I'm no accountant but I have tried to find an explanation for why Renison costs blew out from an expected profit into a large loss (and thus in turn a large loss for shareholders). To start off I go to the Operating Segments to unscramble this omelette and find that the External customers revenue for 2017 is different to that stated on Page 3:
"Revenue from the 50% owned Renison Tin Operations was $36,596,981 (2017: $42,545,389)"
At first, I confirmed that $42,545,389 is the correct figure as stated in the Page 3 Review Of Operations by going back and checking the Dec 2017 Accounts. But then I see the $39,373,102 figure quoted in the “Performance of the Tin Division (50% share)” Table on page 7..WTF. Then after an embarrassing amount of consideration I realise that the $39M figure has been re-calculated to account for deducting TC/RC charges from the 'Realised Tin Price' due to a change in accounting between ’17 and ’18.
So OK, the correct figure to use for comparison with 2018 Revenue is $39M not the $42M quoted at the front where everyone only looks in reality. This mistake hardly inspires confidence, I’m wondering if their accountants are as bad as the Nifty mine managers. It also makes the change from an $11M profit in Dec 2017 to a $6M loss in Dec 2018 that much more puzzling with lower 2017 revenue in reality than presented!
Anyway, I ran through the relevant quarterlies for 2017 and 18 and spreadsheet up a rough summary of revenue and expenditures to get a feel for how closely the Quarterly figures match the Half Yearly accounts (which use slightly different accounting to come up with “Cost of Sales” which is not perfectly correlated to the Performance Table cash cost numbers). The Revenue and Costs need to be halved to 50% for MLX accounts of course but it reminds me that Half Yearlies should roughly match Quarterlies.
As one would hope though, the figures are not a mile apart. Revenue (which my spreadsheet did account for Tc/Rc moving into the Realised Price and out of costs but didn’t use actual Copper Sold) is about $3m up on that management quoted for each half. Revenue less Opex less Sustaining Capex gives a Gross Profit which is roughly equal to half the EBITDA quoted in each Quarterly (I say roughly because there obviously quite a bit of accounting fine print going on and my revenues are not actually“Copper Sold” and it’s getting late.)
Stick with me though, the question I wanted to test is “do the two Quarterlies give a fair and not misleading guide to the half year results?”. Based on the 2017 Operating Profit of $11.5M being around half the Quarterly Reported EBITDA and similar to times my spreadsheet gross profit you would have to say the Quarterlies should give a good guide to Renison’s profitability. Of course, it makes common sense that if Revenue is higher than Costs and the company is reporting good EBITDA profits each quarter that aside from something extraordinary that changes the Half Yearly should be similar to last year.
But no, instead of a 2018 Half profit, inexplicably the black box “Cost of Sales” blows out by more than $10M more than the market obviously expected. It simply doesn’t seem reasonable given the gross profit margin, EBITDAs and no other extraordinary accounting items are apparent or communicated in the accounts. This is the theory I came up with.
Note 5 to the Half Yearly accounts explains that if Inventories are written-down, that write down is made by increasing the “Cost Of Sales”, and also that the 2018 Half actually incurred $10M of Inventory write-down.
5. INVENTORIES
During the half-year ended 31 December 2018 there was a net inventorywrite-down of $10,019,118 (2017:$5,502,173) for the Consolidated Entity. This amount is included in the cost ofsales line in the statement of comprehensive income. Inventory write-downs relateto inventories being valued at net realisable value which is lower than cost.
Further, this quote below taken from a Quarterly spells out that movements in Inventories are predominantly ore stockpiles and that such movements are included in the Quarterly C1 Cash Costs.
“* C1 Cash Cost (C1): represents the cost for mining, processing and administration after accounting for movements in inventory (predominantly orestockpiles)”
The only explanation that I can think of which makes sense is that the market was fed the Sep and Dec 2018 Quarterlies without the $10M write down of Renison ore stockpiles hitting the C1 Cash Costs. That meant Renison reported a $15.3M Quarterly EBITDAs with Revenue clearly greater than costs (not dissimilar to 2017 $21M Quarterly EBITDAs). If that $10m write-down then included last minute into the “Cost of Sales” in the quarterly it would go a long way to explaining how Rension went from an expected profit to a loss. Maybe there is some other extraordinary item or explanation how the market was blind-sided with some $10M higher Cost of Sales than 2017 when the Quarterly Costs were within a few mill of each other?
If this turns out to be the explanation, then the market has been mislead IMO. Many bought the Quarterly results, or didn’t sell them, while plenty of others have been selling. My guess is management will hide behind some excuse like “the Quarterly’s are not audited and cannot be relied upon, things changed during audit for the Half Year”, and nothing will stick. Yet they would have to have known before Jan 30th that the Renison stock piles were getting a write-down in December!
The good news is that this if this is an Inventory write-down of a historical basis then it doesn’t affect Renison ‘cash profits’ last half or moving forward. Regardless of my theory, given the market reaction and damage done to so many uninformed participants an explanation by the company is required in this age of continuous disclosure. Reporting a large loss weeks after reporting what looks like a good profit is misleading at best.
(20min delay)