Submitted to this blog by The Bushranger
In the current issue of Jewellery News Asia, one can find a salubrious blurb about Arafura (Arafura Pearl Holdings LTD) that begins: "The year 2009 is a pivotal year for Arafura ..." and goes on to note that the company is "the second largest [pearl] producer located east of Darwin" and that "it is now the second largest quota holder in Australia." JNA also reports that the company "reported a net profit after taxes of some AUS$10.1 million … 121 percent higher than in the previous year."
"The increased profit was largely the result of significant increases in production shell numbers, which led to a significant increase in the market value of its shell inventory, noted [the company CEO and founding partner]," JNA continued.
And thereby hangs this tale of quite probable statistical finagling that may be poised to erupt on the Australian pearling scene.
Sales revenues for Arafura through June 2008 were reported at AUS$6,514,971, with other revenues of AUS$398,104. Employee expenses during that period were AUS$6,061,428. There were also equipment expenses, lease expenses, travel expenses and fuel expenses, to name but a few. Total Arafura operating expenses were nearly AUS$15,000,000. With all that overhead, how could an after-tax profit of more than AUS$10 million have been made?
For the first half of the following fiscal year, Arafura's total sales revenues were AUS$235,427 and operating expenses totaled AUS$8,107,463. This adds up to a nearly AUS$8 million loss by almost any reasonable calculation. Yet the company reported a before-tax profit of AUS$4 million. So where is that profit coming from?
In June 2008, Arafura's income statement showed an increase in non-current biological assets of AUS$22,325,412. By December 2008, that figure rose again by another AUS$10,351,838 to nearly AUS$52 million.
Last month, auditors finally took the company up on the question of in-house valuations made in the September 2009 Preliminary Final Report. They used the figure of ¥15,000 per momme instead of ¥18,000 per momme as a reasonable sales price, and projected a yen to AUS$ rate for projected future dated sales at 77 in lieu of 70. These calculations turn a net profit from ordinary activities before tax of AUS$5.46 million into a net loss of AUS$9.4 million. They correct the total equity position for the entity from AUS$54.79 million to approximately AUS$44.39 million. Further, what might not be obvious to those not familiar with pearl farming is the fact that the company assumes pearls and sales from their entire quota, something that simply does not happen.
In addition, Arafura is paying an interest rate of 13.9% on a bank loan of AUS$6.5 million, resulting in an annual interest payment of over AUS$900,000. That's against total annual pearl sales of just AUS$857,246.
When interest payments exceed sales and profits are touted, it seems to me something is, as the Japanese are wont to say, kusai (stinky). When you add in the fact that interest rates have recently increased, this situation is bound to get worse if the loan is set at a variable rate. The banks Down Under can no longer afford to turn a blind eye to these statistical shenanigans.