Independent Technical Reports for IPO Mining Companies [Coal Asia Magazine Vol. 46]
INDEPENDENT TECHNICAL REPORTS FOR IPO MINING COMPANIES.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. The authors web site is www.ianwollff.com
Indonesian newspapers recently reported that the Indonesian Financial Authority (OJK) and the Indonesian Stock Exchange (IDX) are in discussions to encourage exploration and mining companies to list at an early stage of development, once a feasibility study and environment report are completed. This is to help the company raise funds for construction, and for the IDX to grow. In the earlier Coal Asia magazine Volume 23 (September 22 – October 22, 2012) I wrote an article “Independent technical reports for IPO mining companies” wherein the process was briefly outlined for an Initial Public Offering (IPO) on the IDX, plus a review of compliance for several mining IPO’s was undertaken. This article takes an updated look at the IPO process for exploration and mining companies.
The IDX standard regulations (Badan Pengawas Pasar Modal & Lembaga Keuangan RI) on preparing a Prospectus (Section III.3.3) refers to a number of requirements that emphasize that responsibility lies with the issuer & underwriters. The Indonesian Fact Book (available on line from the IDX web site) heading “Going Public and Listing on the IDX” list requires supporting documents to include a “Mine Reserve Appraisal Company, to value the resources indicated at concession area (for mining company)”.
IDX general discussions.
In recent discussions with I Gede Nyoman Yetna (head of IDX listing division group 1) and his associates it was confirmed that discussions are underway with the OJK to facilitate such early listings. It is understood a significant issue is that IDX wants the auditors to conduct audit and give opinion to the prospective companies 5 year financial projection, wherein Indonesian Institute of Certified Public Accountants is on going process to compose standard for presenting financial projection. Discussion indicated it is present practice within the Feasibility Study (JORC report etc) to present a long term financial model and that auditors have traditionally not taken responsibility for such financial projections. It would seem that the present system of operating mining companies are not required to have such auditors “sign off” on similar long term financial projections, and that the proposed 5 year auditor “sign off” is being considered to apply only for the non-producing mines. Taking responsibility for long term costs may only be more likely with the lex specialists legal certainty of the COW system, however this is more difficult with the IUP system being subject to the daily changes of laws, taxes, fees etc. It is normal industry practice to have the technical Feasibility Study address the long term mine plan and financial projections, not the financial auditing team. The JORC reserve reports typically list the project risks (including coal price assumptions) etc.
The proposed new IPO regulation retains the IDX requirement that at least one director to be from the mining industry background, and that the IDX has an interview process to determine acceptability of such directors etc. It is up to the company to find such a suitable director.
Despite the Government wanting all mining enterprises to fit one system, the present two system of COW & IUP continues. Discussion indicated the IDX purpose to allow early stage IPO’s is to provide sources of capital for construction, and requires a Feasibility Study, Environmental permit and Production / Operation permit. Under the COW system the separate permitting stages are Exploration, Construction and Production, wherein the IUP system is Exploration & Production (with construction inside the Production permit). Therein the proposed IDX requirement of having a Production license before IPO does not fit well with the COW system.
Discussion indicated that it may take some time before the IDX regulations are realized for admitting IPO’s from mining companies that have reached the Feasibility stage. However, the IDX are here in encouraged to press ahead with this plan quickly, as funding options are severely restricted through the recent new Government regulations that places further limits on foreign shareholders.
Accreditation.
In the past few years there has been some advancement in the accreditation systems used to provide investors with reliable technical Feasibility Studies, Resources and Reserves and such technical reports. The JORC system has been updated from JORC 2004 to JORC 2012, increasing the accountability of this reporting code, see my article in Coal Asia Vol. 27 “2012 JORC tougher code for all”. Also the Indonesian Masyarakat Geologi Economi Indonesia (MGEI) in conjunction with Ikatan Ahli Geologi Indonesia (IAG) and the Association of Indonesian Mining Professionals (Perhimpunan Ahli Pertambangan Indonesia or PERHAPI) have activated the Komite Cadangan Mineral Indonesia (Kode-KCMI 2011) accreditation program.
It is good that the IDX is talking with PERHAPI & IAG about certified professionals, and that both Nationals and Foreigners shall be considered. The KCMI use a restrictive screening process to identify professional geologists and miners to be registered as competent persons and thereby underpin professional credibility. However the threat of sanctions for failing to comply is perceived by some of the investing public as being less effective in Indonesia. The KCMI is presently restricted to the commodities understood by the “grandfathers”, such that Uranium and other commodities cannot be certified by KCMI. The KCMI is a good start in this direction, though I feel the continued use foreign accreditation should be maintained to provide investor confidence during some transitional period. The principal concern here is that the investors are assured that the technical reports are credible and capable. Discussion indicated that the OJK was considering its own separate registration of competent persons for such IPO’s. However it seems such registration by the IDX and again by the OJK may be duplication, or in addition to, the new Law 11/2014 that requires all geological & mining engineers to be registered with the Government.
Example of recent IPO.
The Prospektus Awal for PT. Mitrabara Adiperdana Tbk supported by PT. Danareksa Sekuritas and PT. Surcorinvest Central Gani was prepared for a listing about the 10th July 2014. The body of the document refers to various technical aspects of the project, including coal character, transport and marketing. However the critical appendix 18 provides the required independent technical report to support the “Mine Reserve Appraisal” requirement. Unfortunately the report presented in this appendix is not a signed original, but a sworn & authorized translator’s report of “Laporan Sumberdaya dan Cadangan Batubara Terbuka, per 31 December 2013”. Furthermore it appears that only the translated executive summary of the original report has been presented here. There is no attachment to the appendix to indicate the original authors of the Aseamco Pty Ltd report have agreed to this form of the report, or that Aseamco verifies the presented appendix is a complete and true representation of the original report. This translated presentation appears to reduce the credibility of the Prospectus the status of the IDX, plus those involved with the preparation of the Prospectus.
Certainly Prospectus for companies going for early IPO, based on Feasibility Studies etc, may want to ensure close compliance with all reporting codes to provide a greater degree of confidence, and the IDX listing management may wish to re-examine their approval process.
How to grow the IDX.
Discussions indicated that the IDX is concerned that the typical Indonesians are not sophisticated investors, and thus the IDX is restricted in its outlook. It is commonly perceived by the public that the IDX is largely a “gorang-gorang” pot for cooking up money. This is reflected in the large number of companies that have very low volatility in share price and transactions. It seems this perception is a significant reason for many Indonesians not to participate in developing a share portfolio. Perhaps some ways to develop the IDX into a more mature financial instrument is to;
- Gradually increase the minimum number of shares that must be issued to the public from the present insignificant 5% to a minimum of 51%. This may also shift the emphases of the IDX management from being “company friendly” to being more “investor friendly”, and be a larger disincentive for companies to delist.
- Improve public reporting – presently there is far more reporting of events in the news media without formalizing such reports through press releases issued from the companies and published on the IDX web site, reflecting on credibility & responsibility.
- Improve listed company transparency – wherein far too many press statements give inadequate coverage of IDX listed company activities – reflecting that the concept of materiality needs to be reviewed by the IDX.
- Listed companies with exploration & mining business are not listed on the mining board if such mining business is not the main source of income. The mining board reporting requirements should be applied to such companies (monthly exploration reports etc) to ensure equal treatment.
- Draft regulations between the IDX and OJK should be posted on the IDX web site and open for public response. Note that the Mines Department has a history of such openness.