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1.Why did Harvey Smith ask the professors to do the MIM benchmarking study in the summer of 1994?
Harvey Smith, as a Treasurer of M.I.M. Holdings Ltd., is responsible for the financial support of the Company’s operating activity and implementing diversification policy in terms of borrowings and hedging procedures. Previously, the Company correlated substantial changes in its capital inflow decisions with investment banks and consulting firms’ analysis. This time, Harvey Smith decided to attract independent experts who would give a specific unprejudiced picture of the position taken by the M.I.M. Holdings Ltd. applying benchmarking methods. These experts will compare the Company’s financial indicators with analogous figures of the most successful companies in the mining industry. “Best approach” will be applied to demonstrate the weaknesses in credit policy, managerial efficiency, indicators of return on investments and stock holder value. Appropriate recommendations based on the qualified comparison of the financial ratios of the high-ranked mineral resources companies will assist in the determination of progressive trends and actions for reaching long-term corporate goals of the Company.
2.What were the principal risks to which MIM shareholders were exposed at the time? What were the consequences for MIM?
It should be pointed that the level of cost of equity capital is high. It is combined with the low level of earnings in the shares trade. Moreover, share prices in the mining industry are very volatile due to the high dependability on the commodity price cycle. At the same time, such fluctuations in share prices are the possibility to conduct aggressive buying out policy during the low price cycle.
The biggest risks for the shareholders are the volatility in the dividend payments due to a high industry’s cyclicality. Currently shareholders prefer to invest in the companies with low internally diversified portfolio. MIM should support such a trend in the industry and reject doubtful investments, focus on a qualitative control and expansion of existing profitable areas and cost control.
3.What were the principal risks to which MIM bondholders and bank lenders were exposed at the time? What were the consequences for MIM?
Regarding the cost of debt capital, it is also very high in the industry, whereas the average debt ratings of the top companies are low. Naturally, market risks and economic insecurity as well as cyclicality determine the level of sales and profitability and consequently the ability to timely and fully repay debts. It should be emphasized, that presently the Company follows its debt investors’ interest which benefit from highly internally diversified Company’s investments portfolio, dependability and control over the distribution of cash flow.
4. Is there a difference between the approach to MIM risk assessment between shareholders and creditors?
According to the professors’ report the figure of dividends paid to the year-end market price are the best indicator among others financial ratios of the Company. At the same time due to the high level of leveraging the Company could not provide high profits to its equity investors comparing to alternative investments in bonds and could not assure that the associated risks will be justified. It should be emphasized that poor industry performance, price cycle and a broad diversification policy that does not generate appropriate financial outcomes are the risks for the shareholders.
It is crucial for the Company to shift its financial strategy from satisfying the interests of creditors to the guaranteeing the biggest level of profits for the shareholders. Naturally, it requires efficient cost control and hedging strategy in term of talent manipulation with interest rates and currencies during the low cycles in the industry or recession times and “skimming” revenues during the times of economic recovery.
5. How does this case go to the heart of MIM’s corporate strategy?
When developing the corporate strategy’s direction, top management considers the fact that the mining industry requests high inflow of capital. It is risky due to a big dependability on the world’s commodity prices and cyclicality. With the aim to follow its vision of being the “best mineral resource company in the world” MIM’s corporate strategy should be adjusted to the current trends in the industry and to the corporate cultures of its main competitors. Treasury of the Company must take into consideration the evidence that the best companies in the industry from an equity investor's point of view became more focused on the core areas of activity, do not spend time and resources on activities which have little in common with the main business, are value streamlined aiming to concentrate control in their hands over the particular commodity market.
6. Based on the professors’ report, how would you propose MIM senior management react to it?
Professors’ report is perceived by the Company as a complementary peer analysis of existing trends in the mining industry and current financial policies based on the benchmarking methodology. Taking into consideration, that the mining industry possesses sovereign risks, markets risks, project risks and technological risks, senior management of the company should pay attention to the regulating of the Company’s diversification strategy and hedging strategy. I consider the task for the top management to review and critically analyze minority investments or further diversification of investment’s portfolio through the non-mining industries controlling, conducting aggressive acquisition policy of the strategic objects, reducing capital expenditures in marginal properties and putting an emphasis on the flexible managerial and financial policies to be the most crucial.
It is especially vital recommendations regarding that fact that MIM Holdings, Ltd. is allocated in the worst quartiles in ranking tables of debt analysis in maturity and volumes, net debt, current ratio, debt service coverage capacity comparing to the best companies operating in the industry. Managerial efficiency is in the strongest position comparing to the return on investments and stock holder value ratios. Moreover, the Company possesses 11th place among 15 chosen companies in credit quality rating. It means that the company is a highly leveraged company with the portfolio of debt instruments characterized by short-term borrowings. The ratio of borrowed and equity capital of M.I.M. is 44 percent that is 15 percent higher than the average figure among the chosen companies. Top management of the Company should restructure its debt portfolio with focusing on the extension in maturity dates and decrease in its volume through proposing investors new kinds of preferred stocks.