ANNUAL REPORT REVIEW (June 15, 1992)

Public mining companies have considerable experience preparing a key section of an annual report called “management’s discussion and analysis of financial condition and results of operations” (MD&A). It usually consists of a review of operating results, financial condition, liquidity and an outlook, but it provides management with a flexible tool to discuss past activities and future prospects.

Despite this flexibility, MD&A should still follow the principles of good investor relations. What does the reader want to know? What does the writer want the reader to know? What does the securities regulator insist the reader should know? Securities commissions can force companies to amend their MD&A if disclosures are deficient. Most mining companies, however, go well beyond the minimum requirements and provide a review that enhances a reader’s understanding of the company.

The most important requirement of MD&A is the outlook. The outlook is a discussion of those known trends, commitments, events or uncertainties that are expected to have an impact on the company.

Trends, commitments and events are the easier parts of this quartet; but uncertainties are, well, uncertain. Managers lay plans to control uncertainties, but the risks of predicting the effectiveness of such plans are high. Companies are understandably cautious about describing the future impact of known uncertainties.

What a reader wants is management’s unvarnished forecast of what is going to happen. MD&A’s outlook is where companies should devote their time because, after all, if management isn’t looking to the future then who is? A good outlook includes:

— a discussion of activities directed at replacing ore reserves — an assessment of the expected impact of rising costs

— views on changes in exchange rates and financing costs

— steps taken to reduce political risk in operations abroad — anticipated changes in production rates and costs

— an outlook for prices and markets

— and most importantly the possible effects of known uncertainties, such as, environmental problem areas or labor negotiations.

An MD&A should talk about the impact of metals price fluctuations on the bottom line. Inco (TSE) includes a table that shows the impact of price changes for its primary metals on operating earnings. Also described is the company’s strategy for generating long-term sales with some degree of price protection. For many mining companies, price management is becoming as important as cost control and productivity improvement.

American Barrick Resources’ (TSE) gold hedging program is a vital part of its strategy. Utilizing a combination of gold loans, spot deferred contracts, forward sales and options, Barrick (and others) have realized significantly higher prices. MD&A readers expect to see a discussion of the company’s hedging philosophy, an indication of past hedging results and disclosure about the company’s hedged position. A concise report on all of these is included in Lac Minerals’ (TSE) discussion and analysis. Placer Dome (TSE) tables its position by year for each type of commitment and option. Changes in foreign exchange rates can have a dramatic impact on profitability. Sales are often received in U.S. dollars when operating costs are paid in local currencies. The impact of changes in foreign exchange is immediate. Noranda (TSE), for example, indicates that 1991’s 1.5 cents rise in the Canadian dollar versus the U.S. dollar increased the company’s loss by $32 million.

All events that affect production should be discussed, like mine startups, expansions, shutdowns, grades, recovery rates, labor strife and environmental restrictions. Rio Algom’s (TSE) review of its Elliot Lake, Ont., operations is a good description of what has and will happen to the company’s Canadian uranium production.

Is MD&A an art or a science? That depends on whether you ask a vice-president of finance or a vice-president of public relations. But everyone agrees it’s important, particularly the outlook.

–This article has been prepared by the accounting firm Ernst & Young’s Mining Industry Group, directed by Randy Billing CA. Tony Hawkshaw CA is with Ernst & Young’s Mining Industry and National Accounting/Auditing Services groups.