ECONOMIOC ANALYSIS OF THE COPPER MINING INDUSDRY OF IRAN

1. ECONOMIOC ANALYSIS OF THE COPPER MINING INDUSDRY OF IRAN • Kazem Oraee PhD • Professor, Stirling University, Stirling, UK • ArashGoodarzi MSc • Research Fellow, Ministry of Labor and Social Affairs, Tehran, Iran • Nikzad Oraee-Mirzamani LLB, MSc, DIC Research Student, Imperial College London, London, UK Sarcheshmeh Copper Complex

2. Government's share in GDP was 80 percent in 2005 It is widely accepted that 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. Iran’s GDP=$ 331 billion (2009) WORLD BANK report The program was launched as part of the government's 10-year plan to privatize 80 percent of state-owned assets. The government's assets were estimated at about $120 billion. Since 2005 $63 billion of the assets have been privatized.

3. The Middle East Copper ore production in Iran accounts for 75% of the total production in the Middle East.

4. All activities related to copper (exploration, production, refinement etc) are owned and managed by state owned companies. National Iranian Copper Industries Co (N.I.C.I.Co) Click on Icon Decisions have been made to privatize all these activities.

5. Privatization: • The partial or total transfer of property or responsibility from the public sector (government) to the private sector (business). • The private sector is the “engine of growth”

6. Objectives of privatization - To relieve the financial and administrative burden of the government; • - to improve efficiency and increase productivity; • - to facilitate economic growth; • - to help meet national development targets; • - to reduce the size and presence of the public sector in the economy;

7. History of Privatization Thatcher elected 1979. The Great Britannia has had a good infrastructure for controlling . - BP (1979) - British Aerospace (1981) - Cable and Wireless (1983) - Jaguar (1984) - British Telecom (1984) - British Gas (1986) - British Airways (1987) - Rolls Royce (1987)

8. According to the foundations of communism: The union soviet’s government control the means of production. The Soviet Union and Eastern Europe’s economies reached an impasse in the mid 80s by the lack of management and low productivity in industries. The government spending increased sharply as an increasing number of unprofitable enterprises required state support.

9. General Secretary Mikhail Gorbachev (1985-91) introduced openness and restructuring in an attempt to modernize communism with a program called Perestorika. The program permitted private ownership of businesses in the services, manufacturing, and foreign-trade sectors. Rapid mass privatization led to corruption by managers and controlling shareholders.

10. Privatization Russian multi billionaires rose through the anarchy of post-USSR. They became rich by cheaply acquiring stock in newly privatized Russian companies. This was while 20% of the population lived below the national poverty line. ((WORLD BANK report))

11. Economic analysis is a systematic approach for determining the optimum use of scarce resources. It involves comparing alternative ways for achieving a specific objective under given conditions and constraints. Necessary for decision making concerning investment activities in every business.

12. 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.

13. Financial resources are limited; investors must choose the best investment opportunity. Potential investors need certainty in the current capabilities of a private company. They require financial knowledge and trust in the management in researching financial goals.

14. In Iran investing on mining projects in the stock exchange is thought to be lucrative since approximately one third of the economy is dependent on the activities in the mining sector. Stock Exchange Therefore for the purposes of N.I.C.I.Co (National Iranian Copper Industries 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.

15. Everyone is on the look out for investment opportunities, be it individuals or institutions (or even States). Investment opportunities will have different rankings according to their level of predicted profitability. Even if the investor faces one good 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.

16. 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.

17. The balance sheet Total asset ≈ $2.3 billion

18. Profit/Loss account of N.I.C.I.Co for the recent triennial fiscal years Net profit (annual) ≈ $750 million

19. Investment Economic analysis • Sale analysis • Cost estimation

20. 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.

21. The market for the production of copper in Iran is a pure monopoly market. Furthermore a company enjoyingmonopoly 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.

22. Sale (Import & Export) analysis for 2009 The sale: Import  60% & Import  40% Main production: Cathode copper & Wire rod

23. Cost estimation Costs as well as revenues must be calculated in economic analysis. Costs are the monetary value of expenditures for: - supplies A cost is the value of money that has been used up to produce something. - services - equipment - labor - products - other items purchased for use by a company or other accounting entity

24. The global recession and collapse of copper prices has forcedthe 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.

25. The table of finished products cost for the fiscal years Total cost  $800 million

26. Overheadsthe largest group of costs(40% of the total costs) It is usually used to group costs that are necessary for the continued functioning of the business, but which do not directly generate profits. • Energy - Depreciation - Transport - Rent They include - Repairs - Supplies - Other such costs

27. The table of overhead cost for fiscal years: 2009-2008 Depreciation + Stripping  55% of overhead cost

28. The prediction of price Pricing and breakeven analysis will determine the impact of a price change on the business. Recycling is a major source of copper production in the modern world. Copper is a finite resource, but, unlike oil, it is not dissipated and therefore can be recycled.

29. As consumption in India and Chinaincreases, copper supplies are becoming scarcer. • Nevertheless some reports forecast an increasing demand in the near future as the global economic growth resumes. A rise in raw material prices, especially in the metals occurred in recent months. • 11 Feb 2011 = $9,920.50 per ton

30. The average price of cathode copper from 2000 to 2010 $8,780 per ton $2,540 per ton $1,377 per ton weakening global demand and a steep fall in commodity prices

31. Calculation NPV • The values of the project in the future≠ The value of the project in the past ≠ The value of the project 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. The Net Present Value [NPV] (a useful method for economical evaluation) = 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 long-term projects.

32. Economical evaluation of N.I.C.O.Co for the next 10 years The total assets in 2008 were assumed as our cash flow for year 0 Present Value Index Factor The sum of net profit and depreciation in 2009 were assumed as cash inflow for years 1, 2, 3, 4, 5, 6, 7, 8, and 9 The cash flow table is formed according to the balance sheet and the profit and loss account

33. Net present value is computed for: PVIF = 15%, 20%, 25% and 27.8% The NPV is positive for 15%, 20% and 25% The discount ratethat makes the algebraic sum of future returns and initial investment is equal to zero and is called the Inter Rate Ratio (IRR). IRR is 27.8% where the amount of NPV becomes nil

34. Where inflation and risk are not accounted for, Net Growth is 10% and is therefore an acceptable rate.

35. It is widely believed that if current governmental organizationsare privatized they will need to become more efficient. At present many are not profitable.

36. Privatization in Practice 40% of the shares of N.I.C.I.Co 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. The investors wereother state-owned organizations! Including: - pension funds All shares sold in less than 7 minutes - state banks The public did not have the opportunity to invest in the company. - state broadcasting industry

37. Laws must be strengthened to minimize the potential for corruption before a privatization program can be effective. Experiences in the last schemes of privatization indicate the desirability of speedy mass privatizationtechniques, resulting infull transfer of the interests, without special deals for insiders and without attaching lingering investment or employment obligations.

38. Thank you very much for your attention