Operations of Allegiance Coal Limited

Discuss about the Operations of Allegiance Coal Limited.

Operations of Allegiance Coal Limited:       

Allegiance Coal Limited is listed on the Australian Stock Exchange with a ticker symbol of AHQ. The organisation is involved in acquiring and exploring for metallurgical coal tenements. The primary investment focus of Allegiance includes advanced, near producing projects or production in nations having sound records of investment and minimised level of political risk. The organisation considers the capital expenditure in its projects seriously for assuring that they sit at the back end of the cost curve (Allegiancecoal.com.au 2018). Finally, it is committed to the formation of effective working relationships with indigenous individuals, with whom the organisation is associated for the projects.

Industry overview of the Australian mining industry:

Due to the huge supply of hydrocarbon, mineral and non-mineral reserves, the mining companies in Australia extract, develop and sell these reserves. Since these resources are of greater quality, they help in maintaining global price competitiveness of the mining division. The sector is reliant mainly on export and nearly 70% of the overall revenues have been earned in 2017 from exports (Ibisworld.com.au 2018). This is due to the industrialisation of the global nations like India and China driving demand for natural resources. However, the revenue of this sector has declined over the past five years despite the rise in output. With the surge in global development, most of the Australian mining organisations invested in new projects leading to increase in capital investments and mining volumes. However, the rising supply has resulted in significant price fall in for various division products in the past five years. Hence, it could be said that the main success factors for the Australian mining industry include resource availability, proximity to transport and effective controls related to cost. 

There are certain specific reporting requirements for the mining organisations in Australia and they are elucidated briefly as follows:

Offshore Minerals Act 1999 and Mining Act:

According to this act, the offshore mining regulation needs to be restricted to the area, which is outside the coastal waters of the state. In addition, it could be observed that a corporation could not explore and recover minerals from the coastal waters, unless a licence or special purpose content authorises such exploration or recovery. Any violation of this rule might impose penalty on the organisation up to $30,000 (Legislation.nsw.gov.au 2018). The mining companies need to consider the environmental concerns before exploration and recovery. In other words, they need to ensure protection to the fisheries and scenic attractions in the areas of exploration. Moreover, the Australian government often appoints inspectors to conduct compliance inspection for examining stuffs utilised for mining or exploration purposes like equipment and documents. These are carried out for assuring that the Australian mining companies are abiding by the regulations laid down in the Act.

Industry overview of the Australian mining industry

Mineral Titles Act 2010:

This particular act aims to develop a framework in order to grant and regulate mineral titles, which authorise exploration, extraction and processing of minerals and related products. In addition, another aim of this act is to help in commercialising activities conducted under mineral titles by authorising the formation and switch over of title interests. Furthermore, this act deals with the authorisation of other activities associated with minerals and mineral-related products to be carried out in the absence of mineral titles (Legislation.nt.gov.au 2018). The entities are needed to conduct preliminary exploration of land for finding out whether the land is potential enough for future exploration of minerals and other related products. Such exploration might constitute of investigating the geographical characteristics or air-borne geo-scientific survey with prior approval. For such exploration, the mining companies could not use metal detectors; instead, hand-held and non-mechanical tools could be used.   

Planning and Development Act 2007:

The aim of this act is to provide planning and land system contributing to the sustainable and orderly development of the act. This system is formulated in accordance with effective financial principles. Thus, it becomes necessary for the Australian mining companies to ensure sustainable development while carrying out their mining operations. According to this act, sustainable development indicates the sound integration of environmental, economic and social considerations in the processes of decision-making, which could be accomplished with inter-generational equity principle and precautionary principle (Legislation.act.gov.au 2018). The first principle states that the present generation is required to ensure health, productivity and diversity for the upcoming generations. On the other hand, the second principle states that if there is possibility of serious environmental damage, lack of overall economic certainty need not be used as a cause to postpone measures for restricting environmental degradation. Hence, the mining companies need to take into account these principles while performing their exploration and recovery work.

Mineral Resources Development Act 1995:

This act aims for the progress of mineral resources which is consistent with effective environmental, economic and land use management. The mining companies of the nation need to use effective equipment and machinery for extracting and processing minerals. The intention would be to ensure the environmental protection and limit land or soil erosion (Mrt.tas.gov.au 2018). The Tasmanian Mineral Resources is involved in administering the approval of ongoing works, exploration and special exploration licences, production licences, retention licences along with mining leases for ensuring the safety of the overall community.

Specific reporting requirements for mining organizations in Australia

The four significant business risks that could be identified in the context of Allegiance Coal Limited are summarised as follows:

Cash optimisation:

The unpredicted volatility of the market and the change in the prices of the mineral products result in uncertainty, which signifies risk (Boskou, Kirkos and Spathis 2018). Allegiance Coal Limited is confronted with rising challenge to plan for the long-term due to the limited visibility of demand and price. Such change could place the balance sheet statement of the organisation in risk, which might eventually lead to material misstatement. In this case, cash could be used for managing the liquidity of the balance sheet with the help of sustainable cost minimisations; however, they need not dissolve value. Such minimisations need to raise concentration on working capital along with enhancing the effectiveness of capital.

Access to capital:

The mining companies often encounter significant issues when it comes to raising capital. As pointed out by Carson, Fargher and Zhang (2016), the overall capital that the mining companies had raised in 2015 was 10% lower year-over-year (YOY). In addition, the loan funding to the sector has been falling as well. Allegiance has obtained such loans previously and it has been engaged in reusing them for improving its current infrastructure rather than investing in new projects. Even though it has guaranteed security for backing the debt, it has been faced difficulties for obtaining further bank loans. As a result, certain amount of interest expense needs to be included in the income statement out of the debt security and any inaccurate estimation could eventually lead to material misstatement. Thus, Allegiance is required to look for alternative sources of finance along with realigning portfolios for overcoming this challenge.

Joint ventures:

If the joint venture agreements are managed effectively, it could result in providing greater value to the stakeholders (Fuhrmann et al. 2017). These ventures could improve the portfolio values and in few instances, they could enable in providing access to reserves and capabilities. This denotes that risks could arise in relation to reserves and any wrong estimation would result in loss of time and money for the organisation. As observed from the annual report of Allegiance in 2017, it has entered into joint venture agreement with JOGMEC, from which it has realised $31,590 from this venture and it is depicted under cash flow from investing activities. This amount, if wrongly estimated, could result in material misstatement for the organisation.

Business risks faced by Allegiance Coal

Access to energy:

According to Heenetigala and Armstrong (2017), energy consumption could account for 15% to 40% of the overall operating budget of a mining firm. At the time of selecting energy price, cost is of utmost significance. Allegiance Cost Limited is no exception to this issue as well. If cost is overstated or understated, material misstatement might arise in the income statement of the organisation.

The three most significant areas or accounts of concern for Allegiance Coal Limited constitute of the following:

Liabilities:

Significant concern is inherent in the liability stated in the balance sheet statement of the organisation. This is because the overall liability base of Allegiance Coal Limited might be understated, since it has not recognised or disclosed any provision in its financial statements. In addition, the disclosures related to contingencies might not adequately disclose the exact net amount to be recovered from the tax authority. Furthermore, it has been identified that the organisation does not have any long-term borrowings, which is another concern to carry out its audit work.

Financial results of subsidiary:

There is high chance that the financial results of the subsidiary, Telkwa Coal Limited might be manipulated. The aim might be to impact the market value of the shares prior to the sale of the transaction (Simnett, Carson and Vanstraelen 2016). Thus, it could be stated that the organisation might not have estimated properly the overall worth of the subsidiary.

Sales revenue:

It has been observed that the sales revenue of the organisation is significantly lower in both 2016 and 2017. The organisation currently realises sales revenue based on estimates in respect of its exploration sites. Such estimate could be biased and it might not be dependent on realistic assumptions in relation to the sales price. As a result, the impact of provisional pricing and any revisions in future might not be revealed adequately in the financial statements (Soh and Martinov-Bennie 2015).

Based on the liquidity ratios, the following figure has been represented as follows:

The above figure clearly states that the current ratio of Allegiance Coal Limited has increased significantly from 0.69 in 2016 to 5.31 in 2017. The higher the ratio, the more feasible it is for an organisation (Leung et al. 2014). However, if the ratio is too high, it could be stated that most of the business cash is stuck and it has remained idle. The situation is same for Allegiance as well in 2017 due to high increase in trade receivables and significant decrease in trade payables.

Areas of concern in Allegiance Coal’s financial statements

Quick ratio, on the other hand, is a better measure of liquidity, since it excludes the amount of inventory while evaluating the overall business performance (Moroney and Trotman 2016). In case of Allegiance, the same trend is observed as in case of current ratio, since the organisation has extended its receivable terms. As a result, large amount of cash has remained with the debtors.

The gearing ratio of the organisation has improved highly in 2017; however, it could be observed that equity is used for funding majority of its business operations and projects. This is because it has failed to obtain short-term debts from banks because of the significantly lower net income and revenue earning capacity. As a result, it needs to pay greater dividends to its shareholders for retaining them in order to fund its business operations and upcoming capital projects.

Finally, it could be observed that the debt ratio of the organisation has declined significantly from 1.23 in 2016 to 0.18 in 2017. This is because of the significant increase in non-current assets, especially exploration and evaluation along with significant decline in short-term borrowings. Hence, it could be inferred that Allegiance Coal Limited is going through a poor liquidity position in the Australian market.

The earnings per share of the organisation have been negative over the years due to the declining net income. This is due to the significantly lower revenue generation and high increase in employee benefits expense and asset impairments. Due to such declining revenue, the shareholders have limited their investments in the organisation, due to which it has failed to generate sufficient earnings.

According to the above figure, it could be observed that the return on equity has remained negative over the years. This ratio measures the ability of an organisation to generate earnings out of the investments of the shareholders (Rezaee et al. 2018). In this case, Allegiance Coal Limited has not succeeded to generate sufficient earnings due to the negative net income, even though significant rise in equity base could be observed in the year 2017.

Based on the above evaluation, it is clearly inherent that Allegiance Coal Limited has been struggling to maintain its position in the Australian mining industry. The reasons identified behind such weak financial position include net loss, high amount of idle cash, excessive reliance on equity, inability to generate sufficient earnings and obtaining both short-term and long-term bank loans.

Based on the above evaluation, it is inherent that Allegiance Coal Limited has certain significant risks and areas of concern, which need to be addressed effectively. In addition, cross-checks need to be made whether it has made adequate disclosures in relation to Corporations Act 2001 and general purpose financial reporting. It could be noted that the organisation has not made adequate disclosures regarding its revenue and liabilities and thus, these areas need to be evaluated with utmost care. Even though it is financially not stable, if the audit work is undertaken, verification needs to be made whether the financial statements are understated along with the estimates made. Thus, it could be inferred that the audit work of Allegiance Limited could be undertaken; however, the auditor needs to have a thorough review of all the accounts, income and expenses for ensuring the validity of the financial information in the annual report.

References:

Allegiancecoal.com.au., 2018. [online] Available at: https://www.allegiancecoal.com.au/irm/PDF/1252_0/2017AnnualReport [Accessed 30 Apr. 2018].

Allegiancecoal.com.au., 2018. Allegiance Coal Limited. [online] Available at: https://www.allegiancecoal.com.au/irm/content/default.aspx [Accessed 30 Apr. 2018].

Boskou, G., Kirkos, E. and Spathis, C., 2018. Assessing Internal Audit with Text Mining. Journal of Information & Knowledge Management, p.1850020.

Carson, E., Fargher, N. and Zhang, Y., 2016. Trends in auditor reporting in Australia: a synthesis and opportunities for research. Australian Accounting Review, 26(3), pp.226-242.

Fuhrmann, S., Ott, C., Looks, E. and Guenther, T.W., 2017. The contents of assurance statements for sustainability reports and information asymmetry. Accounting and Business Research, 47(4), pp.369-400.

Heenetigala, K. and Armstrong, A.F., 2017. Credibility of sustainability reports of mining sector companies in Australia: an investigation of external assurance. Economic and Social Development: Book of Proceedings, p.335.

Ibisworld.com.au., 2018. Mining – Australia Industry Research Reports | IBISWorld. [online] Available at: https://www.ibisworld.com.au/industry-trends/market-research-reports/mining/mining.html [Accessed 30 Apr. 2018].

Legislation.act.gov.au., 2018. [online] Available at: https://www.legislation.act.gov.au/a/2007-24/current/pdf/2007-24.pdf [Accessed 30 Apr. 2018].

Legislation.nsw.gov.au., 2018. [online] Available at: https://www.legislation.nsw.gov.au/acts/1999-42.pdf [Accessed 30 Apr. 2018].

Legislation.nt.gov.au., 2018. Legislation Database. [online] Available at: https://legislation.nt.gov.au/Legislation/MINERAL-TITLES-ACT [Accessed 30 Apr. 2018].

Leung, P., Coram, P., Cooper, B.J. and Richardson, P., 2014. Modern Auditing and Assurance Services 6e. Wiley.

Moroney, R. and Trotman, K.T., 2016. Differences in Auditors’ Materiality Assessments When Auditing Financial Statements and Sustainability Reports. Contemporary Accounting Research, 33(2), pp.551-575.

Mrt.tas.gov.au., 2018. Mineral Resources Development Act 1995 – Mineral Resources Tasmania. [online] Available at: https://www.mrt.tas.gov.au/portal/mineral-resources-development-act-1995 [Accessed 30 Apr. 2018].

Rezaee, Z., Sharbatoghlie, A., Elam, R. and McMickle, P.L., 2018. Continuous auditing: Building automated auditing capability. In Continuous Auditing: Theory and Application (pp. 169-190). Emerald Publishing Limited.

Simnett, R., Carson, E. and Vanstraelen, A., 2016. International archival auditing and assurance research: Trends, methodological issues, and opportunities. Auditing: A Journal of Practice & Theory, 35(3), pp.1-32.

Soh, D.S. and Martinov-Bennie, N., 2015. Internal auditors’ perceptions of their role in environmental, social and governance assurance and consulting. Managerial Auditing Journal, 30(1), pp.80-111.