ASSIGNMENT QUESTION
KARRICK Gold & Copper Ltd. (KGC Ltd), an Australian mining firm listed on the Australian Stock Exchange (ASX), has been operating a large Open Cast (Pit) gold and copper mine in the Star Mountain Range in Papua New Guinea (PNG) for 30 years. The Star Mountain Range in PNG is very isolated (no roads) and has a wide range of exotic plants and animals found nowhere else in the world.
Other Information-KGC Ltd. has:
1) Revenues of $30 billion Australian dollars (AUD) a year and, in the absence of new ore finds, has only seven years of ore reserves.
2) The Net Book Value (NBV) of the PP&E is $16.5 billion AUD and another $5.0 billion AUD is needed over the next seven years.
3) There is no active prospecting for additional reserves of ore-because the firm's current license from the PNG government to mine in that region will expire in eight years.
4) While there have been several rich "shows" of silver and lead ore,1 nothing so far is of commercial quantity and quality. However, the mine manager expects that over the next eight years large deposits of commercially-viable silver-and-lead ore will be found within the mine property or adjacent.
5) The KGC Ltd. employs 3,400 full-time employees in its PNG mine, offices, and processing plant-3,000 are PNG citizens and reside in the Star Mountain Range. The labour- participation rate in that region of PNG is 32 percent and the unemployment rate (among those 32 percent) is 45 percent.
NB: If KGC Ltd. shuts down its mining operations in the Star Mountain Range in PNG, the unemployment rate among the 32 percent participating in the labour market will rise to 95 percent and there are few if any alternative sources of employment.
6) The KGC Ltd. PNG operations pay $4 billion in royalties to the traditional owners of the land where they mine and process ore and $6 billion in taxes to the PNG government. Also, they built and operate the only water-processing plants, grade schools, hospitals, and health centres in the Star Mountain Range in PNG.
7) In the last few decades, the Christian-animist residents of the Indonesian half of the Island of New Guinea (the Indonesians call their half of the island "Irian Jaya" or "Papua") have been agitating for independence from Indonesia (it is estimated that 100,000 of them have died in the conflict and some of the tribes have resumed headhunting with the Indonesian soldiers and settlers being targeted. The PNG tribes near the border with Papua are closely related to the tribes across the border and there is fear the conflict and the police actions by the Indonesian army will spill into the PNG portion of the Star Mountain Range.
8) A recent collapse of a "tailings" pond dumped 5 million litres of ore-waste sludge into a river from which two local villages draw their drinking water, fish, hunt, harvest lotus root and water their taro root, yam and cassava crops.2 While most of the sludge flushed through to the ocean in a few days, many environmental groups in Australia are screaming that KGC Ltd. is environmentally irresponsible. The complaints got especially loud and strident after the General Manager of the PNG mine stated at a public meeting: "First) The sludge quickly flushed out to sea; Second) "At sea the sludge was vastly diluted; Third) The solution to pollution is dilution; and Fourth) The peoples of the Star Mountain Range in PNG depend on the KGC Ltd. operations for most of their jobs, clean potable water, health care, and education."
9) The cost of remediating the sludge spill (i.e. a combination of clean-up, fines, offsetting work elsewhere, and compensating cash payments) is expected to range from $6 billion to $60 billion, depending on the outcome of a court case in PNG that has been initiated by an ecological group from Australia. Please note: KGC Ltd. is claiming that the annual benefits of the KGC Ltd. operations in the Star Mountain Range in PNG offset the harm of the mining and processing (including the rare sludge spill) by manyfold and that should the mine be shutdown, the loss to that region and PNG in general would be devastating.
While this case study is adapted from real events and circumstances, names have been changed to protect the innocent and to avoid lawsuits. Please answer the following questions using the above information and supplementing it (as needed) with content from the course, internet, and other literature. Marks will be awarded for clarity of thought and succinctness of presentation.
Required:
a) Discuss the steps that you need to consider before accepting to do an audit of the KGC Ltd. mine in PNG?
b) If the inherent risk of the KGC Ltd. mine in PNG is estimated as 80% and the control risk and detection risk are estimated at, respectively, 10% and 50%, should your audit firm accept the role of doing an audit of the KGC Ltd. mine in PNG? (Explain)
c) List and discuss what should be included in an audit program for the KGC Ltd. mine in PNG. Your program should include general coverage plus items 1 to 9, above.
d) If KGC Ltd. revalues its major PPE assets from historic cost to fair market value, what are the major concerns for the auditor and what tests should the auditor perform to resolve those concerns?
e) Review the future prospects of the mine.
f) In a triple-bottom line addendum (i.e. addition) to their GPFS, KGC Ltd. described their operations as being socially responsible and environmentally friendly. Are you willing to sign-off on that statement as being true and fair? (Explain)
g) KGC Ltd. is hoping to raise $5 billion AUD, KGC Ltd. via a share issue. In the share prospectus,3 KGC Ltd. Noted that its PNG operations are its principal asset and described the operations as low risk and indefinite (permanent) in duration. Are you willing to sign-off on that prospectus as being true and fair? (Explain)