Don,
>>Question 1. - Should future earnings reports make any expense adjustment for the diamond compensation? What number should appear for the President's compensation expense?<<
There is definitely an added compensation expense. I'm not an accountant, but here's how I would think about it.
The executive's compensation is equal to the cash received plus the potential sale value of the diamond. The cost of mining the extra diamond (which may be less than the average cost) should be reflected in either the cost of goods sold or SG&A - I'm not sure which is appropriate in this case. The way I view it, had the company sold the diamond instead of giving it as compensation all the revenues would have been profit.
Note: This could get tricky because as more and more diamonds are given out as compensation, allocating the costs properly might get difficult. In addition, their potential market value might get affected.
>>Question 2. - Next quarter, an investor will look at the quarterly
report for revenues, earnings, etc. and will value the company
accordingly by whatever means he deems appropriate. Does the change in
the President's compensation change the valuation an investor should
place on the company? If so, how?<<
Yes. I believe that mining and natural resource companies are generally valued by looking at reserves and various income streams. I would crunch the numbers using whatever models are appropriate for valuing mining companies and adjust the earnings, free cash flow, and possibly even the reserves downward. I don't know how to value these guys though.
Wayne
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