There are many inefficient and misleading approaches taken by management to communicate with the investment community. Communicating with analysts should not be an exercise in minimalism but in completeness and accuracy with clear and consistent information at all times. Not all information coming from companies is clear or consistent. The bulk of the information is usable, especially in evaluating a company. But usable is not the only criterion for an analyst. The information must be clearly understandable.
Why does the analyst need clear and consistent information? With that information an analyst can better communicate a clear and consistent picture about an investment opportunity to an investor. If the picture is appealing enough to an investor, then shareholder value may be influenced as an investment decision is made.
This communication effort includes information found in annual and quarterly reports, press releases and discussions with management. The information must be timely as well.
Some of the mining companies, primarily gold mining companies, had to be among the slowest in North America in issuing their annual reports for 1988. But, if the gold mining industry has some of the tardiest annual reports, it also has some of the most creative accountants in the land. I say that because disclosure of the same event takes many different forms. Here I refer to calculations of production costs, expensing of exploration activity, and of course, accounting for gold loans. If you have not yet done so, please read the disclosure footnotes for gold loans in some of the companies’ 1988 annual reports. You will find that treatment for gold loans varies widely.
When production costs for the industry are compared, the same words may be used but the composition is different. For instance, joint venture partners often indicate different cash costs for the same mine. A reason for this difference may be that one company includes royalties when the other does not.
Financial statements should be a management tool used to communicate to analysts, shareholders and potential investors how a company is doing. Analysts are looking to rank their investment ideas, and one way to evaluate companies is through their financial statements. Companies should be ranked in terms of cash production costs, full production costs, exploration and development costs and mining and milling costs. These factors should be disclosed by the mine.
If all mining activities are grouped together then company shareholders will not be able to understand the financial performance of various operations. Costs should be grouped into major categories, such as labor, energy, materials and supplies, repair and maintenance, and of course, “other.” Companies should use information about their operations that is beneficial to the owners of the company.
I can hear the comments now: “Why should we disclose more? Who would benefit? We would be giving away competitive secrets. Disclosure of such large margins may draw a hostile raider, or encourage larger wage settlements.”
Companies with complete and consistent disclosures tend to sell at higher price-earning ratios. The stock market tends to pay more for better and more timely information. Companies that remain closed- mouthed tend to become subject to rumors and usually sell at a discount except when selling as a possible takeover candidate.
Improved and standardized disclosure could lead to a higher level of investor’s acceptance of, and participation in, the industry. Acceptance would be achieved as investors develop a greater understanding of the industry, the companies and how to compare the companies on some objective basis. Participation would be achieved through increased ownership of the underlying shares.
Accordingly, I believe the mining industry, along with the accounting profession, should work to improve the current level of disclosure found in financial statements.
The cost of production applies to all mining operations and companies. What costs should be focused on? Companies should focus on production costs, cash production costs, full production costs, break- even costs and direct cost of production. A common basis should be established to define production costs and set guidelines about what should be included.
Another area of differing treatment is in the approach to expensing or capitalizing exploration costs. The differing methods for accounting for exploration costs is reminiscent of the full-cost versus successful efforts accounting in the 1976-77 oil and gas industry. The debate also included all minerals in the natural resources area although the Financial Accounting Standards Board (in the U.S.) chose to limit its ruling to only the oil and gas industry.
As investment interest in the mining industry continues to increase, having consistent, usable and timely financial information becomes more important. Investors will be more willing to place a fair value on the underlying shares if they better understand the mining industry. Consequently, developing a set of consistent accounting and reporting procedures is in the best interests of the mining industry.
If the mining industry and the accounting profession cannot develop such procedures on their own, I believe a less flexible approach to consistency and comparability may be imposed on the mining industry at some point.
At present the amount of details the company offers also varies widely. Some companies provide enough detail, by mine, to help an analyst understand the composition of costs and changes in costs. Such disclosure is more helpful and garners better coverage of the stock by the investment community. Yet, other companies give a bare minimum. They may give the production cost but no breakdown or additional data to help an analyst understand changes from one period to the next.
Good disclosure also should provide operating data by mine, with information on mining, milling, refining, labor, energy, repair and maintenance, and exploration and development.
Given the significant effort in terms of time and money expended by companies to comunicate with investors, a little more attention to clarity and consistency would go a long way.006
Daniel Roling is first vice- president of Merrill Lynch Capital Markets in the U.S. This article, adapted from a speech given by Roling, appeared in a recent edition of Washington Concentrates, published by The American Mining Congress of Washington, D.C.
There are many inefficient and misleading approaches taken by management to communicate with the investment community. Communicating with analysts should not be an exercise in minimalism but in completeness and accuracy with clear and consistent information at all times. Not all information coming from companies is clear or consistent. The bulk of the information is usable, especially in evaluating a company. But usable is not the only criterion for an analyst. The information must be clearly understandable.
Why does the analyst need clear and consistent information? With that information an analyst can better communicate a clear and consistent picture about an investment opportunity to an investor. If the picture is appealing enough to an investor, then shareholder value may be influenced as an investment decision is made.
This communication effort includes information found in annual and quarterly reports, press releases and discussions with management. The information must be timely as well.
Some of the mining companies, primarily gold mining companies, had to be among the slowest in North America in issuing their annual reports for 1988. But, if the gold mining industry has some of the tardiest annual reports, it also has some of the most creative accountants in the land. I say that because disclosure of the same event takes many different forms. Here I refer to calculations of production costs, expensing of exploration activity, and of course, accounting for gold loans. If you have not yet done so, please read the disclosure footnotes for gold loans in some of the companies’ 1988 annual reports. You will find that treatment for gold loans varies widely.
When production costs for the industry are compared, the same words may be used but the composition is different. For instance, joint venture partners often indicate different cash costs for the same mine. A reason for this difference may be that one company includes royalties when the other does not.
Financial statements should be a management tool used to communicate to analysts, shareholders and potential investors how a company is doing. Analysts are looking to rank their investment ideas, and one way to evaluate companies is through their financial statements. Companies should be ranked in terms of cash production costs, full production costs, exploration and development costs and mining and milling costs. These factors should be disclosed by the mine.
If all mining activities are grouped together then company shareholders will not be able to understand the financial performance of various operations. Costs should be grouped into major categories, such as labor, energy, materials and supplies, repair and maintenance, and of course, “other.” Companies should use information about their operations that is beneficial to the owners of the company.
I can hear the comments now: “Why should we disclose more? Who would benefit? We would be giving away competitive secrets. Disclosure of such large margins may draw a hostile raider, or encourage larger wage settlements.”
Companies with complete and consistent disclosures tend to sell at higher price-earning ratios. The stock market tends to pay more for better and more timely information. Companies that remain closed- mouthed tend to become subject to rumors and usually sell at a discount except when selling as a possible takeover candidate.
Improved and standardized disclosure could lead to a higher level of investor’s acceptance of, and participation in, the industry. Acceptance would be achieved as investors develop a greater understanding of the industry, the companies and how to compare the companies on some objective basis. Participation would be achieved through increased ownership of the underlying shares.
Accordingly, I believe the mining industry, along with the accounting profession, should work to improve the current level of disclosure found in financial statements.
The cost of production applies to all mining operations and companies. What costs should be focused on? Companies should focus on production costs, cash production costs, full production costs, break- even costs and direct cost of production. A common basis should be established to define production costs and set guidelines about what should be included.
Another area of differing treatment is in the approach to expensing or capitalizing exploration costs. The differing methods for accounting for exploration costs is reminiscent of the full-cost versus successful efforts accounting in the 1976-77 oil and gas industry. The debate also included all minerals in the natural resources area although the Financial Accounting Standards Board (in the U.S.) chose to limit its ruling to only the oil and gas industry.
As investment interest in the mining industry continues to increase, having consistent, usable and timely financial information becomes more important. Investors will be more willing to place a fair value on the underlying shares if they better understand the mining industry. Consequently, developing a set of consistent accounting and reporting procedures is in the best interests of the mining industry.
If the mining industry and the accounting profession cannot develop such procedures on their own, I believe a less flexible approach to consistency and comparability may be imposed on the mining industry at some point.
At present the amount of details the company offers also varies widely. Some companies provide enough detail, by mine, to help an analyst understand the composition of costs and changes in costs. Such disclosure is more helpful and garners better coverage of the stock by the investment community. Yet, other companies give a bare minimum. They may give the production cost but no breakdown or additional data to help an analyst understand changes from one period to the next.
Good disclosure also should provide operating data by mine, with information on mining, milling, refining, labor, energy, repair and maintenance, and exploration and development.
Given the significant effort in terms of time and money expended by companies to comunicate with investors, a little more attention to clarity and consistency would go a long way.006
Daniel Roling is first vice- president of Merrill Lynch Capital Markets in the U.S. This article, adapted from a speech given by Roling, appeared in a recent edition of Washington Concentrates, published by The American Mining Congress of Washington, D.C.
Be the first to comment on "Clarity and consistency essence of corporate communication (June 18, 1990)"