IDX 2019 Annual Reports and Code Compliant Reporting. Vo 120

Introduction.

The Adaro 2019 Annual Report welcomes readers with a nice short letter that reflects the good intentions of the company, and includes the line; “The main goal of this report is to build more in-depth understanding of our company through our timely, balanced and relevant information, which we hope will help capital market participants to make informed investment decisions.” This is typical of many IDX listed companies’ self-image as projected to the public.

Indonesian mining companies are essentially contractors to the Government to find and exploit the nations resources. Resource estimates are advanced into Reserve estimates through evaluating economic factors of extraction, permits (mining, environmental, social etc) along with marketing. Understanding the status of a mining company’s resources and reserves is fundamental for investors outlook.

This article looks at the “relevant information” that IDX mining companies included about their Resources and Reserves when publishing their 2019 annual report.

What IDX expects to be included in annual report.

The requirements for Mining companies reporting are listed in KEP-38/PM/1996. These requirements strongly emphasize the financial auditing aspect of the company’s annual report. There are only a few examples of requirements that touch upon the nature of reserves, including: –

• “The location and type of the main tangible fixed assets which are more than 5% (five percent) of the total fixed assets of the company and children his company”. Unfortunately, this may not be important from a resource aspect, as mining companies’ reserves do not belong to the company, and their right to extract and sell ore is an intangible asset.
• “The company must provide a brief description that discusses and analyse the report finance and other information with an emphasis on material changes occurred since the last Annual Report or since the Registration Statement was submitted. This may include changes in reserves, though some may consider changes in resources as not a “material change” and thus omit from the report.

Perhaps the only key requirement to report on resources comes under the subheading of “Section on General Analysis and Discussion by Management”, point 8) information about business risks caused by among others- b) supply of raw materials;

Relevant information for resources & reserves?

Perhaps “trust” is the most important factor concerning resources and reserve statements. For most observers, this trust is demonstrated by reporting against a recognized professional code. The Joint Ore Reserves Committee [JORC] has legal backing in Australia as well as professional responsibilities for the authors of such reports who are affiliated with an appropriate body [AusIMM / AIG]. Indonesia follows a similar international recognized code of Komite Cadangan Mineral Indonesia [KCMI] and associated registered Competent Persons with IAGI / PERHAPI. The values of tonnage and grade are reported as an estimate” in recognition of the ever-variable nature of geology, the business of extraction and sales. All these codes follow a similar pattern of ascribing different levels of confidence to the nature of the data. These reporting codes are often updated.

IDX companies reporting of resources & reserves.

The 2019 Annual Report of 29 mining companies listed on the Indonesian Stock Exchange [IDX] were reviewed for some basic information on resources / reserves, exploration and acknowledgment of geological & mining risks. Some 18 of these companies are principally coal companies, 1 with Coal Bed Methane (CBM), 4 nickel companies, 2 gold, 1 bauxite, 1 base metals, 1 tin company and 1 marble stone company.

The review used the digital “find” of key words to identify the areas of interest in the annual reports, with many reports being 200 to 500 pages long. It is possible this review could have missed certain items. This review is designed to gauge some measure of the reporting compliance according to professional standards, and as a reflection of some aspects of the exploration and mining industry. This review and associated table should NOT be used as a guide, or be relied upon, for commercial decisions.

It is noteworthy that all reports were duel language to attract local and foreign shareholders. Reporting compliance seemed to meet the statutory requirements with emphases on the business and social side was strong. Reporting detail associated with Resource and Reserves continues to remain extremely limited.

Table 1: Geoscience for 2019 Annual Reports.

The report presentation of resources and reserves was categorized to reflect the general compliance with the reputable reporting codes. “Good” was assigned to reports giving tonnage, grade and some information on the reporting entity and associated cautionary statements. “YES” was assigned to reports giving tons and simple grade only. And “yes” assigned to reports only giving tones without grade, or a wide range of grades only. The date of reported resources / reserves was generalized to the year, and the reporting code listed. Blanks were left where no information was readily found.  Sometimes a brief table of reserves is only provided in the financial audit section of the annual report. Some reports mentioned the codes in the audited finances section, but this was not accepted here, as it is apparent the company is not taking direct responsibility for mentioning the reporting code.

Observations on resource / reserve and exploration reporting.

1. Resources & Reserves; – Only 11 out of 29 companies mentioned Resources while most (23 out of 29) mentioned Reserves. Most of the companies not mentioning resources seemed to have very large reserves, wherein we might assume any resources may not be considered as significantly material at this stage to warrant reporting. Some of the companies that did not mention reserves were associated with companies not presently mining, and with the marble stone company.

2. Quality of resource / reserve information: – It is apparent that companies with a strong international perspective tend to present their reporting more in line with recognized reporting codes. Most companies have taken the effort to provide updates of their resources and reserves to the year 2019. A few subsidiaries and some companies have not updated their resources to the 2019 period. It is noticeable that among the poorest compliance companies to reporting standards are the State-Owned Companies of Timah and Bukit Asam.

3. Some 5 of the 29 companies have mentioned exploration drilling, three of which have included some data on grades or impact towards resources. Two companies are transparent in reporting that no exploration has been undertaken in 2019. Several companies have stated their strategy is to grow their company through expanding reserves, and acquisition of new tenements. Unfortunately, some of these companies supporting exploration seem to lack clear plans about undertaking exploration.

Observations on Geological / Reserve / Mining Risk.

It seems all companies consider the principal business risks as a) commodity prices and b) government regulation. These risks are largely outside of the operations control, may be difficult to anticipate and have a high impact on the business. The IDX requires reporting on a number of finance related risks (exchange rate etc) that seem to be manageable. Risks related to operations often seem to be of less concern to the directors, as such risks can be, and are assumed to be well anticipated and managed. It would seem nearly all companies have a well-structured risk management system, trained manpower and active involvement in risk aversion.

The statutory requirements to provide “information about business risks caused by among others- b) supply of raw materials” appears to be often interpreted as access to fuel, spare parts and manpower, rather than supply of reserves.

1. Geological Risk: – Only 5 out of 29 companies acknowledged some form of geological risk. Most of these risk concerns related to the geological certainty in the reserve statement. Essentially none of these risk concerns related to the geological stability of the ever-deepening pits. We may have to assume the company directors have high confidence in excellent geotechnical programs, and slope monitoring programs, rather than overlooking the geotechnical risk.

 2. Reserve Risk: – Only 7 out of 29 companies acknowledge some form of reserve risk.  Most of these risk concerns related to the geological certainty in the mine plan. It seems none of these reserve risks related to unexpected quality parameters, or changes to ground conditions. It is assumed that the operation team has sufficient drill data to show confidence to anticipate and adjust mining to the varying ore quality and ground conditions.

3. Mining Risk: – Almost all companies recognize the weather (rain) as a mining risk, along with reliability of equipment performance, manpower and logistics

Risk statements: –

The following example of a simple statement gives a broad outline of some of the risks faced by mining companies; – “the company’s activities are exposed to a variety of financial risks; market risks (including foreign exchange risk, commodity price risk and interest rate risk), credit risk, liquidity risk and capital risk. Operational Risk; – the company is subject to a variety of potentially severe operating and infrastructure risks, including the risk of fire, spontaneous combustion, explosions, embargos, natural disasters, accidents, labour disputes, community issues, unexpected geological conditions, mine collapses, environmental hazards, weather (including heavy rainfall), and other natural phenomena”.

Extracts of the geological, reserve and mining risks compiled from a number of 2019 annual reports in the coal and mineral fields includes: –

Risks related to the estimated reserves and resources include risks associated with the difference between estimates and actual conditions, comprising possible differences in quantities, volumes and other geological conditions. Mitigation of reserve risk can be undertaken through setting high standards at each of the stages of exploration, reserve estimation and mine reconciliation. Improve the accuracy of planning through additional drilling activities to improve the accuracy of quantity and quality of reserves.

Reserves/Business Risk – The Company is aware that one day its operations will cease due to depleted reserves. Therefore, the Company is committed to continuously developing its business by finding new reserves and by exploration. This commitment is marked by the establishment of the exploration department.

Risks Associated with Exploration. Although exploration can have huge benefits, its economic value depends on metal prices, ore grades, metallurgical properties, mining conditions, operating costs, and capital expenditure for the development and location of prospective customers. Therefore, there is a probability of a resource without economic value, which may ultimately affect the Company’s work plans and future prospects. The risk of decreasing mineral prices represents the biggest challenge for every mining company. Therefore, the ability of the business analysis unit to predict rises and falls in mineral prices is important. Information about trends in mineral prices, quantity of production and demand for certain minerals, production capacity of the existing producers, and reserves are essential to predicting mineral prices. These price predictions can also be used as a basis for decisions about investment or divestment.

Operational Risks Factors that can affect the business include the following: 

1. Unexpected geology and geotechnical conditions; damage to hauling road; environmental damage, including metal waste, pollution and other hazardous materials leaking into rivers or sources of clean water surrounding the mine sites; natural phenomena, such as seismic activity, forest fires, floods, and weather changes, and also illegal mining.  Risk mitigation programs include: conducting necessary studies, compiling SOP for each activity and reviewing their implementation, and close monitoring of compliance with regulations.

2. The failure of a tailings dam could have a serious impact on downstream settlements. Mitigation includes a dam operations division with maintenance and management standards, including a dam certification feasibility program to ensure the safety of the operated dams. The Company has also prepared dam Emergency Action Plans that have been approved by the local government.

3. Coal content can change due to atmospheric conditions after mining, and before sales. The risk of self-combustion and contamination of foreign matter is mitigated by limiting stockpiles, spraying chemicals, installing metal detectors to identify foreign body contamination, and improving general management.

Conclusion.

IDX mining companies 2019 annual reports are well prepared for the financial and social aspects, but need much improvement to comply with professional ore reporting standards. Other countries have regulations and laws supporting the full compliance of reporting codes. New Indonesian regulations refer to truthful reporting to the Mines Department only. The Indonesian professional bodies managing the KCMI have a MOU with the IDX that focusses on the suitability of resources and reserves in Initial Public Offering [IPO] documents. This work of full professional reporting compliance may look at extending to all forms of IDX public reports.

It would seem the IDX mining companies requirement to report monthly on exploration activities is not compiled and brought into the annual reports. These observations suggest many mining companies are behaving as contractors to the government in the mining business, and are less interested to undertake growth through new exploration.

The apparent lack of full code compliant exploration reporting to the IDX through monthly and annual reports may provide opportunities for insider trading. The new Mines Department regulations requiring monthly exploration reporting may also be an opportunity for insider trading, particularly if similar data is not provided in IDX monthly / annual exploration reports.

The Mines Department, IDX and Industry would like to see Junior mining companies to be keener to enter the Indonesian exploration industry. Encouraging the present IDX mining companies’ annual reports to emphasize the engaging geological nature of their resources and reserves may help incentivize the public to support exploration and mining companies. Junior companies are active in a number of foreign stock exchanges, wherein their lively geological reports showing maps, sections and drill intercepts can excite the public to support exploration and mining.