Thursday, 5 June 2014

Using the Index of Economic Freedom: A Practical Guide

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Wednesday, 4 June 2014

AusIMM International Uranium Conference 2014

I will have the pleasure of attending and reviewing the AusIMM International Uranium Conference 2014 next week, with big thanks to AusIMM.

Australia currently provides about 12% of the worlds Uranium. The first mine was built in 1906 at Uranium Hill, and then Mount Painter in South Australia in the 1930s. Following the Japanese Fukushima nuclear disaster in early 2011, many countries are scaling back their nuclear power production, with some setting deadlines for a complete shutdown of all nuclear power reactors. It is expected that this may impact on demand for Australian Uranium. State governments have now approved mine development in Western Australia and Queensland.

Despite the clear environmental benefits Uranium mining and its use has remained a point of controversy. China has new energy targets in place which will require clean fuel. Wether or not Australia is a player in that game will depend on how the industry progresses in the next few years. Even Hawke has been weighing in on the debate. 

We heard recently that the Japanese confirm that not one death has been caused by radiation from Fukushima. There may be some longer-term issues coming, but lets not forget the level of smog in China at present. 

How are we to venture forward in this world?
In light of the coming changes would you happily have a Uranium mining stock on your portfolio? 

The two day packed technical program will shed some light on the industry at the moment. The event boasts some very interesting keynote presentations by renowned Australian speakers, a variety of networking functions, a trade exhibition and more.

The speakers include:

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The stages of mine design

Below is a generalised list about the stages of mine design. When you start to look at a mining company and their stock remember the list below. As a general rule you will find that the share price will creep from the initial opening of the stock to the Pre-Fesibility Study, it will then drop sharply and regain some ground a the detailed design phase. Once that is complete and if it is a sound project the price should increase dramatically. 
  • Pre-evaluation study
  • Scoping study
  • Pre-feasibility study
  • Feasibility study
  • Detailed design
  • Project management principles

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Friday, 30 May 2014

8 Creative ways to make money

Sell 477,000 apps in the App Store or 714,000 self-published books on Amazon’s Kindle; either could be the path to riches.

Launch a one-person blog, master Facebook's algorithm, and make multiple millions in eight months.

Average payment from Google ads: $2 per thousand views ($1 for each ad on the page)

Million-dollar maths: If a publisher generates 41,650,000 pageviews per month, they can generate about $US83,000, or $US1 million per year.

Who did it: Scott Young was able to launch his site and get it to 200 million monthly pageviews just eight months later. DeLong uses remnant ads (cheap ads, like Google AdSense). There are two ads on every page.

ViralNova's AdSense rate might be $US2 per thousand views, $US1 for each ad on the page, which would earn Delong $US400,000 every month he hits 200 million pageviews.

Be an UberX driver in NYC for 10 years.

Median income of an UberX driver in NYC: $US90,000

Amount drivers keep per ride: 80%

Million-dollar maths: According to Uber, the median wage for an UberX driver working at least 40 hours a week in New York City is $US90,766 a year and $US74,191 a year in San Francisco. That mean 10 years of work in NYC could earn UberX drivers $US1 million. It'd take 13.5 years in San Francisco. That's without the cost of owning an operating a car built in, however.

Who did it: N/A; Uber the company is only a few years old.

. or a Lyft driver for life. It will take you twice as long to make a million dollars as UberX, according to Glassdoor reviews

Dog-sit for 6,667 pups on DogVacay.

Average amount made per dogsitting: According to DogVacay, the average host could expect to make about $US150 for a five-day Vacay (which is the average length for a first-time booking). That's after the 15% cut DogVacay takes per booking. The average payment varies from city to city, however.

You keep: 100% of that.

Million-dollar maths: $US150 x 6,667 dogsits = $US1,000,000

Who did it: N/A

Create a frustrating, viral app like 'Flappy Bird' and keep it in the App Store for at least 20 days.

Payment from mobile ads: At its peak, 'Flappy Bird' creator Dong Nguyen says he was making $US50,000 per day on his free app by running a tiny mobile ad banner at the top of the game.

Million-dollar maths: $US50,000 per day x 20 days = $US1,000,000

Who did it: Dong Nguyen created 'Flappy Bird' last spring and claims he organically grew it to the top spot in the App Store. While 'Flappy Bird' was at the top, Nguyen told The Verge's Ellis Hamburger it was generating $US50,000 per day. After about a month, Nguyen removed the app from the App Store and Google Play because he felt his game was 'too addicting.'

Self Publish on Amazon

Average cost of a book sold: $US2

You keep: 70%

Million-dollar maths: For every $US2 book sold, you keep $US1.40. $US1.40 x 714,286 books = $US1,000,000.40

Who did it: 29-year old Amanda Hocking was the best-selling 'indie' writer on the Kindle store a few years ago. She was selling around 100,000 copies per month at $US1 to $US3 a pop, which set her on track to pocket a few million dollars.

Sell 10,262 business plans on eBay.

Cost per business plan: $US111 (£68)

Profits you keep: eBay charges a $US0.50 insertion fee, 15% of the initial $US50.00, plus 5% of the remaining final sale price balance, which leaves you with $US97.45 per business plan sold.

Million-dollar maths: $US97.45 x 10,262 business plans = $US1,000,031.90

Who did it: A few years ago, Samuel Katabaaz tried to sell 99,999 copies of his startup's business plan for £68 each. The idea was to fund his startup without giving up any of the equity. It's not clear how many items he actually sold.

Invent a really good idea on Quirky and rake in royalties like Jake Zien did with his product, Pivot Power.

What Quirky is: Quirky is an invention site that lets the community submit million-dollar ideas. It chooses the best ones, then sells them in partnering stores and online.

Cost: $US0 to submit an idea. If your idea gets selected for production, you'll have to split the profits with both Quirky and the website's community. The inventor gets a lifetime royalty of 30% of online sales (wholesale) and 10% of retail sales (in Bed Bath & Beyond stores) if Quirky decides to turn the idea into a product.
Million-dollar maths: A product like Quirky's popular power strip, Pivot Power, retails for $US30. More than 665,000 of the items have been sold. If you assume the inventor, 24-year-old Jake Zien, gets $US3 to $US9 per sale, the idea easily makes him a millionaire.

Who did it: Quirky founder Ben Kaufman told Inc that Jake Zien would be the site's first millionaire in December. 'Kaufman claims, in fact, that Zien should make $US1 million in Pivot Power royalties in 2013 alone, and then every year after, because the product is branching out into an entire line of Pivot Powers. There's a mini edition, a rugged version, and versions for various foreign power-outlet configurations,' Inc's Josh Dean writes.

Rent your Manhattan apartment through Airbnb for 10,309 nights.

What it is: Airbnb lets users rent rooms in their homes to strangers for an amount and length of their choosing. Hosts can set nightly, weekly, and monthly rates.

Average cost per rental: Hosts can charge renters whatever rate they want. Costs depend a lot on the host's location, though. The recommended nightly price for a private bedroom in New York City, for example, is about $US100. Airbnb takes a 3% host fee.

Million-dollar maths: $US97 x 10,309 nights = $US1 million

Who did it: A few years ago, a man named Daren said he made $100,000 on Airbnb off his London rental. A man named Jeff said he had made $US90,000 from his Paris rental. Here are a bunch of other people running six-figure businesses off Airbnb. There don't seem to be any Airbnb millionaires yet.

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May Day "Sale Day"

Proving to be the end of what was a cautious month the market has held its own this week. There has been a heavy focus on Wall street following its gains but regardless of that there is some positive sentiment in the bull. However, that sentiment usually has the bears calling out that we are missing something. The bull has certainly bucked the trend of the May sell-offs of the previous five years. Next week will prove to be interesting given the triangular pattern of the market indicating a breakout.

AFR 30 May 2014:  

“May was something of a watershed month for investors in the oil and gas sector,” Mr Hershan said.
Shares in Oil Search jumped 6.6 per cent to $9.43 after production began at a major liquified natural gas project in Papua New Guinea it is a partner in. Other oil and gas producers that are nearing the start of commercial production on big LNG projects also got a boost. Santos lifted 5.9 per cent to $14.52, and Origin Energy added 1.7 per cent to $15.09.
Woodside Petroleum rose 3.3 per cent to $42.17, its highest price since June 2011, as shareholders mulled the company’s decision to pull out of Israel’s Leviathan LNG project. Brent crude oil gained 1.4 per cent to $US110.03 a barrel as Russia and China announced a major gas deal.
Aquila Resources was the best-performing stock, climbing 38.8 per cent to $3.47 as China’s BaoSteel and Queensland’s Aurizon Holdings lobbed a joint takeover bid worth $1.42 billion.
Mining was the worst-performing sector for the month, down 3 per cent as the spot price for iron ore, landed in China, dropped 9.7 per cent to an 18-month low of $US95.70 a tonne. Resources giant BHP Billiton fell 1.3 per cent to $37.01, while Rio Tinto lost 2.5 per cent to $59.30.
Iron ore play Fortescue Metals Group plunged 12.7 per cent to $4.41 over the month.
“The slump in the iron ore price over May was inevitable given the strong increase in global supply coming through,” Mr Hershan said.
Copper and gold miner PanAust jumped 37.1 per cent to $2.20 after majority shareholder China’s Guangdong Rising lifted its takeover offer to $2.30 per share.
Junior goldminer Regis Resources was the worst-performing stock, dumping 36 per cent to $1.56 as analysts slashed 2015 earnings estimates after the company provided a disappointing exploration update. The spot price of gold fell 3.3 per cent over the month to $US1257.72 per ounce. Australia’s biggest goldminer Newcrest Mining, fell 5.3 per cent at $9.74.
“It was a promising to see the local capital markets really come alive,” Mr Hershan said. “A number of initial public offerings, some of good size and quality, along with an uptick in M&A  activity is creating new opportunities for investors.”
Among the biggest IPOs to hit the boards in May, Spotless Group is up 15.5 per cent at $1.85, while Genworth Mortgage Insurance has risen 19.2 per cent to $3.16. June is tipped to be an even busier month for new listings.

Wednesday, 28 May 2014

How to understand and use NPV in a business case

As mentioned in the previous posts there are a number of factors (metrics), which need to be accounted for when putting a business case together. One example could be where a corporation has employed you to decide whether to introduce a new product line. Metrics to be included in this calculation include:
  •       Start-up expenditures,
  •       Operational expenditures,
  •       Incoming cash receipts (sales)
  •       Disbursements (Cash paid for materials, supplies, direct labor, maintenance, repairs, and direct overhead) 
  •       Over the life cycle of the product.

The NPV  (Net Present Value) is the forecast financial outcome of a new product initiative. It will enable you to give a fairly accurate forecast on the earning potential. Calculating it will firstly tell the business if the product initiative will return a benefit to the business relative to the cost of financing the investment, and secondly the NPV provides a standard yardstick by which to measure one initiative against another. However, there are many variables in the forecast such as the price of employing people to make the product or inflation rates.

The concept is based on the way that the value of money changes over time.

For example, lets say that I have been asked to choose between being given either:

Option 1 – $1000 today
Option 2 – $1100 in 2 years

At first glance it looks like Option 2 is a better deal because I will get more cash in the hand. But I also need to consider what the value of Options 1s $1000 will be in 2 years. This will depend on the interest rate applied to it.

Assuming an interest rate of 5% pa the $1000 will be worth $1050 ($1000*1.05=$1050) after 1 year and $1102.50 after 2 years ($1050*1.05=$1102.50).

So in this case the FUTURE VALUE of Option 1 is $1102.50 versus Option 2s $1100 if we wait for 2 years. So, I am better to select Option 1 $1000.

The NPV does this calculation in reverse. Instead of calculating the FUTURE VALUE of today’s money it converts all current and future revenue and costs into PRESENT VALUE. Again using the example above, the PRESENT VALUE of Option 1 is $1000, and PRESENT VALUE of Option 2 is $997.73. In addition to the monetary values being entered we also need the rate (called the Discount Rate) to be used and the number of years (or periods) to be calculated.

Step 1: Determine the expected cash flows associated with the project or investment.

Assume that the widget machine would cost $100 (although these numbers will work equally well expressed in other currencies). You expect that implementing the widget machine will bring in an additional $50 the first year, $40 the second year, and $30 the third year (the law of diminishing marginal returns). After 3 years, you expect that the juicer will need to be discarded. So, your expected cash flows are: -$100 right now, +$50 in year 1, +$40 in year 2, and +$30 in year 3. It is a good idea to diagram these cash flows on a piece of paper.

Step 2: Determine the appropriate discount rate. 

This step is crucial to a good analysis, and also requires the most discretion. The discount rate is a number used to convert the values of the expected future cash flows into their present values. This is necessary because of what is known as the "time value of money."

The value of money depends on when it is expected to be paid.
  • For example, you should generally prefer to receive $100 right now than to receive $100 3 years from now. This is because you could have been investing that $100 over those 3 years, and at the end of that period, you would likely have more than your original $100. Therefore, $100 expected in 3 years is actually worth less than $100 right now. All future cash flows must be discounted back to their equivalent present values.

  • Determining the appropriate discount rate requires some consideration; in corporate finance, a firm's weighted-average cost of capital is often used. In the lemonade stand example, you might decide that if you didn't purchase the widget machine, you would probably invest the money in the stock market, where you feel confident you could earn 4% annually on your money. So, 4% is the appropriate discount rate.

Step 3: Discount all the cash flows and calculate NPV.

This is done using a simple formula: P / (1 + i)^t, where P is the amount of the cash flow, i is the discount rate, and t represents time. Cash flows that occur immediately do not need to be discounted, as they are already expressed as present value. Using a 4% discount rate, you can get the output of the NPV.

Step 4: Decide if the project is profitable enough.

NPV is an indicator of how much value an investment or project adds to the firm. With a particular project, if NPV given is a positive value, the project is in the status of positive cash inflow in the time of t (usually your chosen year 0).

If NPV is a negative value, the project is in the status of discounted cash outflow in the time of t. Appropriately risked projects with a positive NPV could be accepted.

In financial theory, if there is a choice between two mutually exclusive alternatives, the one yielding the higher NPV should be selected.

It means...
NPV > 0
the investment would add value to the firm
the project may be accepted
NPV < 0
the investment would subtract value from the firm
the project should be rejected
NPV = 0
the investment would neither gain nor lose value for the firm
We should be indifferent in the decision whether to accept or reject the project. This project adds no monetary value. Decision should be based on other criteria, e.g., strategic positioning or other factors not explicitly included in the calculation.

NPV Excel Spreadsheet Download Link Here

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Monday, 26 May 2014

Australian Depreciation Rules - Tax

According to the ATO - Some assets are excluded from the simplified depreciation rules. You can head to their website and find the guide. How to obtain this publication at Guide to depreciating assets 2013 (NAT 1996, PDF, 928KB).

Asset Depreciation

  •  Is an accrual accounting convention distributing and matching lumpy capital investments in long-lived assets with relevant annual revenue generated by consuming the assets over their useful lives
  • It is not a yearly cash outflow
  • As a consequence depreciation must be added back to the net profit after tax to get the corresponding net cash flow for the period
  • Only affects cash flows because its deducibility for tax purposes reduces the amount of the tax paid

Two Depreciation methods commonly used in Australia:

  • Prime Cost (PC) =Straightline (SL) i.e. 20% each year. = Historical asset cost / Effective life

  • Diminishing value (DV) = declining balance (DB) = (Opening written down historical assetvalue + Assets acquired during the period) * 200% / Effective life
Using Excel:

Excel offers five different depreciation functions. We consider an asset with an initial cost of $10,000, a salvage value (residual value) of $1000 and a useful life of 10 periods (years). Below you can find the results of all five functions.

The SLN function performs the following calculation. Deprecation Value = (10,000 - 1,000) / 10 = 900.00. If we subtract this value 10 times, the asset depreciates from 10,000 to 1000 in 10 years (see first picture, bottom half).

The DB (Declining Balance) function is a bit more complicated. It uses a fixed rate to calculate the depreciation values.

The DB function performs the following calculations. Fixed rate = 1 - ((salvage / cost) ^ (1 / life)) = 1 - (1000/10,000)^(1/10) = 1 - 0.7943282347 = 0.206 (rounded to 3 decimal places). Depreciation value period 1 = 10,000 * 0.206 = 2,060.00. Deprecation value period 2 = (10,000 - 2,060.00) * 0.206 = 1635.64, etc. If we subtract these values, the asset depreciates from 10,000 to 995.88 in 10 years (see first picture, bottom half).

Note: the DB function has a fifth optional argument. You can use this argument to indicate the number of months to go in the first year (If omitted, it is assumed to be 12). For example, set this argument to 9 if you purchase your asset at the beginning of the second quarter in year 1 (9 months to go in the first year). Excel uses a slightly different formula to calculate the deprecation value for the first and last period (the last period represents an 11th year with only 3 months).

Depreciation Spreadsheet in Excel

Excellent guide here also