The best and busiest time of the year for shareholders
This is the best time of year for shareholders. It should also be the busiest.
For right now, investors have the timeliest information they are likely so see from any public company for the next 12 months. An annual report might be a reflection of the year just past - and what you really want is a view of the future - but it does give a real-time look at the drivers of any business: whether it can last, or better, whether it can prosper.
With an annual report, some like to start with the chairman's statement, or the chief executive's, to get their versions of the future.
I like to dive straight in and begin at the cash flow statement: the only statement in the whole annual report that is difficult to spin or misinterpret. Money in, money out.
The two companies I want to concentrate on are in the resources sector. I have chosen them because I suspect the big falls in coal, iron ore, oil and gold will eventually be overdone in a world whose population is growing and where even more wealth is emerging in Asia.
I stress here that I have chosen the companies for their relative simplicity, not because I think they are good buys (or sells for that matter). Follow the process and you might make your own judgment. But the process of reading the accounts and assessing the company - now and in the future - is something too few investors do.
The first example is Whitehaven Coal, which has operations in NSW's Gunnedah Basin. It also has a major project, Maules Creek, part of which is still under construction but which has just started producing. The approval of the Maules Creek mine project has been the subject of much publicity, especially in NSW. The price of Whitehaven has fallen from about $7 to just more than $1 a share in five years. Such is the decline in coal prices and the sensitivity of the company to them.
In the past year, the cash flow statement tells us Whitehaven had $213 million worth of cash flow from operations. But as it was constructing Maules Creek, it had to draw down an extra $250 million worth of debt. Total debt is $935 million, and it has an unused debt facility of about $300 million.
The gearing ratio (debt to shareholder equity) is a relatively modest 24.6%, up from 17.6% last year which is comfortable for companies with strong cash flow.
So what shareholders need to know - the factors that are vital to Whitehaven's health - are: 1) can management get the Maules Creek mine operating to capacity and its cash flow positive as soon as possible; 2) coal prices (it produces both thermal and metallurgical coal); 3) the Australian dollar, because it exports large amounts of coal 4) the production of coal from its mines; and 5) the certainty of credit facilities from its lenders.
The company says Aussie dollar coal prices fell to $80 a tonne in 2014-15 from $86 the previous year. $US-denominated coal prices fell 16% but the falling $A offset this with an 8% lift. If you follow this company, you need to watch the coal price and exchange rates.
If Whitehaven can deliver its project on budget and get production moving quickly, it can boost its profits and repay debt. But if the coal price falls, or if there are troubles ... watch out.
The other company I want to use as an example is Northern Star Resources, the second-largest goldminer in Australia. It was started in 2003 and created its business by buying assets from major miners Barrick and Newmont. It is valued by the stockmarket at $1.2 billion, and has no debt. In fact it has $178 million worth of cash and cash equivalents (gold). It has underlying free cash flow of $183 million a year.
Last financial year it sold 580,784 ounces of gold worth an average $1065 an ounce, well within its guidance. The cash flow statement says it all. Northern commits cash flow to acquiring more gold production and - if the $A price is right - the business can continue to produce more gold, dividends and production.
Both balance sheets and cash flow statements are worth a read, even if you never buy its shares. It is the understanding of the dynamics of businesses that allows you to appreciate risk and value - which most investors going off broker recommendations never understand.