With the change in commodity prices affecting the mining sector globally, financial reporting on operations has become significant for companies as this has an impact on how mining companies strategise to keep their companies operational.
Citing KPMG’s 2014 Mining Financial Survey report published in January, KPMG Energy and Natural Resources partner Daniel Hooijer notes that, given the change in commodity prices over the past few years and the significant gold price drop, companies have started reporting on their finances differently to what they did in the past. This document publishes the results of a survey of the financial reporting by 25 major mining companies from across the globe.
He adds that since the last survey, which was done in 2012, mining companies have faced significant headwinds as assets impairments, estimates and judgments and non-generally accepted accounting principles (GAAP) measures have been identified as some of the trends that have affected financial reporting in the mining sector.
Based on the impairment of nonfinancial assets, KPMG’s survey recorded that 80% of the mining companies it surveyed had challenges since 2012, with impairment of assets. This is owing to the uncertainty of market conditions and the volatility of capital and operating costs in the mining industry. This has led to regulators also placing an increased emphasis on disclosures related to impairment and the assumptions used to determine the recoverable amount.
With the estimates and judgments, the survey identified that the management of mining companies make assumptions to determine the carrying value of assets and liabilities. KPMG notes that, while this may be common across industries, mining companies must make some complex estimates owing to the nature of their operations.
“Owing to this, we found that there were strong disclosure areas where there were impairments recorded. However, the existing trend being the shortage of capital will lead to more companies opting to merge projects so that risks and management is shared,” states Hooijer.
Although the survey focuses on mining companies’ financial statement disclosures in accordance to GAAP, many companies also report additional figures regarding their financial performance that they may consider useful information to assist readers of their financial statements.
Therefore, a non-GAAP measure generally can be defined as a numerical measure of financial performance that does not meet GAAP criteria for presentation in financial statements.
“It is interesting as non-GAAP measures are ever evolving, and everyone has a measure to differentiate themselves from their competitors, some are cash costs and what was positive to see is that companies are coming to a similar understanding of what mining costs are,” Hooijer indicates.
As a result of this, he mentions that in the future, the whole introduction of non-financial measures in the reporting and focus on integrated and sustainable reporting that there will be different opinions that will suggest different ways on how to do this.
Owing to these changes, Hooijer warns that commonality for companies on whether to base their decision-making on cash generation or cash conservation has become of paramount importance. As a result, companies are reducing exploration expenditure significantly and looking into investing in brownfield and near mine explorations projects, which is a way to conserve free cash flow without jeopardising business currently.