Objectives of Financial Statements Provide information about the: –Financial position –Performance –Changes in financial position Comprise: –Balance sheet –Income statement –Statement of changes in equity –Cash flow statement –Notes
What about …… Financial review by management Environmental reports Value added statements Employee reports CSI reports SHE reports BEE information
What about …… Project review / Exploration report Resources statement Operating review / Management Discussion and Analysis
Users Information Needs Investors: risk and return; buy, hold or sell; ability to pay dividends. Employees: stability and profitability; ability to provide remuneration, retirement benefits and employment opportunities Public: employment; environment; economy; community
SAMREC Code Main Principles Materiality: all the relevant information required to make a reasoned and balanced judgement regarding results, resources & reserves Transparency: clear and unambiguous information Competency: the work and responsibility of suitably qualified and experienced persons Impartiality: no undue influence; adequate disclosure
IFRS 6 Exploration and evaluation assets to be tested for impairment when the carrying amount of the assets may exceed their recoverable amount. Disclose information that identifies and explains the amounts recognised in financial statements arising from the exploration for and evaluation of mineral resources, including –accounting policies –amounts of assets, liabilities, income and expense and operating and investing cash flows arising from the exploration for and evaluation of mineral resources
How else could this be treated? What is its real value? Minimal loan funding, if any Theoretical NAV. Could also be 30,900!
Arises mostly with SA interested companies Development stage; impairment Largely share options - Black Scholes Deferred
Where’s it gone to? Where’s it come from?
Caveat The Company is in the process of exploring its mineral property interests and has not yet determined whether these properties contain economically recoverable mineral reserves The underlying value and the recoverability of the amounts shown for mineral property interests and equipment are entirely dependent upon the existence of economically recoverable mineral reserves and the ability of the company to obtain the necessary financing to complete the exploration and development of the properties
Critical Accounting Estimates Some estimates: –the value of mineral resources & reserves –the carrying values of mineral properties, –the carrying values of property, plant & equipment –the valuation of stock-based compensation expense –determination of future income tax assets & liabilities –asset retirement & reclamation obligations Actual amounts could differ from the estimates used and, accordingly, affect the results of operations
Mineral Property Interests Mineral property acquisition costs capitalized on a property-by-property basis. Exploration expenditures incurred prior to determination of feasibility - expensed as incurred Development expenditures incurred subsequent to a development decision - capitalized and amortized / impaired over the estimated life of the property Mineral property acquisition costs include the cash and/or the fair market value of shares issued The amount shown for mineral property interests represents costs incurred to date and accumulated acquisition costs, less write-downs, and does not necessarily reflect present or future values
Stock-based Compensation Share option plans - record all stock-based payments using the fair value method. Stock-based payments measured at the fair value the equity instruments issued and are charged to operations over the vesting period. The offset is credited to contributed surplus. Consideration received on the exercise of stock options is recorded as share capital and the related contributed surplus is transferred to share capital.
TIME Target Generation Planning Historical data Remote sensing Geological Primary Exploration Geochemical Geophysical Trenching Drilling Advanced Exploration In-fill drilling Geological modeling Metallurgical testing Pre-feasibility study Project Development Feasibility study Geological modeling Metallurgical testing Mine planning Mine Construction Engineering design Build the plant Build the mine Mine planning details Development Stages RISK PROFILE
Reporting of Exploration Results Mineral tenement and land tenure status Exploration done by other parties Geology Data aggregation methods Relationship between mineralisation widths and intercept lengths Diagrams Balanced reporting Other substantive exploration data Further work
General Relationship between Exploration Results, Mineral Resources and Ore Reserves Source: SAMREC
Mineral Resources Inferred mineral resources: estimated on limited information; geologically speculative; no certainty that mineral resources will be upgraded to mineral reserves through continued exploration Indicated mineral resources: sufficiently well defined to allow geological and grade continuity to be reasonably assumed and assessed Mineral resources: not mineral reserves; not demonstrated economic viability; have reasonable prospects for economic extraction
Estimation and reporting of Mineral Resources Database integrity. Geological interpretation. Dimensions. Estimation and modelling techniques. Moisture. Cut-off parameters. Mining factors or assumptions. Metallurgical factors or assumptions. Bulk density. Classification. Audits or reviews. Discussion of relative accuracy/confidence.
Rough Guide to (Gold) Value Early stage; some inferred resources - about 3.5% of gold in the ground Later stages; more tangible assets – about 10% Early stages of production – value between 15% and 25% of value of ounces in the round
Rough Guide to Value Commodity price leverage –Value = PV of future cash flows –Cost to mine $400; gold price $500 value is PV based on $100 margin –Gold price increases 20% to $600 - margin doubles and value doubles Move to option pricing and real options
Rough Guide to Value Weighted Average Cost of Capital (WACC) Early years = cost of equity Risk / Return trade-off NAV or V NA?
Intangibles Management track record How is the money being spent? Economic reality How long before the bubble bursts?
It’s the Management, stupid Clearly defined objectives & strategies (87%) Full disclosure - transparent, open & honest (85%) Reputable, honest & trustworthy (82%) Financially sound & secure (78%) Chief executive & senior management always approachable (78%) Communicates well with the investment community (69%) Source: Campbell Belman
Flow-Through Shares Stimulate exploration & improve access to capital Exploration company incurs expenses – tax deduction deemed to flow through to shareholders Costs claimed sooner, and at higher rates
Flow-Through Shares Advantages for individual investors - receive 100% tax deduction for share investment Shown to enhance investment returns In the last three years alone, more than $350 million raised through the flow-through share mechanism
Additional Information ;Technical report - Goldstream Mining; Nickel Australia; Great Basin presentation; Jubilee Platinum; Minotaur Exploration Deliberately not commenting on SA Financial Statements – the standards seem high but need a fair review before comment Corporate Governance
Earnings Management or Manipulation? Revenue –Record future revenues before earned –Defer current revenue –Fictitious Expenses –Record future expenses early –Defer current expenses –Don’t record or disclose liabilities Non-recurring transactions –Record in operating income –Geography matters (especially when not disclosed) –“Big Bath”
So Who’s Doing It? Most companies DO NOT intentionally distort their financial reports Warnings –Poor internal controls uLack of independent directors uCompetence of external auditor –Extreme competitive pressure uDecelerating real growth uSurvival in doubt uPrivate companies –Management’s character in question uGreed Why? –It pays –It’s easy –It’s unlikely they’ll get caught