reporting clarity and guidelines

Hi Folks,

There has been a number of threads recently, and snippits from within threads regarding FML's treatment of exploration and development expenditure.

Couple of snapshots from the annual report and a calculation i did to explain how these costs are actually shown on our Profit and Loss Statement.

Here are relevant extracts from the 2011 annual report.

So, if we look at the balance sheet of FML, we can see that $77,667,223 is sitting there as an asset against exploration and evaluation. As they develop the mines and produce, they will need to start moving this the Development and amortizing those costs. If i assume a residual value on their tenements of say $5,000,000, than that means they have $72M of expenditure already incurred that will need to be amortized during the life of the mine.

They also state that they use the "unit of production method" to amortize costs.

If i do a calculation, it is as follows:

Assumptions:

1. Asset of 72,667,223 (assume $5M residual value)
2. Mine to produce 120,000Oz/year over 5 years = 600,000 Oz

Thus, the unit per production cost will be $121.11 per oz of gold that is produced over that 5 year period and would be a cost that would be borne in the P&L each year. For example, if the above were true, the annual cost to the P&L would be $121.11 x 120,000 Oz = $14,533,444. If exploration effectively stopped, this would reduce the balance sheet impost from 77,667,223 to 63,133,778 after year 1.

Anyway, that was just an example of how they are treating their exploration and development costs and the impact on the profitability of the business moving forward on an annual basis. The $121.11 (or whatever it actually is around that mark) is a real cost that has to be expensed at some point.

The financial statements clearly indicate that FML is on a clear growth path and is expecting to produce a hell of a lot of ounces at a hell of a profit moving forward. You don't (and cannot legally), park that sort of money in the balance sheet without justification of future benefits associated with that cost.

Hope the above was not too boring :(

Enjoy your day.