Depreciation of mining assets

Why is units of production used for mines?

IAS 16 requires depreciation to reflect the pattern in which an asset's benefits are consumed. A mine's benefits are the ore extracted from it, and production rarely runs at a steady rate, so a units of production method matches cost with output better than straight-line. It applies to assets whose useful life ends when the ore body is exhausted, such as pre-stripping, shafts and declines, and plant and infrastructure built only for that mine. See IAS 16 depreciation methods.

Which reserves base is used?

Most companies use proved and probable ore reserves from the current life-of-mine plan. Some include a portion of measured and indicated resources that they expect, with reasonable confidence, to convert into reserves, because the mine plan already assumes they will be mined. Including resources lowers the depreciation rate, so it needs a strong track record of conversion and clear disclosure. Any future capital spending needed to extract the extra tonnes should be considered, so that costs and tonnes are consistent. Inferred resources are rarely appropriate.

Mining depreciation: a worked example

A mine's development and plant cost US$ 600 million. Proved and probable reserves are 40 million tonnes of ore, and a further 10 million tonnes of indicated resources are expected to convert. In the year, 5 million tonnes are mined and 4 million tonnes processed, with the rest added to a stockpile. The mining fleet cost 120 million and lasts 6 years.

Including resources reduces depreciation by 15 million a year. Because one million tonnes went to the stockpile rather than the mill, part of the depreciation, 15 million on the reserves basis, sits in the stockpile's cost and reaches cost of sales only when that ore is processed and sold. See ore stockpiles.

Tonnes mined, tonnes milled or metal produced?

Pit and mine development assets are usually depreciated on tonnes of ore mined, since that is what consumes them. Processing plant may be depreciated on tonnes milled. Some companies use units of metal, such as ounces or pounds produced, which moves depreciation with grade: a high-grade year carries more depreciation. Revenue-based methods are not allowed. The unit should match how each asset is used up, and companies often use different units for different components.

What about assets with shorter lives?

Haul trucks, excavators, drills and light vehicles usually wear out long before the ore body is exhausted, and are replaced several times. They are depreciated straight-line over their own lives or on operating hours. Major components, such as truck engines or mill liners, are depreciated separately over their own lives. See component depreciation.

How are changes in reserves handled?

Reserve estimates are updated as the life-of-mine plan changes, usually once a year. The change is applied prospectively under IAS 8: the remaining carrying amount is spread over the remaining reserves from the date the company's policy sets, often the start of the year in which the new estimate is approved. A large downgrade may also be an impairment indicator; see mining impairment and mineral reserves disclosures.

How does US GAAP compare?

US GAAP also uses units of production for mineral properties and mine development, generally based on proven and probable reserves, and has historically been stricter about including resources in the base. See depletion in oil and gas and mining accounting.

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