IDX – Adding Value Through Exploration… or Not [Coal Asia Vol. 28]

IDX – Adding Value Through Exploration… or Not

By Ian Wollff

The author is an expatriate principal geologist of about 28 years experience in the Indonesian exploration & mining industry, and is employed by an international consultant company.

Introduction

Mining companies listed on the Indonesian Stock Exchange (IDX) share value have been falling due to lower commodity prices, increased production costs and further legal uncertainty etc. One avenue to improve company performance and share value is through exploration to define more reserves, particularly if such new reserves have a better economic picture- through longer mine life, higher quality or lower cost etc. This outlook is recognized by a number of IDX companies, that include statements in their business development plan to “include acquisition & exploration to add value to their company.”

The IDX published fact book of 2012 outlines reporting requirements including :

• Listed companies & EFT’s are required to submit periodical reports and incidental reports to both BAPEPAM-LK and the IDX. All reports will be immediately published through electronic reporting system. Investors can obtain reports directly from the website.
• Exploration report for mining company – monthly, at latest of the 12th day of the following month.
• Exploration report for listed company which has subsidiary in the mining sector – monthly, at the latest of the 12th day of the following month.
• Annual public exposure – at least once per year, submitted at least 3 days after event.
• Each important event of relevance – submit as soon as possible after the occurrence of the events.
• Annual Report – submit maximum 4 months after end of book year.

Correspondence with the IDX indicates :

• That the IDX consider a subsidiary as a company in which the listed company has more than 50% of the shares.
• That reporting requirements include the amount of cost spent, the party who conducted the exploration, the method of investigation, the area investigated, the results of the investigation until the exploration is finished.
• Exploration reports should be prepared for each company / subsidiary and compiled into one monthly report.
• There should be consistence between monthly exploration reports and annual reports.
• The IDX has a person in charge of monitoring the compliance of listed companies concerning information disclosure, and is able to conduct a team meeting and call for clarification from the IDX company.
• The IDX has rule number I-E concerning The Obligation of Information Submission. In section General Terms of Report & Information Disclosure it is determined that – In the event the clarification inquired by the Exchange can not be published or it is considered confidential or has not been clarified by the Listed Company, the Listed Company must submit the information or statement on its inability to fulfill the said inquiry and the reason thereto.”

The IDX sets out the above administrative requirements but does not further specify the quality aspects of such reporting, (as does the ASX and other Asian exchanges that refer to JORC code etc) and thus the quality of information released through the IDX is variable. However the IDX outlook for quality of information is partially captured in the fact book 2012 as :

• The sanctions for non compliance, which includes suspension if “the listed company fails to properly disclose important and relevant information, which may have materially significant impacts on share prices and investment decisions”.
• The IDX published Code of Corporate Governance (Chapter 2) includes such statements as “…BEI exchange rules must be complied with and implemented by members of the stock exchange..” plus “…compliance with exchange rules, regulations and policies that prioritize the public interest so as to enhance market integrity, protect investors and market efficiency”.

The IDX (Listing Division) determines the category of “miner” as such companies who’s revenue comes mainly from mining. A listed company that owns a mining subsidiary but is engaged in other more significant business, may not be listed as a miner.

Objective

The main question posed in this review is one of transparency and disclosure. Can the public investors (present or potential shareholders) make their own assessment of exploration results, and thus decide to invest or divest such shares in a timely manner ?

Method

A review of the 27 listed mining companies (Indonesian Capital Market Electronic Library -ICMEL) published on the IDX web site was undertaken for the period 1 Jan 2012 to 10 Dec 2012, with emphases on the technical nature of exploration work provided in such monthly, expose and annual reports. In this authors context, exploration is seen to be activities to define resource & reserve, and are separate from routine production work. Other aspects of the IDX public announcements, including the correlation between monthly & annual reports, the implementation of exploration programs consistent with prospectus or annual programs , or comparing release of reports to changes in share value, are not reviewed here.

An investor might reasonably expect the exploration reports to include – exploration target, location map, drill and assay data, geological parameters, coal logistic route, relations with community, legal compliance, Occupation, Health & Safety performance, plus managements interim assessment if such results are encouraging (or not), and show exploration work is being undertaken according to plan.

Further to this table it is noted:

• The coal company BSSR – PT. Baramulti Suksessaranana Tbk is recently listed, with no significant reports on exploration to 10 Dec 2012.
• There are a number of companies not on the miner list, that have subsidiary coal & mineral concession, and should also comply with monthly exploration reporting commitments. Some have been reviewed, and it seems they follow a similar pattern as the above table. For example PT.ABM Investama Tbk (ABMM) has regular monthly exploration reports that give exploration statistics, while others do not.

Findings

1. The obligation to provide monthly exploration reports appears to be interpreted differently by a number of companies wherein :

• Most companies tend limit reporting to the most basic exploration outline, with only Tima & J Resources making a consistent effort to provide meaningful exploration results.
• Companies with subsidiary concessions in the oil & gas industry, Coal Bed Methane, or international sites, are apparently unsure of their reporting commitments towards these entities.
• Companies often mix their production & exploration reports, such that regular production activity of survey of stockpiles or drilling for water is included in exploration. Some companies in production do not report on exploration, even though part of their concession may be in the exploration status.
• Companies that are not carrying out exploration sometime correctly report such, while others fail to report that no exploration was undertaken.
• Annual Report stated expectations of exploration or production (including new subsidiaries start up) are sometimes not seen to be followed through in monthly reports.

2. The linkage between exploration reports and the public expose & annual reports is often quite poor. Despite the commitment to provide “important events that can effect the company” , Exploration is rarely presented well in public exposure & annual reports.

3. The announcement of increases of resources & reserves, or the acquisition of a concession with resources & reserves is usually presented as a company worded comment, (not JORC compliant). Shareholder are generally not provided with access to the ongoing independent technical reports through the IDX web site, and thus public direct assessment is not possible. Note that the public is provided with ongoing annual independent financial reports.

4. The content of exploration reports is mainly limited to statistics (how many drill holes were completed etc) and often do not provide adequate details to demonstrate if such exploration is being done well, on target or the nature of their findings.

5. Each company seems to have its own standard format for monthly exploration reporting, that allows for easy following of one company, but more difficult to compare with another companies performance.

Conclusion

Most investment decisions are not based upon exploration results alone, but include an outlook on production, markets, management and many other factors. This review concludes that the exploration factor as presented in the IDX monthly reports, public expose & annual reports is generally inadequate to determine the exploration potential as a contribution to the wealth factors of such companies.

Recommendation:
A) Under the IDX Code of corporate governance requirement to “prepare rules of interpretation as an explanation for the legislation or regulatory changes”, there would seem to be a need to :

1. Further define exploration – related to type of activity, status of concession etc.
2. Guidelines for report format be implemented, wherein a wider specified list of items to be reported upon, for example see JORC code.
3. Provide ongoing material independent technical reports to the public.
4. Provide additional IDX staff dedicated to the task of reviewing report compliance.

B) Under the IDX code of Good Corporate Governance (clause 2), the IDX is to run routine oversight on the activities of its members. This review suggests such oversight on reporting commitments should be undertaken more vigorously.

C) The IDX code of Good Corporate Governance (clause 5) includes, that :

• Transparency is applied where the company provides access to shareholders to various information, including “important events that can affect the company”. “This principle of transparency does not reduce or eliminate the Company’s obligation to keep confidential information in accordance with certain rules and regulations in force or on the basis of business considerations”. This judgment between transparency and confidentiality may provide companies with some justification to support the present practice of minimal exploration reporting during the process of acquiring a new subsidiary. However it is desirable that greater transparency should prevail where exploration is undertaken in an existing concession or subsidiary of the listed company.
• Accountability is undertaken to ensure the company is operated properly. “In carrying out its duties and responsibilities each part of the company and all employees must apply business ethics and the companies code of conduct”. This is vital wherein, the lack of detailed and prompt exploration public reporting may lead to situations where a few knowledgeable people within the company have more access to material information, and thus increase the risk of insider trading.
• Independency of management is to ensure the company is operated for the fair and equal treatment to all shareholders and stakeholders, and this includes access to information in accordance with the principals of transparency.

The IDX may consider how other stock exchanges approach implementing these values, further define the nature of reporting on exploration, and updated the IDX to protect all shareholders.

Review Summary
See the complete table summary