americas school of mines - pwc brasil · 14th americas school of mines basics of mining accounting...

14th Americas School of Mines

Basics of Mining AccountingMarcus CardosoVânia Pereira


Agenda

• The life of a mining operation

• Key accounting principles and issues for a mining company

• GAAP differences

• Non-GAAP measures


The life of a mining operation

1. Exploration and Evaluation

• Accounting policy (expense v.capitalize)

• Cut off between phases2. Development

• Stages of ore reserves andresources

• Joint Ventures

• Capitalization of costs3. Production

• PP&E, depreciation and deferredstripping

• Inventory and production

• Functional currency4. Closure and Reclamation

The life of a mining operation


PricewaterhouseCoopers

• Exploration (search for) and evaluation of mineral resources suitablefor commercial exploitation include the following activities:

• Exploratory drilling, trenching and sampling

• Determining ore grade and volume of deposit

• Feasibility study preparation

• Key accounting principle determination: expense x capitalize?

The life of a mining operationExploration and Evaluation

Slide 4

Section heading goes here



• US GAAP – prohibits capitalization of exploration and evaluationcosts until bankable feasibility study completed and permits are inplace

• IFRS: IFRS 6 – provides option on conversion to avoid IASBframework and capitalize E&E asset depending on prior accountingpolicy


Slide 5




• Financial Statements in the exploration stage:

• Costs incurred on E&E

• Stock option costs

• G&A• Issues to consider:

• Impairment – triggering events and implication

− Rights to explore have or about to expire

− No further expenditures planned

− Not deemed commercially viable

• Going concern – disclosure considerations


Slide 6




• Cut-off between E&E and development key:

• Technical feasibility and commercial viability

• Usually on completion of Bankable Feasibility Study

• Decision to develop made by the board of directors

• Treatment of costs: Transfer of E&E asset costs into developmentasset

• US GAAP: expensed so n/a

• IFRS: intangible / tangible split


Slide 7




• Stages of ore reserves and resources:

• Resources are identified mineral occurrences with reasonable prospects foreventual economic extraction

• Reserves are the part of a resource that, based upon appropriateassessments, demonstrate that economic extraction could reasonably bejustified

• Categorized by degree of certainty with which quantities can be estimated:

• Inferred

• Measured and Indicated

• Probable

• Proven (developed or undeveloped)

The life of a mining operationDevelopment – Reserves

Slide 8




Ore Reserves – the fisherman’s view :

Inferred There is lake in the distance…

Measured and indicated You saw something disturb the surface ofthe lake – it looked like a fish…

Probable There are fish in the lake – you have hadsome bites, have seen them jumping andheard of others catching them, but havenot caught any yet…

Probable – undeveloped The fish is on the hook and you can seeit but it is still in the water, where theyalways look bigger…

Probable – developed The fish is in the boat – you have eighedit and will keep it for dinner.


Slide 9




• Difference in reserve standards:

US GAAP: SEC Industry Guide 7 only allows proven and probablereserves to be disclosed (unless required by foreign law e.g. 43-101)

IFRS– currently no global standard

• Implication: reserves form the basis for depletion and amortizationcalculations

• Based on most current information – change in estimate(prospective), usually annually for producing mines


Slide 10




• Joint Ventures are common in the mining industry due to:

• The high capital requirements associated with new projects

• Increasing number of projects in high-risk developing countries

• Companies looking for a strategic investment

• Contractual arrangements whereby two or more parties undertake aneconomic activity which is subject to “joint control”

• Joint Control – contractually agreed sharing of the continuing power todetermine the entities strategic operating, financing and investing activities(regardless of ownership interest)

The life of a mining operationDevelopment – JV´s

Slide 11




• Joint Ventures usually fall into one of two groups

• Jointly control entities

• Jointly controlled assets / operations

• Jointly controlled assets / operations provide for an undividedinterest in a percentage of all balances, including production

• US GAAP – proportionate accounting by each party (allowed forextractive industries under ASC 930-810/EITF 00-01)

• IFRS – Proportionate accounting


Slide 12




• Jointly controlled entities involve the establishment of a legal entitywhich can enter contractual arrangements in its own right

• US GAAP – equity accounting by each party

• IFRS – at present choice… under review• But…


Slide 13




• US – (ASC 930-810-45)FIN 46, such joint venture relationshipsmust be evaluated under the Variable Interest Entity (VIE) rules firstto determine

• if the joint venture is a variable interest entity, and

• whether one investor, or another enterprise with variable interestin the entity, is the primary beneficiary and may be required toconsolidate the joint venture


Slide 14




• Accounting considerations:

• Accounting policies – JV financial information should be adjusted toconform to the policies of the venturer which is incorporating theinformation in their own accounts

• JV financial statements should be adjusted to eliminate any materialbalances existing between JV and investor

• JV year end needs to be within 3 months of venturer’s, but still need toconsider material events in intervening period


Slide 15




• Cost capitalization

• Purchase price of the area of interest and construction costs (inc.community infrastructure costs, roads)

• Costs to bring the asset to location and condition for intended use (e.g.removal of overburden, shaft sinking)

• Borrowing / interest costs (ASC 835-20/FAS 34, IAS 23)

• Present value of initial estimate of future costs of dismantling andremoving and restoring the site

• Allocation of directly attributable costs (inc. salaries and stock options)

• Amortization of assets used in development of mine

The life of a mining operationDevelopment – Cost Capitalization

Slide 16




• Current GAAP (ASC 915-10) (FAS 7 -SOP 98-5)

• Pre-operating costs should be expensed as incurred

• Other costs should be assessed for capitalization or expense dependingon the nature (i.e. PP&E purchase)

• Expense once start production (US model)

• Amortize when “ready for productive use

• 2011 – model under IFRS?

The life of a mining operationDevelopment – Start up Costs

Slide 17




Moving from development to production:

• Impact: cease capitalizing, expense operations

Assets must be ready for productive use

• Historically mining industry accepted that this is when commercialproduction levels are achieved

− Nominated percentage of designed capacity for the mill

− Continuous production or output

• Consideration of geological footprint as to when ‘ready’

The life of a mining operationProduction

Slide 18




• Stripping is the removal of overburden or waste to accessmineralized material. Capitalize prior to production.

• Deferred stripping in the production phase:

• US GAAP: (ASC 930-10-05) EITF 04-06 – Expense costs

• IFRS: IASB framework for definition of an asset – use of stripratio to defer costs (effect of smoothing) permitted

The life of a mining operationProduction– Production PP&E

Slide 19




• PP&E is depreciated over its useful economic life

• Each part of an item of PP&E with a cost that is significant to thetotal cost of the item shall be depreciated separately (IAS 16).

• Period over which it is expected to be used; or

• Units of production expected to be obtained from or processed bythe asset

• Stop depreciating when

• Asset held for sale / Discontinuing Operation

• Asset is derecognized (end of LOM a moving target)

The life of a mining operationProduction - Production PP&E

Slide 20




• What should be taken into account when calculating depreciationcharges?

• Proven and probable; or

• Resources not yet designated as reserves (and future costs todevelop resources) (not allowed in US GAAP)

• Mixed practices in the mining industry• Factors to consider :

• Track record in converting resources into reserves

• Time frame for carrying out the work to convert resources

• Further development expenditure would be needed to access theresource

The life of a mining operationProduction – Production PP&E

Slide 21




• Not an annual test, but based on triggering events:

• Changes to commodity prices, political and regulatory circumstances

• Increased production costs including ARO estimate

• Decrease in reserves

• US GAAP: FAS144 (ASC 360-10)

• An impairment loss should be recognized if the carrying amount of a long-livedasset is not recoverable and exceeds its fair value

• IFRS: IAS 36

• An asset is impaired if its carrying amount is greater than its recoverable amountwhich is the higher of the value-in-use and fair value less costs to sell

The life of a mining operationProduction –PP&E Impairment

Slide 22




• US GAAP

• 2 step test

− Gross cash flows over the LOM v. carrying value of the mines assets

− If less, step 2 requires determining fair value of the mining property(discounted cash flow model)

• IFRS

• 1 step test

− Value-in-use: based only on existing factors

− Mining context fair value more appropriate

• Implication – more frequent impairments as go to FV straight away…butreversals of impairments required

The life of a mining operationProduction – PP&E Impairment

Slide 23




• Components of inventory

• Stockpiles

• Leach pad material

• Concentrate and in-circuit

• Processed metals

• Supplies

• Inventory costs

• Labor (standard and contract)

• Consumable material (fuel, reagents, and chemicals)

• Overhead elements directly and indirectly attributable to production based on“normal” capacity

The life of a mining operationProduction – Inventory and Production

Slide 24




• Stockpiles – measurement based on quantities and perpetualinventory systems. Grade determined through assays. Highlyinaccurate science

• Long term stock piles – generally lower grade to be processed later

• IAS 2 requires that inventory be valued at the lower of cost and netrealizable value

• If inventory costs plus costs to complete will not be recovered bysales proceeds, inventories should be written down to netrealizable value

• Fair value write downs may be reversed if NRV recovers


Slide 25




• Supplied include materials utilized in production process

− Reagents and chemicals, grinding balls, safety supplies,other consumables

• Capital spares and insurance spares commencing 2008 included inPP&E (IAS 16)

• Expense costs of routine maintenance and repairs• Major cyclical maintenance projects – treatment?• Perpetual method of inventory with cycle counts performed on a

regular basis (most common method utilized)• Usually accounted for using the average cost method – easiest to

apply


Slide 26




• Joint/Co-product v By-product accounting

• Joint Products: metals or minerals within an ore body whicheach have significant relative sales values

− record their own costs, and revenues separately

• By-products: metals or minerals within an ore body which haveminor sales values

− revenue included as net expense in P&L


Slide 27




• US: FAS 52 (ASC 205-10)

• Self sustaining v. Integrated operations

• Impact on recording of foreign transactions in P&L v CTA

• In determining classification of foreign operation:

− Sales price for minerals

− Labor, material and other costs

− Financing currency

− Day-to-day relationship and intercompany transactionssignificant

• Change in functional currency done prospectively

The life of a mining operationProduction – Functional Currency

Slide 28




• IFRS 21:

• Concept of influences on primary and secondary indicators• Presentation currency

• An entity may elect to present its financial statements in acurrency which differs from its functional currency

The life of a mining operationProduction – Functional Currency

Slide 29




• Asset Retirement Obligations (FAS 143/ASC 410-20):

• Unavoidable existing legal obligations associated with “retiring”the mine / “reclaiming” the land

• Not obligations that result from on-going, or improper, operationof an asset, e.g., clean-up / remediation

• Examples of closure activities: removal of infrastructure, pit in-fill,tailings pond, on-going water treatment

• Referred to as: Reclamation, Environmental Remediation,Decommissioning, Restoration, Rehabilitation

The life of a mining operationClosure and Reclamation

Slide 30




• Measured at “fair value”

• The present value of the expected future cash flows based on closureactivities performed by a third party

• Requires recognition for a closure obligation when an obligation isincurred

• Assumptions required to determine measurement

• Timing of future cash flows

• Real Discount rate (credit-adjusted risk-free rate)

• Third party costs• Accounting on day 1 to set up asset and liability at fair value; thereafter

amortize the asset in PP&E, and accrete up the liability to the amount ofcash to pay on final closure


Slide 31




• Need to consider: changes in estimates, timing and assumptions –significant area of estimates

• Recognize as an increase or decrease in a) carrying amount of the AROand b) the related asset retirement cost capitalized as part of the carryingamount of the related long-lived asset


Slide 32




• IAS 37

• Present obligation both legal or constructive

• Use management best estimate

• Use current discount rate each balance sheet date

• Accretion as interest expense not operating cost


Slide 33




• Not in the financial statements but the MD&A

• Main measure is cash costs per unit of production

• Provides information on the efficiency of the mine

• Used by investors to make decisions but outside the scope of ouropinion

Benchmarking

• Comparability of information across the industry

• No fixed standard of what has to be included although the GoldStandard has a voluntary standard

The life of a mining operationNon-GAAP measures

Slide 34




Questions ?

Slide 35


Accounting Basics in Mining

©2010 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of memberfirms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legalentity.

Thank you!!!

americas school of mines - pwc brasil · 14th americas school of mines basics of mining accounting...

Documents