0
0.293
2199.9
6
7500
0
7,500
0.432
3242.5
0.335
2511.7
0.250
1875.0
0.230
1721.4
7
7500
0
7,500
0.376
2819.5
0.279
2093.1
0.250
1875.0
0.180
1346.9
PVIF
(15%)
-24,000
0
7500
3
DCF
(15%)
PVIF
(20%)
1.000
-24000.0
7,500
0.870
0
7,500
7500
0
4
7500
5
Year
11
DCF
8
7500
0
7,500
0.327
2451.8
0.233
1744.3
0.250
1875.0
0.141
1053.9
9
7500
0
7,500
0.284
2132.0
0.194
1453.6
0.250
1875.0
0.110
824.7
NPV (Billion Rials):
11786.9
6232.2
12
10875.0
12.0