The Journal of the National Board of Accountants and Auditors Tanzania DO MINING COMPANIES DEMOSTRATE RESOURCES — INTO RESERVES USING IFRS ANALYSIS OF THE UPCOMING fereviMon MARKET THROUGH | swoT LV (e)e] =i mer) INVESTIGATION INTO THE EAC COMPETENT AND VERSATILEDo mining companies demostrate resources into reserves using IFRS? Prof Handley Mpoki Mafwenga PhD, MSc, MBA.PGDTMADTM Abstract, ‘The purpose of ths paper isto reflect onthe importance of reserves and resources inna statements, ‘and in particular, 1 show case that ther accuracy is vital when considering the profit or lass of mining company. In essence, if ore reserves and mineral resources are misstated they can misrepresent ‘he profit and loss account and balance sheet. This paper asserts that mining companies have not been able to demonstrate resources ino reserves inline with International Financial Reporting Standards (ERS), 0 sto preserve room for taxabilit duet high capital cots, wreaitcroporting of coats using accruals concept under certainty condition end tack ef adoption of TERS tht captures resources and reserves definition components. Mareover. ndings have shown that foreach percentage pot Inrease in resources, om average reserves increases by 0.607458 percentage points. This paper is combination of both confrmaton ind exploratory research whic is qualitatively and quanttaively analyzed from nvestment data of companies in Te 5re andthe css of mining, processing snd seling the mineral product. There fandom kas hold tue. wheter the mineral or rockin question sand snd gavel fr costvtion purposes, tase end precious metals or india + eneray miners ‘makes it difficult to compare the ey recovered ty aeoee value of one mineral operation with #10 sle The time fiom discovery, ‘Production ost estimates a5 well thet Ws ne saree er genet mineis ota messutd in sean eed tonsenevable and ae determined pcesng an ale of seca By the inherent combination ofthe fours the ane sh Oe et fr rong ie pci cation Petes aly there ae other mineral reserves lke dent a minal sk, tat Meal Rsoure inten Bat whl are renewable in nature, ca mine om te care ier tin of ean, pnts ens suck Kind of minerals ar poses an ald tpi fies yp gate Pos, (CM Come Mineral property reserves form the basis” forall Om the otter han, i is argucd that Resource estimate othe consideration ofthe appoprine goologial Tnerpectton sid the appiaton‘volumes and weight sample oats, ‘snpling. proved: and assays of ‘ther analyses, the overall precision os mineral serve eximate may be Timed to two signifiant figures. 1 js genwaly recognized that mineral reserve catates, being prediction of ‘nis expeted o occu nthe tir, are based oo imperfect. knowledge fof the preset, wil be inacaate 1 fone degre I i alo recogni tht ‘itfeont dvi analysing he sae ‘tn ay ave at somewhat ering ineretaons and cozclusions. ‘The fac that mineral reserve estate may te proven tbe insccurte at Inter de, when addon ifoomation 1s "vulable or esonomie conditions have ‘hanged doce not necessary men that the eximate was made incmpetnt or fauduleny. Statements comeing iin revere estimates must have 2 Teasnable basis and be mide in ood 2.0 Brief Literature review {a puarced be wrong. Some, owever, are les wrong than others (Rorman 1998), 1 is widely eld ow tt, reserve (and sometines 8 resource) the primary input into fny financial sali, evaluation and intron er feasbiltystades theefrs;itcan be asumed that tase faluations,inerpretatons ot sy tila thereto be wrong Sigafcnt (fo ison expended on capita and ‘operating cost estinaton, commodity ‘rice forecasts, and ebace of discount Ince as purmeric messes while Sncerainy inthe primary ap, tbe Monte Carlo simulation while mulaing 4 number of hypothetical feenarios, allows uncerlaty 10 be fxpessed as range and stitution fof possible values fr any nimber (Of gen varables or input (iter Inimation on Monee Caro Sirti canbe found ia tet such as Rubinstein {1989 Law and Kelton (1991). Eliot ct 1 (1997) jn jusihing unceainty “xgument deste bow, in high mgt effect eavirement, ok of soothing can re loss of revenuo through the micasifston ‘fore to waste. Likewise, Bulk deity information i reared or etch and vey ek ype ely tobe ibe. This ir eommonly the wort technica feature of resource database (ililan 1998), Inappropcite_ resource casifation tls hat significant potential to eet levee of uncer For example a poorly defied resource tat is Inapproprnely classed 5 Indicted, ‘ould Be sed he ass for an reserve estate. Subsequtly mining tay tke place on at ely may ‘enhing or than fered Resoarce tn constrting a financial model of 1 mining project signcant ett Is pended on capital nd operating cost ‘timate, commodity priveFrear tnd choice of discount rates while Uinserity in the primary np, he reser, roe comply overlooked Four qualiative process have an These stages a 1) Oe defnton 2) tologel nterrtation 3) Resource station and 4 Ore reserve sian nd ine planing och stage contaiag a number of tasks tht may be considered s Key Perfonnance Actives (KPA) ‘Optimising the manner in which tose PAs arecompleted can nove a great eal of uncertainty and eno fom the ‘Seouccerere proces. Examination ffthese KPA within company ean tlk provide an sph the aly of the information underlying the peje ‘This wllallow the company oHeny sty shortomings inthe ts and 2 sess the esling sks (Gilfillan, 1998), ‘The ore defation suge encompsses retvies asocined with dling ‘he geomety and” geochemical ‘haracterisies ofa resource. Dilfient omponice teat thew activites in deen ways boeaue there is usually ‘grey area exploration an the ‘ommoncenent of oe body sinaon Tn thie paper ere definition involves ini ding of previoos explo hoes pester ili 10 esblish ore boty dimersions, hole oguing, Singing, assyng andthe sompiiation all data fon vobust and vai habs Having ethered information on the locaton Tiloges, structures and mineralisation, the nox stages to ary ou govlogia and getecicl Inurpeaion of the data in oder to determine = eologial model Toft i ion hat derived ding the ore fain stag, such ts regional goologial undertanding, fanilarty with the miverliation syle and sructal contol Wil (Obviously cabaoe. the poloical interrttion. This stage involves the ‘conception ofthe ore Boy ad itsgeologicalcouto's In Resource estimation, aces involved during tis stage ae peimaly seo wi the intepoiin of dala ‘ed the estimation of tesouree tonnes nd grade, A range of tchaigues are salable tis significant note tht ‘ompinyinivdualexptense and profrene olen bises the choice of Teehmgue This maybe in par de to Tack of experi cr falacty with some techniques bit fs more ofen = altri within the company that rest fom paradigms held by ey akeboldrs, "Tania sittin, ‘he anigeegeolgiea! Tears of the fr body, alongwith sisal and fpowstulsical atlsis of the damshouldbe wot to determine te most appropiate methods Fee intepoaion of gale within the geological mode! having developed a msource model, economi parame an be applied to drive the re restive sa amie desi an be cred. The ere reserve estimation proces involves ‘he duiled defn of which parts ofthe enue ean be conomically etated. Tho dasign sould be opimied in open pitas the ase may be underground mines. The cpimination process most adsl manugenet isa seoogia. mining enginecing. etal, geotechnical Std operational inses, Maximum Net Preset Vile (NPV) is ‘nidered a the Bench ack fr optimist (Tulip, 197), The end sul ofthis sage isa reserve statment The final sage i the planing and scheduling of tp extraction af the resoure which must consie the sing tetnique and equipment be wed. Othe ft that most abo be considered ding the mine planing stage cade raining consistency of il sda bth ones nd grade, ‘ending roquienent,seotacial work such a bolting, presplitig and ongoing monitoring, lead tine to acces for though underground develope, or pessiping for ‘open pt mos. The dacision process rearing resources nd ‘ert in mining indy isa shown gus | A nuner of ses have boon completed using fina sian tesiniqus w aso vk or uncertainty in mining projet (or example Newendorp 1975, Malitann 1987, Mackenal 1998, Rozmaa 1998, These sin generally ‘oeus a vation in quite factors such ae revenue and cost. Most financial ics eter tnd to del with ‘mcr in resource or reserve estnaies by sruping AIL ik, nto 4 Tato which i ape to the inl reserve trade sd tonnage, While this does adie uncertainty in the rsewe estima, the factor aptiod te typaly 00 onservative, Thespian of uncertainty inthe resource! reserve estimate is highlahed by a. Groupe Relesion fctrespondeat (Coie de Geo-oitign, 1990 who reported tha among smaleinng companies nSouth Affe ang. tie 1980, 10% fled snl Boa fave estimation of the ore reserve tonnage and rode. Beutel Goodman and CO (reported in Cente de Geosassiqus, 1994) cored & summary of Neth Arian mie flares ising 40 mis "ha were ten runing at ealy 25% ofthe eal invested in (On the basi of esti say or investent analysis, the reserve ca which the eapal estan dsson way made only be sssumed bef restr inthe acti achieved by mining. The unesrtiny ait ote reserve i ese isos was obviously inadequate Bight tre potent problems fo the investors. The inact of telly sal tmargin for etor should not be destined. Reema (1998) uss the gold indy as an example, nd ight tha nan indy that generally re tpt agin of 10 20% beter tha 10%, 2) madeling of ore body outlines to a secu of 10% isa challenge, and 3) _Aoten sere is only expected o be accurate 1 Therefore the range of uncurany of the ore eer fs ‘tet fo have wsgifica impact on projet Ivesteat Aecisons, A cil way to ety the peal soures of uncraetyin mining projet to cose the proses tha ad va to the project 2A Challenges facing Reserves and Resources under International Finan Reporting Standards (IFRS) and Taxability Normally resources are classified a eserves, tough this rome, prsumably Denise ey believe ther tbo uch uncer about namreserve materi (what se the an-rserve male). This miy happen eros mining ‘companies cm lay th adlonal work requed to caver isting mining plan. I hs rear, deprecation chess Shou eet the expected mine ie and tthe timing of two equi proveup the eserves ‘Sule i 10 aay tha in det acount foe nomesene ‘sci ining compass are roqted o determin, and fof cours must bo able demcntate a “high dee of ‘utidenc,"thathe resus wil beconvered inser This must be nderken in lndom with the savant aniston palicy tat woud be applicable seston. Hrahold iso be Bore in ming that there sa varaxing between mulation! mining Although mining companies are Extractive industry fms do not Sonpenies options an "sta supe rege fo dle et ognize mar aster ‘only nied in scievingcompuabilty developed counties, tbe nature and information tas bon Tong standing in the finmeialrepoing by mining extents cere spotconsisent challenge for those who sek to regulate > global standards othe across the mining indasry as fr as extactve industy fms sminatonoftesouresanreserves,ulationl ompatie ae concemed “ Figurel: The Decision Process regarding Resources and Reserves in Mining In The decision process En if Dicavered = Moet = Potentially Remahing Economic Discovered Gam een Me Unesonomic 4 “ Discovered | Niner inven uneconomic] "| Mineral Inventory Total n Pace Nineraisation -- eae Ps Undiscovered Soares Br Sapo Teley Nal Young ligament of Resor apd Reserve Clasiicaion Stans Rasalan Fedbration and3.0 Methodology ‘The pope has dealt with parameters that are not tually indcpendeat by easring tht the conional debuton values ofthe dependant vale are determin by using the ‘pit fom sampling the dtbuton of the fist vanale Tho statsical input the mode ave Den derived fom the andr experience of the tors and tug contaton wid collages within the indo. Whit every ef as oor made to ensure tht the inputs ate meaning and reals, the are not based on empirical dita and expres the pinion of de authors ‘Therefre, Sustained expansion of gol exports woul! ie toa actor prodctviy Hence, should be weed separa factor of proton, Several cross industrial data fem gold mining companice were obtned fr snl; fram te Compaties might 20 be good measure to support pote produetion expe! from the reserves reli! because ash Fesources a deposied in ore acsouns and to some {stent might nt adouately add vale signal tpoive toute ofthe el interest te Hwee, maximum poduson of pol reeves tie fs Ho)= Ocwhere{a mat : 1802} Tiss shown a fs fe gl prodton gh srs proton of od tine # Hence, any resoryes atime Fis the associated coninuous snd pace diferent state params I thi pata eivative ofthe fctonal Q wit respect the funtion a(t) stapoint ¢ The tock ofthe resource atime O can be expressed through woducton functon of the proven reserves follows Roy = Solarian Og. Q-Quuntiy of resources expresed as 4 desivaive of uy of reserves aie ‘Thetis varance of tock esaurve which inplies ht the remaining Hock in re body ay ine (i Ry= fLOla.thae facxaxts) Note ota, (is pereved continous conto futon with at most, inte munber oF scouts with fie jomps (Le one seins tcc oi of denny, Ri fnton totonly of be piel oer chris ate of the polactine tg song oe ig opal ining to deo amie ena meases of th it os peed somerset of ey of ronsenvate emus Atm te dic Spumaty coin forte imate rene marm=fy)= mu) Where m= fis the curent valu ini esr piss This equation implies that, caret vale of in st eau ale ipreases at ofits es the eres in te st fm exacting the marin poc of old per ui. elt) = VAN) -w! X! ~ Cow! gh), R(t) 1 onfsg=ao+n(@e)-a0] ALthisanctre fal seas mi) foal Te is pemieut therefore to arg from the economic function shown above tat, changes in he inde aera resources or measured fer that mate shane changes in he Ieelofrealzed reser and not the other way ound could be specified in he regression mods. The simple regression ‘ode would explain reserves which is dependent rele {daly oa independent ail, tab the seve ai, ‘The model an be exposed = Reserves’ Bo + byresouces, +0,(6) The fastion depicts tha, reserve is dependent not aly ‘on parameters affecting the hie ofthe ines but lo on the Sochasic(andom) element © so that reserve isthe finction of by byeserves, and e, “Thesconday dat have been cll rom the gold mining onic in Tavania analysed aed dzpicted ws show 4.0 Empirical Findings and Qualitative Evaluation of Minerals Performance Prortofocsingon profitability asthe method ofmeasareent of amining compat’ perfomance tiselevant cone tome of the oer mente tht ae wed to dstrming perfomance inthis sector. Whilst nt am exh tthe peroance measures inclu} exploration saeco, 5 produton, i) cash cots nd i share pie valation,Exploration success Measuring company performance by exploration succes is bighly appropriate for explorion companies. Typical, the management and the dnesers of these exploration companies re very cle tothe action and hve god fs for wbnt occuring in the company: Silay, investors ‘such companies ate looking for capital growth through clortonsbvess, aa vidends om sable earnings. The majo materia that thse compass wil be reporting Wil be geological infomation, opel aching reserves hd ours The inporance ofthe reserves and resources {van inp fo the ep aforain Is ely o be pester athe adie Snail eu, Exploration sucess seri an important performance ‘measure for ll mining companies; weve, rlevanee ts 4 mearre depends onthe explerationioematon bing ‘por, Ingen the lnper the mining company, he less ‘aerial hat exlotion eporing becones. Production The release of production staiscs i an enrol wef arom st how # mining apa is performing Most panics would now agra there sn pois x inns product oth sak of fy and tus a petformance meas fo mining company production has exten linitains Note that focusing on proditon exer than profitably, increases the rink tha vale wil be destoyed Cash costs Cash cost comparisons are commonly wed by many In the indy, and many indy obcrvry sich af aba Being nthe lowest quale of eash cost pode a0 nim hss tobe shared bythe vst majority of mining companies around the labs This fation on cash cos ‘vit the mining inst has been damaging, ands bon ‘one othe primary reasons band the inst contning ‘dentay va yea ale year Thor foo much foes on Imokng cash retry, wht ignoing the unk ont neared. Ty shareholders in etaishing opens, Share price valuation Jdpingpetormance ofa company by looking the share price tle fakes all ofthe above perfantance messes Iho ascunt (incuding the dw back of esc!) at well tthe profit of company. Ht alo takes imo account isuts such as commodity price outlook and moversent ia ries, exchange rates and peteptions of companis and Fndustien In my wap, i he uliate measure as To thet sbreoldes ae etisfed withthe manne in which Imanagement tnd the dietors a sering te company. Cher markt vloes can als ineloe number pote factors tht may bo eu the con of te eompan. and they may no refit pert valuation of company on & ‘iy to ay as. In asec shorter ends may andere longer re vale, ‘This method of metsuremsnt of performance taker ins account epored exploration iafrmation snd profil fd thus, lies eserves and resources beng acum. 41 Determinants, Accounting Implications and Tax Implications of Reserves and Resources under IFRS In onr to calle ore teres, mining companies are ‘equ tess sina nd suri about ange fof pualogia, technical and ccenomie ft including ‘quanti, grids, roducion tectnigus, recovery mes Production ‘cost, tnsport cos, commodity” demand Enmmdity peices and etchane ats In tht regard, while existing the quan andl arade of fore eserves rogues the sz, shape and depth of oe ban tobe dotomind hy analysing gonlogis data sch a he logging and ansaying of el samples. This proces may eae complen and ifeut oolgial judgments and ‘elon nargret he dt Tt shoud bet In nd tht, coononicassmpios used to etimate ore reserves change frm prod oped, and ional geological dts generated daring te cure of opsratins; hence, th estimates af ore reserves may also hang from period to period. Theor, campos In the Teper ore eres Hy aft the company’s nani ‘enls ad anil potion ina number of ways including (0) Asst crying values which may be affected due © ‘anges etna ft ca owe, (©) Depreciation, depetien, and amortization chargedin the income starts may change where such hangs re dete by the wit production basis or where the ofl economic ves of ss change )verbudn removal cots recorded on the tlance hoe or ching in the income statements may ‘hanged o changes in tpg eto or he unit ‘of pndetion bss of epoca 4) Decommissioning st reiration and environmental provisions may change whore changes i estimated fe reserves aff execaions abou th ining OF ont of hese ative; ad (5) Thecarrying vale of defied tases my change dhe to change in estates of the likly ecoery 3 Asst tht ore bjt impsimment Tet" whenever changes “in ‘eeovrale An inpinnentoss ie resognizes fr the umount by which the ass carping amount exceds is recoverable taut. The rcoverable oun is the higher of tease’ st val lee cost sll and vale in ie. For he purpose of asesingipsinent, st ae grouped tthe Lowest lvl for which thre re seperately ienifable ash Now Ingairment calculation ssunpdons ay inca; peers Eee eee cee See ee eae ace ate me eect peer (0) Lite ofmine plans based on prospective eserves and (©) Managements estimate of the fue gold price trae onthe curt pee ond (9 Forign exchange res and (@) Pretax dsoount tense orcouty and poet Assumptions wen sting mineral eserves nla (a) Changes in proven and probable reserves, (©) Thegmdeo mint eserves may vary ignifcaly (6) Diferenses between actual sommodiy psa and commit pce assumptions (© Changes in capi, operating, mining, rocesing nf reclaation cost dco rales and Trig ‘xchange tes nd the uf lives eats preci on sah lnc tai, whore the fives are limited to he eof he ‘esate rasa snd ot wo “Sane etary ressver cx Bo hase mb Powe, Foc aneti ann ‘Stason ens of essing a geo oe SOP ae RSE hades ‘SaRaR a Spe pd anor ett oe cuca et Fo aly 5 cna a SSS ST [RNa ata! espe ot mapas en ‘psig nr dy af ‘eB ge an ener eter od at Pape eee ed 2a tet eee Sop. ney See ‘omens mmr ao pvr tues ‘eta wie oper wand The sages eno See ga nt et ep Ey ch ise ers orn an mere rear a oes fee. ee(nthe ther, the mineral sous are ernie in Tine with IFRS 6. thonld be bore iain tha, asets (ined as used inthe exploration fo ‘nd evaliton of mineml resource sre eid 0 be sty ee ‘suiment which are apposed tobe Fay icon The balances within the roi and loss secon apd alae sheet that requie large degresotjudgmentindeterining tet value ave beea highlighted etd cal ilioes al entire ‘When each ofthese judgment aest is comsdered, tere is one overiding factor wGh highlight Hei i the the importance ofthe accuracy ofthe eserves an eoures ‘Te accountng impietonsof serves sud esources encompass the allong dequtely ares wnigue 2) Some TFRS* question the relevance of exiting practoee 3) Mining companies adhere ocemary body. exising 4) No-ckar sage defiion of roeres and resource tnd the way they can be clearly 5) The time for the amet recogniton on the blance thoet is not let, 6) is oot clear a to how the ‘Sse should be measured ‘eters and remus should be disclosed inthe financial report and 8) Blame sheet recogton nd measrement of minerals ‘soe bas ied wefUlnest reovent though vefable ie too. sibestve as needs Conventional Matrix for Determinants of Resources and Reserves and Tax a 8 Depricadonfamortiation | RepredOre Reserves (and sometines ‘expense Minera Resouces) parte af n-th expense om Which ats ve cjoyed Wear and Ter Delucons ‘aleaions which ae highly depende nore ‘Reserves and Mineral Resotes Teepements ‘Deemined_ Wy net presen value | Inpinenloses ave to eae tack hex Aesnining Compton et fecane cane tenet hate ot en ead ‘ventory ‘determined from cash costs and | ‘depen arotston Sar fave ten seized ‘Dependent on Or Reserves Mins Retabilatonprovions | Crs ‘ele at the caret yale of the ‘hae eat hs Is impacted by Ore Reserves sod Mine Resource (3 cei tof ee of cloare ae lacringly | No tax implication to the ext that cos have eon et ade However when css ae rained Allowance or tx dalton enviable ‘ecclerted depreciation or Declining. balance Phd under Third Schedule PTTA 332 In my evaitio, th model explains spprointly 28%, ofthe variation in the Reserves ae aise by haiBee bb smears Reserves=2.6556740.6074S8Resouces Ere, 8) four assumption is surely taken that there nly exists uni-etionlreainship between eserves und resources, we should ‘conclude ht fr each perentage point inert in resources. on average srs increas by USU74S8 percentage pis, Table I nial Investment and Reserves for the Six Large Seale Gold Mining Companies Minit | nner Mig [sere Oneq) | trimacd Rewer 0M | Barick Gold Mining ‘20,000,000 | ss0,00.00 3.000900 ° cr SNGME) erik Galan Taanoao0 | jonnoon00 Sma 5 Comite oN | Pangea Meek “somom | sero m0 vom ing oy ‘GGML]ArgloGoHastani | ssoaooao0] —_1sapo0p00 Sino 2 ‘an | Rene Tranomo | __aioane 200 me WAN | Pugaincnicnt | sown | —sassane 3a%000 EY Ta Tazo | _iarvasTane 2500 7 Source: Mins of Energy and Minerals (2008) 5.0 CONCLUSION Ieisherby suggest hat geologists, engines, mtllugis, accountants, detox, air, investors and-analst do tot always derstand the interactions hetcen some of these groups of people, With cera it can Be aged that isi inc nts ve Dec pore in undetsoed by people wbo sed the information, oF the ‘stnates were wrong, Ties an re tht needs considerable ‘Senion by mining Companies If ers ae not ob made Simi, there is lack of understanding abt resources asureservesy sme regulators tht leading to peste rings regarding valine tat will redace athe than cohence the understanding of mining bosneses hy investor De othe fet that uncertain nthe resource and es tstinate process can have on peel iis important fo allow for enon i thse peocestes in amy facial analysis tr aibiliy dy vis frommended tha, when bling 1 finmncial model, a review of slant resouceeseve ‘fe aplid to provide argo of pot otcomes. Those ‘uses can then Be Tactred ito th dt! cash flow tatyis in order Yo enue tht tech mnccraity tat nto investment ecvion. ti therfore sued a hit ncture at generally mining compe ave ns bee be to demansieesoures into reseres fine wth IFRS, 0 36 to preserve ror for table def uncetaty condions tnd lack of adoption of TFRS that apres resorts nd6.0 REFERENCES 6 1 i Centr de Geosaisign, (194). "Sommary of the first 12 debate. Groupe de Rfleron on Pnanclt Analysis and (One Reserve Bolton opubliabed ‘CIM Coun, 2003), "Estintion of mine reserves sd mineral resources" Best Practice Guidelines Eliot, SM, Snowden, D V, Bywater A, Sunding, CA and Ryka, A 197. “Reconliion of the MEKlanons Gold Deposit. Cobar New South Wales Mining Geology Covfrence, Launceston. 13 Gillan, J #198, Testing the data "The Roe of techie! due dilgence”. Ore reserves an Fiance Sein. 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