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  • Writer's pictureA. Christine Davis, CPA/CFF, CVA, CGMA

Chris Davis’s Expert Opinions Provide the Basis for Special Master’s Decision

Updated: 2 days ago

In a case involving a dispute between non-leasing co-tenants of mining claims, Chris Davis of Financial Evidence Group served as the accounting expert for the defendants. The mining claims are located in a historic mine (gold and silver) in California. The entire mine consists of approximately 1,000 acres of land and is comprised of 33 patented mining claims, 161 unpatented lode mining claims, one patented mill site, and 18 unpatented mill sites.


The “rules” pertaining to the respective rights and obligations of co-tenants of mineral properties being mined by less than all of the co-tenants have long been established by case law. Those rules include, among other things: (1) The mining co-tenant (in this case the defendants) must account to the non-mining co-tenant (in this case the plaintiffs) for the minerals removed from the land and pay the non-mining co-tenant his/her share of the net revenue generated; (2) If the project is not profitable and the mining co-tenant sees no return, they are under no obligation to pay the non-mining co-tenant anything; and (3) In the accounting, the mining co-tenant (the defendants) is entitled to charge against gross revenue the reasonable and necessary costs of extracting, refining, and selling the minerals from the property.


In their lawsuit, the plaintiffs objected to defendants’ accounting since inception of the mining Project and claimed that not all of the costs recognized on the Project's financial statements should be deducted from gross revenue in arriving at allocable profits; instead, plaintiffs claimed that only a portion of such costs should be deducted from gross revenue to arrive at plaintiffs’ allocable profits.


Chris Davis prepared an expert report to rebut plaintiffs’ expert’s accounting opinions and testified in deposition and at trial. Chris applied her accounting expertise and testifying experience to effectively explain why it was appropriate to measure and count all costs depicted in the audited consolidated financial statements to properly measure the mine’s allocable profits to be distributed to the mining co-tenants. Chris obtained a sufficient understanding of the Project's history and operations, quantified the costs for the Project since inception, and explained the relevant accounting rules, along with the significance of audited financial statements and their implication as to the reliability of the defendants’ accounting and reporting processes, the meaning of receiving a clean audit opinion for decades, and the significance of an entity’s filing those financial statements in compliance with SEC rules of reporting.


Chris also thoughtfully articulated her opinion that the correct accounting for the mine’s operations is not affected by a (mere) change in the mine’s ownership or legal structure, which change was the at the crux of plaintiffs' claims. In expressing this opinion, she carefully recounted the mine's history through the last 40+ years with a focus on key facts supporting the irrefutable conclusion that the mine today was the same mine originated then. In her expert report, Chris concluded by stating: Disregarding [any portion of the mining] Project’s … operating costs/expenses as reported in the audited income statements…is improper as doing so results in materially understated total Project costs to-date. Such improper disregard for substantial and necessary costs would result in materially overstated Project profits and, consequently, an inappropriate and unfair economic windfall to plaintiffs upon the allocation of their proportionate share of those overstated profits.”


The Special Master's decision is that, based on evidence provided by Chris and the Defendant’s senior management over the course of trial along with their testimony, the Defendant’s “may charge against the gross revenue generated from minerals extracted from the Plaintiff’s mining claims the proportionate share of the reasonable and necessary direct and indirect costs of mining, refining, and selling the minerals from the entire mine, not just from the Plaintiff’s mining claims, throughout the life of the project." [Emphasis added.] This decision by the Special Master mirrors the opinion expressed by Chris with respect to recognizing all costs for the entire mining Project to arrive at allocable profits. The Special Master concluded that the amount of reasonable and necessary direct and indirect costs to be charged against gross revenue was $315 million as of December 31, 2021; this amount includes all of the costs Chris quantified for the specific period relevant to her assignment.


Financial Evidence Group is grateful for the opportunity to assist counsel and their clients and congratulates them on this positive and successful outcome.


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