Provisional pricing on concentrate sales

How does provisional pricing work?

A sales contract for copper, zinc or lead concentrate sets the price as the average market price, such as the London Metal Exchange cash settlement price, over a quotational period after delivery, for example the third month after shipment. The buyer pays a provisional invoice of perhaps 90% of the value at shipment, and the final invoice follows once the quotational period ends and the final assays of metal content are agreed. Payable metal is reduced for the share the smelter will not recover, and treatment and refining charges are deducted.

When is revenue recognised?

When control of the concentrate passes to the buyer, often when it is loaded onto the vessel under the shipping terms. Revenue is measured at the amount the miner expects to receive, which at that date is usually based on the forward price for the quotational period. If the miner is also responsible for shipping after control has passed, for example under CIF terms, the shipping service is a separate performance obligation, recognised as it is performed. See over time or point in time.

Provisional pricing: one shipment across a year end

A miner ships concentrate containing 2,500 tonnes of payable copper on 15 December. The price will be the average for March. On 15 December the March forward price is $9,000 a tonne; at 31 December it is $8,600; the March average turns out to be $8,800. Treatment and refining charges of US$ 0.6 million are deducted.

Revenue from contracts with customers stays at 21.9 million. The loss of 1.0 million in the first year and the gain of 0.5 million in the next are fair value movements on the receivable, presented separately, for example as other revenue or provisional pricing adjustments, and disclosed apart from IFRS 15 revenue. The total cash received matches the final price.

Why is the receivable at fair value through profit or loss?

Once the concentrate is delivered, the miner has an unconditional right to cash, so the receivable is a financial asset under IFRS 9. Its cash flows depend on future metal prices, not just principal and interest, so it fails the cash flow characteristics test and is measured at fair value through profit or loss. Under the old IAS 39, the price feature was treated as an embedded derivative separated from the receivable; under IFRS 9 the whole receivable is measured at fair value instead, with no separation. See IFRS 9 classification.

How are assay and quantity adjustments treated?

Differences between provisional and final assays, the measured metal content, change the quantity of metal sold rather than its price. They are variable consideration under IFRS 15: the miner estimates the final quantity at delivery, constrained if necessary, and the adjustments are part of revenue from contracts with customers. See variable consideration.

How are treatment and refining charges presented?

Treatment and refining charges paid to the smelter that buys the concentrate are deducted in arriving at the price, so revenue is shown net of them. Where the miner instead pays a toll processor that does not buy the concentrate, the charges are a cost of producing the metal, not a deduction from revenue.

Do miners hedge the quotational period?

Often, with metal swaps or futures that fix the price for the quotational period. Because both the receivable and the derivatives are at fair value through profit or loss, their movements offset naturally, so hedge accounting is usually unnecessary. See commodity price hedging and mining accounting.

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