Appendix 5B explained: reading an explorer's quarterly cash flow report

The Appendix 5B is the quarterly cash flow report that ASX-listed mining exploration companies lodge within one month of each quarter's end. It shows where cash came from and went, how much is left, what was paid to directors and their associates, and in item 8.7 an estimate of how many quarters of funding the company has. If item 8.7 is below 2, the company must answer three extra questions about how it will keep going.

Who lodges a 5B and when

Under ASX Listing Rule 5.5, a mining exploration entity must lodge an Appendix 5B within one month after the end of each quarter, usually together with its quarterly activities report. Quarters end in March, June, September and December, so late January, April, July and October are 5B season. Producing miners generally report differently and are covered in how to read a quarterly activities report.

The 5B is a cash statement, not a profit statement, and it is not audited. Each line shows the current quarter and the year to date.

Section 1: operating activities

• 1.1 Receipts from customers: usually nil for explorers.
• 1.2 Payments for: (a) exploration and evaluation, if the company expenses it; (b) development; (c) production; (d) staff costs; (e) administration and corporate costs.
• 1.3 to 1.8: dividends received, interest received, interest paid, income taxes, government grants and tax incentives (such as R&D refunds or exploration incentive receipts), and other.
• 1.9 Net cash from or used in operating activities.

Compare staff and admin costs (1.2(d) and 1.2(e)) with exploration spending. An explorer spending more on corporate overhead than on the ground deserves a closer look at why.

Section 2: investing activities

• 2.1 Payments to acquire or for: (a) entities, (b) tenements, (c) property, plant and equipment, (d) exploration and evaluation if capitalised, (e) investments, (f) other non-current assets.
• 2.2 Proceeds from disposal of those items.
• 2.3 to 2.5: loans to other entities, dividends received, other.
• 2.6 Net cash from or used in investing activities.

Section 3: financing activities

• 3.1 Proceeds from issues of equity securities (placements, share purchase plans, entitlement offers).
• 3.2 Convertible debt, 3.3 exercise of options.
• 3.4 Transaction costs of equity issues. Divide by 3.1 to see what the raise cost: brokers' fees on placements are commonly several percent.
• 3.5 to 3.9: borrowings, repayments, loan costs, dividends paid, other.
• 3.10 Net cash from or used in financing activities.

Sections 4 and 5: cash movement and reconciliation

Section 4 walks from 4.1 cash at the start of the quarter, through net operating (4.2), investing (4.3) and financing (4.4) cash flows and foreign exchange effects (4.5), to 4.6 cash at the end of the quarter. Section 5 reconciles 4.6 to bank balances, deposits and overdrafts.

Section 6: payments to related parties

Item 6.1 shows the total paid to related parties and their associates that is included in operating cash flows (section 1); 6.2 shows the amount included in investing cash flows (section 2). Related parties include directors, and payments usually cover directors' fees and executive salaries. They can also include consulting, drilling, geological or office services provided by a director's company.

The company must describe and explain these payments. Ordinary directors' fees are expected. Worth noting: related-party payments that are large relative to exploration spending, or services bought from directors' businesses, where you may want to read how the arrangements are explained.

Section 7: financing facilities

Item 7 lists loan facilities, credit standby arrangements and other facilities, the amount drawn, and 7.5 unused financing facilities available at quarter end. Item 7.6 describes each facility: lender, interest rate, maturity and security. Most junior explorers show nil here; facilities become important for developers and small producers.

Section 8: estimated cash available for future operating activities

This is the section to read first.

If the company had net cash inflows (positive relevant outgoings), item 8.7 is shown as "N/A".

The item 8.8 questions

If item 8.7 is less than 2 quarters, the company must answer three questions in item 8.8:

1. Does it expect to keep its current level of net operating cash flows, and if not, why not?
2. Has it taken, or does it propose to take, any steps to raise further cash, what are they and how likely does it think they are to succeed?
3. Does it expect to be able to continue its operations and meet its business objectives, and on what basis?

Read the answers carefully. "The company is considering a range of funding options" and "the company has received firm commitments for a $4m placement" are very different answers to question 2.

Worked example

A hypothetical explorer's 5B for the quarter shows (in A$ millions):

Section 8 then works out as:

• 8.3 relevant outgoings: 0.42 + 1.48 = 1.90
• 8.6 total available funding: 2.90 + 0 = 2.90
• 8.7 quarters of funding: 2.90 ÷ 1.90 = 1.5 quarters

Because 1.5 is below 2, the company must answer the 8.8 questions. At this burn rate, cash runs out in roughly four and a half months. You can test other scenarios with the cash runway calculator.

Limits of item 8.7

• It uses one quarter's spending. A heavy drilling quarter makes runway look short; a quiet quarter makes it look long. Check the year-to-date column for an average.
• It ignores events after quarter end. A placement completed in the following month will not appear. The activities report usually mentions it.
• It ignores commitments. Planned drilling, tenement expenditure commitments and deferred acquisition payments are not deducted.
• It counts unused facilities as available, though drawing them may come with conditions.

Where DrillScore uses the 5B

The cash runway page lists explorers by quarters of funding from their latest 5B, alongside their drilling results, so a strong hit can be read in the context of the company's funding position. The cash runway and capital raisings guide explains what tends to happen when runway is short. This is general information only, not advice about any company.

The short version

• Explorers lodge an Appendix 5B within one month of each quarter's end under Listing Rule 5.5.
• Add expensed (1.2(a)) and capitalised (2.1(d)) exploration to see total exploration spend.
• Items 6.1 and 6.2 show payments to directors and their associates; read the explanation.
• Item 8.7 = (cash + unused facilities) ÷ (operating outflow + capitalised exploration).
• Below 2 quarters, the company must explain in item 8.8 how it will fund itself.