Mining exploration and evaluation

What counts as mining exploration and evaluation?

Spending after the company has the legal right to explore a tenement, such as acquiring the exploration licence, geological mapping, geophysical and geochemical surveys, drilling, trenching and sampling, metallurgical test work, and scoping, pre-feasibility and feasibility studies. Spending before the right is obtained is outside IFRS 6 and expensed. Building the mine after the decision to proceed is development, under IAS 16.

Which costs can be capitalised?

IFRS 6 lets a company set its own policy and apply it consistently. Common policies are to capitalise all exploration and evaluation costs for each area of interest until the outcome is known; to capitalise only acquisition costs and expense the rest until a resource is defined and development is probable; or to expense all exploration until the decision to mine. Whatever the choice, a company should capitalise only costs it can link to a specific area of interest, and the policy must be disclosed. See IFRS 6 exploration and evaluation.

Mining exploration: one project under two policies

A company acquires a copper exploration licence for CU 2 million, spends 3 million on mapping and sampling, 12 million on drilling that defines a resource, 4 million on a pre-feasibility study and 5 million on a feasibility study. At the year end, the board has not yet decided to build the mine.

The second policy capitalises the feasibility study because, by then, the company has a defined resource and development has become probable. Both policies are allowed; they produce very different balance sheets for the same project, which is why analysts read the policy note before comparing explorers.

How do mineral resources and ore reserves relate to the accounting?

Reporting codes such as JORC, NI 43-101 and SEC subpart 1300 classify mineralisation as inferred, indicated or measured mineral resources, and, once a pre-feasibility or feasibility study applies mining, processing, economic and other modifying factors, as probable or proved ore reserves. Many companies tie their accounting milestones to these: for example, capitalising from the point a resource is defined, or treating the declaration of reserves and a decision to mine as the end of evaluation. See mineral reserves and resources disclosures.

When does the evaluation phase end?

When technical feasibility and commercial viability of extracting the resource are demonstrable. IFRS 6 does not define the point, so companies set it in their policy, usually completion of a feasibility study, financing in place and a board decision to develop. The exploration and evaluation assets are then tested for impairment and reclassified to mine development, within property, plant and equipment or intangible assets. See mine development costs and mining accounting.

When are mining exploration assets impaired?

When facts and circumstances suggest it: the exploration licence is expiring and will not be renewed, no further spending is budgeted, results do not support a commercial project, or data show the carrying amount is unlikely to be recovered from development or sale. A sustained fall in the relevant metal price or a junior explorer's market value below its net assets can also be indicators. Assets are tested in cash-generating units, or groups of them, no larger than an operating segment.

What about exploration projects acquired from others?

Buying a company that holds an exploration project is often an asset acquisition rather than a business combination, because the project is not yet an integrated set of activities producing outputs; IFRS 3's optional concentration test can confirm this. The cost is allocated to the mineral rights, with no goodwill and, under the initial recognition exemption, no deferred tax. In a business combination, mineral rights are measured at fair value, including value attributable to resources beyond proved and probable reserves. See purchase price allocation.

How is exploration presented in the cash flow statement?

Only spending that results in a recognised asset can be classified as an investing cash flow under IAS 7. Exploration that is expensed is an operating cash outflow. The policy choice therefore also changes operating cash flow, a measure investors watch closely.

How does US GAAP differ?

US mining companies generally expense exploration costs until reserves are established, while capitalising the cost of acquiring mineral rights. That is closer to the most conservative IFRS policy, so a US miner and an IFRS junior with identical projects can show very different assets. See successful efforts vs full cost for the oil and gas equivalent.

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