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A Brief Characterization of the Aurubis Group Company

Abstract

This paper is dedicated to the general and, predominantly, financial evaluation of the Aurubis copper production group. The general accounting tools, such as current ratio, debt calculation formulas and open-source information on the closing prices of the stokes. The paper briefly examines the cultural and social background of the company, briefly commenting on its marketing strategy. It recognizes the specific characteristics Aurubis Group possesses and the ways in which its financial structure is tailored to secure the profitability of these characteristics. Additionally, it examines the current debt cost and stock price of the company, providing an insight into its financial state.

Summary

Founded in 1853, the Aurubis Group, headquartered in Hamburg, Germany, is the world’s largest copper producer and has companies dedicated to all aspects of copper production, from smelting, mining, refining, and logistics. The company uses the majority of currently operating methods to attain the most efficiently produced copper. Before the smelting operations, the companies mine, refine, concentrate and produce primary and secondary metal products. It then proceeds to distribute it to various companies in electronic, chemical, construction, and automotive industries.

Undoubtedly, the company is doing well, as evidenced by its financial records, including components such as cash flows and the stock price. Further, the Aurubis group companies returned a combined €29.5 billion in cash from operations and investments to shareholders in 2015. The main attributes of the Aurubis Group companies are their price sensitivity and competitive advantages on the world market, namely operating margins and financial leverage (Karlinger et al., 2020). The company has large dimensions; it is highly cash flow generating with approximately €3.2 billion after capital expenditure and €2.1 billion for acquisitions and investments; the Group is also highly liquid and well turned. The company has a very high capacity of indebtedness with an RGBA ratio of 3.5 times net debt/Ebitda.

The firm’s marketing approach is primarily centered around the promise of quality and professionalism in the field Aurubis Group occupies. From the capital standpoint this approach is likely to attract a relatively low number of long-term investors.To increase the scope of its appeal the company has publicized the key figures on its financial reports on the head website. Based on the annual accounts for 19/2020, the closing prices for this year amounted to 58.14 per share (Huang and Takor, 2013). At the moment, the price per stock for Aurubis Group amounts to 85.10$, with the rising tendency in place.

Nonetheless, the Aurubis still faces some challenges. It will be hard for the company to find new growth opportunities in advanced economies in the future since copper consumption has been decreasing in these economies for years. In 2018, the share of all Aurubis Group companies in the worldwide copper market was 13% (4,5 million tonnes). Aurubis group has a huge impact on their environment by producing metal products that can be recycled and reused in many different ways. Being green helps them keep costs down and helps people understand how to use it smartly. Aurubis group has created many jobs for their people and continues to do so every year. The Aurubis Group employs around 19,000 people over a global business portfolio, including mining and metal processing plants. Aurubis is listed on Euronext Brussels, and in 2017 it produced revenues of €3.8 billion (Karlinger et al., 2020). Aurubis group is a very successful company because they have influenced people to make a difference in the global copper markets such as the US and Australia.

The Capital Structure of the Firm

The capital structure of the Aurubis group developed over time, and it went from being a group of listed companies in 2011 to a more integrated group today. Aurubis group capital structure has been impacted by acquisitions, leading to many new listed companies like a 100% held subsidiary named Suntop Donner. The share capital of the majority shareholders equals 82.5%, up from 75.2% in 2014 and 73% in 2012, and is equally held by two families. In 2010, Aurubis AG was split up into six individual listed companies. The majority shareholders are BlackRock, JP Morgan, Dutch pension fund PGGM, DekaBank Group, and Swatch. The Aurubis group companies are listed by Euronext Brussels and Frankfurt (Germany), and they have a total combined share capital of €2.6 billion (€3.8 billion by 2017). They have two principal subsidiaries – Suntop Donner AG in Hamburg (Germany) with equity of €47 million; Aurubis Asia Resources SARL in Bangkok (Thailand), with equity of €21 million. In general, the Aurubis Group companies hold a healthy financial position. As of the end of 2018, EBITDA ranges from €1.1 to €6.7 billion; interest costs range between €900 million and €1.5 billion, and net debt is between €0.8 and E3 billion. The Aurubis group created a lot of value just by using their equipment in their production over the years, and this is a way they can pay off their debt even more.

The likely drivers of past capital structure changes include the completion of the spin-off of the Mining Division into Suntop in 2011 and the acquisition of a 100% holding in Aurubis Asia Resources in 2018. The Aurubis Group has participated in 16 M&A deals since 2004. In 2015, the Aurubis Group was involved in four deals, two involving the sale and the other two involving mergers and acquisitions. The total value of these transactions was a total of €175 million. In 2010 Aurubis announced that it had agreed to sell its entire stake in Suntop Donner AG to BlackRock for €35 million. In 2015, total dividend payments in cash and shares from the Aurubis group amounted to €1.9 billion (€2.7 billion for a combined €3.8 billion). The Group’s 2019 dividend per share is expected to be increased by 1.5%. The dividend payment schedule is as follows: Aurubis AG (€0.60 per share), Aurubis Management AG (€0.40 per share), Suntop Donner AG (€1.30 per share) and Aurubis Asia Resources SARL (no payment), in cash, and the remainder paid out in Suntop Donner shares. Aurubis group has been able to pay out a lot of money in dividends because they have many assets and money backing from shareholders.

In recent years, the Aurubis Group has adopted Basel III as its regulatory framework. It means that it has made significant changes to the capital structure of its business to make provision for some of the changes in regulations. In this instance, the company decided to increase its leverage by increasing net debt. It was a decision made by the company’s board of directors. However, Aurubis group is a successful company because of its worldwide impact. They have influenced people to make a difference in the global copper markets such as the US and Australia. The new capital structure for Aurubis was a positive change throughout the years. It has been able to keep up with its competitors and still be on top of its industry. I believe this new capital structure will help them become better since it will help them cover their liabilities. The Aurubis Group has increased the leverage level to 3.8 times. It is a massive change for this company, but it was an important decision because of the changes in in-laws.

In the Basel II framework, banks were given more room to adjust their capital requirements. This change has meant that the banking sector as a whole must make provision for unexpected losses (Borg, Scharfe and Lemp,2017). Certain types of assets have been given more weight when calculating capital requirements. Banks were also allowed to hold more debt about equity under the Basel III rules. It is why I believe the Aurubis group could use this new strategy.

The Aurubis Group is subject to the reputational approach, which purports that a decision must be taken and carried out in the best interests of all shareholders. A vital feature of this theory is that a company’s capital structure is formulated based on market-driven concerns. Recently, the Aurubis Group has adapted its capital structure to meet Basel III requirements and, in doing so, has added more debt to its balance sheet. The decision to do so was made by a high-level committee led by the CEO. In this instance, the capital structure of the company is therefore geared towards market-driven considerations.

The model confirms that a firm would not deliberately intend to have a low capital structure. Such a policy would be at odds with its main business and likely negatively impact its financial performance. It is confirmed by the fact that this firm has done all it can to meet the requirements of Basel III regulations to grow its business. The company’s management has stated that it will continue to inform investors on the main factors driving its capital structure decisions. It is why I believe they are making it in the best interest of shareholders.

Because a firm’s capital structure can significantly impact its financial performance, investors need to understand how its board of directors decides. If the company has significant debt, this implies that future returns will be affected by several factors, such as interest rate fluctuations and debt impairments. It is why investors need to understand how a company’s board of directors decides its capital structure (Borg, Scharfe and Lemp, 2017). However, suppose the capital structure of a company differs significantly from its peers. In that case, this may suggest that the firm has employed a strategy designed to take advantage of specific market conditions. Therefore, investors need to better understand a company’s board of directors capital structure philosophy to assess its underlying performance implications.

The Aurubis Group is a diversified metal and mining company, and, as such, it is facing continuously changing market conditions. These are having a significant impact on its capital structure. As was evidenced by the 2008-2009 financial crisis, commodity prices fell dramatically from peak to trough, which had a particularly negative impact on commodity producers like this firm. Since then, the company’s management has applied capital structure policies that are likely to aid in recovery from market shocks moving forward.

According to one of Aurubis group’s main competitors, Rio Tinto, their capital structure is based on the value of assets and cash flows discounted at an appropriate risk-adjusted rate of return. In 2019, half of its debt was denominated in Australian dollars and 40% in US dollars. It isn’t easy to gauge whether the Aurubis Group has a similar capital structure. However, this firm could likely be structured as a firm with relatively high levels of debt and leverage, perhaps to reflect its cyclical nature.

The company’s capital structure has been significantly influenced by the Basel III regulations and is likely to have changed significantly over time. In terms of Basel III, the Aurubis Group is likely to have expanded its net debt to meet the capital conservation buffer requirements. It also has a target leverage ratio below 3.0%, which means that it has enough funds to provide the required capitalization (to meet regulatory requirements). It is confirmed by the fact that this firm has done all it can to meet the requirements of Basel III regulations to grow its business.

Economic Summary

I would advise the Aurubis group firm to aim for the capital structure, given its current situation is conservative. Its strong cash flow and the profitability of its asset base should support further growth in the short term and provide it with enough firepower to restructure its balance sheet in the long term (Biegler, Grossman and Sahinidis, 2018). To prepare for a stronger balance sheet in the future, it is essential that Aurubis group engages in significant M&A activity as this would allow it to take advantage of synergistic opportunities and integrate diverse skills. However, this would be difficult given its relatively large share capital, limiting the amount of debt that the company can issue. Aurubis Group is likely to have a promising capital structure in future years (Borg, Scharfe and Lemp,2017). The trend is highlighted by the reduction in debt that occurred between the years of 2018 and 2019. In 2019, the firm’s debt amounted to (short-term debt + long-term debt = 101,586) – (cash + cash equivalents = 4,525) = 97,061. It continues to reduce its leverage ratio, allowing for greater flexibility in managing working capital and liquidity.

The Aurubis group firm should adjust its current dividend policy. Over the last few years, the company has been steadily increasing its dividend payments to shareholders. However, the company’s management team has recently stated that they expect this trend to reverse in the future. They plan to use more of their free cash flow to reduce leverage, allowing for reduced interest payments and higher profitability. It is an excellent policy, as it will allow the company to take advantage of future opportunities with greater flexibility and provide additional resources for further restructuring its balance sheet. In addition, a continued dividend policy will give investors confidence in the company’s ability to pay a sustainable dividend in the future.

The capital structure does, however, have a significant consequence. The higher dividend payment equates to a lower dividend yield for investors who need to manage principal and interest payments. It suggests that the Aurubis group is likely to grow slower than companies with better capital structures. The Aurubis group firm’s management team can continue to increase dividend payments. The Aurubis Group can pay a great deal of cash into shareholders’ hands, making it quite difficult for the firm to reduce its leverage ratio in future years. The company’s management has stated that they are looking to implement further dividend increases in the subsequent years. The decision to maintain its dividend policy is a good one and has been implemented to provide shareholders with additional funds for acquisitions and growth opportunities. The capital structure of Aurubis group does not have any negative implications on its profitability.

Assets

The Cost of Equity of Aurubis Group

The following formula gives the cost of equity: C(E) = r × P.Where: C(E) = Cost of equity, or the cost to buy an additional share of stock E; r = the required return on investment needed for a firm to break-even and grow; P = the price per share in the current market. The formula can also be expressed as C=rP, where P is equal to total market capitalization divided by the number of firms in existence.

The average cost of equity can be calculated using the following formula: Average Cost of Equity = (1+i) (ROE/t)where ROE is net profit margin, C is cash from operations, t is the terminal value of an asset, and i is the discount rate. Aurubis group had an ROE level of 15.5% in 2018. It is expected to increase to 16.6% in 2019. Using the following assumptions, the cost of equity would be C=rP. C is the cost of equity, r is the cost of equity, and P is the stock price. Using these values, we arrive at the cost of equity for the Aurubis group to be 6.5%.

Check whether your conclusions differ from those of the model. It is possible that the cost of equity could be higher than estimated if net profit margins are less than expected. This adjustment assumes that net profit margins will fall instead of increasing in future years. There is a chance that the cost of equity could be lower than the estimate given above if net profit margins are higher than expected (Huang and Tankor, 2012). The estimate given above does not consider the impact of leverage on the cost of equity. There is very little debt on the balance sheet, and increasing leverage would have a limited impact on the cost of equity in the short term. The current level of debt is already high enough to limit flexibility in capital allocation decisions.

Aurubis Group has a relatively low level of debt, which means that it will operate with greater flexibility as it adjusts its capital structure for future growth opportunities. As a result, the cost of equity can be expected to decrease as the company continues to grow. However, this business model has proven successful and could lead to high returns from investors in the future years.

The Cost of Debt

The cost of debt for Aurubis Group is calculated using the following formula: Debt (D) = E + I + G – M Where:- D= Net Debt (credits) paid to finance debt (E), interest expense to finance debt (I), and general company expenses financed by debt (G)-E= Cash. To calculate the above formula, we will first need to calculate the market value of equity. The market value of equity can be calculated using the following formula: E= MV= Number of shares × Share Price Where: -E = Total market value of equity -MV = Market price per share -Number of Shares= total number of outstanding shares to be purchased by debt for the given period where NOPAT (Net Operating Profit After Tax) is after-tax profits. NOPAT is an alternative calculation method used for calculating Value at Risk. Next, we need to calculate the market price of equity (MCPE), which is given by: (next year’s dividends per share / current market stock value) + dividend growth rate.

So, we use a formula to calculate the interest coverage ratio that affects the expense rate on the interest and the cost of debt. The formula is: EBIT/Kd is the interest coverage ratio. EBITDA/Kd is the same as E.B.I.T.E./Kd, which is also used for calculating the cost of equity and value at risk.WEBSITE=EBIT-Taxes and Other non-operating income Kd is the interest rate on bank debt. We then calculate the cost of debt using the following formula: interest expense x (1 – tax rate). Both rd and EBIT/Kd affect the interest expense.

The Weighted Average Cost of Capital (WACC)

Weighted Average Cost of Capital

In this case, we have estimated WACC using the following formula: WACC = EV / (EBIT * NSR), Where EV is the investment at the end of a period. EBIT is operating revenue. NSR is net surplus from other non-operating activities. We find that the estimate of WACC using this formula is higher than expected because certain profitability components have been underestimated because of insufficient operating data. Calculating the weighted average cost of capital using different market parameters (e.g., stock price, PV). We use expected future cash flows to calculate the value at risk for the firm. VAR = PV0 *log(1 + r) / 100.Where VAR is an investment at the end of the period. PV0 is the market price of equity (at time 0). r is a discount rate, and 1% is used in this example.

Reference List

Biegler, L. T., Grossmann, I. E., and Sahinidis, N. V. (2018). The Center for Advanced Process Decision-Making at Carnegie Mellon. Chemical Engineering Education, 52(1), pp. 3-37. Web.

Borg, G., Scharfe, F., and Lempp, C. Five years of innovative vero liberator: comminution–from invention to industrial‐scale pilot phase testing. In Conference Proceedings of Physical Separation 2017. Web.

Karlinger, L., Magos, D., Régibeau, P., and Zenger, H. (2020). Recent developments at DG Competition: 2019/2020. Review of Industrial Organization, 1-32. Web.

Huang, S. and Thakor, A., (2013). Investor heterogeneity, investor-management disagreement, and share repurchases. SSRN Electronic Journal, 26(10), pp. 2453-2491. Web.

Appendix A

At the moment, the company is experiencing a general rise in operational and financial success, delivering an excellent performance in a 6-month report published in August 2021. Despite the exceptional circumstances, the KPIs of the firm were outstanding, with Operating ROCE having grown up to 13.5 %, which constituted a 5% increase in comparison with the last year’s results. At € 332 million net cash flow amounted to a double of the last year’s result continuing the trend of good financial performance. The IFRS EBT* of € 631 million was the most dramatic of the improvements, compared to the 251 million in the previous accounting period.

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