However, for quite a few companies that produce a metal concentrate or ore for sale, they receive an estimated price based on when the ore or cons leaves the mine gate. They then receive their actual price about 3 months’ later. The estimated price has a US$ component and an exchange rate, as does the actual price, and any difference between the two revenues has to be accounted for in a theoretical “money pipeline”.

Losses can be incurred through the metal price falling or the local exchange rate rising, and similarly profits can be generated vice versa. Hence Independence Gold’s comment that it had received an estimated average nickel price of A$12,642/t in DQ02 (US$7095/t at an average of US$0.56) for its production resulting in accrued nickel revenue of $2.4m, but expected that it could be higher when it received its actual nickel prices 3 months’ later.

Table 1 Estimated and actual 3-month later nickel prices received (Oct 2002 to Mar 2003)

As shown in table 1, the nickel prices have still risen in the March quarter in A$ terms despite the stronger A$, although if the A$ had remained at US$0.56 then the March Quarter’s average could have become almost another A$1000/t higher at A$14821/t. As it is the possible revenue that IGO received may have been closer to A$2.66m or about another 10% higher than the original estimated price.

It should be recognized that table 1 is a simple representation since it has not factored in the individual amounts of nickel produced each month and weighted those results by production to generate an estimated and actual average metal price received.

The above sounds simple and logical, however, a complication creeps in when losses have to be accounted for that exist in an accounting sense but not in a practical sense. Aquarius found itself in one of these situations for its half-year to December 2002, and consequently had to record a forex loss of US$6.6m even though it had not practically occurred. The reason is that AQP accounts in US$, but receives its revenue in South African Rand, so that estimated sales were in Rand and when the Rand appreciated an apparent loss was generated and had to be recognized even though AQP accounts in US$, as illustrated in table 2.

AQP was in fact itself further frustrated because it could not show what had happened in Rand terms, that resulted in the apparent forex loss.

Table 2 Estimated and actual 3-month later platinum prices received (Aug to Dec 2002)

AQP is a typical platinum producing mine and consequently receives revenue from a suite of 10 metal products, but for simplicity we have only shown the price for platinum in table 2. It can be seen that from a US$ viewpoint, and accounting in US$, that higher revenue of US$0.8m is received (based on 20,000oz of platinum (Pt)), however, due to the strength in the Rand a loss of R7m has occurred and the company has to recognize and record this R7m or US$0.77m loss.

So although the company can receive higher US$ revenue it actually has to record a forex loss of US$0.8m due to the apparent R7m loss. In AQP’s case it did in fact receive higher revenue from its Kroondal operations from DH01 to DH02 but had to recognize a US$6.6m forex loss due to the “money pipeline” accounting procedure.

AQP has requested to be allowed to report in a manner that matches its actual revenue with its actual costs for quarters and half-yearlies but has been informed that they cannot do it that way under existing accounting practices.

The above two examples show that sometimes companies can benefit and other times they can lose according to what stage they are in of the “money pipeline”.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, who has a Proper Authority with State One Equities, and with his associates, either has or expects to have interests in most of the stocks in this article, This e-mail address is being protected from spambots. You need JavaScript enabled to view it . The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.