Mining impairment when commodity prices fall

What triggers a mining impairment test?

An indication of impairment at the reporting date, such as a fall in long-term commodity price assumptions, a reduction in reserves, a significant rise in operating or capital costs, a strengthening local currency, geotechnical problems such as a pit wall failure, the loss or delay of permits, a change in fiscal terms, or a market capitalisation below the company's net assets. Exploration and evaluation assets have their own triggers under IFRS 6; see exploration and evaluation in mining.

What is the cash-generating unit for a mine?

Usually a single mine with its processing plant. Where several mines feed one concentrator or smelter, and none can generate cash inflows independently, the mines and the plant form one cash-generating unit. A smelter or refinery that buys and processes ore from third parties, with an active market for its input, can be a separate unit. Goodwill from acquiring a mining company is allocated to the units expected to benefit. See cash-generating units.

Fair value or value in use?

Most miners use fair value less costs of disposal, measured with a post-tax discounted cash flow model of the life-of-mine plan. It takes a market participant's view, so it can include planned expansions and resources that a buyer would expect to mine, which value in use excludes as enhancements. It is a Level 3 measurement, and inputs should be consistent with what market participants would use. See impairment of oil and gas assets for the same choice in another extractive industry.

Mining impairment: one copper mine, three views

A copper mine is carried at US$ 900 million, including its development, plant and rehabilitation asset, net of the rehabilitation provision. Its recoverable amount is modelled at a long-term copper price of $8,500 and $7,500 a tonne, first on reserves only and then including the value of additional resources that a buyer would pay for.

At $7,500 on reserves alone, the mine is impaired by 40 million. Including resources that market participants would expect to convert and mine, valued with appropriate risk adjustments, lifts the recoverable amount to 920 million and removes the impairment. That is legitimate under fair value less costs of disposal only if a buyer would genuinely pay for those resources; the evidence, such as comparable transactions, should be documented and the approach disclosed.

Which price, discount rate and currency assumptions are used?

Companies typically use forward prices for the first few years, where the market is liquid, then long-term real prices from their planning, checked against analysts' consensus. Discount rates reflect the mine's country risk, so the same mine would be worth less in a riskier jurisdiction. Revenue is often in US dollars while costs are in local currency, so exchange rate assumptions matter: a stronger local currency raises costs in dollar terms. Assumptions must be consistent with each other and with those used for reserves, depreciation and stockpile valuation.

How is the rehabilitation provision treated?

A buyer would take on the closure obligation, so fair value is measured after closure costs. To compare like with like, the company deducts the recognised rehabilitation provision from the carrying amount of the cash-generating unit, as IAS 36 allows. See mine rehabilitation provisions.

How is an impairment allocated?

First to any goodwill in the unit, then to the other assets pro rata to their carrying amounts, but not below the highest of each asset's fair value less costs of disposal, value in use and zero. Inventories, such as stockpiles, are outside IAS 36 and are tested separately for net realisable value under IAS 2. Depreciation is then based on the reduced carrying amount. See ore stockpiles.

Can mining impairments be reversed?

Yes, except for goodwill. If the indicators reverse, such as a sustained rise in long-term prices, the company retests and reverses the impairment, up to the carrying amount the assets would have had, after depreciation, without it. US GAAP does not allow reversals, so IFRS miners' results recover faster when prices do. See impairment reversals and mining accounting.

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