Transnational Research Associates
Analysis of the Cash-Flow Dynamics of America Mineral Fields, Inc.
for the Years Ended October 31, 1997 and 1998
Art Madsen, M.Ed.
America Mineral Fields, Inc. (AMF) was selected for cash-flow analysis due to its extremely unusual fiscal situation reflecting a turbulent financial history and a number of significant characteristics worthy of special examination. In spite of its name, this multi-national mineral exploration and extraction firm is incorporated in Vancouver, B.C., Canada, and operates under the regulations of that nation for accounting purposes. Its principal investment information headquarters, however, is in Dallas, Texas; while, technically speaking, its head office is located in London, England.
AMF describes itself as being focused principally on the development of mineral resources in Third World nations, with specific reference to Angola, Zambia and the Democratic Republic of Congo. It has diversified mining properties in these nations and also in Russia, Norway, Finland and Brazil. However, AMF’s 1997 and 1998 Annual Reports, as well as current press communiqués, indicate that this is a firm with an unstable financial structure, one almost completely reliant on the continuing issuance of share capital for (1) settlement of previous debts, (2) on-going exploration and (3) operational cash. AMF, consequently, is an investor-dependent Company with a spotty record of achievement in remote areas of the globe known for economic disruption and uncertainty. The risks that AMF’s Board of Directors seems willing to take are based, of course, on potential rewards in the form of profitable mining concessions, lucrative joint ventures, and resale of mined-ore at levels considerably above production and refinement costs. None of these profits have materialized and the Company has continued to move more deeply into debt.
This cash-flow analysis will concentrate on the methods a firm such as AMF uses to maintain investor confidence so as to generate operational cash, to maneuver around cash-flow crises, and to plan ‘optimistically’ for the future financial status of the Company in spite of overwhelmingly negative indicators. The appended Consolidated Financial Statements, excerpted from AMF’s most recently net-published Annual Reports, will provide data and input for an in-depth discussion. Reference will also be made to Cash Management models and strategies as outlined in Orgler (1970) and to cash-flow interpretative material provided in Plewa and Friedlob (1995). Theoretical support will also be derived for this analysis from text material provided in University of Leeds MBA Accounting Manuals. Sagner (1997) will prove useful for the final recommendation section of this analysis, wherein suggestions for improved, reengineered cash-flow strategies will be offered within the context of AMF’s relatively precarious position.
America Mineral Fields, under the direction of several different CEO’s appointed periodically as crises developed by Mr. Robert Stewart, previous Chairman, and later by Mr. Bernard Varela, Chairman of the Board since February 1998, posted operational losses of US $4,228,110 and $3, 753,175 for 1998 and 1997 respectively. However, at the beginning of 1997, the Company indicated a pre-existing deficit of $3,961,115. These three figures, added together, represent almost $12 million dollars which was posted as AMF’s 1998 Year-End deficit ($11,942, 400). In spite of this onerous burden, cash-flow was maintained over the two fiscal year 1997-1998 period through astute management of income generated largely by the judiciously timed issuance of public stock shares. To accomplish periodic acquisition of needed capital, the Company assures potential investors, in its attractively presented literature, articles and conferences, that the ‘underlying value’ of its worldwide mineral leases and holdings is more than sufficient. Future mineral sale proceeds, the Company claims, will guarantee a handsome return on investment and retirement of any debts accrued by the Company during its exploration and development phases.
This would seem to be standard operating procedure for many start-up firms in the mining industry. However, AMF has encountered a series of uncommonly experienced reversals that have caused share prices to fluctuate dramatically and deficits to soar. Investments may not be entirely recoverable, according to AMF’s Note 1, quoted in their appended 1998 Consolidated Financial Statement, due to destabilizing political events in the Congo and Angola, among other third world locations. Under these adverse conditions, and even in the presence of legal proceedings against potential and future partner-firms such as Anglo-American, the Company still maintained satisfactory operational cash-flow throughout 1997 and 1998.
At the beginning of 1997, ‘current cash assets’ amounted to $13, 785, 532, and after a net drop of more than 10 million dollars in cash related to unproductive mineral properties, leasing litigation, and exploration expenses, the year-end 1998 statement indicated a cash balance of only $3,169,345. Interestingly, AMF’s liabilities totaled some twenty-six and a half million dollars as of the end of fiscal 1998.
Obviously, there was a liability to cash-on-hand ratio of approximately 9:1. This unwieldy comparison may not be considered valid, of course, since there was a restricted amount of eight million dollars in cash reserves, set aside for specific use in operating a newly negotiated joint venture created subsequent to litigation and resolution of differences between Anglo-American Corporation and AMF. In effect, they created a new firm, Congo Mineral Development (CMD), which is to be capitalized by injection of funding from Anglo-American to the extent of $8,000,000. This amount, in addition to an additional $8,000,000 to offset costs and expenses already expended by AMF, is ear-marked, therefore, only for Kipushi (Congo) feasibility studies and future development (Note 4, Consolidated Statement), all of which is held in abeyance due to Civil War in the Congo at this time.
Corporations frequently restrict capital for specific projects in the future thus adversely affecting their cash-flow posture. In this instance, in spite of a negotiated settlement with Anglo-American, it appears that AMF has obtained only a pledge of this 16 million dollar capital infusion, rather than the actual funding. It appears, on Table I below, as if half the total sum in question is sequestered in Luxembourg at the moment. Such an arrangement pleases all parties since AMF can claim that it possesses this capital, can actually place it on the books, and can create the appearance of a balanced financial statement. A casual glance at their Consolidated Statement indicates that the total of their (unproven) mineral properties, this non-realized eight million dollar infusion from Anglo-American, minimal cash on hand, investments and "mineral evaluation costs" (funds deferred for future evaluation of ore deposits in conjunction with the DRC’s state-owned firm, Gecamines. See Note 5) equals their liabilities of 26 million! Indeed, potential investors should be aware that a number of risk-sensitive conditions apply to each of the asset positions posted on AMF’s balance sheet.
And yet, funds continue to flow into this Canadian mineral development company, chartered under the laws of British Columbia and the Yukon. Fortunately, there does not seem to be any apparent attempt on the part of the CEO or the Board of Directors of AMF to deceive potential investors or current stockholders. In fact, the extensive notes and explanations provided in AMF’s annual reports serve as an adequate forewarning for anyone truly interested in perusing them.
With reference to the cash positions of AMF in 1997 and in 1998, it can be discerned that 1997 definitely proved to be the more favorable year. In fact, cash amounted to almost 14 million dollars and liabilities were only approximately 23 million. This represents a decidedly more workable liability to cash-on-hand ratio than in 1998. By reexamining the dates and amounts of share issuance and employee options issued, it can be seen that adequate amounts of capital were generated, at various levels of stock value, over a two year period preceding the end of fiscal year 1998. In fact, 30 million dollars in gross proceeds were generated from the sale, in 1996, of Special Warrants (each converted to one share of stock).
Additionally, most of the employee share options (generally exercised at a lower than market price) will expire in the three or four years beyond 2000, thus placing considerable up-front capital, in addition to the 30 million dollars generated in 1996, at the disposal of the Company in the intervening period. As for stock shares, issued to the public, these generated increasing amounts of capital as AMF began to acquire additional mining properties overseas to underpin and hence justify their issuance. Notes on pages 13 and 14 of the Consolidated Statement attest to these approaches.
By acquiring additional properties, even those with geologically unproven bodies of ore, AMF was able to interest investors in their potential for future development of these acquisitions. The restructuring of AMF’s identifiable assets by geographic location over the two-year period in question indicates, not only the pattern of loss discussed earlier, but also the shift in where assets were being held and their relative proportions. Table I below, adapted slightly from AMF’s Segmented Information Section of the Consolidated Statement for 1997 and 1998, reveals, to some degree, the significance of strategies used by Bernard Vavala and his CEO, to justify increased stock issuance and appeals to the investment community.
|Identifiable AMF Assets By Geographic Location In Millions of U.S.$||
|Democratic Rep of Congo||3.803||3.510|
Source: Notes to AMF 1998 Consolidated Financial Statement, p 14.
A major decrease in assets located in the United States occurred during this two year timeframe and the Company invested considerable amounts of capital in Brazil, Angola and the Congo, all fairly high-risk locations given the particular circumstances of each mineral property or project located in those areas. An attempt was clearly made to reassure investors who had begun to lose confidence in the Congo-based Kipushi Tailings Project. Shoring up of this investment theater was a brilliant strategy since, in spite of the problems associated with Kipushi, investors regained confidence in the affirmations of the Company’s geologists to the effect that the Congo, and particularly AMF’s holdings, were a treasure trove of economically accessible copper, zinc and cobalt. This type of strategy, perhaps familiarly known as ‘window-dressing’, proved successful in enhancing revenue flow for AMF through a variety of investment vehicles approved in Canada, the U.K. and the U.S.A.
Because AMF is not yet producing mineral revenue in its exploration and development stages, there can be no traditionally analyzed cash-flow pattern as described in Orgler (1970). He displays sales figures, expenses and various cash outlays in budget format and in periodic cash-flow statements (7, 63, et al.). In the case of AMF, income for the years under study was obtained through a myriad of investment vehicles and subsequently expended on exploration and intended, if not actual, development. It can be said that Keynes’ old theoretical model (Keynes, 1936, 170-174, 194-209, and Orgler, 1970, passim) of holding cash balances for three different reasons, namely,
served partially, during the 1997 and 1998 time period, as the rationale for AMF’s cash-flow dynamics. Given the amounts set aside, however, for precautionary measures, it seems more likely that the majority of AMF’s cash was utilized for on-going worldwide expenses, equipment acquisition (no cash-flow is associated with amortization or depreciation), and taxes, but also in terms of acquiring partially or totally unproven mineral properties. Achieving the right mix of stock-generated income and outflow of capital seemed to constitute a delicate and even dangerous task for upper echelon managerial personnel, the CEO and the Board.
It can be seen on the Consolidated Statement for example that in 1998 administration costs were quite high at 3.755 million dollars, even exorbitant, and contributed heavily to the year-end deficit of almost 12 million dollars. Shareholders equity, which might be expected to be higher, was three times the deficit. These realities clearly interfered with cash-flow patterns during both years. Given the large number of expense items and on-going exploration, development and operational costs in more than a half dozen nations, it is a minor miracle that AMF was able to generate sufficient cash-flow at various times for maintaining surface solvency. As if to only partially reflect this instability, stock prices, according to the Statement, lost only 14 and 15 cents per share in real value. Although on the market, during this period, the writer distinctly recalls AMF having plunged dramatically as Congo-based Kipushi negotiations bogged down in Kinshasa, and a major litigious dispute erupted with Anglo-American.
A brief analysis of the Company’s 1997 and 1998 losses in relation to its cash-flow status might prove useful. Normally, according to Plewa and Friedlob (1995, 164, 165) and, of course, other sources, a company realizes an easily determined net income. It also creates a specific cash-flow from its operations. Typical accounting procedures compare these two figures and, adding depreciation of equipment back into net income (because depreciation decreases earnings without consuming cash), the analyst can arrive at a close approximation of the relative difference between the income and the flow. This figure is usually on the order of 0 to 5 %, and serves as a crosscheck on accuracy.
In the case of AMF, there was virtually no income produced, except on certain investments which yielded minor cash sums (0.85 million out of 26.5 million total assets). Value resided in the mining properties, to be sure, but these properties had not achieved production status. The task of AMF was simply to manage the assets it possessed as wisely as possible, in the interest of shareholders and other investors. Issues of judgement and decision-making were at the bottom of AMF’s poor performance during 1997 and 1998, as were certain unpredictable events such as civil revolt and joint-venture partner unreliability. By overextending its limited capital base, and by virtually forfeiting massive sums, or at least freezing them in limbo for extended periods, in the Congo and Angola, AMF was unable to move more heavily into more suitable geographic areas. The Company could have invested more substantially in Norway, for example, where mineral development might have produced actual cash-flow, rather than cash drain. Nonetheless, it must be stated that a firm such as AMF, devoted to mining and industrial development in and of the Third World, in the hope of realizing substantial profit, is inherently a high-risk proposition when considered at face value.
In his insightful book, Cash-Flow Reengineering, James S. Sagner (1997) defines the notion of redesigning a managerial cash-flow strategy in ways that can enhance amounts available at any given point in time. He links cash-flow to profitability in a number of ways and elaborates on the manner in which opportunity costs can be optimized to produce high cash-flow figures for any corporation (Sagner, 1970, 90). His advice, which is at the core of profitability and cash flow analysis, needs to be heeded by executives at AMF in the immediate future. Further, he suggests, among other things, that, "….the profitability of an activity should be measured against the cost of debt and equity investment necessary to fund the activity." (Sagner, 1970, 90, 91) In the case of AMF, cash-flow was minimal, debt and debt service were relatively high and the (share) equity investment required was considerable.
These realities combined with poor judgement and bad, but perhaps partially predictable, luck in the Third World, led to substantial drainage of funds over the entire two year period under analysis. In spite of up-beat optimism on the part of Bernard Vavala, it would seem to any astute analyst of these Financial Statements that losses may well continue, in the presence of growing indebtedness in the form of long-term debt, shareholder equity, employee options and other artificial fund-raising vehicles. This is likely to be the scenario until America Mineral Fields can proceed with ore-production and refinement on a scale likely to offset its obligations.
Keynes, J.M. The General Theory of Employment, Interest and Money, Harcourt Brace and Company, New York City, N.Y., 1936.
Orgler, Y.E. Cash Management, Wadsworth Publishing Company, Belmont, California, 1970.
Plewa, F.J. and Friedlob, G.T. Understanding Cash-Flow: Finance Fundamentals for Nonfinancial Managers Series, John Wiley and Sons, Inc. New York City, N.Y., 1995.
Sagner, J.S. Cashflow Reengineering: How to Optimize the Cashflow Timeline and Improve Financial Efficiency, American Management Association, New York City, N.Y., 1997.
University of Leeds, Accounting Texts and Manuals, MBA Programme, 1999-2000.
Vavala, B. Consolidated Balance Sheets in U.S. Dollars, October 31, 1998 and 1997, America Mineral Fields, Inc., Vancouver, British Columbia (Canada).
First Four Pages, plus Notes, of the
1998 AMF Annual Report/Consolidated Balance Sheet for 1997-98
Downloadable in ADOBE READER format at: http://www.am-min.com/reports.html