Digging into the first Canadian payment reports: Royalty audits and more…
This post also appears on www.ExtractAFact.org
For many us, whom have dedicated years to advocate for the laws that require the disclosure of payments in Canada, the time has come! Reports required to be disclosed in accordance with the Extractive Sector Transparency Measures Act (ESTMA) are piling up, and shortly (May 2017) we expect there to be hundreds and hundreds of disclosures covering countries from every continent. You can explore the reports here.
Reports by Canadian or Canadian-listed extractive companies stand out from their peers in a couple of ways: Firstly, most of the reports will be for mining companies; secondly, many of the companies are small, with just a few projects, and thirdly, Canada has strong project-level disclosure requirements for public mining companies, which means that there will a lot of complementary information available for each mining company/project.
One of the big questions is: what can I do with this data? Well, there are lots of possibilities. Once the reports have all been filed sometime next fall, we will be able to pull it all together into one dataset, so that we can identify trends and aggregate data. However, before this happens, there is an important opportunity to dig into individual company reports.
At Publish What Pay Canada’s retreat this year, this is exactly what we did. Participants attending the retreat were divided into groups and each group was given one of the mining projects below:
- The Selinsing Mine in Malaysia owned by Monument Mining
- The Edikan Mine in Ghana owned by Perseus Mining
- The Langer Heinrich Mine in Namibia owned by Paladin Energy
Every member of the group was provided with a folder complete with information on their assigned mining project. The information in the folders drew from 5 primary documents types: Investor presentations, mine project webpages, regulatory filings (technical reports, audited financials), and at times external sector specific information, such as EITI reports or data on uranium production and pricing from the World Nuclear Association. The latter was particularly important, because unlike gold, uranium is often sold on long-term contracts with negotiated prices, rather than using a global price.
Participants were asked to look for certain pieces of information, including:
- At what point, is the project at, in the project life cycle. Development, Production, Closure?
- Have there been any recent expansions, which could have led to increased costs, thereby lowering gross revenues and overall payments to governments?
- The royalty rate applied to the project, the sale price of each unit of the commodity sold (gold/ounce), gross revenue, annual production.
- Participants were also asked to look for any other red flags, conflicts related to the project, discrepancies between ESTMA report and other reporting.
But most importantly, they were asked to determine whether they could conduct a royalty audit. A royalty audit involves comparing the royalties paid with a calculated assumption of what should have been paid. To conduct a royalty audit, one needs access to project-level production, average annual sale price and the royalty rate. Further, the royalty must be production-based.
With one hour to dig deep into the information at hand, participants come up with some interesting results. Below we explore the results from two groups.
The group that analyzed Perseus Mining Company’s project, “Edikan Gold Mine” found that 10% of mining royalties in Ghana are transferred from the central government to local governments and local land-owning authorities. According to the ESTMA report, Perseus paid 17,890,000 Australian dollars/13,856,860.00 USD (given the exchange rate of 0.74425 provided in the ESTMA report) in royalties from July 1st 2015 – June 30th 2016. As a result, 1,789,000AUD/1,385,686.00 USD should have been transferred to local governments and authorities. The group concluded that it would be worthwhile to follow up to see whether the money was transferred and what it was used for.
The group also conducted an audit on the royalties paid by Perseus for the production at the Edikan mine. The royalty audit involved comparing the royalty payment of 13,856,860.00 USD with the royalty payment calculated by the group given annual production, average price, and the royalty rate. All data was found in Perseus annual report.
In this case the calculation relied upon gold sold versus gold produced, although the numbers are very similar. While the group stumbled at first, given the different currencies used in the annual report (USD) and the ESTMA report (AUD), the final royalty audit showed a discrepancy between the royalty payments reported and that revealed through the royalty audit we conducted. The royalty audit revealed a figure 4.5 million USD below that which was reported. It would be worth reaching out to Perseus to better understand why the royalty audit revealed a figure well below what Perseus Mining paid in royalties for the Edikan project in 2015/2016.
Annual gold sales of 153,957 ounces x average annual price 1,224.00 USD/ounce x Royalty rate 5% = 9,442,168.00 USD
The group looking at the Selinsing Mine in Malaysia was able to complete a royalty audit using available information. To conduct the audit the group first had to convert the royalty payment reported in the ESTMA report from Canadian into US dollars. Given that the ESTMA report did not outline the CAD/USD conversion, an average rate for 2016 of 0.75 USD to each 1 CAD was used, thus royalties of 1,150,000.00 CAD became 862,500 USD. Additionally, given that Monument Mining settled a gold forward sale contract in 2015/2016 for 5,000 ounces/gold at $519.00/USD, the group had to calculate and add two different figures for royalties, assuming that royalties were paid in 2015/2016 on the gold forward sale.
Gold Sales 18,150 ounces x 1,157.00 USD/ounce x royalty rate of 5% = 1,049,975.50 USD
Gold forward contract settled for 5,000.00 ounces/gold x 519.00 USD/ounce x royalty rate of 5% = 129,750.00 USD
While the group noted that the royalty rate in the ESTMA report were roughly similar to the royalties revealed by the audit, with the exchange rate factored in, there appears to be a discrepancy of over 300,000 USD. Some of this difference may be due to the actual exchange rate, but it would still be worthwhile to question the company about this difference. Another thing noted by the group was the highly variable corporate expenses charged by the company to the project, ranging from 19% of revenues in 2014 to 9.49% in 2015, to 16.5% of revenues in 2016. The group noted that it would be interesting to further understand why corporate expenses are so high.
Paladin Energy posed a challenge, as the royalty rate applied to the project in Namibia was not publicly disclosed. Research conducted after the group exercise shows that the Langer Heinrich mine may be subject to a 3% royalty rate, however, Paladin reported the project was subject to a 2% royalty in 2006.
Another important point noted in research conducted after the group activity, was that Paladin Energy reported 6,600,000.00 USD in royalties paid to the government of Namibia in their ESTMA report, a figure that is markedly different from that reported in its annual report of 4,982,697.00 USD in royalties to the Government of Namibia for FY 2016 (p.47). Both figures were cited as referring to financial year 2015/2016. This discrepancy merits further discussion with the company.
Given that the royalty rate applied to the project was unclear, the group sought to identify the royalty rate paid by Paladin given production and price. Luckily, Paladin had only one producing property in FY 2016, thus all figures in the annual report reflected production at the Langer Heinrich project. It can be noted that the royalty rate ranged from 2.7 to 3.65% depending on whether it was calculated using the Annual report or the ESTMA report. I will follow up with Paladin to try and understand the discrepancy between the ESTMA report and the annual report and can report back any findings.
Using royalty payment reported in Paladin’s Annual Report In FY2016 production was 4,763,000 lbs x price 37.75/lb = $179,803,250.00/4,982,697.00 = 2.77 % royalty rate
Using royalty payment reported in ESTMA report In FY2016 production was 4,763,000 lbs x price 37.75/lb = $179,803,250.00/6,600,000 = 3.65 % royalty rate
All the groups noted that the exercise was more challenging than anticipated. Moreover, to write up and verify the results took me considerable time, piling back through company reports and taking into account new information not available during the group exercise. That said, royalty auditing is empowering, arming civil society with critical questions which can be asked of governments and companies. Similar, a closer look at each project yielded other questions, which can form the basis of an informed conversation with companies and governments.