Many junior mining companies are not able to identify any benefits in the International Financial Reporting Standards (IFRS) conversion process, a survey published last night by PKF Accountants & business advisers reveals. PKF’s 2008 survey, Global Resources, shows that over half of the 20 AIM and UK listed mining companies interviewed believe they need more sector guidance from IFRS on mining and, in particular, on accounting and capitalisation policies for both exploration and mine development costs. The survey charts their selection and application of key accounting policies as well as the level of disclosure provided in their accounts. Areas reviewed in the survey include: exploration costs, amortisation and depreciation, functional and presentational currencies, hedging, segmental analysis and business combinations. 

As well as carrying out a survey of accounting policies PKF also spoke to a number of CEOs and finance directors in the mining sector to understand some of the key issues they see facing them in the marketplace. The current toughening and volatility in commodity prices and very difficult financial markets means the market for IPOs and secondary fundraisings has become more difficult. As a result PKF expects that mining companies will increasingly be subject to M&A activity. This is evident in the results of the survey with 56% of participants planning to make business acquisitions in the next 18 months. Interestingly, when asked about production costs, one mining company said they believed that the rise in oil prices will increase costs by 40% more than originally budgeted. However, the company in question is not planning to change its mining methodology. What’s more, none of the companies surveyed plan to change their mining methodology due to the rise in oil prices. 

PKF corporate finance partner and a mining sector specialist, Jeff Harris, said, “Mining companies, particularly, are exposed to fluctuations in commodity prices, foreign exchange rates, interest rates and energy prices. As such, those companies that are still in development need to place greater emphasis on stress testing their financial models to make sure that they still work if input costs rise further and if commodity prices weaken. “The survey found that 78% of the mining companies interviewed do not plan to hedge their future production. And while more than half of the participants said they have felt under pressure to hedge from banks, several companies commented that they have received pressure from shareholders not to enter into hedging arrangements. Over the last ten years junior miners as a group have only tended to see commodity prices rising and it will be interesting to see if this sentiment changes in response to the current markets.” 

In relation to IFRS, PKF assurance and advisory partner and mining sector specialist, Stuart Barnsdall, added, “We have found that, to date, IFRS has had a lukewarm reception by the industry with little benefit identified.  As leading accountants and business advisers to the mining industry, we were motivated to undertake a survey to assess how IFRS has impacted on the key areas for mining companies.   “However, CEOs and Finance Directors should appreciate that, as they seek to access capital from the major markets worldwide, IFRS accounts are now accepted by the regulators of all the major capital markets including the UK, Australia, Canada, the US, South Africa and China.  The short term pain of transitioning to IFRS may be worth it if it can help them to raise money away from their main market.”  

Summary of key findings   Exploration, evaluation and development costs

• 80% of the companies stated that all pre-exploration costs incurred prior to obtaining the legal right to explore were expensed to the Income Statement. The remaining 20% remained silent on this point
• 60% capitalised their exploration and evaluation costs until the point at which they could determine whether the project was commercially viable
• 60% had a policy of subsequently re-classifying exploration and evaluation costs as mine development costs on reaching the development phase.  

Production

• 45% had entered into production and 65% had or were developing an open pit mine.

  Impairment, amortisation and depreciation of deferred costs

• 20% had impaired their mineral assets.
• 55% used a unit of production basis to depreciate capitalised development costs.

Decommissioning, re-instatement and rehabilitation costs

• Of the 90% of companies that had a policy regarding provisions, 83% specifically mentioned their policy in respect of mine rehabilitation costs.
• 100% of the companies that disclosed details of their capitalisation policy capitalised this cost as a fixed asset within tangible mining assets.

  Functional and presentational currencies

• 75% presented their results in their main functional currency. 35% presented their financial results in the currency of the country of their primary listing, whilst 60% presented their financial statements in US$.
• Of the 25% of companies that did not present their results in their parent company’s functional currency 100% presented their accounts in US$.

  Segmental analysis

• 76% considered their primary segment to be geographic.

  Hedging and financial instruments

• 20% used commodity price hedging instruments; these companies covered a range of metals and market caps. Of these, three companies (75%) adopted hedge accounting.

  Copies of Global Resources can be obtained bycontacting Claudia Belsman on 020 7065 0039 or emailing [email protected]