Stripping costs under IFRIC 20

What are stripping costs?

To mine an open pit, the company removes overburden, the soil and rock above the ore, and waste rock around and within the ore body. In the development phase, before production, this pre-stripping is a cost of building the mine and is capitalised under IAS 16. Once the mine is producing, stripping continues for the rest of its life, and that production stripping is what IFRIC 20 covers. Underground mines are outside IFRIC 20; their development, such as declines and drives, is capitalised under IAS 16.

When is a stripping activity asset recognised?

Production stripping costs are recognised as a non-current stripping activity asset only if all three conditions are met: it is probable that the future benefit, improved access to the ore body, will flow to the company; the company can identify the component of the ore body to which access has been improved; and the costs relating to that stripping activity can be measured reliably. To the extent the benefit is ore produced in the period, the costs are inventory under IAS 2. The asset is added to, or enhances, an existing asset, the mine, rather than being a separate asset.

Stripping costs: allocating a year's waste removal

A mine is working a component of its ore body for which the mine plan expects a life-of-component strip ratio of 3:1, three tonnes of waste for each tonne of ore. In the year it extracts 100,000 tonnes of ore and removes 400,000 tonnes of waste, a ratio of 4:1, as a pushback opens up ore for later years. Each tonne moved costs US$ 20.

The excess waste, 100,000 tonnes, did not produce this year's ore; it gave access to ore to be mined later from the same component, so its cost becomes the stripping activity asset. If the component still holds 1,000,000 tonnes of ore, the asset is depreciated at US$ 2.00 a tonne as that ore is mined: 150,000 tonnes next year means depreciation of 0.3 million, which becomes part of the cost of that ore. In a year when the actual strip ratio is below the expected ratio, no asset is recognised and all costs go to inventory.

How are costs allocated between inventory and the asset?

When the costs of the stripping asset and the inventory produced cannot be identified separately, IFRIC 20 requires an allocation based on a relevant production measure, calculated for the identified component. Examples are the volume of waste extracted compared with the expected volume for a given quantity of ore, as in the example; the cost of inventory produced compared with expected cost; and the mineral content of ore extracted compared with expected content.

What is a component of the ore body?

A specific volume of the ore body made more accessible by the stripping, usually identified from the mine plan, such as a pushback, phase or cut-back. It is normally a subset of the whole ore body. Identifying components needs judgement and close work with mine planners, and the component and its expected strip ratio should be updated when the mine plan changes.

How is the stripping activity asset depreciated?

On a systematic basis over the expected useful life of the component of the ore body that becomes more accessible, usually units of production based on the ore in that component. The asset is measured at cost less depreciation and impairment, and is tested for impairment as part of the mine's cash-generating unit. See units of production depreciation.

How does development stripping differ?

Stripping before commercial production is part of the cost of constructing the mine and is depreciated over the reserves it gives access to, often the whole pit. The change from development to production stripping happens when the mine is ready for its intended use, so the commercial production date matters for this too. See mine development costs, mining depreciation and mining accounting.

How does US GAAP differ?

US GAAP treats stripping costs incurred during production as variable production costs included in inventory. There is no stripping activity asset, so costs in heavy stripping years flow into inventory and cost of sales, and unit costs are more volatile than under IFRS. See IAS 2 inventories.

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