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The Case PGG Limited (ASX: PGG) is a listed public company involved in the mining of diamonds in Australia and Africa. The company was incorporated in 2005 and was listed on the ASX in January 2010. PGG currently operates two diamond mining projects (Lekara Industrial Diamond mine in South Africa and Elleka Diamond project in South Australia) and two exploration projects (Phoenix exploration project in South Africa and Tikara exploration project in Western Australia). You have been the external auditor of PGG since July 2018 and have always issued an unqualified audit opinion. PGG's objectives and strategies To maintain and grow its market share, PGG has undertaken the following strategies: 1. Shifting of its "industrial' diamond operations at Lekara Industrial Diamond mine from open-pit mining to underground mining Currently, the open-pit mine is only producing about half of its average yearly capacity and the final blasting operations of the open-pit mine are scheduled for the first half on 2021. Shifting from open-pit to underground mining will allow PGG to explore the mine at greater depth and extend the life of the mine by at least 10 years. The construction costs of the underground mine have been partially funded by long-term debt and PGG plans to fund the remaining expenditure by raising equity via issue of shares on the ASX. 2. Commencement of the construction of an open-pit mine at the Phoenix exploration project, South Africa . PGG's ongoing exploration activities resulted in the find of a large 'gem quality" diamond deposits in north-west of South Africa. Development will commence in 2020. The ongoing funding of the project is planned through long-term debt. In March 2020, initial funding was secured and the terms of the debt finalised. The stipulated debt covenants (namely maintaining a minimum of 10% net profit ratio (i.e. EBIT) and retaining of the chairperson of the Board of Directors for the whole tenure) were agreed by PGG. 3. Continued investment in exploration activities at the Tikara exploration project, Western Australia As PGG's Elleka Diamond mine in South Australia is expected to start its mine closure activities in 2022, the company has increased its exploration activities in the Gibson Desert of Western Australia. PGG is optimistic of finding new diamond resources in this unexplored area of Western Australia. 4. Implementation of significant cost-cutting measures PGG's management has been continuously evaluating its expenses and have taken significant measures to minimise costs and increase productivity. PGG had announced a reduction of 200 jobs in 2018 over the period of five years as part of its cost minimisation program.PGG's key stakeholders Shareholders - A large Chinese company holds 15% stake in PGG to ensure a secure supply of both industrial and gem quality diamonds to China. Key executives - Mr Cliff (Chairperson) and Mr Stroter (CEO) are the founders of PGG Ltd. Their continuation with the company is critical to the future direction of the company. Customers - One customer in the U.S. accounts for 40% of the total 'gem quality' diamond sales. This customer has a significant influence on the price setting for diamond sales to the U.S. market. Industry The Australian Diamond industry is heavily export-oriented and operators depend on global demand for diamonds. Although the rising demand from Chinese markets and other South-East Asian countries for both industrial and gem- quality diamonds is likely to boost diamond prices in the future, the industry profitability is expected to fall substantially over the next five years. The root cause is the closure of existing mines and the lack of new diamond resources. The diamond industry faces increased competition from synthetic diamonds. Consumers and the world's finest retailers are often unable to distinguish between a synthetic and a mined diamond. These diamonds cost a fraction of the price of a mined diamond. Though the synthetic diamond cannot replace the true value of a real diamond, it shall definitely affect the demand for lower range diamonds. Further, when used for industrial purposes, synthetic diamonds are superior to its natural diamond counterpart because its properties can be tailored to specific use and can be produced in large quantities at a fraction of the price. Majority of the Australian industry's output is exported, and the prices of diamonds and gemstones are typically denominated in US dollars. When the Australian dollar appreciates against the US dollar, the relative price of Australian diamonds increases in comparison to other diamond suppliers. Consequently, as diamonds are generally a discretionary purchase, an appreciation of the Australian dollar against the US dollar typically reduces demand for Australian diamonds, negatively affecting industry revenue. However, if the Australian dollar depreciates against the US dollar, Australian diamond and gemstone miners' competitiveness strengthens.Table 1: Abstract from PGG's Comprehensive Income Statements In millions (AUD) Item 30-Jun-17 30-Jun-18 30-Jun-19 30-Jun-20 Sales/Operating Revenue 183.25 170.75 173.50 170.50 Other Revenue 2.32 2.89 3.02 3.35 Total Revenue Excluding Interest 185.57 173.64 176.52 173.85 Operating expenses 132.22 128.35 112.47 109.28 Exploration expenses 12.30 13.35 13.20 18.50 Impairment 15.00 10.00 Foreign exchange gain/(loss) (3.25) (4.35) 2.35 5.92 Depreciation and Amortisation 20.35 17.00 15.50 12.75 Total Operating Expenses 161.62 154.35 158.52 156.45 EBIT 23.95 19.29 18.00 17.40 Finance costs 7.33 6.43 8.42 10.16 Profit before tax 16.62 12.86 9.58 7.24 Tax Expense 4.99 3.86 2.87 2.17 Net Profit after Tax 11.64 9.00 6.70 5.07 1 Impairment charge pertains to the Elleka Diamond projectAbstract from PGG's Balance Sheets In millions (AUD) Item 30-Jun-17 30-Jun-18 30-Jun-19 30-Jun-20 Current Assets Cash 2.64 2.47 3.86 4.91 Receivables 18.56 26.05 31.77 36.51 Inventories 27.84 31.26 35.30 83.47 Total CA 49.03 59.77 70.93 74.88 Non-Current Assets PP &E 600.00 584.65 617.65 662.15 E&E Asset 1.62 13.1 Total NCA 600.00 584.65 627.27 675.34 Total Assets 649.03 644.42 698.20 750.22 Current Liabilities Account Payable 19.83 19.25 16.87 16.39 Short-Term Debt 23.20 28.65 33.54 34.99 Provisions 5.00 3.25 3.81 6.50 Total CL 48.03 51.16 54.22 57.88 Non-Current Liabilities Long-Term Debt 160.00 132.00 177.00 219.00 Restoration provision 40.00 44.00 48.00 52.00 Employee Benefit Provisions 3.00 10.26 5.27 2.56 Total NCL 203.00 186.26 230.27 273.56 Total Liabilities 251.03 237.42 284.49 331.45 Net Assets 398.00 407.01 413.71 418.78 Shareholders' Equity Share Capital 350.00 350.00 350.00 350.00 Retained Earnings 48.00 57.01 63.71 68.78 Total Equity 398.00 407.01 413.71 418.78 Additional information 1. Cash and Bank Balance Cash and bank balance comprises of balances in Australian banks and bank accounts in USD and South African Rand- ZAR. Sales to customers are in USD and expenditure is incurred in local currency. PGG's accountant uses the exchangeAnnexure 4 Summary of audit differences Issue Current assets Non-current assets Current Liabilities Non-current Profit before tax liabilities Restoration Leave Receivables Sales Bank Impairment TOTAL CLASS BAI 74,880,000 675,340,000 57,880,000 273,560,000 7,240,000 Impact (%) Total/Class bal Materiality - Planning ? Proportion [Total/Planning Materiality Evaluation of misstatements Evaluate Discuss Individual misstatements (individual account balance) Aggregate misstatements (class balance) Aggregate misstatements (Planning and Performance materiality) Individual misstatements (qualitative materiality) Type of misstatements and the risk of undetected errors 17