11
Performance before expenses and tax $ millions Increase in unrealized profits 5 Trading profit 5 Other income 3.9 Profit before taxes and expenses 13.9 ROE before tax and expenses 13.9% Expenses 2.5 Profit after expenses before tax 11.4 ROE after expenses before tax 11.4% Funds employed at Liabilities Shareholders equity 30/6/2000
120 20 100
Return on gross assets
11.6%
Any changes in capital during the year would be reflected as the weighted average of funds employed at the beginning of the year so as to present an accurate reflection of the funds performance.
1.9 Terminating Resources The Problem There is a natural assumption that failing insolvency, merger or takeover, a business that is profitable continues in perpetuity and does not consume itself by exhausting its assets. While this assumption is valid for most businesses, it cannot be said to apply to a mining company whose resources have an economic life expectancy. If directors have a vested interest in extending the life of the business, they may expend more money that can be economically justified on new exploration. Shareholders can therefore find themselves in a dual type of company − the business of mining the existing resources and by default a pseudo exploration company of the same name but without a prospectus. Exploration is a subjective probability gamble whereby the dividing line between a valued judgement and foolishness is often indistinguishable.