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Mining Exploration Companies

Mining Exploration Companies. Understanding Exploration Company Financial Statements Douglas Taylor Wits Business School. Agenda. Objectives Principles Financial Statements Assumptions & Definitions Trends Reporting Exploration Results Valuation issues Flow-through shares

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Mining Exploration Companies

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  1. Mining Exploration Companies Understanding Exploration Company Financial Statements Douglas Taylor Wits Business School

  2. Agenda • Objectives • Principles • Financial Statements • Assumptions & Definitions • Trends • Reporting Exploration Results • Valuation issues • Flow-through shares • Additional Information • Earnings “Management”

  3. 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

  4. What about …… • Financial review by management • Environmental reports • Value added statements • Employee reports • CSI reports • SHE reports • BEE information

  5. What about …… • Project review / Exploration report • Resources statement • Operating review / Management Discussion and Analysis

  6. 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

  7. SAMREC CodeMain 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

  8. Qualitative Characteristics of Financial Statements • Understandable • Relevant • Reliable • Comparable • GAAP / IFRS

  9. 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

  10. How else could this be treated? What is its real value? Minimal loan funding, if any Theoretical NAV. Could also be 30,900!

  11. Arises mostly with SA interested companies Development stage; impairment Largely share options - Black Scholes Deferred

  12. Where’s it gone to? Where’s it come from?

  13. 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

  14. 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

  15. 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

  16. 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.

  17. Development Stages • 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 • Target Generation • Planning • Historical data • Remote sensing • Geological TIME RISK PROFILE

  18. Target Generation Primary Exploration Advanced Exploration Project development Operating mines

  19. Mineral Property Interests

  20. 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

  21. General Relationship between Exploration Results, Mineral Resources and Ore Reserves Source: SAMREC

  22. 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

  23. 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.

  24. 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

  25. 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

  26. Rough Guide to Value • Weighted Average Cost of Capital (WACC) • Early years = cost of equity • Risk / Return trade-off • NAV or V NA?

  27. Intangibles • Management track record • How is the money being spent? • Economic reality • How long before the bubble bursts?

  28. 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

  29. 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

  30. 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

  31. 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

  32. 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”

  33. So Who’s Doing It? • Most companies DO NOT intentionally distort their financial reports • Warnings • Poor internal controls • Lack of independent directors • Competence of external auditor • Extreme competitive pressure • Decelerating real growth • Survival in doubt • Private companies • Management’s character in question • Greed • Why? • It pays • It’s easy • It’s unlikely they’ll get caught

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