Case study


by Professor Ian H. Giddy
New York University

In 1993, Ban Pu Coal Company, Ltd., was one of Thailand's fastest-growing companies. In fiscal year 1992 its revenues reached 839 million Thai Baht, almost quadrupling the previous year's revenues, and in 1993 revenues were expected to double again. Net profit, at 192 million baht in 1992, was rising at a similar pace. The company had a dominant position in the coal sector of Thailand and had negotiated long term contracts up to 1998 to sell 7.4 million tons of coal to the Government and to other customers. The most important single project was a 10-year overburden and lignite removal contract with the Electricity Generating Authority of Thailand at its Mae Moh mine in Lampang Province, which was expected to generate 1,200 million Baht a year for the decade. Other than coal, Ban Pu's principal product, the company mined and marketed kaolin and ball clay for the ceramics industry, produced granite and was involved in gold prospecting. Ban Pu had also invested in electricity generating plants for the industrial region of south-east Thailand. Outside Thailand, Ban Pu owned a share in an Australian coal producer, Oakbridge, and had coal exploration ventures in Indonesia. Because of limited domestic resources, the company felt it was essential to secure external reserves of coal to meet Thailand's growing energy requirements. The Thai government had predicted that the country's energy needs would grow at an average rate of about 10 percent per annum in the next ten years. The use of coal was expected to grow even more rapidly. Because of its low cost relative to oil or natural gas, energy-intensive Thai industries such as cement, pulp and paper and food processing were increasingly turning to coal as their basic fuel.

A major issue facing the company in mid 1993 was how future expansion should be financed, particularly considering ever more costly pollution control requirements. Past years' growth had been financed by internal reinvestment of profits, and issues of shares on the Bangkok Stock Exchange in 1991 and 1992 which had raised a total of 1,155 million Baht. The company also signed a project loan agreement for the Mae Moh mine of 3,910 million Baht constituting loans and guarantees with 7 banks and financial institutions. It seemed certain, however, that Ban Pu would have to turn elsewhere for financing in the future.

Assume you have asked to help the company plan its future financing strategy. Please examine the attached information about Ban Pu. Based on the nature of its business and the characteristics of its assets and revenues, as well as the possibility of financial distress, what would you think about the optimal way in which the company should be financed?

Consider the following:

• How much debt in relation to equity should Ban Pu have? Also • Should the debt be fixed or floating?

• How much of the company's debt should be long term?

• What should be the currency composition of its debt?

Exhibits: Annual Report, 1992, pages 50-52, 55-56 | | | | contact
Copyright ©2005  Ian Giddy. All rights reserved.