Assignment Task:
Task:
Question The Board of Exploration Ltd. was meeting for the last monthly meeting before the publication of the year end results. There were two points of discussion on the agenda. First was the discussion of the year-end results; second was the crucial latest minerals reserves report. Exploration Ltd. is a large listed multinational company that deals with natural minerals that are extracted from the ground, processed and sold to a wide range of industrial and construction companies. In order to maintain a consistent supply of minerals into its principal markets, an essential part of Exploration Ltd.’s business strategy is the seeking out of new sources and the measurement of known reserves. Investment analysts have often pointed out that Exploration Ltd.’ value rests principally upon the accuracy of its reserve reports as these are the best indicators of future cash flows and earnings. In order to support this key part of its strategy, Exploration Ltd. has a large and well-funded geological survey department which, according to the company website, contains ‘some of the world’s best geologists and minerals scientists’. In its investor relations literature, the company claims that:‘our experts search the earth for mineral reserves and once located, they are carefully measured so that the company can always report on known reserves. This knowledge underpins market confidence and keeps our customers supplied with the inventory they need. You can trust our reserve reports – our reputation depends on it!’At the board meeting, the head of the geological survey department, Richard, reported that there was a problem with the latest report because one of the major reserve figures had recently been found to be wrong. The mineral in question, tantalite, was Exploration Ltd’s largest mineral in volume terms and Richard explained that the tantalite reserves in a deep mine in a certain part of the world had been significantly overestimated. He explained that, based on the interim minerals report, the stock market analysts were expecting Exploration Ltd. to announce known tantalite reserves of 4.8 billion tonnes. The actual figure was closer to 2.4 billion tonnes. It was agreed that this difference was sufficient to affect Exploration Ltd.’s market value, despite the otherwise good results for the past year. Christine, the finance director, said that the share price reflects market confidence in future earnings.She said that an announcement of an incorrect estimation like that for tantalite would cause a reduction in share value.
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