Corporate Finance Assignment PDF

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16/20 Corporate Finance Assignment...

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CFTP Summer 2020 Group Assignment #999 Word Count: 2,480

Alex Cheney, Tenzin Kyishi, Aram Nashat, Kareem Sakr

Table of Contents Executive Summary .......................................................................................................................................2 Introduction...................................................................................................................................................3 Body...............................................................................................................................................................4 ➢

Environment ......................................................................................................................................4

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Social..................................................................................................................................................7

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Governance .......................................................................................................................................8

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RAP ....................................................................................................................................................9

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Ethics ...............................................................................................................................................11

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Remuneration..................................................................................................................................13

Conclusion ...................................................................................................................................................15 Reference List ..............................................................................................................................................16

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Executive Summary This report will provide an analysis and comparison of South 32 and Fortescue metals. The two largest mining companies listed on the ASX, these businesses share manly similarities, and these are discussed in the report. Where possible, a comparison of the practice of the two companies was completed in particular sustainability practices, ethics, and management remuneration. The report analyses goals/targets the company hopes to achieve regarding the above topics and the course of action to accomplish the goals. Where possible, the effectiveness of the methods used, and the outcomes will be discussed. The report also investigates the fact that the analysis conducted has limitations. The data we collected was based on the 2019 financial year report. Thus, forecasting figures regarding the performance of the company towards achieving its goals/targets cannot be determined.

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Introduction Mining of ores and minerals made $202 billion in GDP and is equal to 10.4% of the Australian economy in the years 2019-2020. According to the Australian Bureau of Statistics. South 32 founded in 2015 and Fortescue metal's founded in 2003 are within the top 5 largest mining companies in Australia. Although they are in the same industry both companies have different goals and targets that they are aiming for regarding their practices. These differences are important to understand as it allows us to differentiate and provide comparisons of the two businesses. This report will provide information obtained through an in-depth analysis of two mining giants and provide a comparison of the two companies. Focusing on ethics, sustainability (social and environmental), governance, remuneration of directors, and their Reconciliation Action Plan (RAP) will be examined closely. How each company dealt with issues regarding these topics are covered in-depth in the relevant subheadings.

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Body ➢ Environment Fortescue Environmental Issues Climate Change

Fortescue have set a long-term target of achieving net-zero operational emissions by 2040.To begin achieving this, they have targeted a reduction of scope 1 and 2 emissions by 26% of 2020 levels to be reached by 2030 (Climate Change Report, page 3). In FY2020 they invested over US$800,000,000 in energy-infrastructure projects, aiming to deliver 25-30% of stationary energy from solar power (Climate Change Report, p.8). They have also partnered with ATCO Australia to create infrastructure for refuelling hydrogen powered vehicles in WA (Climate Change Report, page 12). In 2020 FMG emitted 13% more emissions than in FY2019 due to expanding operations (Climate Change Report, p.21).

Biodiversity The firm targets a net positive impact on biodiversity and to achieve zero significant environmental incidents each year. In 2020 they recorded no environmental issues and invested AUD$1.7million in research and conservation programs (Sustainability Report, p. 73). Water management The firm has the water management objectives: “to lead a better understanding of regional hydrogeological systems where we operate” and to “use water responsibly by improving water 4

use efficiency and minimising water.” In 2020 FMG withdrew 170GL of water and returned 116.5GL with 98% of water reinjected or used for beneficial purposes (Sustainability Report, p. 76). Closure and rehabilitation FMG plan their mine closures so as to return the land to a state which will provide future use and value. Strategies are reviewed over the course of the mine’s life and a range of “practical, achievable solutions” are used to ensure responsible rehabilitation (Sustainability Report, pp 7677).

South32 Environmental issues Climate Change The firm have committed to following the Paris agreement objectives and achieving net-zero emissions by 2050. They aim to achieve this by five-yearly emission reduction targets, which are linked to executive’s variable remuneration. Current goals are maintaining scope 1 emissions under a 2015 baseline and reducing yearly scope 1 and 2 emissions below 24,672 kilo tonnes of CO2-e (sustainable development report, p 45). In FY20 South32 emitted 23,250 kilo tonnes of CO2-e in Scope 1 and 2 emissions (Sustainable Development Report, p 41).

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Biodiversity South 32 manage biodiversity following ICMM’s mining principle 7, to “contribute to the conservation of biodiversity and integrated approaches to land-use planning” (Sustainable Development Report, p 48)

Water South32 is heavily reliant on water and therefore needs to ensure they have a supply which does not affect local communities and environments. To achieve this the firm uses low quality water for nearly half of its input and it recycles as much water as possible (Sustainable Development Report, p 50-51)

Mine Closure and Rehabilitation The firm attempts to rehabilitate areas once their activities there are complete. In FY20 they rehabilitated an area of 400 hectares (Sustainable Development Report, p 49)

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➢ Social Social sustainability is a pillar of a company’s sustainability approach as it can have the ability to make or break an establishment’s reputation if not given enough attention. South32 Placed an importance of philanthropy demonstrated by the following donations: •

Made contribution of US$800,000 in response to Townsville floods

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US$250,000 to support the recovery from Cyclone Idai in Mozambique

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Matched donations employees made to such causes:

This was done as part of South32’s Australia Employee Matched Giving program. Where in FY19 A$138,000 of employee donations were matched by the company with a total of more than A$350,000 matched since 2016. Fortescue Fortescue’s approach to social sustainability is encapsulated with their following statement “At the center of our approach is a belief that by building a strong business, we can create economic opportunities and contribute to thriving communities.” However, actions speak louder than words which is demonstrated to the many programs and community outreach services Fortescue has been involved in over the years. Since 2011 Fortescue’s “The Billion Opportunities” program started to create business opportunities for aboriginal people and since commencement 120 aboriginal businesses were launched valued at $2.7 billion. Similarly, they strive to support the communities in which they work in by supporting local businesses and employing locals as well. Such support is demonstrated by the $6.6m social investment made in the communities within which they operate. Finally, further Community investments have also been made as part of their Community grants program “with up to A$5,000 in funding to support a variety of community initiatives that benefit the Pilbara”. Comparison Both companies’ approaches to social sustainability are similar as they involve a combination of philanthropy and community outreach. 7

➢ Governance Fortescue Good corporate governance is critical to FM, as it includes the collective of the Board of Directors and all levels of managers. FM continues to establish new practises and uphold governance standards to the current standards in respect to culture and values of the team. FM governance falls under five main categories: transparency, integrity, empowerment, stewardship, and corporate accountability. Being transparent is imperative for a business and FM has made it clear that they stand by this. Being transparent means providing all insights to shareholders with the addition of maintaining a clear and honest form of communication, no matter the news. Integrity must be maintained; FM ensures that they are following the laws and regulation emplaced and considering ethical practises in all business decisions. Empowerment on the other hand ensures that all team members in FM have a voice in order to have the best interest for stakeholders, which also falls under stewardship. Corporate accountabilities make FM more honest as they display the results and reasoning behind decision making, such as whether it was effective South32 Similarly, to FM, South32 places great importance on sustainable governance which is imperative considering its success in the mining industry for all these years. All board of directors except of CEO are independent of the company ensuring the board decisions made are not biased. Furthermore, South32 understands the importance of governance to a degree demonstrated by the fact that they established the following committees: o Nomination and Governance Committee o Remuneration Committee o Risk and Audit Committee o Sustainability Committee The nomination& governance committee ensures the board members are held accountable through a performance evaluation process which is done through the board evaluation guideline.

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Furthermore, the company’s dedication to appropriate corporate governance is demonstrated further by the following figure:

Finally, FM & South32 both demonstrate a clear mission of ensuring their respective corporations to be governed at a high level

➢ RAP South 32 South32 began has developed an innovative RAP for the years 2020 to 2022, with a strong focus on business activities, services, and programs. They are forming mutually beneficial relationships with Aboriginal and Torres Strait Islander stakeholders. South 32 has 4 distinct goals that they wish to achieve which are shown in the image below.

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South 32 aims to achieve these goals by implementing previous methods such as: ➢ Hosting National Reconciliation Week and NAIDOC Week events. ➢ Celebrating Aboriginal and Torres Strait Islander cultures and histories. ➢ Increasing the recruitment of Aboriginal people as well as developing professional development to retain employees. ➢ Diversifying their suppliers to include Aboriginal or Torres Strait Islander businesses. These approaches are just some of the many listed on the official RAP, from these it's evident that South 32 is on track to achieving its goals.

Fortescue A similar company as South 32 is the global leader in iron ore mining Fortescue. Although Fortescue does not have a RAP, they are committed to creating generational change within Aboriginal communities through their Billions program. Focusing on training, employment, and business development. This program commenced in 2011 and since then has awarded 284 contracts and subcontracts worth more than 2.84 billion to 117 aboriginal businesses. The image below is a snapshot of Fortescue’s objective and target for the next two years.

This target is achieved by creating a workplace that supports and promotes the employment of Aboriginal people. 10

Programs such as: ➢ Fortescue’s trade-up program à 82 attendees in 2019 ➢ Curtal awareness training of all employees ➢ Leadership and Excellence in Aboriginal people (Leap program) à 38 attendees 2019 ➢ Aboriginal development team support (VTEC) à ➢ Housing Support ➢ Aboriginal Health Programs These programs are the main methods utilised to promote diversification in the workplace and incentivise more indigenous people to apply as well as retain workers. With a positive output of participants, it is evident the program is working towards achieving Fortescue’s goals. In 2019, there were 1070 indigenous people employed, about 12.1% of the workforce and with continued support, this number is set to grow. With new opportunities for graduates through their graduate programs and cadetships for skilled workers. Fortescue metals are on track to achieving all its targeted goals.

➢ Ethics When considering a decision, a business must always follow the laws and regulations placed. Business’ do not have any obligation to be ethical, however it is recommended as it could impact the business’ public image very negatively.

Fortescue Metals ensures that their strong approach towards sustainability is aligned with the goal of continuously increasing the wealth of the shareholders. In order to achieve such ethical standards, FM boards have approved Code of Conduct and Integrity which establishes personal and corporate conduct with employees, suppliers, contracts, and those who work with the business. FM modern day slavery statement has made it clear that the company opposes all form of slavery in their operations and the operations of their suppliers. FM has undertaken key actions in FY20 as they revised their Modern Slavery Strategy, but also developed a supplier risk assessment matrix that rates suppliers against four criteria to identify high risks. FM understands 11

the importance and history behind the land to indigenous people, such that the $4.3billion tax payment included Native Title payments. Funds going to the Native Title Payments ensure that indigenous people have a voice on whether a particular land can be mined, but also a right to their sacred land.

On the other hand, South 32's approach towards sustainability is to develop natural resources that can improve people's quality of life, now and for future generations. The company also prides itself on its values of care, trust and togetherness that helps guide them to righteous business decisions. South 32 still ensures to increase the wealth of stakeholders by staying motivated during global crises such as the COVID-19 pandemic, climate change and inequality. Similarly, In South 32 modern day slavery statement, they have stated that their goal is to improve to respond to human rights, modern slavery, and related exploitation risks from year to year. In the statement they have highlighted that there were no modern-day slavery practises identified in their supply chain during FY20. South 32 also stated that they have found opportunities for suppliers to improve on their practises in accordance with human rights, as if they are not attended- it could lead to cases of modern-day slavery. South 32 has also made sure to engage with Aboriginals and Torres Strait Islander peoples in order to manage cultural areas of significance, such that contracting spending at GEMCO increased by 13%. The company has continued to increase employment opportunities for Aboriginal and Torres Strait Islander and supporting their business’.

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➢ Remuneration Fortescue remuneration Executive remuneration at Fortescue Metals is comprised of Total Fixed Remuneration (TFR), Executive and Senior Staff Incentive Plan (ESSIP) and Long-Term Incentive Plan (LTIP) (Fortescue Metals Group Annual Report, p. 123). TFR TFR comprises the executive’s salary and superannuation. It is set at a level reflecting the executive’s experience in their role (Fortescue Metals Group Annual Report, p.132). ESSIP ESSIP is an annual incentive opportunity awarding the accomplishment of stretch targets. 60% of ESSIP derives from operational goals regarding safety, production, cost, cash flow and revenue. 20% comes from people and culture, measured through an internal safety and culture survey while the final 20% comes from strategic KPI goals (Fortescue Metals Group Annual Report, p.132-3). LTIP LTIP remuneration consists of share rights vesting over three years upon the accomplishment of performance outcomes. Such performance outcomes include targeted TSR and AROE figures, as well as the fulfillment of key strategic measures (Fortescue Metals Group Annual Report, p. 1356).

Evolution of targets throughout the past three years Operational target figures have increased through the years including production figures, lower costs and a sustained Capex increase. Targets for participation in the safety and culture survey increased demonstrating a greater emphasis on employees and culture. Moreover, the introduction of KPIs to ESSIP demonstrate the actual objectives which executives are striving to achieve. This demonstrates a greater accountability within the company.

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South32 Remuneration Compensation comes in the form of Fixed Remuneration, Short-term incentive (STI) and longterm incentive (LTI). Fixed Remuneration Fixed remuneration is set with regard to the median of peer groups, each executives responsibilities, location, skills and experience (South 32 2020, Annual Report p.71). STI Incentivises outcomes which are a priority for the financial year. It is equally comprised of four measures: sustainability, financial: production, cost and capital expenditure, financial: adjusted ROIC and strategic goals (South 32 2020, Annual Report p.75) LTI Consists of share rights subject to TSR performance over a four-year period relative to a sector and world index (South 32 2020, Annual Report p.78). Evolution of targets throughout the past three years South32 have continually targeted a reduction in total recordable injury frequency and exposure to harmful substances, demonstrating a continual focus on increasing safety. They have also implemented progressively reduced CO2 emissions and decarbonisation plans, as well as targeted community investment and diversity and inclusion targets. Comparison Fortescue Metals remuneration focuses on the accomplishment of more financial and operational targets. South32 meanwhile have also incentivised social and environmental targets leading to greater sustainability.

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Conclusion

In conclusion the report has discussed and analyzed both Fortescue Metals and South 32, Environmental impact, Social impact, Governance policies, RAP, Ethical actions, and Remuneration. Both companies being in the mining industry can add a challenge on whether they have a positive outcome on all these factors. This report discussed the similarities and differences on how each company performs and operates.

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Reference List Fortescue Metals Group, 2020, Annual Report 2020, viewed 17th January 2021.

Fortescue Metals Group, 2019, Annual Report 2019, viewed 17th January 2021.

Fortescue Metals Group, 2018, Annual Report 2018, viewed 17th January 2021.

Fortescue Metals Group, 2020, Sustainab...