Business Risk Analysis Project Report For Fortescue Metal Group

Nature of the Entity

The Auditing is defined as the independent examination of the financial statement of the entity for the purpose of reporting over the true and fair view of the financial statement of the entity. In the given report the company we have considered is Fortescue Metal group is engaged in the business or Iron ore. During the report various area of the business are examined in order to create understanding over the company current operation. The report analyze the different aspect of the business such as nature of the entity, industry regulation and the external factor, objective and strategy, entity performance measure, management and the governance.  

The Fortescue Metal group is the global leader in the iron ore industry and is the industrial leading development of iron ore deposit has most significant mines in the world. The company has grown as one of the largest global iron ore producer and operates integrated operation spanning five mines sites in the Pilbara. The company is engaged in the exploration, processing, development production of iron ore and owns and operates integrated supply chain including five berths Herb Elliott Port in Port Hedland and heavy haul railway with 42 ton Axle load capacity (Fortescue Metals Group Ltd, 2017).  The company owns and operates its purpose design rail and port facility to deliver iron ore from mines to port and finally to the customer.

The Fortescue Metals Group Limited is the fourth largest producer of the iron ore in the world and has two main group of operation namely Pilbara region of Western Australia and Chichester Hub and Solomon Hub. The Chichester Hub is located in the Pilbara and is made up of Fortescue flagship minesite cloudbreak and the other one is Christmas creak (Fortescue Metals Group Ltd, 2017).   The cloudbreak is currently mining 40 million tons of iron ore in the year and it operates on horizontal nature of deposit whereas other make the use of the vertical deposit of the ore. The processing facility of the company process and refines the product before transporting to ports. On the other hand the Christmas Creak has lifted its capacity to 50 million tons per year.

The Solomon hub is located in the middle of Fortescues Pilbara Tenement area which is company second most major project. The exploration team of Fortescue has delineated 2.86 billion tons of resources at Solomon hub and targeting the same upto 2.86 billion tones.

The BC iron is the smaller company with its iron ore deposit at Nullagine and is in joint venture with Fortescue Metals Group Limited where BC iron manage crushing, mining, screening and trucking and Fortescue provide haulage and port service to the JV (Fortescue Metals Group Ltd, 2017).

Industry size: The continent has been provided with heavy and giants ore mineral resources of iron and they keep finding more with the help of heavy equipment and machines. The continent Australia is blessed with diverse natural resources but none is important or essential or significant as iron ore. Iron is the basic and common element found in the rocks and soil – but finding iron in high concentrations and in the minerals which makes mining a bit harder task and it takes a bit more tough efforts. Iron ore overlapped Australia’s most valuable, important as well as the significant export of Coal, in the year 2010. This as a fact provides that it is a fast-growing part of Australian economy having $ 47.2 worth in the economy in 2010.

Industry growth: According to some analysts production volume of iron ore and export in Australia are expected to rise (Klettner, et. al., 2014).  The industry of Iron ores is growing too rapidly in the Australian market. Iron ore exports have increased quickly and rapidly over some of the few years and period which shows positive growth of the industry (IBIS, 2017).

Some of the key and major players of the industry include Fortescue itself holding a market strength and position of 10 %,
Brake Horse Power (BHP) having a market share of 16 %,
Rio Tinto holding a market position of 17 % and
Vale having a market share of 26 %.

Market share of iron ore industry in seaborne

However, this industry is having some crucial success factors which should be followed by these industries prevailing in the market which is as follows:
 Effective Cost controls,
Availability of the concerned resources and
downstream ownership skills (Shepherd and van Leeuwen, 2011).

Understanding the Industry

Industry sometimes faces several threats due to which it becomes hard to find the opportunities in the environment, some of the threats and opportunities of the industries are given below:
(a) A major threat being a weak positioning of Australian dollar in international market and for the same opportunity being higher volume of mining will support industry revenues and profits in the current period (Cowie, et. al., 2015).
(b) The second threat being production volume of iron ore and opportunity in the case be exports of the iron ore are forecast to increase over the next 5 upcoming years.
(c) Third and the last threat being Australian iron ore production and for the situation, the opportunity would be iron ore exports have increased quickly and rapidly over some of the few years and period. 

 The legal environment of Fortescue comes under several state and commonwealth acts which are as follows:
Wildlife Conservation Act 1950;
• Bush Fires Act 1954;
• Rights in Water and Irrigation Act 1914;
•Western Australian Marine (Sea Dumping) Act 1981;  
• Agriculture and Related Resources Protection Act 1976;
• Private Railways (Level Crossings) Act 1966;
• Environmental Protection and Biodiversity Conservation Act 1999;
• Land Administration (Amendments) Act 1997;
• Health Act 1911;
• Conservation and Land Management Act 1984;  
• Dangerous Goods (Transport) Act 1998;
• Rail Freight System Act 2000;
• Mines Safety and Inspection Act 1994;
• Environmental Protection Act 1986;
• Australian Heritage Commission Act 1975;
• Occupational Safety and Health Act;
• Explosives and Dangerous Goods Act 1961;
• Town Planning & Development Act 1928;
• Soil and Land Conservation Act 1945; 1984
• Local Government Act 1995;
• Mining Act 1978;
 • Rail Safety Act 1998 and
• Aboriginal Heritage Act 1972.

Some of the commonwealth regulations likely to be significant to the Fortescue include the following:  • National Native Title Act 1993;
• Environmental Protection and Biodiversity Conservation Act 1999 and
• Environmental Protection (Sea Dumping) Act 1981.

Provisions relating to Rehabilitation
Provisions are identified when the Company Fortescue has a current legal or constructive liability because of past events, it is most likely an outflow of resources will be needed to support to settle the liability and the value can be reliably be determined (Andrew and Cortese, 2011).  
Liability for site rehabilitation is only in need because of the extraction, mining and processing activities of the Company Fortescue. Liability of rehabilitation consists of removal of treatment of waste items, decommissioning of facilities, and restoration of site and rehabilitation of the land. The surplus of work needed and the associated costs are determined using today’s techniques and standards of current restoration. Estimation of the cost of each program of the rehabilitation program is determined at the time of disturbance in the environment occurs. 

The auditor of the Fortescue Metals Group Limited needs to create the understanding over the external environment of the business and report the key event which may create impact over the current working of the company (Lu, 2015).  

PEST analyze

The PEST analyze of the company which create the understanding over the change in the macro factor and the impact it create over the current working of the company.

Understanding the Legal Environment

Political – The few of the political factor which created impact over the company working is importance of material sectors to the economy and in the country economy and level or corruption especially in relation to the material sector.  The Legal frameworks of the enforcement of the contact and intellectual property protection impact over the company. Also the industry safety regulation in material sector in and mandatory employee factor which create impact over the company working.

Economic – The economic factor include the rate of inflation, interest rate, exchange rate, economic cycle and the demand and supply in the economy (Fullagar and Wallis, 2012).

Social factor – The external environment also include Demographic and skill level of the population and the hierarchy and power structure in the society. Also the culture, attitude and leisure interest create the impact over the company working.

Technology – The auditor also needs to look towards the development of technology and the way it create impact over the company working. The recent technological development by Fortescue Metal group competitor will have huge impact over the company demand (Wilson, 2011).  

The other tool which can be to create the understanding over the external environment is SWOT analyze-

Strength – The industry in which the company is operating has strong diversification and their low barrier to the market entry. Also the industry growth rate is high and shows the strong relationship with the suppliers and the partners.

Weakness – There is long adjustment period in the Industry and there is less number of the supplier.

Opportunity – The Company has the availability of the global market and current trend is of increase in market size (Hosseinzadeh, et. al., 2016).

Threat – The industry see new market entrance which may be a huge threat for the company

Porter five forces model

The porter five forces model is the strategic approach which assists the management in creating understanding of the external environment of the company.

Threat of new entrance – The new entrant in the market bring innovation and new ways of doing business on Fortescue Metal group through low price strategy, reduction of the cost providing new preposition of the customer.

Bargain power of the supplier – nearly all the business in material industry purchases the goods from numerous suppliers so the supplier in the market can decrease the margin of Fortescue Metal group.

Threat of substitute – The Fortescue Metal group has the threat of substitute if the new product offers a value and the preposition which is different from present offering of the company.

Rivalry among the competitor – The Fortescue Metal group by building sustainable differentiation has collaborated with the competitors to increase the market size rather than working for small market.

Bargain power of the Buyer – The Fortescue Metal group needs to work to build the large customer base as the demand of the buyer is continuously changing and create huge impact over the company working.

Other external factor 

The company also needs to examine the change in the other external factor such as interest rate, inflation and currency revaluation and general economic condition. The change in the interest rate will lead to increase in the company cost of working. Also the rise in inflation in the country in which Fortescue Metal group operates has huge impact over the demand of the company. So the company needs to exercise check over all these external factor to smoothly conduct the company operation.

Provisions Relating to Rehabilitation

The company focus has been on the debt repayment and capital flexibility in the long term sustainability of core iron ore business and developing low cost growth option to generate strong return to the shareholder. The company is also working over the safety and reported 33% reduction in the total injury for the year due to the result of the safety excellence and culture survey. Also the company has focus over the diversity and focus to build the workforce which is truly representative of the community and ongoing innovation across the business (Cleary, 2014).  The company is building the Aboriginal employee engagement program throughout the year and created the supporting and encouraging environment for the women.

The company future objective is to deliver 170.4 million tons in the financial year 2017 from the mining operation at the Chichester and Solomon hubs through the rail infrastructure and word class port of the company. The company in order to serve the customer in the best possible way has made refinement to the product strategy and the other core requirement such as timely delivery, quality and flexibility. The company to further enhance the efficiency of the port operation has deliver four new ore carrier during the year 2017 and planning for additional four deliveries during the year 2018.

The efficiency focus and sustained productivity has been the core element of the Fortescue which has led to reduction in cost by 17% in FY2017 in comparison to the year 2016 (Lynch, 2014).  The company has optimized Technology and innovation across all the area of the business which has helped inn reducing the cost. The company has reported continuous growth in the demand in the Asia market and has participated in the regional growth through one belt one road strategy. The company has expanded the collaboration with the chines industry through the construction of the ore carrier at china Jiangsu Yangzijiang and Gunagzhou shipbuilding international shipyard.

Analyst in the current case analysis based on the case study of Fortescue Metals Group Ltd  company data into current study came over the certain conclusions based on the outcomes of the certain analytical data described as follows –

Current ratio – The current ratio of the company depicts its overall liquidity position. Over the span of last year the company in the particular segment has witnessed a downward trend. The financial liquidity positioning of the company has loosened up. This is clearly displayed through below mentioned chart where the company after reaching up to satisfactory level in the current ratio figure witnessed a downfall in the referred segment (Ooi and Lu, 2011).  

 In the particular segment company has improved its positioning in the market over the span of some years. Company Fortescue Metals Group Ltd is continuously witnessing a growth in the aspect of profitability.  From 0.04% of profitability in comparison to revenue the company’s has improved its percentage to 0.25% in the year 2017. This showcase the situation the referred company has improved its cost effectiveness over some years which have enhanced its overall margin spread.

Turnover Ratio

There is decline in turnover of the company over the span of time, this shows reduce in effectiveness of the company to convert the debtor into cash on the timely basis.

Observing the communication and implementation moral esteem and honesty

In the current case study, the chosen business undertaking Fortescue Metals Group Ltd has selected and methodology that supports in empowering the related perspectives and suppositions from the side of labor and employees. In addition to this, the current Company Group creates an environment of trustworthiness and moral Esteem through better correspondence routes.

Existence of sense of duty and responsibility regarding achievement of competence

Fortescue Metals Group Ltd company group in the present case compile its business activities towards training and improvement program implementation for its employees and workers to upgrade their skills and learning (Amaeshi, et. al., 2008). At the current company relates to the group in the metal segment, organization place it’s great to focus in implanting a procedure on creating abilities, the better attitude of employees.

Creating participation of individual which are charged with governance

The contribution level of these gatherings which deal with administration, speculation, corporate Administration, and leadership focus on the part, that the current organization is working its operational task in a lawful manner while practicing ethical and moral attitude. Working standards as provided by norms are inspected by the gathering to upgrade the overall administration practice within the business organization (Ansell & Gash, 2008).

Overall organizational structure of Fortescue Metals Group Ltd

To process its working the company has created the different level of administrations. Various representatives and employees working for the organization perform their job in a predetermined hierarchical manner. In terms of leadership that exists within the metal-based organization is decentralized to implement better execution of task on timely manner (Klettner, et. al., 2014).

Working style and philosophy of Management

While reviewing the first company structure and policies that have been followed up by management it has been observed by the analyst that company took viable hazards to attain new market positioning and better benefits out of it. Effects procedural system has been maintained by the company group so that there is a high level of consistency in maintaining the accounting reports and following up of legal compliance. General standard and laws that have been applicable to the other organization in the industry are being matched up (Easterby-Smith, et. al., 2012).

Conclusion

So it can be concluded from the assignment that the auditing provides the complete understanding of the company which benefit the different stakeholder to make key decision in relation to the business. The report has provided us understanding the nature of the Fortescue Metals Group Ltd and the industry in which the company operates. Also it has provided us information over the current regulation and external factor of the company and the way entity performance is measured and monitored. The report has created understanding of the current performance of the business and management and governance of the company.

References 

Amaeshi, K.M., Osuji, O.K. and Nnodim, P., 2008. Corporate social responsibility in supply chains of global brands: A boundaryless responsibility? Clarifications, exceptions and implications. Journal of Business ethics, 81(1), pp.223-234.

Andrew, J. and Cortese, C.L., 2011. Carbon disclosures: Comparability, the carbon disclosure project and the greenhouse gas protocol. Australasian Accounting, Business and Finance Journal, 5(4), pp.5-18.

Ansell, C. and Gash, A., 2008. Collaborative governance in theory and practice. Journal of public administration research and theory, 18(4), pp.543-571.

Cleary, P., 2014. Native title contestation in Western Australia’s Pilbara region. International Journal for Crime, Justice and Social Democracy, 3(3), pp.132-148.

Cowie, J., Taylor, L., Felsner, B., Stramare, A. and Hardie, G., 2015. Use of Instrumented Revenue Vehicle to Manage 40 Tonne Axle Load Operation at Fortescue Metals Group Ltd. IHHA2015, Perth Australia, June.

Easterby-Smith, M., Thorpe, R. and Jackson, P.R., 2012. Management research. Sage.

Fortescue Metals Group Ltd, 2017. Fortescue Metals Group Ltd Annual report. [Online] available at: https://www.fmgl.com.au [Accessed on 16^th September 2017].

Fortescue Metals Group Ltd, 2017. Fortescue Metals Group Ltd Business review. [Online] available at: https://www.businessreviewaustralia.com [Accessed on 16^th September 2017].

Fullagar, R. and Wallis, L.A., 2012. Usewear and phytoliths on bedrock grinding patches, Pilbara, north-western Australia.

Hosseinzadeh, A., Smyth, R., Valadkhani, A. and Le, V., 2016. Analyzing the efficiency performance of major Australian mining companies using bootstrap data envelopment analysis. Economic Modelling, 57, pp.26-35.

IBIS, 2017. IBISWorld Industry Report B0801. Iron Ore Mining in Australia. [Online] available at: https://clients1.ibisworld.com.au [Accessed on 16^th September 2017].

Klettner, A., Clarke, T. and Boersma, M., 2014. The governance of corporate sustainability: Empirical insights into the development, leadership and implementation of responsible business strategy. Journal of Business Ethics, 122(1), pp.145-165.

Klettner, A., Clarke, T. and Boersma, M., 2014. The governance of corporate sustainability: Empirical insights into the development, leadership and implementation of responsible business strategy. Journal of Business Ethics, 122(1), pp.145-165.

Lu, L. ed., 2015. Iron Ore: Mineralogy, Processing and Environmental Sustainability. Elsevier.

Lynch, A., 2014. Fortescue metals group ltd v commonwealth: The mining tax, discrimination and federalism.

Ooi, T.C. and Lu, L., 2011. Formation and mitigation of PCDD/Fs in iron ore sintering. Chemosphere, 85(3), pp.291-299.

Shepherd, K.A. and van Leeuwen, S.J., 2011. Tecticornia globulifera and T. medusa (subfamily Salicornioideae: Chenopodiaceae), two new priority samphires from the Fortescue Marsh in the Pilbara region of Western Australia. Telopea, 13(1-2), pp.349-358.

Wilson, J.D., 2011. Resource nationalism or resource liberalism? Explaining Australia’s approach to Chinese investment in its minerals sector. Australian Journal of International Affairs, 65(3), pp.283-304.

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