This text is issued from a scientific article entitled « What causes mining asset impairments? » written by: Andrew Gillis from Aurora Hydrogen Inc, Edmonton, AB, Canada, John Steen & W. Scott Dunbar from Department of Mining Engineering, University of British Columbia, Vancouver, BC, Canada, Andrew von Nordenflycht from Beedie School of Business, Simon Fraser University, Burnaby, BC, Canada (Gillis et al., 2024).
Mining asset impairment refers to the accounting recognition that the carrying amount (book value) of a mining asset exceeds its recoverable amount, necessitating a write-down to reflect its true economic value. This impairment occurs when the asset’s value on the balance sheet is no longer recoverable through its expected future cash flows or market value. Let’s talk about 4 major causes of mining asset impairments from an analysis of 266 impairments declared by TSX-listed mining firms between 2002 and 2015 in Canada as mentioned by the authors.
Metal prices
By far, declining metal prices were the most frequently reported reason for impairment and accounted for the largest share of impaired increases the average impairment value to $244M and increases the median value to $88M.
Ore grade
Impairments attributed to ore grade issues were driven by grade reconciliation problems during mining operations and by infill drilling1 of orebody areas that had not yet been mined. Grade reconciliation problems occurred when the mined ore grade did not match the grade predicted by the surface or underground exploration drilling used to create the orebody model for the mine. Grade reconciliation problems often resulted in significant changes to the mine plan that reduced mine value because areas of the orebody had to be reclassified as waste. Impairments also occurred when infill drilling did not confirm the pre liminary orebody model. Preliminary exploration drilling may be done at 200-m intervals (for example) to create an initial orebody model. Mining companies will often conduct more detailed drilling at closer spacing (say 50 or 100-m intervals) to confirm the initial orebody model after mining of better-defined areas has already started. We attributed impairments to reductions in mineral reserve and resource estimates when infill drilling could not confirm the initial orebody model that was already part of the mine’s economic model.
Ore access
Impairments attributed to ore access were typically reported directly as geotechnical issues or changes to the mine plan, with further explanations revolving around increased dilution and lower production estimates. Geotechnical problems included pit slope failures (when the designed wall of an open pit excavation fails or the company expects it to fail), underground failures (when a tunnel or open stope excavation collapses, or the company expects it to collapse), and unexpected water ingress in underground mines. Indirectly reported ore access issues included higher dilution and lower production rates than expected. Higher dilution typically occurs in underground mining when the waste rock surrounding the ore is weaker or more fractured than expected and mixes with the ore after blasting and during ore recovery. It may also occur when an ore vein is narrower than expected, and the mechanical equipment used for mining cannot mine the ore as selectively as expected. Lower production estimates were typically reported by under ground operations when rock was either harder than anticipated (lowering drilling and mining rates) or weaker and more fractured than expected (requiring more engineering and ground support than expected).
Operating costs
Impairments attributed to higher operating costs included increases in operating costs due to higher global demand for materials and labour, increases in local operating costs due to home country inflation or import restrictions, and lower than expected labour productivity. Most impairments related to operating cost increases occurred between 2008 and 2012 when commodity prices dramatically increased (relative to prices over the rest of this study period). The demand for mining materials and skilled labour was strong through these years as existing operations expanded and new mines started. Operating cost increases due to home country factors were unique to Brazilian and Argentinean operations during this study period. Brazilian inflation reached almost 15% in 2003 and caused significant increases in local operating costs. Argentina instituted several tax, currency, and trade laws in 2013 and 2014, which resulted in impairments related to higher operating costs for some mines in Argentina. Some companies cited lower than expected labour productivity causing operating cost impairments in Romania and the Democratic Republic of the Congo during the study period.
Reference
Gillis, A., Steen, J., Dunbar, W. S., & von Nordenflycht, A. (2024). What causes mining asset impairments? Resources Policy, 90, 104821. https://doi.org/10.1016/j.resourpol.2024.104821
