Article written on November 25, 2024

According to PwC's Mine 2023 report, the world's top 40 mining companies recorded impairment charges of $16.1 billion in 2022, highlighting the critical importance of proper impairment testing for mining assets. In this comprehensive guide, we'll dive into the intricate world of exploration and evaluation (E&E) asset impairment testing, ensuring your company stays compliant while making informed decisions about your valuable assets!

Understanding Exploration and Evaluation (E&E) Assets and Impairment Testing Fundamentals

Throughout my years working with junior mining companies, I've found that the fundamentals of E&E asset impairment testing often create significant confusion, especially when distinguishing these assets from other mining assets. Let me break this down in a way that's practical and actionable.

Under IFRS 6, exploration and evaluation assets include exploration rights, geological studies, exploratory drilling, and sampling costs. What makes these assets unique is their treatment during the exploration and evaluation phase, before technical feasibility and commercial viability are demonstrable. This distinction is crucial because it affects how we approach impairment testing.

One of the most challenging aspects I've encountered is helping companies understand the difference between E&E assets and development assets. Here's a practical example: if you've got drilling costs from a preliminary exploration program, those would typically qualify as E&E assets. However, once you've established technical feasibility and begin drilling for the purpose of mine planning, those costs would fall outside the scope of IFRS 6.

Regular impairment assessments are non-negotiable, and here's why: they serve as an early warning system for potential issues with your mineral properties. The regulatory framework, primarily governed by IFRS 6 and complemented by IAS 36, provides specific guidance for when and how to conduct these assessments. In my experience, companies that implement robust quarterly assessment protocols tend to have fewer surprises during their annual audits.

The methodology for impairment testing follows a logical sequence, but there's more flexibility under IFRS 6 compared to IAS 36. You can develop specific indicators of impairment relevant to your project's circumstances, which is particularly valuable for junior miners operating in unique geological or political environments.

Let's talk about a real-world scenario: Consider a junior exploration company with multiple early-stage properties. While IFRS 6 allows for testing at a higher level than a cash-generating unit during the E&E phase, it's crucial to document your rationale for grouping assets. I've seen companies face challenges during audits because they couldn't justify their grouping decisions with solid technical or geographical arguments.

Remember, the fundamental principle here is to identify potential impairment before it becomes a material issue for your financial statements. This proactive approach not only satisfies regulatory requirements but also provides valuable insights for management decision-making.

Identifying Impairment Indicators in the Mining Sector

When it comes to identifying impairment indicators in the mining sector, I've learned that it's crucial to take a comprehensive approach. The interplay between various factors can be complex, and missing even one indicator could lead to significant financial implications.

Let's start with market-based indicators, which often provide the most obvious signals. A sustained decline in commodity prices is a clear red flag. For instance, if you're exploring for copper and the price drops below your project's assumed long-term price for an extended period, that's a critical indicator. Market capitalization falling below net asset value is another key signal – I've seen companies overlook this only to face challenging questions from their auditors later.

Technical indicators require particular attention in the junior mining space. Disappointing drilling results don't automatically trigger impairment, but they need careful evaluation. Consider this scenario: if your initial resource estimate projected a certain grade, but recent drilling consistently shows lower grades, that's a clear technical indicator requiring assessment. The same applies to metallurgical test results that show lower recovery rates than initially anticipated.

Economic and financial indicators extend beyond just commodity prices. Changes in interest rates affecting discount rates, increases in operating costs, or challenges in raising capital can all signal potential impairment. In today's environment, I've noticed that access to financing has become an increasingly important indicator, particularly for junior miners.

Legal and regulatory triggers deserve special attention. Permit delays or denials, changes in environmental regulations, or shifts in government policy can significantly impact asset values. From experience, I can tell you that maintaining strong relationships with regulatory bodies and staying ahead of potential policy changes is crucial for risk management.

Environmental and social impact considerations have become increasingly critical. A loss of social license to operate can be just as damaging as poor drilling results. I've witnessed projects face significant delays or even cancellation due to community opposition or environmental concerns, making these factors essential in your impairment assessment.

Here's a practical tip: develop a comprehensive checklist of indicators specific to your project's circumstances. Include both quantitative and qualitative factors, and review it regularly – at least quarterly, but more frequently if significant events occur. Document your assessment process thoroughly, even when you conclude no impairment is necessary.

Step-by-Step Impairment Testing Process

Having conducted numerous impairment assessments over the years, I've developed a systematic approach that helps ensure nothing falls through the cracks. Let me walk you through the process that has proven most effective in practice.

The first critical decision is determining the appropriate level of assessment. While IFRS 6 provides flexibility during the E&E phase, you need to have a solid rationale for your approach. In my experience, geographical proximity and shared infrastructure often provide the most defensible basis for grouping assets. However, be careful not to group assets at too high a level – I've seen companies face challenges when they couldn't justify why disparate properties were assessed together.

Calculating recoverable amounts presents unique challenges for E&E assets because many traditional valuation methods may not be applicable. When dealing with early-stage projects, market-based approaches often provide the most reliable evidence. For instance, comparable transaction analysis can be particularly useful, though you'll need to carefully consider whether recent transactions truly are comparable.

Fair value measurement requires careful consideration of market participant assumptions. Remember, these aren't necessarily your company's assumptions – they're what a typical market participant would consider. I've found maintaining a database of comparable transactions and market metrics invaluable for supporting fair value estimates.

Value-in-use calculations become more relevant as projects advance and cash flow projections become more reliable. However, be cautious with early-stage projects – I've seen companies struggle to defend optimistic cash flow projections for properties without defined resources. When using value-in-use, ensure your assumptions are reasonable and well-documented.

Documentation requirements cannot be overstated. From experience, I can tell you that robust documentation has saved countless hours during audit reviews. Maintain detailed records of:

• - Your assessment methodology and rationale
• - Key assumptions and their basis
• - Market data and comparable transactions used
• - Technical reports and expert opinions relied upon
• - Sensitivity analyses performed

A practical tip that's served me well: create a standardized impairment testing template that captures all these elements. This ensures consistency in your approach and makes it easier to track changes in assumptions over time.

Advanced Impairment Testing Considerations

In my experience dealing with complex mining assets, the advanced aspects of impairment testing often separate adequate assessments from excellent ones. Let's delve into these nuanced considerations that can significantly impact your testing outcomes.

Group assessments versus individual asset testing requires careful judgment. While IFRS 6 allows flexibility during the E&E phase, you need to establish clear criteria for grouping assets. I've found that successful grouping typically aligns with how management actually makes decisions about continuing or abandoning exploration activities. For instance, if you're exploring a large land package with multiple targets but shared infrastructure, treating this as one group often makes sense – but you need to document your rationale thoroughly.

The treatment of shared infrastructure and facilities presents particular challenges. Consider this scenario: you have multiple exploration properties that would potentially use the same processing facility or transportation infrastructure. How do you allocate these costs in your impairment assessment? I've found that developing a clear methodology based on expected usage or benefit can help defend your approach during audit reviews.

Joint venture considerations add another layer of complexity. When you're not in full control of the asset, impairment testing needs to consider both your interest and the joint venture as a whole. I've seen situations where one partner's inability to fund their share of expenses triggered impairment considerations for all partners. It's crucial to maintain open communication channels with your joint venture partners about impairment indicators.

Foreign exchange considerations can significantly impact your assessments, especially in volatile currency environments. Your functional currency might differ from the currency in which commodity prices are quoted or in which major costs are incurred. I've learned to pay particular attention to these currency relationships and their potential impact on recoverable amounts.

Risk factors and sensitivity analysis deserve special attention. In my experience, the most robust impairment assessments include comprehensive sensitivity analyses covering:

• - Commodity price scenarios
• - Foreign exchange rate variations
• - Discount rate changes
• - Operating cost fluctuations
• - Capital cost estimates

Remember to document how these various factors interact – sometimes it's the combination of multiple modest changes that creates significant impairment risk.

After years of preparing and reviewing financial statements for mining companies, I can tell you that the reporting and disclosure requirements for E&E asset impairment are both critical and complex. Let me share some practical insights that will help you navigate these requirements effectively.

Under IFRS 6 and IAS 36, the disclosure requirements are extensive and demanding. The key is to provide clear, concise information that tells your story effectively. From my experience, successful disclosures typically include:

• - A clear description of the facts and circumstances leading to impairment
• - The specific impairment indicators identified
• - The methodology used to determine recoverable amounts
• - Key assumptions and estimates used in the assessment
• - The amount of impairment recognized or reversed

When it comes to Management Discussion and Analysis (MD&A), you need to go beyond just stating the numbers. I've found that effective MD&A discussions provide context about:

• - The business rationale for decisions affecting impairment
• - Changes in market conditions or other external factors
• - Future plans for affected properties
• - Risk factors and uncertainties

Technical report implications can't be overlooked. Any significant impairment might trigger the requirement for an updated technical report under NI 43-101. I've seen companies caught off guard by this requirement, so it's crucial to coordinate with your qualified persons early in the process.

Audit documentation requirements are particularly stringent in this area. Based on my experience, maintaining the following documentation throughout the year makes the audit process much smoother:

• - Quarterly impairment indicator assessments
• - Minutes from technical committee meetings discussing project status
• - Market analysis and commodity price trends
• - Correspondence regarding permits and regulatory matters
• - Updated financial models and sensitivity analyses

Regulatory filing obligations extend beyond just the financial statements. Stock exchange filings, material change reports, and annual information forms may all need to address significant impairments. I've learned that coordinating with your legal counsel early in the process helps ensure all filing obligations are met.

Conclusion

In conclusion, impairment testing for E&E assets requires a systematic, well-documented approach that considers multiple factors and stakeholder needs. Remember, the goal isn't just compliance – it's providing meaningful information that helps investors and other stakeholders make informed decisions. Need assistance implementing these procedures or reviewing your current approach? Our team of mining industry specialists is here to help ensure your impairment testing process is robust and compliant with all regulatory requirements.

For detailed assistance tailored to your unique business needs, we invite you to connect with our experienced guides. By leveraging our expertise, ensure that your company remains at the forefront of the industry, adhering to best practices and maximizing potential outcomes. Schedule a time to meet Heidi for a Virtual Coffee today or reach out.