Key points:
- Careful consideration needs to be taken by directors in forming and maintaining their opinions regarding a company’s solvency.
- Current economic conditions are likely to result in greater regulatory supervision and shareholder activism, particularly around financial reporting and continuous disclosure obligations.
- A thorough review of statutory and contractual obligations should be conducted as part of any decision to suspend or shut down mining operations.
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2008 will most certainly be regarded as one of the most tumultuous and volatile years in recent times. Much has been written about its causes and effect. Australian mining companies have borne the brunt of the financial and economic crisis that started with a few bad mortgages in the United States. The confluence of falling commodity prices, tight debt and equity markets and stubbornly high operating costs have taken their toll on company profits and exerted considerable downward pressure on the share price of many Australian listed mining companies.
But as 2008 winds to a close and many of us prepare for a pause over the Christmas holiday period, it is appropriate to reflect on what 2009 may hold for Australian mining companies. Regardless of one’s views on whether the recent events are merely a short term blip to the ‘stronger for longer’ mantra of the last few years, or represent a more sustained downturn in the world economy and, in particular, its impact on the developing ‘BRIC’ economies of Brazil, Russia, India and China, 2009 is shaping as a challenging sequel to 2008.
We have set out below some of the themes expected to dominate the landscape for Australian listed mining companies in 2009:
Work outs, restructures and insolvencies
Whilst it is hoped that many mining companies can survive the current economic downturn, the reality is that some will not. Companies struggling to maintain cash reserves will need to closely monitor their solvency levels to ensure that they do not trigger insolvent trading liabilities. In this regard, it should be noted that liability for insolvent trading rests with the directors in their personal capacities and can also extend to holding companies.
Directors should ensure that the following issues are considered when forming their view as to whether they have reasonable grounds to expect that the company will be able to pay its debts as and when they fall due:
- current difficulties and delays being experienced in the market by companies trying to secure new credit facilities or extensions and rollovers of existing facilities, and
- future cash flow and working capital requirements need to be considered in light of the increased counterparty risk of contracts being breached, suspended or terminated, particularly in respect of offtake and transportation arrangements.
Alternative forms of financing
With debt and equity harder to secure, many companies looking at bringing mines into production are having to turn to alternative sources of capital to fund development activities. We are already seeing an increase in the number of assets being placed on the market as companies seek to introduce third party equity to their project. It is likely that the divestment of project interests undertaken in conjunction with the offer of commodity offtake rights will continue in 2009.
Increased supervision by regulatory authorities
As companies teeter on the financial precipice, it can be assumed that stricter regulatory supervision and controls will figure prominently in 2009.
On 3 December 2008, ASIC issued guidance to entities preparing their 31 December 2008 financial and audit reports. The guidance incorporates specific issues identified through ASIC’s review of 30 June 2008 financial reports. The specific areas of focus are ensuring:
- the appropriateness of the going concern assumption in financial reports
- robust and transparent impairment review processes
- that fair value assessments for property and infrastructure assets are supported by market evidence. Valuations of financial instruments should also be supported by appropriate markedbased information, with methods and assumptions fully disclosed
- appropriate explanations are made as to why certain assets and liabilities are off balance sheet, and
- proper disclose of risks associated with financial instruments.
Greater shareholder activism
Falling share prices may also lead to a new wave of shareholder activism. Signs have already emerged in the recent AGM season of shareholders opposing the grant of executive options, the reappointment of directors and increases in non-executive remuneration. And it’s not just the institutional investors who are leading the charge with retail investors demanding more than just the free coffee and biscuits.
The previous CLERP 9 reforms (including the reforms which allow a non-binding vote to be taken on a remuneration report) have already increased the level of shareholder engagement. More reforms may be on their way. The recent Parliamentary Joint Committee Report on Corporations and Financial Services (June 2008) entitled ‘Better shareholders – Better company’ contained a number of recommendations to the government regarding the manner in which companies engage with and communicate with investors. These include:
- greater supervision and monitoring by ASIC of disclosure of company information in private briefings to institutional shareholders, and
- establishing best practice guidelines for the reporting of company financial information.
In these difficult economic times, companies should ensure that they are keeping shareholders regularly informed and updated as to the company’s activities. The last few years in particular have seen an acute rise in the number of companies being pursued by large, well-resourced litigation funders planning to institute proceedings against companies and their directors for misleading the market.
Project interruptions and shutdowns
A number of companies have recently announced plans to suspend or close mining operations (eg Norilsk Nickel, Consolidated Minerals). Companies considering placing a project on care and maintenance should be mindful of the following issues:
- ongoing environmental obligations are still required to be met
- minimum expenditure commitments required to keep tenements in good standing still need to be satisfied. There is limited scope under most mining legalisation to defer these obligations solely on the basis of constrained financial circumstances
- particular focus should be given to issues of workplace and public safety in and around the mine site, particularly if the mine is to be shut down in preparation for abandonment or sale
- general counterparty risk associated with review or trigger events in contracts with customers and suppliers
- from a native title and Aboriginal heritage perspective, a review should be undertaken of any agreements which the company has with traditional owners to see whether they contain any obligations in relation to operating a project on a care and maintenance basis. Particular areas for review would be in relation to the effect this would have on:
- payments due under the agreements with traditional owners
- commitments to consult with traditional owners around closure planning
- conditions of any indigenous cultural heritage consents and the terms of any cultural heritage management plans, and
- regular reporting with regulatory and government agencies should be carried out during the planning and implementation stage of these operations.
Should economic conditions change, companies intending to restart operations should ensure that a thorough review of legal obligations and methods of management of these is conducted before operations are recommenced.
More information
For information regarding possible implications for your business, contact