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Mining companies report increase in impairment loss: Jacques Erasmus, KPMG

The 25 largest mining companies recorded a $70bn loss on impairments in 2013/14.

SIKI MGABADELI: The major global mining companies surveyed by KPMG’s Mining Financial Reporting Survey 2014 reported an impairment loss of $70bn in the 2013/14 financial year, signalling the impact of a low commodity price cycle currently being experienced. This may also indicate that companies might have overpaid for mining investments in the past.
   To look at some of the findings we are speaking to Jacques Erasmus, who is partner and head of mining in southern Africa with KPMG.
   Jacques, thanks so much for your time today, I suppose today’s production updates from Anglo American underscores the findings of the survey.

JACQUES ERASMUS: Yes, good evening to all. We are very excited. I think our survey touches on a very interesting point. It has obviously looked at the 25 largest mining companies and what we found in those companies – they recorded a $70bn loss on impairments.
   Now, what would be interesting to listeners is when we look at the disclosures 15 of those companies disclosed the underlying conditions that gave rise to impairments. Interestingly 12 of these obviously cited commodity prices for the decline and therefore they recorded impairments.
   I think it’s also important – there were specific assets, and I think we are going to see more of that into the future – where there were changes to mining plans, there were abandonments of projects, there were suspensions of projects, delaying projects. And I think that is all brought about by obviously a shortage in capital. So companies are looking forward and saying which are the best projects we should be spending on to obviously survive the period of low commodity prices – and some of the other projects we are going to put on the back burner. I think naturally from that you’ll see some impairments.

SIKI MGABADELI: In what ways would you say, then, that mining executives have had to I suppose re-look the economics around mining and how they make their decisions.

JACQUES ERASMUS: I think that’s a very interesting point. Obviously, as your listeners will know, you don’t build a mine in six months. So a lot of these projects were envisaged sort of from 2005 to 2010 and in those periods we were still in the supercycle. I think when you spoke to people then they were very upbeat and saying “we expect this to last another 20 years”. So a lot of those investment decisions were taken when there were higher commodity prices.
   Obviously in 2008 and even today we have softer commodity prices. With the economy out there, there isn’t easy access to capital and capital is expensive. So a lot of the executives don’t take these impairments lightly. They sit for hours and debate and look at the assumptions.
   I think another key finding out of our reporting survey – we looked into it in 2011, and in the latest one now – is companies are a lot more transparent and they really explain to their readers what assumptions they have used. And I think that is good, because it gives the reader a sense that no, you don’t just see in the headlines that there was an impairment. They can really go and look and see why management revealed that these assets were impaired.
   And obviously the interesting question is this: at commodity prices then – and we all think at the time we are going to have a better commodity price – are there going to be reversals of these impairments, and a partial reversal of these impairments. It will be interesting to see what disclosures companies then do around those facts.

SIKI MGABADELI: And what about non-financial disclosures?

JACQUES ERASMUS: Non-financial disclosures are also a very important part of our survey. We call them sort of non-GAAP measures. So it’s really something which is not under IFRS or under US GAAP, and I think that’s what companies use to distinguish themselves. So if you look at financial statements there is a big drive to make them very transparent and make one able to compare companies. But then management is looking and saying how can you show an investor that you are doing better in certain areas. They then use non-GAAP measures, which they obviously reconcile based on their financial numbers. And typically what they add back are impairments, fair value adjustments and so forth to get to the real cash costs or, in the case of gold industries, all-in sustainable costs – so really to show to the reader what their sort of future earning potential is going to be.

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