Company Overview

Analysis of the financial performance is very important for the investor. Before making any investment in the company, it is very necessary to know about the financial condition of the company and consider the various factors like its weighted average cost of capital, dividend policy, and ratios like ROA, ROE, and debt ratio. It is a report containing the analysis of the financial performance of Alacer Gold Corp (AQG) listed on ASX. The analysis is done to provide a financial advice to the investor regarding its investment in this company.

Alacer is a Canadian corporation incorporated in Yukon Territory and is primarily listed on Toronto Stock Exchange. It is also listed on Australian Securities Exchange (ASX). Alacer Gold Corp is a leading gold mining company having 80% interest in Copler gold mine in turkey and remaining 20% is owned by Lidya Madencilik Sanayi ve Ticaret A.S. the company deals with the acquisition, production and exploration of gold in Turkey (Alacergold.com, 2017).

Substantial shareholders

• 20% shareholdings: Lidya Madencilik Sanayi ve Ticaret A.S.
• More than 5% of holdings: Van Eck Associates Corporation (10.60%), JCP Investment Partners Ltd (9.20%), Newton Investment Management Limited(5.50%) 

Main people involved in governance

• Chairman- Edward C. Dowling, Jr.
• Board Members- Richard Graff, Thomas Bates, Alan Krusi, Anna Kolonchina.
• CEO-Rodney P. Antal (Alacergold.com, 2017).

• Calculation of ROA and ROE

The Annual reports available on company’s website is only for the year 2015 and 2016. Due to this, the data has been taken for the past three years only.

Alacer Gold Corp Financial Statements for year 2013-16
Particulars	2014	2015	2016
	AUD$	AUD$	AUD$
EBIT	90,846	64,566	-2,424
Net profit	89,040	65,629	15,660
Total Assets	759,494	815,618	865,389
Total Liabilities	63,857	51,367	67,278
Shareholders’ Equity	695,637	764,251	798,111

1.   Rate of Return on Assets
	2014	2015	2016
A.      Net income	89,040	65,629	15,660
B.      Total assets	759,494	815,618	865,389
(A/B)	11.72%	8%	2%

2.       Rate of Return on Equity
	2014	2015	2016
A. Net income available to equity shareholders	89,040	65,629	15,660
B. Shareholder’s Equity	695,637	764,251	798,111
(A/B)	12.80%	8.59%	1.96%

3.    Debt Ratio
	2014	2015	2016
A.      Total Liabilities	63,857	51,367	67,278
B.      Total assets	759,494	815,618	865,389
(A/B)	8%	6%	8%

Proving the equation

For 2014

0.11961 x 0.98012 x 1.0918 = 0.128

0.128 = 0.128

For 2015

0.079162 x 1.016464 x 1.067212 = 0.085874

0.085874 = 0.085874

For 2016

-0.0028 x -6.4604 x 1.0843 = 0.01962

0.01962 = 0.01962

• In the above equation, TA/OE means Total Assets/Owners Equity. The variable is the formula of Equity multiplier, which measures financial leverage. Generally, companies raises funds for their operation through equity or debt. A high equity multiplier means a large portion of company’s assets are financed through debt.

It is considered as a key factor in DuPont analysis. The analysis divides ROE into its components which are known as financial ratios and metrics. These are profit margin, EBIT, Owner’s equity and Total assets. It examines the changes in these components in order to measure the corresponding changes in ROE (Brigham and Houston, 2012) 

The equity multiplier compares the shareholders’ equity to the total assets. The multiplier has no relationship or negative relationship with Return on assets ratio. As the total assets increases, equity multiplier also increase, results in the decrease of ROA. On the other hand, if there is an upsurge in sales, ROA will increase but the multiplier remains the same. On a whole, a high equity multiplier will increase ROE and decrease ROA, whereas increase in ROA will also increase the ROE, while the equity multiplier remains stable (Leach and Melicher, 2011).

• In 2014 and 2015, Return on Equity of Alacer is more than its Return on assets. This is because the company is generating more returns from its investments as compare to its assets. A high ROE also indicates that Alacer is managing its shareholder’s capital in a very efficient manner. Moreover, it has comparatively less owner’s equity in 2014 and 2015 than in 2016, which boosts up the ROE. In 2016, ROE is less than ROA, reason being Alacer is effectively and efficiently uses its assets to produce profit. It can be seen from the financial reports of the company that in year 2016, total assets are comparatively higher than the owner’s equity than that of in 2014 and 2015 (Parrino, Kidwell and Bates, 2011).

 The graph is prepared on the basis of average return of stock prices of the company comparing with the average return of market indices. Data related to past two years has been taken that is from 13 December 2015 to 11 December 2017. Graph shows the fluctuations in the average returns during the years. It represents that the returns on stock prices of market remains stable while return on stock prices of Alacer Gold Corp (AQG) varies on a daily basis. Starting from 13 December 2015 to 13 June 2016 the returns are increasing frequently and the highest point in this duration is 0.1. After that the return falls to -0.1 in December 2016. Reasons for this fall may be the slow growth of the company, reduction in sales and profits or the investors become pessimistic about making investment in the company. The concern of investor about the overall market is one of the reason for the fall in stock prices and their returns. It can be seen from the graph that highest return of the company was in the month of March 2017 that is 13.93%. This was the peak point where the return on stock prices of Alacer were highest as compare to market indices. This was because the company was performing well in the market and was having an increase in its earnings and rise. Investors become optimistic regarding making the investments and value the stock more highly. After March, the average return of the company falls and continue to remains the same for the next few months. At some point of time it was almost close to the line which represents market indices. This can be seen in the graph (In.finance.yahoo.com, 2017).

Financial Performance Analysis

Significant announcements made by Alacer Gold are:

 Announcement 1: On February, 2017 the company make an announcement about the arrival of both autoclaves at Copler mine. These autoclaves were manufactured in Italy and then transported to the Northern Turkey. Each of them was transported to Copler in three pieces. The CEO of Alacer considered this arrival as a milestone for Copler Sulfide Expansion Project.

Announcement 2: Alacer announces the completion of Turkish Lira Hedging Program results in the reduction of capital outlay for Copler Sulfide Expansion Project. To purchase 500 million TRY at an average conversion rate of 3.8 USD was sold. The hedge can be used either in the oxide operations or the sulfide project. There can be potential deductions in the overall spending for sulfide project with approximately 40% capital expenditure denominated in Turkish Lira (Alacergold.com, 2017). 

Announcement 3: An announcement was made on December, 2016 by the company regarding production and cost guidance. The production guidance was to be between 115,000 ounces to 125,000 ounces of gold. In cost guidance, total cost was revised between $675 per ounce and $725 per ounce. All-in Sustaining costs was between $900 and $950 per ounce.

Announcement 4: On 12 May 2016, Alacer Gold Corp announced that an approval has been received for full construction of Copler Sulfide Project from Board of Directors. CEO stated that the amount of work completed on this project provides a base for investment decision and also increases the company’s confidence in delivering long-term growth at high financial returns.

Announcement 5: Alacer made an announcement on September 13, 2016 about the success of the prefeasibility study applied on Gediktepe project. The study proves that the project is technically and economically viable and it is considered to be a valuable part of portfolio of mining assets. This illustrates the capability of company to capture value from exploration and also determines great prospectivity in Turkey (Alacergold.com, 2017).

• The value of beta for Alacer is calculated on the basis of its share prices as it was not given on the recommended website.

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.115753784
R Square	0.013398939
Adjusted R Square	0.011441397
Standard Error	0.030425898
Observations	506
ANOVA
	df	SS	MS	F	Significance F
Regression	1	0.006336452	0.006336452	6.84477782	0.009156822
Residual	504	0.466570575	0.000925735
Total	505	0.472907028
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	0.000358512	0.001354738	0.264635766	0.791398251	-0.002303117	0.003020142	-0.002303117	0.003020142
X Variable 1	-0.45631434	0.174415244	-2.616252629	0.009156822	-0.79898483	-0.113643849	-0.79898483	-0.113643849

Here, the value of calculated beta is 0.45631434.

• Calculation of required rate of return using CAPM formula

E(R) =

E(R) = Expected or required rate of return

 = Risk free rate of return

β = Beta

= Market Risk Premium

Calculation of Required rate of return
Risk free rate (A)	4%
Beta (B)	-0.4563143
Market Risk premium (C)	6%
Required rate of return [A+(B*C)]	1.26%

• Conservative investment are the investments with low risk and low return. It helps in short-term funding and is best for the investors who are not ready to take risks and want to preserve their funding. It is an investment strategy that preserves the value of investment portfolio by investing in lower risk securities. As far as Alacer is concerned, the standard deviation of the company is 3.06% and its return on Equity is also less than 12% in the past three years. This implies that investing in this company would be a conservative investment as it has low standard deviation and low return. Investors who want to take low risk can prefer to invest in Alacer as its return on equity is pretty low which involves low risk (Huffman, 2016).

• Cost of Equity (calculated above) = 1.26%

Cost of Debt = 0%

Weighted Average Cost of Capital (WACC) = Cost of debt (interest rate after tax) + cost of equity.

WACC = 0% + 1.26%

             = 1.26%.

Cost of debt is zero because company has no borrowings and the debt portion mainly comprises of liabilities which are to be paid during the year.

• Weighted average cost of capital shows the company’s cost of capital across all sources that includes preferred shares, ordinary shares and debt. Weights are been given to the cost of each type of capital on the basis of the percentage of total capital. If WACC increases or goes high, it will definitely impact the management decision regarding the evaluation of investment project to a large extent. Higher the WACC, more will be the risk. Increase in WACC is due to the rise in beta value and rate of return on equity. This signifies a decrease in evaluation and increase in risk. It is basically a sign of higher risk associated with the operations of the company and to assume additional risk, investors will require additional return. If the weighted average cost of capital continues to increase, then while evaluating investment proposals there will be a point where management will decide not to invest in a particular project because of high amount of risk involved in it. Thus, a higher WACC do affect the management’s decision concerning with the evaluation of projects (Frank and Shen, 2016).

• Debt ratio shows the degree of leverage used by the company. It measures the ratio of firm’s total liabilities to its total assets. In other words, it represents the capability of a company to pay off its liabilities with its assets. The Debt ratio of Alacer has increased from 6% to 8% in year 2016 which does not appear to be stable. This increase means that most of the assets of Alacer are financed through debt which implies greater financial risk. Moreover, a high debt ratio also shows that the company is over-leveraged and makes it difficult to borrow money. The ratio of Alacer keeps on fluctuating from past three years and does not seem to be stable (Tracy, 2012).
• Generally, gearing ratio mainly comprises of long term liabilities or borrowings but Alacer Gold Corp does not have any borrowings or long term liabilities and this is the reason for its cost of debt being zero. It only has liabilities which are to be paid off within a year. The debt ratio of Alacer was 8% in 2014 and then in 2015 it reduces to 6% and again increase to 8% in last year that is 2016. The debt ratio is calculated on the basis of liabilities which does not have any part of borrowings. In 2015, the company’s liabilities were reduced to some great extent as compare to 2014 which led to a reduction in its debt ratio. Later in 2016, the ratio again reaches to the level of 8% due to rise in liabilities. As the company has no borrowings so the adjustments related to them cannot be made. It only has a fluctuating debt ratio. 

Rate of Return on Assets

The policy of dividend mainly determines the part of earnings that will be paid out to the stockholders and shareholders as dividend and also the amount of earnings retained in the business for financing the future growth. There are basically four types of dividend policy which are regular, stable, irregular and no dividend policy (ICSI, 2017). Taking the information from the past three financial statements of Alacer, it is identified that company follows an irregular dividend policy as it has paid dividends in year 2014 but no dividend has been paid to the shareholders in year 2015 and 2016. Lidiya Mining who is entitled to receive 20% share of legally declarable dividend from Anagold has not received any payment in 2015 related to Anagold’s earnings of 2014, 2015 and 2016, reason being the future capital expenditure involving the Sulfide Project. However, in 2014 the board of directors declared a dividend of $0.02 per share to its shareholders. Payment of dividend made to Lidya Mining as per its share in year 2014, was $22.2 million. But the financial statements of 2016 does not show any dividend payment by the company. The reasons for this irregular dividend policy is the expenditure to be incurred on the Sulfide Project and also a low profit earned by the company. Alacer has the lowest profit in 2016 in comparison with the 2014 and 2015. These can be the reasons for not paying the dividend during the year (Alacer Gold, 2017).

On the basis of above analysis, it can be concluded that it is better not to include Alacer Gold Corp in an investment portfolio. Reasons being, considering various factors like its dividend policy, net profit, Return on Equity and debt ratio. The company follows an irregular dividend policy and has also earned lowest profits in past year. Considering its ROE, it has been continuously decreasing from year 2014. This implies that the company is giving low returns on equity, although it can be favourable to the investors who want to make conservative investment. The debt ratio of Alacer has also increased in the past years indicating high risk. So overall, the company is not performing well financially and it should not be included in a portfolio. 

References 

Alacergold.com. (2017). Alacer Gold. [Online] Available at: https://www.alacergold.com/company/profile-strategy [Accessed 23 Dec. 2017].

Brigham, E.F. and Houston, J.F., 2012. Fundamentals of financial management. Cengage Learning.

Frank, M.Z. and Shen, T., 2016. Investment and the weighted average cost of capital. Journal of Financial Economics, 119(2), pp.300-315.

Huffman, B., 2016. Assessing the Risk of Conservative Investments. Journal of Applied Financial Research, 1, p.42.

ICSI. (2017). FINANCIAL TREASURY AND FOREX MANAGEMENT. [Online] Available at: https://www.icsi.edu/WebModules/Publications/FTFM_Final.pdf [Accessed 23 Dec. 2017].

In.finance.yahoo.com. (2017). AQG.AX Income statement | ALACERGOLD CDI 1:1 stock – Yahoo Finance. [Online] Available at: https://in.finance.yahoo.com/quote/AQG.AX/financials?p=AQG.AX [Accessed 23 Dec. 2017].

Leach, J.C. and Melicher, R.W., 2011. Entrepreneurial finance. Cengage Learning.

Parrino, R., Kidwell, D. S. and Bates, T. 2011. Fundamentals of corporate finance. John Wiley & Sons.

Tracy, A. 2012. Ratio analysis fundamentals: how 17 financial ratios can allow you to analyse any business on the planet. RatioAnalysis. Net.

Ahrendsen, B.L. and Katchova, A.L., 2012. Financial ratio analysis using ARMS data. Agricultural Finance Review, 72(2), pp.262-272.

Alacer Gold. (2017). Consolidated Financial Statements. [Online] Available at: https://www.alacergold.com/docs/default-source/Regulatory-Filings/year-end-financial-statement.pdf?sfvrsn=2 [Accessed 23 Dec. 2017].

Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.

Titman, S., Keown, A.J. and Martin, J.D., 2011. Financial management: Principles and application