Analysis Of A Mining Company’s Operations And Risks

Overview of the Company’s Operations

In the present report, an effort has been made to deeply analyse various aspects of the company. The main objective of analysing these aspects is the determination of whether the auditing firm should accept the company as one of its client. Several factors are needed to be considered before accepting an audit engagement. For instance the various laws and regulation that are applicable on the client, the various business risks that the company is currently facing and the extent of probability of material misstatement present in the financial statement of the company (Leung et al., 2014). After the results of this in depth analysis are derived, a conclusion will be drawn regarding the acceptability of the company as its audit client.

The primary focus of the operations conducted by the company is on acquisition and exploration of the metallurgical coal tenements. The flagship project of the company at present is the Tekla metallurgical coal project. The project is located in the North West of the British Columbia. The company is also presently holding interests in several other projects like in Back Creek project, which is situated, in Surat Basin of Central Queensland in Australia, the Kilian project that is located in the Bowen Basin of central Queensland in Australia (Hay et al., 2017). The company was first incorporated in the year 2011. The company runs its operation with Sydney, Australia as its base.

In terms of the industry overview, the company is operating in the field of exploration and acquisition of the metallurgical coal tenements. The black coal is the key element of steel making and energy generation industry and thus enjoys heavy demand. It is a matter of fact that coal is found all over the world but, Australia is Amon g the lowest cost producer of coal and thus has been able to establish itself as a major exporter of coal. The reserves available in the domestic boundaries of the country are of high quality and are easily accessible too. In addition to that, the reserves are much in excess of the domestic needs. The production of coal is mainly carried out in the areas of Queensland, New South Wales and Victoria (Mygind et al., 2016). The quality of the coal generally moves towards the north. In the financial year 2016-17 Australia was able to export around 267 million tonnes of thermal coal and 209 million tonnes of coking or metallurgical coal, which is worth around a$21.635 billion and a$34.932 billion respectively. 

Industry Overview

Schedule 19 of the Regulation 35 of the MRSDMIR sets out the various reporting requirements of the mining companies. The various rules and regulations regarding reporting of income and expenditure by the mining companies are as follows:

1. Schedule 19, section 1-

This section is relevant for reporting of the expenditure in respect of the wages and salaries.

As per the guidelines of this section, the company must ensure that the wages and salaries of all the direct employees and the expenditure incurred in respect of the contractors who have undertaken various operations that are in direct association with the license.

The financial statements must include the cost of the licensee’s own labour cost that have been incurred in respect of operation that are directly related to the operation and amounts to less $25000 per annum. For claiming a deduction of an amount more than $25000, a proper verification of the amount has to be undertaken to substantiate the claim made by the licensee (Hoque & Pearson, 2018). The verification of the claim will require evidence like qualifications/ experience/ hours worked/ and rate per pay.

1. Schedule 19 section 2:

This section deals with the expenditure related to the equipment, plant and machinery. As per the guidelines of this section, the licensee should include the capita costs of the plant, machinery and other equipment that have been purchased by it. It must also include within the finical statements any amount that has been spent by the company to hire the requisite plant and machinery for the use in the operation s related to the mining (Coghlan et al., 2015).

1. Schedule 19 section 3:

This section deals with the costs incurred in respect of the overheads of the company. As per the guidelines of this section all the costs that have been incurred for the administration of the operation of the mining company. some of the overhead costs that have been allowed for deduction under this section include rent, office supplies, tenement management, photocopy expense, aboriginal heritage surveys, maintenance of the equipment, purchase of the construction materials, field material and the various costs incurred for administrative purposes like power, explosives etc.

1. Schedule 19 section 4:

This section deals with the expense that is related to the rehabilitation of the project. As per the guidelines of the section, the rehabilitation expense of the company must include the expenditure that has been incurred in respect of the rehabilitation work that has been carried out by the licensee within the license area (Huang et al., 2015). The costs will include expenditure like the land forming activities and costs incurred in respect of revegetation expenses actually incurred on the site. However, the company must not include any development costs relating to the development of rehabilitation programs and any cost incurred on the corresponding documentation of the rehabilitation programs. 

Reporting requirements of Mining Companies

In the annual report of the company, there is a clear mentioning about the various issues that might cause significant risks for the company and potentially cause material misstatement in the next year’s financial statements. They are as follows:

1. Exploration and evaluation costs:

The company follows the policy of capitalising the expenditure that has been incurred for the purpose of exploration and evaluation where the management of the company presumes that the amount is very likely to be recovered. The reason being that the project has not yet reached a stage wherein it can be objectively and reasonable determined the existence of the reserves (Moroney & Trotman, 2016).

The issue is being faced by the company in respect of two projects they are the Telkwa metallurgical coal project and The Kilian and Back Creek project situated I the Queensland.

In respect of these projects, the company is incapable of assessing the technical feasibility and commercial viability. Hence, in the present case the decision regarding whether the asset has been damaged or not primarily depends upon the judgement of the management of the company. In addition to this, the quantum of the adjustment that needs to be made in respect of any impairment is purely dependent upon the judgement of the management.

1. Share based payment transaction-

The company measures the cost of the transaction that have been settled with the equity  while transacting with the employees are measured at the fair value of the shares that was prevailing on the date on which they were granted. The fair value of the same is determined by the company using the Black Scholes or the Binomial model. The value is undertaken after considering the terms and condition with which they were granted (Bunn et al., 2018). The accounting estimates and assumptions taken up by the company may not have any significant effect on the carrying value of the assets and liabilities but may have significant impact on the profit or loss and equity.

1. Impairment of non-financial assets other than goodwill and other indefinite life intangible assets :

The company assesses the value of the goodwill and other intangible assets, which have an indefinite life at each reporting date by conducting an evaluation of the conditions that specifically affect the company and to the particular asset that might lead to impairment. If the company receives any impairment triggers, the recoverable value of the asset is so adjusted (Tucker & Schaltegger, 2016). The adjustment is being made at fair value less cost of disposal or value in calculations. The value in sue calculation are primarily based on the estimates and the assumptions of the management.

1. The company does not comply with the norms, which have been put in place by the statute in respect of setting up of a nomination committee.

Issues affecting Material Misstatement in Financial Statements

  Three areas/ accounts of concern and the reason for them to be considered risky are as follows:

1. The company lacks a committee to manage risk and its mitigation-

As per the guidelines issued by the statute, the BOARD must have a committee or committees that are primarily responsible for the task of overseeing risk and its mitigation. Furthermore, the committee must have eaten last three members the majority of whom should be independent directors. The committee must be chaired by an independent director.

The reason this area is considered to be risky is that at present the BOARD is managing the immense amount of risk involved in its mining business all by itself. The absence of any independent director in the entire process may put the interests of the shareholders at risk (Heenetigala et al., 2015).

1. Remuneration committee in the company:

At present the remuneration and the nomination committee is formed as per the requirement of the company and it has no permanent committee for such purposes. The requirement of the BOARD is determined by a board resolution. The committee will comprise of the BOARD as a whole. The committee will be tasked with recommending the management regarding the various packages to be provided to the executive and the non-executive managers of the company (Liu et al., 2016). 

As per the statutory requirements, the company is required to form a permanent committee in this respect and it must be comprised of at least three members the majority of whom are independent directors. The committee must be chaired by an independent director.

The current status of the committee is very risky as the committee is fully comprised of the BOARD members and it is highly expected that it will work towards increasing the remuneration of the directors and this can be detrimental to the interests of the shareholders.

1. Impairment testing of the intangible assets of the company-

The impairment testing of the intangible assets of the company is conducted based on the judgement of the management regarding the circumstances that can have a negative impact on the realisable value of the assets. In addition to that, the amount of the loss to be accounted for is also in the hands of the management (Bemelmans-Videc, 2017). This is a significantly risky account as the management of the company can voluntarily show more amount of impairment loss so as to reduce the profits for taking tax benefits etc. hence the subjectivity involved in these cases make them risky.

	Formula	Results(2016)	Results(2017)
Liquidity
Current Ratio	Current Assets/ Current Liabilities	0.69	1.99
Quick Ratio	(Cash+ Cash Equivalents + Trade and other receivables)/ Current Liabilities	0.69	1.86
Debt Ratio	Total Debts/ Total Equity	-5.37	0.23
Gearing Ratio	Total Liabilities/ Total Equity	0	0.11
Profitability
Ordinary Earnings per share	Per annual report (cents)	-9.25	-0.8
Managerial Efficiency
Return On Equity	Net Income/ shareholders’ equity	8.50	-0.24

The above table clearly demonstrates the various aspects of the company’s financial performance and the financial position of the company. The following analysis can be drawn from the above table:

Current Ratio
	2016($)	2017($)
Current Assets	1429101	1859295
Current Liabilities	2063015	350010
Current Ratio	0.69	5.31

Accounts of Concern

In terms of liquidity it is observed that the current ratio of the comp any has improved over the period of fine year. The current ratio of the company has increased from 0.69 in the year 2016 to 5.31 in the year 2017. The reason for this change is that the current assets for the period amounted to $1429101 and $1859295 for the year 2016 and 2017 whereas for the corresponding period the current liabilities of the company amounted to $2063015 and $350010 for the year 2016 and 2017 respectively (Carson et al., 2014). The combined effect of the increase in the current assets of the company and the reduction of the current liabilities of the company has prompted the current ratio of the company to go up. This suggests that the company is better equipped with the availability of current asset to meet up with the short-term obligation that crop up during the daily operations of the business.

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Quick ratio
	2016($)	2017($)
Cash and cash equivalents	1418192	1637343
Trade and other receivables	5536	94832
Current Liabilities	2063015	350010
Quick ratio	0.69	4.95

It is observed that the company’s quick ratio has improved the period of one year. The quick ratio of the company increased from 0.69 in the year 2016 to 4.95 in the year 2017. The reason for the change being that amount of cash and cash equivalents increased from $1418192 to in the year 2016 to $1637343 in the year 2017. The balance of the trade and other receivables amounted to $5536 in the year 2016 and $94832 in the year 2017. The amount of the current liabilities amounted to $2063015 and $350010 in the year 2016 and 2017 respectively (Groomer & Murthy, 2018). Due to the combined effect of the reduction in the value of the current liabilities and the increment in the value of the quick assets of the company, the quick ratio of the company has improved significantly over the period of one year. This demonstrates that the company is better equipped to meet up with the very short-term liabilities using its liquid assets.

Gearing Ratio
	2016($)	2017($)
Total Liabilities	2063015	933232
Total Equity	-383914	4144066
Gearing Ratio	-5.37	0.23

The gearing ratio compares the total debt or liabilities of the company in respect to the capital that has been contributed by the owners of the company. The ratio is derived by dividing the total liabilities of the company with the total equity of the company. In the present case, it is seen that the total liabilities of the company amounted to $2063015 and $933232 in the year 2016 and 2017 respectively (Wheaton et al., 2016). In addition to this the equity of the company amounted to -$383914 and $4144066 in the year 2016 and 2017 respectively. This clearly demonstrates that the total liabilities of the company have reduced significantly over the years and along with it, the total equity of the company has significantly increased. Due to the compound effect of both of these, the Gearing ratio of the company has reduced. This suggests that the liquidity position of the company is improving as the liabilities to be borne by the owners have reduced significantly.

Debt Ratio
	2016($)	2017($)
Total Debt	0	583222
Total Assets	1679101	5077298
Debt Ratio	0	0.11

The debt ratio gives the relationship between the total debts and the total assets of the company. It denotes the availability of the assets of the company in correspondence to the debt of the company. It is derived by dividing the total debt of the company with that of the total asset so the company. In the present case, it is seen that the total debt of the company has increased from $0 to $583222 for the year 2016 and 2017 respectively. In addition to that, the total assets of the company amounted to $1679101 and $5077298 for the year 2016 and 2017 respectively (Hui et al., 2014). This clearly shows that the total debts of the company have increased and at the same time the total assets of the company has also substantially increased over the period. However, the effect of increase for debt was cancelled out by the rapid increase in the value of the total assets. Hence, the debt ratio of the company could not be increased significantly. This suggests that the company has adequate amount of total assets for the purpose of mitigation of the debt that is presently accrued in respect of the company.

	2016($)	2017($)
Ordinary Earning per share	-9.25	-0.8

The warning per share reflects the amount of profit at the end of the year that is directly allocated to the shareholders. In the present case, it is seen that the ordinary earning per share of the company amounted to –9.25 and -0.8 for the year 2016 and 2017 respectively. This clearly demonstrates that the company has been able to increase the earning per share and thus has been able to create value for the shareholders. It has to be however noted that the company is not earning positive earnings per share rather it has just managed to reduce the loss per share (Butt et al., 2016). The company must work towards creating positive returns for the shareholders in terms of the mount that is attributed to them at the end of the accounting period.

Return on Equity
	2016($)	2017($)
Net Income	-3263070	-984621
Shareholders’  Equity	-383914	4144066
Return on Equity	8.50	-0.24

The return on equity is a measure that determines the amount of returns that the company is capable of generating for its shareholders. It establishes the relationship between the net income of the company and the shareholders equity. It is derived by dividing the net income of the company by the shareholders equity. It is seen that the total net income of the company amounted to -$3263070 and -$9284621 for the year 2016 and 2017 respectively. For the same period of time the shareholders equity of the company amounted to -$383914 and $4144066 for the year 2016 and 2017 respectively. It has clearly seen that the net income of the company has increased by 130% and the shareholders equity of the company has increased by 1179%. As the rate of increase in the value of the Return on Equity is much higher than the Rate of increase in the net income of the company, the return on equity of the company has decreased. This shows that the company has not been able to generate enough returns for the increased amount of equity shareholders. The company is still earning negative returns. This is severely detrimental to the interests of the shareholders of the company. However, the company has been able to reduce the loss earned by it. Hence, if the company’s performance moves further in the direction of the trend, the company will be able to create value for its shareholders.

The detailed analysis of the various ratios gives an insight into the financial position and the financial performance of the company. It is very advantageous to utilise ratios that are concerned with different aspects of the company like liquidity, managerial efficiency and profitability. It enables a comprehensive analysis of the financial position and the performance of the company. 

The following conclusion can be drawn in respect of the financial position of the company:

1. In terms of liquidity, it is seen that the company has been able to increase the amount of current assets so as to adequately meet the obligations that may arise in the business on a short-term basis. This suggest that the company has enough stock of liquid assets to meet up with the very short term obligations that crop up during the daily operations of the business (Soh et al., 2015). It is also seen that the with the decrease in the value of the total liabilities of the company it managed to increase its total equity too. This suggests that the equity shareholders are now less subjected to external liabilities thus
2. In terms of profitability the company the company has not been ale opt generate positive reruns for its shareholders. The company has however been able to reduce the losses it was earning for the period of time. The company at present is not performing well in terms of profitability (Knechel & Salterio, 2016).
3. The company’s management has not been able to create value for the shareholders. The reason being that the company has no positive net profit to be allocated to the shareholders. Hence, the company must increase its managerial efficiency.

Conclusion and decision whether to undertake Audit

After considering the various aspects of the financial and non-financial indicators of the company, it is concluded that the auditing g firm should not take up the company as its client. There are Manu reasons for this some of them include the vast amount of expertise needed for conducting certain valuation of the assets and liabilities of the company like that of the stock of the reserves of the mines etc. In addition to this the company is in non-compliance with significant laws and regulations applicable to it like appointment of a proper remuneration committee a nomination committee etc. hence, it will be risky to take up the audit as the chances of material misstatement is immense in case of the company’s financial statements. 

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