Martel Industries Limited is in the mining business. The company has significant exploration activities in many countries and has started to explore and develop oil and gas properties in the last few years. The company's shares trade on the national stock exchange. Martel has several significant loans with the Mining Bank Limited (MBL), which monitors its debt to equity ratio.
One of the company's largest ever silver mines is starting to produce (Mine A). In the past year, a significant amount has been spent getting the property ready for production. The company has had to borrow additional funds from MBL this year in order to complete the mine and has installed a complex underground railway system (railway cars and tracks) to assist in bringing the ore to the surface for processing. Martel has asked its engineers and geologists to estimate the amount of silver that exists in this property. The engineers and geologists have come up with a fairly wide range, with the top end of the range being three times the lower end of the range. The lower end of the range relates to silver ore reserves that can be proven and the upper end represents possible/probable silver ore reserves. The life of the mine is expected to be approximately 10 years, after which the company will probably just abandon the mine.
The life of the railway tracks is 50 years and the railway cars 20 years. The company may be able to salvage the tracks and cars at the end of the 10-year period but is not sure if it would actually do this (and sell or reuse them) since the salvage costs would likely be high. As the ore is mined, it is stored in large piles waiting to be processed into silver. At year end, in anticipation of significant sales in the new year, the ore piles are very large.
Another mining property (Mine B) is just in the evaluation and exploration stage. The funds being spent on this property are also pretty significant and financed by borrowings. Primarily, the expenditures consist of geophysical studies, exploratory drilling, and sampling. Although the preliminary work that is being done points to a significant geological find of gold, there is still a large amount of uncertainty as to whether sufficient gold ore actually exists of a commercial grade. Nonetheless, the company is continuing to develop this property. A large amount of time has been spent on this particular property by Martel's senior management since this property is in a politically unstable country (Country C). Martel had to negotiate for several months for the rights to bring an exploration team into the country to begin the work. In addition, Martel had to pay a one-time fee to the resource minister of the government of Country C for this right. All costs have been capitalized.
Mine C has been actively producing copper for two years. During the current year, the government announced that it would be imposing stricter regulations on mining companies, requiring that they restore the land to its original condition. Although in the past Martel has tried to minimize any negative impact on the environment (there are numerous environmental groups that monitor the company's policies), senior management has admitted in private discussions within the firm that they have not met the proposed new standard. The amount would be material. As a matter of fact, the company may decide to close Mine C and abandon it. Mine C is in a country where Martel would likely not do business in the future due to the high incidence of earthquakes.
The oil and gas segment of the business has several producing wells. Luckily, they have not had any "dry wells" (that is, all properties that they explored resulted in producing wells). The oil rigs require major maintenance every two years. The costs to do this maintenance are pretty significant but given the risks involved, it is well worth it. The company stores its gas in underground storage caves. Approximately 25% of this gas will never be sold since it is required to pressurize the cave. The rest of the gas is generally sold.
During the year, the company put in place a new long-term benefit plan for Martel employees. Under the funding arrangement for the plan, the company will contribute to the plan annually an amount that is based on net income.
Instructions
Adopt the role of the company controller and discuss the financial reporting issues. Use the case analysis format discussed in class.