Daku Resources Limited

Daku Resources Limited

Analysis of the pre-released information about the Daku Resource Company shows that the Major project Dam requires examination.

Marrang Dam

Analysis

The Dam holds a significant amount of gold that the company can profit from by excavating. If the firm can develop the high-grade underground mine, then the cash-flows will increase. Investment in the Dam will result in additional expenses such as buying of treatment facility at Beltana at the cost of $2.8 million. Beltana is to be refurbished at an extra cost of $1.3 million. From the financial forecast, the Dam project is worth undertaking for the next years. The project has realized a profit before income of $1,037,972 in the year 2018 and $8,432,668 in the year 2017. The difference between the capital expenditures versus repairs and maintenance is given by $426, 275. Based on the information, the firm made a net profit of   $611,697 and $ 6,878,090 in 2018 and 2017, respectively.  This shows a positive response from the project in terms of cash flows.

Evaluation

Cash Flow, Profitability Calculation and Analysis

From the pre-released background information, the DRL has a net cash flow from operating activities worth $7, 273,183. Net cash flows from investing activities amount to $9,504, 353. In the steady cash flows also comes from financing activities. The company realized a net increase in cash flows of three million in 2018, with cash equivalent at the end of the financial year amounting to $16,170,847. DRL Company registered a rise in profitability, having a gross profit of $2, 495,386 in the same year. The profit before income tax was at $1,037, 972, and net profits at the end of the year was $611, 697. From the above cash flows and profitability, the firm realizes more returns from the project more than the expenses.

Asset Capitalization and Amortization

By undertaking Dam project, the company had to purchase various capital assets, current asset, and long term assets. In the year 2018, the firm had current assets amounting to $17,506,927 and non-current assets amounting to $24,386,598. The total assets by the end of the year were worth $41,893,525. Current liabilities with provisions amounted to $3,420,132 and non-current liabilities totaling to $ 4,841,313 in 2018. The value of total assets inclusive of current and non-current assets was $8,261,445. Analysis of the assets and liabilities shows that assets are more than liabilities by (14, 893,525-$8,261,445) shows that assets are more than liabilities by approximately five million. This shows that since investing in the Dam project, the firm is doing well and is in a stable state. It can pay all its debts and remain with cash at hand for internal operations.

Advice

From the analyses, the firm can acquire the Beltana plant for refurbishing the gold at an extra cost of $1.3 million. The plant will act as an asset of the book value of $2.8 million-plus additional cost of $1.3 million. The total book value for the plant as an asset will amount to $4.1 million. It is desirable to acquire the plant and continue with the project.

Governance and Board

Analysis

Examination of DRL’s governance and board composition reveals some adjustments that need to be implemented. The chairman of the board should have executive roles with a master’s degree in accounting qualification. Further, the role of Mr. Matthew Hawke can be played by the chairman of the board to reduce the long organizational structure. The structure should begin with chief executive officer Mr. Benjamin Butler as the head of the organization. To ensure corporate governance principles of transparency and accountability, the company should have a more clear leadership structure whereby ever board member knows his or her job description and area of jurisdiction.  Some post seems to share the same responsibilities, which may create confusion in the administration. For example, Benjamin Butler, the Chief Executive Officer, seems to share the same administrative roles with the chairman of the board, Mr. Bruce Smith. Also, even though Mr. Paul Sawails is experienced, he is old to be a board member.  The company should hire another young mining engineer to take his position.

Evaluation

Daku Resources Limited should adopt a corporate governance system that ensures fairness, accountability, transparency, and openness as this will attract investors to provide more finance to the company. Another issue that needs to be addressed is cutting down the expenditure on payments. Some positions can be merged to reduce the salary payments. All the management teams must adhere to an ethical management code of ethics, such as objectivity, confidentiality, competence, and professional behavior. The managers and the board of directors must ensure that they act professionally and with a lot of integrity. Following the code of ethics enhances better performance and improve the general business profit margins. It is therefore recommended that the organizational leadership should be restructured. The CEO should be the top leader, followed by the chairman of the board. Positions with similar job descriptions should be merged to reduce total operating and salary expenses in the firm.

Business risks

Analysis

Fluctuations in the United States dollar (USD) spot gold price and AUD/USD exchange rate

The firm is operating in two currencies, which are USD and AUD. It means that the company conducts currency exchange between the dollars. Fluctuations in the USD dollar gold price may reduce the firm’s incomes significantly. Further, changes in exchange rates in the two currencies may have a more significant impact on the company’s net return. For currency risk, DRL can apply forward contracts, limit orders, and stop-loss orders to reduce the risk.

Government regulation

The company’s operations are limited to regulations and laws governing the mining industry. Its exploration and expansion activities must adhere to statutory laws, taxes, and labor standards, among others. DRL has limited actions when it comes to government regulations. The only way to mitigate the risk is to ensure that every firm’s undertakings strictly follow the law as required to avoid court cases.

Exploration and Development Risk

Mining companies face exploration, expansion, and development risk due to the nature of their operations. Meeting future profits margins, capital forecasts, and sales volume require that the company employ strategic planning to mitigate risks associated with exploration and expansion.

Operating Risks and Hazards

Mining activities are among the riskiest operations. It involves digging into the open pits that may collapse, hurting people. Underground mines entail a high level of risk and hazards that may be fatal. The production, exploration, and development of gold mines may result in deaths. The firm should have risk management strategies and have robust safety and security operations management team to help reduce the risk of loss of lives or injury.

Capital Raising

Analysis

DRL gets its finance from combined placement and shares a purchase plan. The funds collected are used for de-risk underground mining and improve resources in the firm for drilling purposes. The company raises approximately $15 million via a share placement and 4 million through share plan purchase. The total amount of money forecast is 19 million that will be used to run major business operations in the next few years of the initiation phase. The company has managed to place 15.8 million through ordinary shares at a price of $0.95. This has resulted in the contribution of fund managers amounting to $15 million before cost. Through the share plan DRL, the current shareholders have been allowed to subscribe for more shares to increase the company funds.  A total of 4 million is expected to be raised within two years by a share purchase plan.

Evaluation

Based on the report, underground development will account for 17 million while working capital and other costs will utilize two million. DRL also plans to get funds from willing investors in the mining company to expand its mining activities beyond the Dam.

Recommendation

From the above capital report, the company should not only focus on combined placement and shares purchase plan but also includes another capital financing such as the issue of shares, public deposits, and loans from financial institutions. DRL can issue shares to those willing to buy at affordable prices. This will increase the level of operating capital and allow the purchase of more assets for the mining activities. Further, the firm should explore debt financing from financial institutions to improve its financial base. Long term loans and short term loans should be explored to increase finance in the company.

2-5 Year Strategies

DRL strategy for the next two to five years should focus on expansions and exploration of Marrang Dam. It needs to identify investors to raise more funds to curb security concerns in the mines. The firm should strategize in purchasing efficient mining equipment to enhance the production process and make it less risky. Further, to move forward in the next five years, the firm should restructure its management team to reduce the number of people in the management. Some functions can be combined to be performed by one person to reduce salary expenses in the firm. Capital strategies should include raising approximately $15 million via a share placement and 4 million through share plan purchase. The total amount of money forecast is 19 million that will be used to run major business operations in the next few years of the initiation phase.

It is also advisable for the firm to explore mining activities such as underground mines, placer, open surface, and in-situ mining. If the company strategizes in underground mining activities with more developed equipment, then the rate of extraction will increase hence. This will result in an improvement in the total return of the company. Underground development will account for 17 million, while working capital and other costs will utilize two million. Underground mines entail a high level of risk and hazards that may be fatal.  DRL also plans to get funds from willing investors in the mining company to expand its mining activities beyond the Dam. In adopting various mining techniques, the firm should ensure that all mining activities align with the laws and regulations. Adhering to rules that govern mining ensures smooth mining without authority’s interference.