In an effort to explore methods to encourage development and reduce poverty in resource-rich countries—particularly in developing nations—the Canadian federal government assembled the Resource Revenue Transparency Working Group (RRTWG) in September 2012. Consisting of the Mining Association of Canada, the Prospectors and Developers Association of Canada, Publish What You Pay Canada and the Revenue Watch Institute, this group was formed as a means to provide guidelines to help ensure that the estimated $3 trillion in annual worldwide mineral and oil & gas exports are better applied to the benefit of affected communities. Ideally, this improved transparency of payments to governments will reduce bribery and mismanagement of funds while providing citizens and investors with better information upon which to advance their respective positions. If effective, these measures could help initiate change in many of the world’s poorest countries, improving the existence of millions of people in the developing world. The RRTWG published its recommendations on January 16. On March 27, Natural Resources Canada published a consultation paper based largely on the recommendations of the RRTWG. The reporting standards outlined in this paper, if adopted, would apply to all companies that are reporting issuers under Canadian securities legislation, as well as medium and large private companies operating or headquartered in Canada and involved in the commercial development or export of oil, natural gas and minerals. These companies would be required to annually disclose broadly-defined payments to domestic and foreign governments that meet or exceed a minimum reporting threshold, with penalties applied for non-compliance and no allowance for exemptions of any kind. The paper recommends the legislation be enacted on April 1, 2015, with a consultation process currently under way. For the 60 percent of mining companies globally that would be affected, complying with the recommendations will not come without significant effort and cost. The company’s management team’s first step should be to thoroughly familiarize itself with the recommendations, monitoring as they become requirements to ensure timely compliance. From here, management should assess its current processes and systems for adherence to the reporting requirements, modifying for any identified gaps to ensure that all required information is fully and accurately captured. Finally, management should implement an effective process incorporating appropriate internal controls to ensure accuracy and consistency of data production and reporting. This process should also include assembling a file to accommodate potential audits by regulators. Management must also be sure to include all subsidiaries, controlled (directly or indirectly) and jointly-controlled entities and entities subject to significant influence in its reporting process evaluation, as these types of companies are explicitly subject to the reporting framework. To eliminate redundancies, the recommendations also include recognition of equivalent reporting regimes, such as the U.S. Dodd-Frank Act and the E.U. Transparency and Accounting Directives, suggesting acceptance of equivalent reporting standards. Many express concern at the prospect of additional reporting regulations for public companies, which have increased exponentially in the past decade, particularly in the area of internal controls over financial reporting. Others have embraced the opportunity to demonstrate corporate responsibility to improve shareholder support and gain social license, both key factors in the success of mineral project developments. Regardless of the position reporting issuers take, endorsed by prestigious organizations such as those comprising the RRTWG, implementation of the recommendations will bring Canada in line with the U.S. and E.U., ensuring the continued perception of Canada as a leading country in the extractive industries. This guest post has been written by Bryndon Kydd, CPA, CA, Vancouver leader of BDO Canada’s Natural Resources Practice. For more information, he can be reached at [email protected].

Gold production costs have been silently increasing for years, hidden behind inconsistent reporting metrics that emphasized short-term impact. When gold prices fell sharply to below $1,200 per ounce in June 2013 and then remained depressed until recent months, the actual long-term costs of gold mining were forced into the spotlight. The industry embarked on aggressive cost cutting and slashed exploration expenditure in many instances, but the gold price also emphasized that the industry had no single up-to-date, consistent standard of cost measurement that captured the true cost of mining an ounce of gold. That month, the World Gold Council issued guidance on non-Generally Accepted Accounting Principles (GAAP) metrics that sought to more fully reflect the economics of gold mining, providing a more comprehensive, long-term view of the costs to produce an ounce of gold. Sophisticated investors have long since recognized that existing cash cost measures frequently fail to capture the full cost, leading gold miners to fail to capture sufficient margin in the gold price bull-run as cost inflation and weakening average grades merged. Management teams rightly point to the true cost of mining when addressing wider stakeholders, such as governments and trade unions, but it is little wonder they latched on to the cash cost measure pushed so heavily by the industry itself. Unions and governments generally perceived super profits within the industry based on the short term “cash cost” measure. As a result, the industry continues to wrestle with these stakeholders seeking a share of the gold price — a price that remains robust by historical standards and significantly above those reported cash costs in most instances. This contributes to the continuing wage disputes in the South African gold industry, and is reflected in the moves by various African governments to amend mining codes. Opponents of traditional cash cost measures argue that they not only provide an incomplete picture of mining costs over the years, but also suffer from inconsistency across a variety of measures and formats. The Natural Resources practice at BDO in the United Kingdom conducted an analysis of cash cost disclosures by leading gold producers from 2008 to 2012, and found that 70 percent disclosed a total cash cost measure. However, each measure involved a wide range of Key Performance Indicators (KPIs), including total production cost, gold-equivalent ounce production cost, by-product cash cost and operating cash cost, among others. Only half of the companies using total cash cost stated that they followed the Gold Institute guidance, a predecessor to the World Gold Council’s more recent Guidance Note. Some gold producers included reconciliations to demonstrate how they arrived at non-GAAP cost measures, but comparisons between companies are difficult for a number of reasons:
  • Reporting methods vary widely around issues such as gold sold or produced, by-product credit for copper and other metals, and non-routine items
  • Treatments of inventory write downs and non-cash remuneration differ across companies
  • Varying approaches to recognizing royalties within cash cost measures
The World Gold Council Guidance Note hopes to change the traditionally narrow cash cost measures and establish more uniformity and transparency in reporting, moving the industry toward all-in-sustaining costs and all-in-costs calculations. The World Gold Council has stated, “The all-in sustaining costs is an extension of existing cash cost metrics and incorporates costs related to sustaining production. The all-in costs include additional costs, which reflect the varying costs of producing gold over the life-cycle of a mine.” The all-in sustaining cost effectively extends the historic cash cost measure to incorporate wider corporate costs, additional non-cash items such as share-based remuneration, rehabilitation charges and the capital expenditure and exploration required to sustain, rather than materially increase, existing production levels. All-in costs takes this a step further, incorporating expansion capital expenditure and exploration costs to give a full life-cycle cost for the business as a whole. Gold producers are increasingly starting to adopt these measures, but the new metrics leave a number of issues open to interpretation that may cause lingering inconsistencies, including:
  • “Sustaining capital expenditure” is defined as all capital expenditures except those involving “major projects,” which materially increase production; the term “major” is highly subjective
  • The development of new operations are classified as non-sustaining costs, but there is no guidance about the point at which costs incurred on such mines move out of “development” and into “sustaining capital expenditure”
  • A significant portion of exploration costs are related to sustaining existing production over the long term, but some may argue that most of their exploration costs are tied to expanding the reserve base and therefore excluded from the measure
  • Companies are “encouraged” to reconcile previous metrics with the new guidance, but there is no prescribed format for these reconciliations
Regardless of the concerns with the new measures and their implementation, the World Gold Council’s guidance is a step in the right direction and will contribute to improved industry transparency. Investors need analysis based on longer time horizons to better evaluate underlying trends and costs. The key to success will be cooperation within the industry to support the new guidelines, and these moves will go a long way to rebuild trust in cost reporting. This guest post has been written by Ryan Ferguson, Audit Director with the Natural Resources practice at BDO, LLP in the United Kingdom. He can be reached at [email protected].

The Oil & Gas Awards have announced the 2013 winners for the Northeast region:

The Oil & Gas Awards have announced the 2013 winners for the Rocky Mountain region:

This guest post has been authored by Tammy Thompson, Partner, BDO Eastern Canada Natural Resources Leader and David Roux, Associate, BDO Canada LLP. They can be reached at [email protected] and [email protected], respectively. Around this time last year, financial analysts predicted that the junior mining industry in Canada would experience a severe decline in the wake of falling commodity prices, increased costs, lack of funds and shy investors. The “crystal ball” may have been a little blurred. One year later, this prediction has not come to full fruition. While the junior mining industry has seen a decline, it appears it is not as dire as originally anticipated. There have been 27 de-listings from the TSXV between December 2013 and January 2014. Of these 27, 13 were in the mining industry: one was a result of insolvency, two were a result of moving to the CNSX, one was a voluntary liquidation, one was inactive, one failed to file since 2012, and seven arose from mergers or reorganizations. From these recent statistics, it would seem far fewer mining companies have disappeared than predicted, and instead, there appears to be a trend toward consolidation in the industry. As Bruce Gordon of BDO Australia noted in his blog post last January, there has been and will continue to be increased merger and acquisition activity as the industry focuses on reducing costs and increasing efficiencies. Similar to Australia, we believe Canada will see more distressed mergers and acquisitions on the eve of the return of investor confidence. This may be the new future of the junior mining sector: a smaller number of larger explorers feeding the needs of the Majors. Another concern for junior mining companies has been the lack of traditional financing. Of the approximately 359 junior mining companies listed on the TSXV with a market capitalization below $25 million, a share price below $0.05 and less than $200,000 in working capital, 96 have raised funds through private placements in the last six months. Together, they have raised approximately $33 million, but at an average of only $350,000 per company. This suggests that much of these funds are coming from existing investors, allowing them to protect the company from insolvency while increasing their equity stake with limited investment. From what we’ve observed, the low share prices allow mining companies just enough funding to survive and keep their best properties in good standing, but unfortunately not enough to carry on the exploration so vital to the advancement of the industry. Traditional funding still seems to be in place to sustain the existing organizations; however, it may no longer be adequate to fuel growth. Although some of the warnings for the industry may still prove true, there may be cause for cautious optimism about the future. The mining industry in Canada has been around for decades and has seen many highs and lows along the way. Miners have repeatedly demonstrated their ability to adapt through these cycles, and we believe this current cycle will shape how the industry does business in the future. Recently, the Canadian government announced it has extended the flow-through share and the mineral exploration tax credit programs. As the industry moves toward recovery, we expect to see traditional private placements continue together with the increased use of convertible debentures and rights offerings to sustain the industry. That expectation, combined with the inevitable and necessary consolidation of the industry through mergers and acquisitions, will facilitate the continued survival of the junior mining industry. Economic change is upon them, but they appear to be up to the challenge. When looking through the “crystal ball” of mining and predicting future outcomes, it is important to remember mining is inherently a long game, with a “fast track” mine taking at least 10 years from exploration to opening. Short-term cycles in the market don’t necessarily affect the long-term prospects for the industry significantly. The world will always need the products of the mining industry, and therefore it is inevitable that recovery is on its way. With a trend toward consolidation, junior mining acting as asset feeders to the Majors and the need for non-traditional sources of funding, it is difficult to predict what the future will hold.

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