The Perth Mint recently released its 2015 Annual Report. This article
discusses the Mint’s financial results with a focus on those areas
where conventional financial analysis would fail due
to the unique aspects of a the Mint’s business model. Below is a summary
of the Perth Mint’s financial results (figures in thousands of Australian
dollars) – the full report can be downloaded from our Annual Report webpage.
Some general comments on the figures:
- Financial Year – Australia works on a 30 June financial
year end.
- Sales Revenue – this figure excludes loco
swaps and other payments for metal by way of metal account credits,
that is, it only includes transactions involving cash (the volume
of metal we process inclusive of loco swaps is around $15 billion). It
includes metal purchased back – for example, if we sold $100 worth of
metal and bought back $50 worth, we would record the $150 worth of
transactions as “sales”.
- Trading Profit – Sale Revenue less cost good sold.
- Tax – this is calculated at the Federal
corporate tax rate of 30% that would apply if the Mint was a
company. As a Statutory Authority, the Mint does not pay Federal tax and
instead the tax equivalent is paid to the West Australian government.
- Current Assets – the majority of this is the Mint’s
precious metal that backs its Depository client holdings. Note that
Allocated holdings are not recorded on the Mint’s balance sheet
- Current Liabilities – the majority of this is the
unallocated and pool allocated liabilities to Depository clients.
- Shares – this represents the paid in capital of the
Mint’s owner – the West Australian government.
- Cash – this includes money held with the Mint by Perth Mint
Depository customers, which is usually much higher than the Mint’s
own cash balances.
- Financing Activities – the Government requires the Mint
to be self-funding, so this only represents tax equivalent and dividends
paid to the Government.
The Perth Mint’s profit before tax for the year ended 30 June 2015 was
just under $20 million, down from a high of $40 million achieved three years
ago. The chart below shows that, unsurprisingly, the Mint’s profits are
related to precious metal prices.
In 1999-2000 profits were boosted by sales of Sydney 2000 Olympic
Coin Program numismatic coins and physical coin sales driven by Y2K fears of
computer malfunctions. The 2009 financial year saw unprecedented investment
volumes during the height of the global financial crisis.
To capitalise on the interest in precious metals as the bull market
developed, the Mint invested in capital equipment (increasing annual
expenditure from $4 million to $12 million post financial crisis) and
expanded its Depository business and associated working inventory levels
to allow its factories to operate more efficiently.
As the the Mint is required to be self-funding while at the same time
paying tax equivalent at the rate of 30% and then 75% of remaining profits as
a dividend, its ability to expand capacity is restricted. The chart below
shows how much of its profit the Mint retains (the payout policy was not in
place in the 1990s). Theoretically the Mint should be paying out 30% + (70% x
75%) = 82.5% but it varies depending on the application of arcane tax
law.
This chart also demonstrates the difference a bull markets makes – the
first eight years covers a somewhat stable precious metal price period during
which the Perth Mint was being rejuvenated. The 1997-2005 covers a bear
market and tentative bull market but the post 2005 period demonstrates the
Mint’s potential envisaged by the architects of the
Mint’s late-1980s modernisation.
Analysis of the Mint’s margins is made difficult by the fact that the
products the Mint sells differ in gross margins dramatically in addition to
the mix of products sold varying depending on precious metal prices. The
chart below shows the Mint’s gross margin (trading profit / sales revenue)
and profit margin (profit before tax / sales revenue) over time.
Normally such declining margins would be a cause for concern but this
merely reflects increasing volumes of low margin bullion coin and bar
and Depository sales relative to high margin numismatic coin sales as the
bull market developed from 2001 onwards. The Mint has actually increased
numismatic coin volumes and profits but these figures get overwhelmed by high
value bullion sales when working out aggregate margins.
The increased capital expenditures and precious metal inventory levels
would normally raise concerns about the profitability or capital efficiency
of a business. The chart below shows the Mint’s return
on equity (profit before tax / equity) over the last couple of decades.
Even after $90 million worth of capital expenditures over the past 10
years and holding $3 billion worth of working inventories, the Mint has
exceeded a 15% return on equity. A key contributor to the Mint’s
profitability comes from the unallocated balances of Perth Mint Depository
clients, which is the major source of funding for the Mint’s working
inventory. While the value of Perth Mint’s precious metal assets can be
easily found in note 11 on page 27, the liability to Depository clients is
note so clearly identified, merely being called “Current liabilities –
precious metal borrowings” in note 21 on page 34 but the giveaway
to its nature is the note that “These do not attract interest and are
utilised in the consolidated entity’s operations”. Leasing from external
parties in note 18 on page 33, which is clearly identified as interest
bearing.
As explained here, the Perth Mint’s unallocated is a win-win situation
where the Mint has free funding for the precious metal it uses in its
business while clients get 100% backed safe storage of their precious metal
for free. The Mint also leases in precious metal from bullion banks to cover
fluctuating operational requirements. The very small amount of metal the Mint
owns is mostly related to pre-purchases of metal for numismatic coin programs
where the selling price is fixed, otherwise the Mint has no exposure to
changes in precious metal prices – this being borne by Depository clients or
the lenders from whom the bullion banks have sourced metal.
The existence of this large funding source from Depository clients at zero
interest rates does complicate traditional solvency risk assessment. For
example, a classic Debt
to Equity ratio for the Mint would result in a figure of over 25:1, as
shown in the chart below.
It is not coincidental that the Debt to Equity ratio above increases along
with the increase in Depository client metal – as Depository clients buy
unallocated gold the Mint buys physical gold and willingly increases its
inventory as this gives its operational flexibility. The purpose of such a
ratio is to highlight the risk to a company’s profits due to excessive
interest expenses. However, with unallocated metal incurring no cost to the
Mint, including such metal in the calculation hides the true risk. If one
backs out the unallocated liability then the ratio averages 0.90.
Solvency metrics like the Current
Ratio also get tripped up by the large value of unallocated metal, and
particularly so for more aggressive ratios like the Acid
Test, which ignore inventory on the assumption that it is not easily
converted to cash without some loss of value. The chart below shows the
conventional current ratio in blue and a revised ratio in green, which
excludes the Mint’s precious metal assets and liabilities.
The point of solvency ratios is to assess the ability of a company to meet
its current obligations. However, as precious metal inventories are as good
as cash in that they can be readily sold, one needs to remove the
precious metal value (not cost of manufacture, which would be lost in a
forced liquidation) from assets and the corresponding precious metal
liability as these dominate the calculation – otherwise the ratio has no
information value as it is basically 1, as the blue line shows. The green
line thus gives a better representation of the Mint’s short term
solvency.
While the Perth Mint is a profitable and financially conservative business
on a standalone basis, ultimately our clients take comfort from the explicit Guarantee of the performance of the Mint’s obligations by
the West Australian Government as enshrined in the Gold Corporation Act 1987.
