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Accounting & Market Changes
Impacting Mining Companies
William J. Kohm, Audit Director
([email protected])
April 29, 2013
Agenda
• 2012 Mining Company Financial
Results
• Asset Impairment & Reclamation
Accounting
• New & Proposed Accounting
Standards
2012 Mining Company
Financial Results
2012 Mining Company Results
per First Research
Coal
Metals
Non Metal
Current
Ratio
1.98
2.08
2.20
Debt/
Net
Worth
1.20
1.31
0.73
EBITDA 10.8%
to Sales
17.4%
12.8%
Return
on Sales
1.8%
7.0%
2.6%
ROA
2.2%
3.4%
2.3%
2012 Mining Company
Financial Results
Company
Mining
Type
Current
Stock
Price*
52
Week
Low
52
Week
High
2012
Impairment
2011
Impairment
Arch
Coal
$4.76
$4.66
$10.43
$850 million
$7 million
Peabody
Coal
$19.57
$18.78
$31.97
$929 million
$0
Alliance
Coal
$67.16
$52.21
$67.16
$19 million
$0
*As of April 24, 2013
2012 Mining Company
Financial Results
Company
Mining
Type
Current
Stock Price*
52
Week
Low
52 Week
High
2012
Impairment
2011
Impairment
Freeport
Metal
$29.78
$29.00
$43.65
$0
$0
Newmont
Metal
$34.33
$33.51
$57.93
$52 million
$2 billion
Martin
Marietta
Non
Metal
$98.63
$63.64
$106.57
$0
$0
Vulcan
Non
Metal
$47.76
$32.31
$59.48
$2 million
nominal
*As of April 24, 2013
Asset Impairment &
Reclamation Accounting
Example Mine Plan
Estimated Production by Year
Mine
Status
Reserves
(Tons)
2013
2014
2015
Mine #1
Closed
0
0
0
0
Mine #2
Active
900,000
500,000
400,000
0
Mine #3
Idle
250,000
0
0
250,000
Asset Impairment Accounting
1. Types
–
Goodwill (Annual requirement)
–
Long-term Assets (Facts/Circumstances)
2. US GAAP
–
Impairment is permanent
3. IFRS
–
Non Goodwill impairment can be reversed
GAAP LT Asset Impairment
Example
Company A
Group 1
Group 2
Total
Gross Cash
Flows
$35,000,000
$15,000,000
$50,000,000
Net Book
Value
$30,000,000
$20,000,000
$50,000,000
Difference
$5,000,000
($5,000,000)
$0
Impairment
No
Possible, step 2
n/a
GAAP LT Asset Impairment
Example
Company A
Group 1
Group 2
Fair Value
n/a
$12,000,000
Net Book
Value
n/a
$20,000,000
Difference
n/a
($8,000,000)
Impairment
n/a
Yes
Reclamation Accounting
• Engineering Valuation Inputs
– End of mine reclamation cost estimate by
permit
– Timing of end of mine reclamation
payments consistent with Mine Plan
• Discounted Cash Flow Valuation Technique
– Risk adjusted risk free rate
– Third party profit and risk premium
– Inflation
New and Proposed Accounting
Standards
New Accounting Standards
International Accounting Change
• IFRIC 20 Stripping Costs in the Production
Phase of a Surface Mine (January 1, 2013)
• Accounting issues regarding waste
removal costs incurred in surface mining
activities during the production phase of
a mine, referred to as production
stripping costs.
IFRIC 20 Stripping Costs in the
Production Phase of a Surface Mine
• IFRS- now allows capitalization of excess
overburden during production process and
treated as a depletable asset if can assign to a
reserve base
• US GAAP- costs are factored into inventory
and run through expense upon sale of
inventory
New Accounting Standards
International Accounting Change
• IFRS 11 Joint Arrangements (January 1,
2013)
• Joint Operations- recognize share of
assets and liabilities
• Joint Ventures- proportionate
consolidation no longer permitted, must
use equity accounting
Emerging Accounting Issues:
Joint IASB/FASB Projects (Leases)
• Excluded
– Mineral, oil, natural gas leases
– ST leases (less than 1 year)
• “Right of Use Asset” and Lease Liability
• If deemed Significant Use (e.g. equipment
lease)
– Enhance EBITDA and operating cash
flow presentation
Emerging Accounting Issues:
Joint IASB/FASB Projects (Leases)
• 2012 Pro forma impact to Peabody Energy
based on min. lease disclosure and assume
6.5% discount rate
– PPE goes up 5%
– Debt goes up 9%
– EBITDA goes up over 10%
• In Q2 2013 expect a final lease draft
Additional Resources
2012 Coal Company Headlines
• Patriot Coal filed for Chapter 11 Bankruptcy Protection.
• Arch Coal recorded goodwill, mine closure and asset
impairment charges of $850 million, reflects in part idling 5
operations in App and weak coal market conditions.
• Alpha recorded Q2 impairment charges of $2.5 billion, reflecting
write-down of goodwill relating to Massey acquisition and
impaired mineral reserves and PPE in Eastern Coal Operations.
• Alliance Resources posted record EBITDA, sales volumes and
revenue during 2012 enhanced by its Illinois Basin and Northern
App operations.
Coal Company Results
per First Research
2012
2011
Current
Ratio
1.98
1.80
Improve
Debt/Net
Worth
1.20
1.34
Improve
EBITDA
to Sales
10.8%
13.2%
Decline
Return
on Sales
1.8%
4.8%
Decline
Return
on
Assets
2.2%
5.9%
Decline
Metals Company Results
per First Research
Metals
2012
Metals
2011
Current
Ratio
2.08
1.94
Improve
Debt/Net
Worth
1.31
1.33
Flat
EBITDA to
Sales
17.4%
15.2%
Improve
Return on
Sales
7.0%
7.2%
Flat
Return on
Assets
3.4%
4.7%
Decline
Non Metals Company Results
per First Research
Non
Metal
2012
Non
Metal
2011
Current
Ratio
2.20
2.31
Decline
Debt/Net
Worth
0.73
0.98
Improve
EBITDA to
Sales
12.8%
12.4%
Flat
Return on
Sales
2.6%
3.6%
Decline
Return on
Assets
2.3%
3.4%
Decline
Cash Flow Projections
IFRS Guidance
• Base cash flow projections on reasonable and supportable
assumptions that represent management’s best estimate of
the range of economic conditions that will exist over the
remaining useful life of the asset. Greater weight shall be
given to external evidence.
• Base cash flow projections on the most recent financial
budgets/forecasts approved by management, but shall
exclude any estimated future cash inflows or outflows
expected to arise from future restructurings or from
improving or enhancing the asset’s performance. Projections
based on these budgets/forecasts shall cover a maximum
period of five years, unless a longer period can be justified.
Cash Flow Projections
IFRS Guidance
• Management assesses the reasonableness of the
assumptions on which its current cash flow
projections are based by examining the causes of
differences between past cash flow projections
and actual cash flows. Management shall ensure
that the assumptions on which its current cash
flow projections are based are consistent with
past actual outcomes, provided the effects of
subsequent events or circumstances that did not
exist when those actual cash flows were
generated make this appropriate.
Impairment Consideration
• The following examples of events or changes in
circumstances indicate that the carrying amount of an
asset should be assessed for recoverability:
• A significant decrease in the market value of an asset;
• A significant change in the extent or manner in which
an asset is used or a significant change in the physical
condition of the asset;
• A significant adverse change in legal factors or in the
business climate that could affect the value of an asset,
including an adverse action or assessment by a
regulator;
Impairment Consideration
• An accumulation of costs significantly in excess
of the amount originally expected to acquire or
construct an asset;
• A current period operating or cash flow loss
combined with a history of operating or cash
flow losses or a projection or forecast that
demonstrates continuing losses associated with
an asset; and
• A current expectation that, more likely than not
(i.e., greater than 50%), an asset will be sold or
otherwise disposed of significantly before the
end of its estimated useful life.
Reclamation
Terms
• End of Mine (EOM) - disturbed area at
completion of mining
• Point in Time - disturbed area at current
date; what it would cost to reclaim current
conditions
• Contemporaneous - reclamation completed
as part of normal mining activity
• Water treatment obligations - perpetual
costs to treat water areas
End of Mine Reclamation Model
Mine
Estimated
2013
Reclamation
Costs
2014
2015 to 2020
Mine #1{C}
$5,000,000
$3,000,000
$1,000,000
$1,000,000
Mine #2 {A}
$2,500,000
$0
$0
$2,500,000
Mine #3 {I}
$1,000,000
$500,000
$250,000
$250,000
Reclamation Accounting
7 Best Practices
1. End of Mine Reclamation (EOM) model
properly established and maintained
2. Management approves key inputs into model
3. Third party engineering reports used on a
periodic basis (at least every third year)
4. Accounting provided listing of all new
disturbances by engineering on a regular
basis (cross check that all disturbed permits
are included)
Reclamation Accounting
Best Practices (cont.)
5. Interim EOM Studies to speed up
year end financial close
6. Timing of expected future EOM
payments should be consistent with
mine plan
7. Status of job as active/closed/idle
(may start back up) very important
Bill Kohm has over 15 years of financial mining experience
and leads DDAF’s Natural Resources Team which
specializes in the following areas:
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accounting
tax
financial statement audit
public company reporting
Internal audit/SOX
acquisition accounting
litigation support
business valuation
IT consulting
Accounting & Market Changes
Impacting Mining Companies
Questions?
William J. Kohm, Audit Director
([email protected])