Objective
To help an equity research client measure mining sector companies’ share price performance with their respective commodity mix.
Methodology
We devised a model to compare, companies’ revenue and operational profitability (EBITDA), by commodity, with their share price. Here is the step by step approach that we followed:
- Determined companies’ revenue and EBITDA split by commodities on a semi-annual basis using company filing.
- Assigned an aggregate weight to each commodity based on their contribution to revenue and EBITDA.
- Tabulated the changes in prices for these commodities from authentic sources.
- Multiplied the changes in the prices for commodities with the weights to arrive at weighted percentage change for each commodity.
- Tabulated the commodity index (by company) using the total weighted changes and rebasing.
- Formulated companies’ index using share prices and rebased them to the same date as done for the commodity index and finally, compared both the indices.
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Outcome
We prepared a comprehensive report offering an in-depth view on companies in the mining sector and their share price performance compared to their commodity mix. Using our approach the client was able to determine whether a company’s share price had outperformed or underperformed the prices for their commodity mix. Any abnormality was easily spotted and reasoned using company reports and news. For example, if a company’s share price is under performing its commodity mix, it was generally backed up by operational inefficiencies.
