Developed Economies Worldwide after the Great Financial Crisis - Essay Example

Business Introduction After the great financial crisis, developed economies worldwide had taken various decisions in order to rectify their situations. The process of restoring the balance sheet figures in public and private sector was needed. The financial markets have played an important role in these uncertainties. Financial market is referred to as one where private and public companies as well as individuals can trade securities and other financial commodities at a price that is determined by changes in economic forces like, demand and supply. The commodities may include valuable metals like, silver and gold as well as agricultural goods. The securities mainly consists of stock and bonds (Ali, Butt and Rehman, 2011; Cybo-Ottone, Di Noia and Murgia, 2000). The financial markets are often encountered by financial risk or uncertainty, which can be defined as added unevenness in net returns of the owner’s equity that is the outcome of financial liability linked with debt or capital lease financing. This risk primarily results from employment of debt, which is reflected by leverage and leverages multiples. The potential loss or return is generated through various levels of operational performance. So, financial risk is manifested by unevenness in return on equity of business (Aktan, et al., 2009; Chinn and Meredith, 2004). The main objective of report is to furnish a supplementary piece of research to the CEO of True Gold Inc. so that it is helpful for him/her to raise finance for the Karma project. Part 1 The capital structure of True Gold Inc. can be recognised as a means for identifying risk profile. The capital structure planning of True Gold Inc is to determine and measure the risk. The risk in planning for the capital structure is measured with a rational confidence on ways to reduce the risk that impacts overall capital adequacy of the project (Furusawa and Hideo, 2007; Jones, 2002). The project has considered qualitative factors that integrate experience of the management and their assessment of the risks (Menkveld, 2012). A qualitative appraisal is very crucial to understand and measure the risks that cannot be fairly quantified (Arestis, Demetriades and Luintel, 2001; Balamurali and Bogahawatte, 2004). The project should not permit financials to compensate for the weaknesses present in risk management processes and practices (Imbs, et al., 2003). There is a lot of gap between the risk creation and its occurrence in financial performance of the project. When the project encounters fall in credit quality, rise in charges for the loan, distorted funding, rise in processing errors and other measures for financial performance, the fundamental causes are established. It needs considerable amount of time to overcome these challenges. Additionally, when weaknesses of the project are determined, it is difficult and expensive to raise the capital that is needed for the whole process. The capital single-handedly cannot meet the exuberant risk taking and fallacious practices (Chittedy, 2009; Christiansen and Koldertsova, 2008). These weaknesses stand in the way of uninterrupted governance, adequate internal controls and right risk management principles in context of the project. The project, thus, needs ways to be vigilant towards deterioration in risk management processes (Majid, et al., 2009). The project has high level of capital concentration, which requires processes for mitigating compounded risk linked with the concentrations. It is observed that concentration levels may rise way higher than the capital levels. The project has been funded with high asset growth linked with high risk or liability or risk layering strategies. The increase in investment of the project, without any knowledge regarding exposures of risk and structural complexities, leads to wrong assessment of financial health of the project (Agénor, 2001; Alfaro, 2003; Alfaro, et al., 2006). When the project will encounter rapid growth in its structure, then this is bound to be accompanied with staffing problem and systems mismanagement. The project has explored a number of targets and specific strategies will be formulated for capital structure management of the project (Chen, Firth and Rui, 2002; Henry, 2000; Kawai, 2006). One of the prominent characteristic of Karma Project is series of exploration targets. The project will also demonstrate capability of True Gold Inc in drilling mineral resources. In late 2013, North Kao was regarded as a blind discovery, which had been drilled within one month. Over past few years, True Gold Inc had tested five targets and had achieved 100% success rate. Hence, they had discovered five new areas that had potential to add resources to the current base or resources. Presently, there are 35 drill-ready targets within three major gold trends with an aggregate strike length in excess of 100 kilometres on Karma Project (Pollen, 2013).  The total pre-production capital cost (capex) of Karma project is estimated to be US$131.5 million including onsite working capital as well as an amount of US$8.6 million that is held for contingency. So, capital structure of the project is relevant for encountering any type of contingency at any time period (Pollen, 2013; True Gold Inc., 2013). The total life of mine capex is US$171.4 million and the initial capital costs incorporates development and designs of plant and infrastructure of the mine like, haul roads, mobile mining equipment, leach pad, transport, ponds, power plant and ADR plant (Pollen, 2013; True Gold Inc., 2013). True Gold has utilized outcome of Feasibility Study in order to source its finance for successful implementation of the construction of Karma Project. The payback period of Karma Project is predicted to be short and strong cash flow will enable the company to attract investors for investing in the company. The low pay back period of the project will help the company to earn back the invested amount in a shorter time; this will assist in spending the amount in other developmental works. The company had looked for new financial sources for its Karma project. The executive chairman of True Gold Mining Inc., Mr. O’Dea, had signed deals for raising an amount of $ 33.5 million of capital in the beginning of May, 2013. The amounts were equivalent to half of the company’s market value of $60 million. This was a big amount to gather for the junior gold miner at that point of time (Pollen, 2013). The junior gold miner had already encountered and suffered from detrimental market conditions, which were observed in the recent years. The risk of capital has increased over years and equity financing opportunities had dissolved due to lack of demand on the part of investors. The current drop in the price of gold had worsened the situation. Hence, miners had to seek out other sources of finance. O’Dea, who is a renowned mining entrepreneur, had exclaimed that equity markets are not favourable for raising capital for the project. This motivated him to follow a dissimilar method for seeking strategic investors. He figured out that cash is available for smaller companies since they work harder than the larger ones (Kovem, 2013). The company has strived to target and gather different niches of investors and have managed to pool sufficient capital from the traditional sector. The junior miners are very enthusiastic about drawing in strategic investors, particularly from Asia; but it is observed that none are successful in doing so, thereby failing to accumulate adequate amount of capital. True Gold has tapped two different sources of finance. In May 2012, a miner based in Vancouver had raised $10 million through private placement with Teck Resources Ltd (Kovem, 2013). This helped the company to receive a massive amount for the Karma Project as well as for improvement in the company. The company has also received an amount of $23.5 million as investment from Liberty Metals & Mining Holding LLC, which is a subsidiary of Liberty Mutual Insurance and also a long-term investor of LCC (Kovem, 2013; Wong, et al., 2004). Moreover, True Gold has the advantage of employing Mr. O’Dea who has a promising track record. He was the CEO of Fronteer Gold Inc., which had made discovery in Nevada and later sold the same to Newmont Mining Corp. for an amount of $2.3 billion in 2011 (Pollen, 2013). He also has a good relationship with Teck Resources Limited, which has benefitted True Gold (Kovem, 2013). Mr. O’Dea identified that key motive of the company is to collect adequate capital for the project. The main intention was to attract more investors so that larger amount of capital could be acquired. He stated that Liberty is interested in the Karma project in Burkina Faso since it has lower capital intensity, along with construction cost of less than $150 million. It is very crucial for a market where capital is a vital factor and quite scarce. Therefore, this project provides appropriate lesson to junior miners who try to undertake more similar and favourable projects in order to enjoy greater benefits. When the market had begun to change, junior miners observed that projects with small capital costs are more favourable since its production is relatively quicker and can withstand the downward pressure on price of gold (Pollen, 2013; Kearns, Kulesza and Nevmyvaka, 2010). Part 2 (risks inherent when investing in Karma Project outlined in the document) Trade and global activity worldwide have gained momentum at the end of second quarter of 2013. The recent data have highlighted that global growth during that period of time had been stronger than the anticipated value in October 2013. The demand for advanced economies has escalated as expected owing to upward rise in growth. This is due to higher demand for inventory (Chen, Firth and Rui, 2002). In emerging markets, export rebound is the main operator for driving the best activity. Likewise, the domestic demand generally remains tamed. The financial conditions in advanced economies have eased after October 2013. There were little changes in the financial condition. Even so, on December 18; after the announcement by U.S. Federal Reserve, the financial condition began to fall steeply. However, such financial crunch involved other declines in risk premiums on the government debt for economic crisis of Euro zone countries. In emerging markets, financial situations have continued to deteriorate, which was followed by the surprising announcements of U.S. in May 2013. This did not withstand the elastic capital flows. The equity prices had not entirely recuperated the total amount of yields from sovereign bond and the currencies will be under pressure (Darškuvienė, 2010). The risk that the project may encounter during implementation is exposure to change in interest rate, price, liquidity as well as compliance risks (Aggarwal, 2002). Other types of risk include strategic risk and reputation risk. The uncertainty can also emerge from operating units and subsidiaries. Every mining project follows a process, which allows it to determine the associated risk. Thus, after this determination process, strategies are formulated in order to cope up with the possible risks. Figure 1: Risks inherent in types of investments (Source: Alfaro, et al., 2006) The figure above highlights the fact that the investors should be well aware of the risks that are linked with the types of investments. It is observed that investing equity shares or specialist funds are risky and at the same time advantageous for the investors if the market performs well. Thus, it can be inferred that if the Karma project becomes successful the investors who have invested for the project will earn high returns. The invested amount of the investors is the main source of finance for the project. Thus, if the market encounters the above mentioned risks then project will face huge loss along with the investors. (potential global macroeconomic and financial market risks going into 2014/15 and beyond that could affect future cash flows generated by the Karma Project) The turning point will be noticed at the end of 2014. The growth in economies is expected to accelerate by 2.8%, which is a 1.9% hike from that of 2013 (Naeem, 2002). Therefore, following inventories in the second half of 2013, recovery in 2014 will heighten the demand for export and import, thereby increasing demand and supply. There will be huge reduction in fiscal deficit as a result of budget agreements. Nevertheless, the budget agreement will also tighten the projected fiscal position in 2015 (Neuhause, 2006; Narayan, Smyth and Nandha, 2004). Conclusion It is observed that True Gold is sufficiently positive towards success of Karma project in the long run after examining Feasibility study. So, the company has planned to invest in the developmental model of owner-operator. However, such a scenario will also include purchased equipment that propels a rise in capital expenditures as compared to that in contract mining. Even so, the project will offer lower operating costs for the long-term, enhanced operating flexibility and improved cash flow. Thus, it can be concluded that the project is feasible enough to be executed and is expected to earn benefit after the completion of the same. Reference List Agénor, P. R., 2001. Benefits and Costs of International Financial Integration: Theory and Facts. 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