Mine development costs

Where does development fit in a mine's life?

Development starts when exploration and evaluation ends, usually on a board decision to build the mine after a feasibility study. The exploration and evaluation assets are tested for impairment and reclassified to mine development, and from then on IAS 16 applies. See exploration and evaluation in mining.

Which mine development costs are capitalised?

• Access to the ore body: pre-stripping of overburden in an open pit, shafts, declines and access drives underground.
• Processing and infrastructure: the concentrator or processing plant, tailings storage facilities, power lines, water supply, roads, rail sidings and the accommodation camp.
• Directly attributable costs: engineering, project management, employee costs of people working on construction, site preparation and testing.
• Rehabilitation: the present value of the obligation to restore land disturbed by construction; see mine rehabilitation provisions.
• Borrowing costs: interest on project finance and general borrowings used for the mine, because a mine is a qualifying asset under IAS 23.

Which costs are not capitalised?

General and administrative overheads, the cost of opening a new office, training, advertising, and costs of relocating or reorganising operations are expensed. So are abnormal amounts of wasted material, labour or other resources, for example from a collapse during construction. Once the mine is capable of operating as intended, costs are no longer capitalised even if it is not yet used, or runs below capacity, and initial operating losses while demand builds are expensed.

Mine development costs: commissioning sales before and after 2022

A company spends US$ 470 million building a copper mine and capitalises 30 million of borrowing costs. While the plant is being tested, it produces concentrate costing 35 million and sells it for 40 million.

The amendment, effective from 2022, stops companies netting sale proceeds against the asset. The company must identify the cost of the items sold, measured under IAS 2, which can be hard when the same people and equipment are both testing the plant and producing ore, and disclose the amounts if they are not presented separately. Testing costs themselves, such as assessing whether the plant performs technically and physically as intended, remain part of the mine's cost.

When is the mine ready for its intended use?

When it is in the location and condition needed to operate as management intends. Mining companies often call this commercial production and set criteria in their policies, such as a set period of production at a planned percentage of design capacity, consistent recoveries and grades, completion of testing and handover from the construction team. The date matters a great deal: depreciation starts, capitalisation of borrowing and other costs stops, and stripping moves from development to production. It is a judgement that should be disclosed.

How is underground development treated?

Primary development that gives access to the ore body, such as declines, shafts and main haulage levels, is capitalised. During production, development that opens new areas of the ore body for future years is also capitalised and depreciated over the ore it gives access to, while development needed only to mine the current period's ore is a production cost, included in inventory. The distinction mirrors stripping costs in open pits; see stripping costs under IFRIC 20.

What about expansions and sustaining capital?

An expansion project, such as a plant upgrade or a new pit, follows the same rules: costs are capitalised until the expansion is ready for use, and sales of its output during commissioning are revenue. Sustaining capital, the regular replacement of equipment and components, is capitalised when the recognition criteria are met, with the replaced part derecognised. See IAS 16 explained and mining accounting.

This guide is general information. It is not tax or legal advice for your situation.