0310 Delo It Te Mining

7/31/2019 0310 Delo It Te Mining

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Financial Reporting in the Global Mining Industry

A survey of twenty-one leading companies


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Managing Risk in the Global Mining Industry

Mining for the Best Report

IASC Extractive Industries Issues Paper

Comprehensive IntegratedSolutions for the Mining Industry

A study of the role of internal audit in todaysglobal mining community

An analysis of reporting on sustainability andenvironmental issues by leading miningand metals companies

A summary and analysis of the important issuesprepared specifically for the mining industry

A description of our global mining practice and ourrange of services, including examples ofprojects undertaken

Deloitte Touche Tohmatsu is one of the worlds

leading professional services organisations. Themember firms of Deloitte Touche Tohmatsu deliver

world-class assurance and advisory, tax, and

consulting services. With 119,000 people in 140

countries, the member firms serve more than one-

half of the worlds largest companies, as well as

large national enterprises, public institutions and

successful,fast-growing companies.

Our internationally experienced professionals strive

to deliver seamless, consistent services whereverour clients operate. Our mission is to help our

clients and our people excel. Our global mining

practice provides a comprehensive range of audit,

tax, consulting and financial advisory services to

the mining and metals industry and counts most

of the leading companies in the industry among

its clients.

This publication is one of a series prepared to help

our clients in the mining industry. Other publications

include:

About Deloitte Touche Tohmatsu


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Contents

F I N A N C I A L R E P O RT I N GM I N I N G

C O N T E N T S

Introduction page one

Disclosures about mineral reserves and resources page two

Accounting for exploration and mine development page eight

Amortisation of capitalised costs related to mineral reserves page fourteen

Accounting for impairment page sixteen

Accounting for site rehabilitation and environmental costs page eighteen

Business combinations accounting for goodwill and mineral rights page twenty-one

Accounting for joint ventures and related undertakings page twenty-four

Currencies used in financial statements page twenty-six

Tables analysing certain accounting policies & disclosures page twenty-eight

Company reports reviewed page thirty

References page thirty-three

Deloitte Mining Industry Leadership Team page thirty-four

Key accounting policies and disclosures:


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Grey Quartz

This mineral occurs commonly in igneous, metamorphic, and sedimentary rocks,

and can be frequently found in mineral veins with metal ores


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Intro ductionIn November 2000, the International Accounting Standards Committee published Extractive Industries,An Issues Paper issued for comment by the IASC Steering Committee on Extractive Industries (referredto hereafter as the IASB Steering Committee). (1) During the comment period, we produced a publicationthat summarised for our mining clients the major issues raised.


I N T R O D U C T I O N

Many companies in the mining industry submitted thoughtfulcomments on the Issues Paper, as did Deloitte ToucheTohmatsu. However, with the subsequent formation of theInternational Accounting Standards Board (IASB) and theadoption of a new agenda by the IASB, extractive industrieshas taken a back seat and is not currently listed as anactive research topic. While the subject continues toreceive the attention of a group of national standard settersinterested in accounting in the extractive industries,

comprehensive global accounting standards for the industryare clearly a long way off.

Ongoing convergence of accounting standards around theworld has helped to narrow some of the accountingdifferences found in the mining industry, for instance, inareas such as accounting for site reclamation and businesscombinations. Many issues remain to be addressed,however. This publication highlights the more importantareas and summarises current practice, without offeringsolutions or suggesting best practices.

Our findings are based on a review of the published annualfinancial statements and supplementary data of twenty-one of the worlds leading mining companies. Thesecompanies listed on page thirty , are domiciled in ninedifferent countries and use seven different accountingframeworks for preparing their financial statements. Welooked at their reporting in many of the key areas addressedby the IASB Steering Committee: accounting for explorationcosts and mine development, the amortisation of capitalisedcosts, the issue of impairment, provisions for costs to beincurred after mine closures, establishing fair values in abusiness combination and reporting interests in jointundertakings. We also looked into an area not addressed

by the steering committee, but an important one wherepractice seems to vary: the currency used to measure theresults of operations. Mining is an industry where theproduct is generally priced in U.S. dollars regardless ofwhere it is produced.

No survey of this nature would be complete without reviewingsupplementary disclosures about mineral reserves, generallythe most valuable asset of a mining company, but one you

will not find on the balance sheet. While not reflected asan asset, the way a company determines its mineral reservesis critical to most amortisation calculations, for addressingimpairment, and comes into play in determining fair valuesin a business combination.

In a few places in this report, we have referred to views ofthe staff of the U.S. Securities and Exchange Commission(SEC) that are a matter of public record.

Every effort has been made to ensure the accuracy of thecontents of this publication but Deloitte Touche Tohmatsuaccepts no responsibility for any errors or omissions.

We hope that this survey of accounting and reporting bymany of the industrys leading companies will be useful tomining companies worldwide. We also hope it will be ofvalue to those who are working towards the eventualestablishment of accounting standards that will addressthe issues unique to this industry. This is a goal we stronglysupport.

Robin FryerGlobal Leader Mining Industry Practice

Deloitte Touche Tohmatsu

page one


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Although its mineral reserves are arguably the most

valuable asset of a mining company, they do not appearas an asset on the balance sheet except to the extentthey were purchased. Even then, the cost of mineralreserves is often not disclosed separately from othermining-related fixed assets.

Disclosures about mineralreserves and resources

page two


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Under the historical cost model, mineral reserves that resultfrom a companys exploration activities do not appear asan asset. Information on mineral reserves is, however, vitalto investors and analysts in predicting future cash flowsand evaluating the prospects for a mining company. Thus,supplementary disclosure about mineral reserves outsidethe financial statements is important for a more completeappreciation of the value of an enterprise.

Because quantities of minerals beneath the earths surface

cannot be known with absolute precision, reserves areusually categorised as proven or probable, dependingon the degree of confidence about the accuracy of thedisclosed quantity. All of the companies we reviewed thatdisclose information on reserves provided quantities ofproven and probable reserves, in some cases separatelyand in other cases combined.

Many companies disclose in their annual reports informationon mineral resources as well as reserves. Mineral resourcesare quantities of minerals for which there are reasonableprospects of eventual economic extraction. These areclassified as measured, indicated or inferred, dependingon the degree of confidence. Only those parts of a companysmineral resources that have been determined to beeconomically extractable can be classified as reserves.

This distinction is important from an accounting perspectivesince only proven and probable reserves are used incalculating amortisation on a unit-of-production basis andin measuring impairments. Most of the companies wereviewed state this explicitly in their financial statements,and those that do not are believed to follow this practice.Generally speaking, only proven and probable reservesare taken into account in determining fair values foracquisition accounting.

The U.S. SEC does not permit the disclosure of other thanproven and probable reserve quantities on a unit of salebasis, such as ounces for gold, in filings with the commission.(2) The SEC will, however, permit the disclosure of measuredand indicated mineral quantities on a non-unit of sale basis,such as tonnes and grade of material in the ground forgold. The U.S.-based companies that we reviewed did notprovide disclosure of resources not classified as reserves.Companies in other jurisdictions that we reviewed disclosedboth reserves and resources in their annual reports. With

limited exceptions, however, foreign filers with the SEC donot disclose information on resources in theirSEC filings.

Unfortunately, there is no internationally agreed set ofdefinitions for reserves and resources and the sub-categorieswithin each. Three definition frameworks commonly usedare CIM, JORC and SAMREC, developed by the miningindustry in Canada, Australia and South Africa, respectively.(3) Not surprisingly, companies based in these countries

used their own framework. In the United States, the SEChas developed its own definitions of reserves, which arecontained in its Industry Guide 7. Unlike the otherframeworks mentioned, the SEC requires completion of afinal or bankable economic feasibility study before it willallow measured or indicated mineral resources to beclassified as reserves in SEC filings. U.S.-based publiccompanies are required to calculate their reserves accordingto Industry Guide 7, and foreign registrants are required todo the same in filings with the commission.The tentative view of the IASB Steering Committee wasthat an international financial reporting standard for theextractive industries should initially use the JORC definitionsin the case of mining enterprises and that, longer term, a

joint industry group should develop a common set of reservedefinitions. The committee did not develop a tentative viewon the determination of the commodity price to be adoptedfor measuring reserve quantities.

In the gold mining sector, we looked at six major companies.Disclosures of proven and probable reserves are largelyconsistent, except for the frameworks used to define reservecategories:

COMPANY FRAMEWORK

Anglogold SAMRECAshanti JORCBarrick Industry Guide 7Goldfields SAMRECNewmont (See note below)Placer Dome CIM

Note: Newmont has provided definitions for proven and probable reserves rather than indicating the source.


M I N E R A L R E S E RV E S A N D R E S O U R C E S

page three


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Notes to Ashantis ore reserves and mineral resourcesstatement include:

The statement is classified according to JORC.

Identified inferred resources are not reported in thestatement.

A gold price of $300 per ounce has been used to determinereserves.

In the base metals mining sector, we looked at ten majorcompanies. CODELCO, CVRD and Norilsk Nickel do notprovide any disclosure of reserves in their annual reports.Of the seven that provide disclosure, information on provenand probable reserves is again largely consistent, exceptfor the frameworks used to define reserve categories:

COMPANY FRAMEWORK

Falconbridge CIMFreeport McMoran (See note below)

Inco CIMNoranda CIMPhelps Dodge (See note below)Teck Cominco CIMWMC Resources JORC

Note: Freeport McMoran has provided definitions for proven and probable reserves rather than indicating the source. We did not find definitions of reserve categories in the Phelps Dodge annual report, but the company would, we believe, have followed Industry Guide 7.

All of these companies have disclosed reserves in tonnes,grade and contained metal in ounces, as well as theprojected gold price used to determine the reserves.

In addition to reserve disclosures, all except Newmont (thesole U.S.-based company in the group) have disclosedinformation on resources in their annual reports, thoughthere are some inconsistencies as to what is disclosed.

Typical of this group, the following resource disclosureshave been extracted from the Ashanti 2002 annual report:

Measured and indicated mineral resources as at 31December 2002

Location MeasuredTonnes

(m)

MeasuredGrade(g/t)

IndicatedTonnes

(m)

IndicatedGrade(g/t)

Total(million)

TotalGrade(g/t)

GoldOunces

(m)

EquityOunces

(m)

Obuasi

Underground

Surface

Tailings

Sub total

22.1

17.8

14.5

54.4

11.1

3.0

2.0

6.0

35.9

1.4

5.0

42.3

9.6

2.8

2.2

8.5

58.0

19.2

19.5

96.7

10.2

3.0

2.0

7.1

19.0

1.9

1.2

22.1

19.0

1.9

1.2

22.1

Location MeasuredTonnes

(m)

MeasuredGrade(g/t)

IndicatedTonnes

(m)

IndicatedGrade(g/t)

Total(million)

TotalGrade(g/t)

GoldOunces

(m)

EquityOunces

(m)

Obuasi

Underground

Surface

Tailings

Sub total

22.1

17.8

14.5

54.4

11.1

3.0

2.0

6.0

35.9

1.4

5.0

42.3

9.6

2.8

2.2

8.5

58.0

19.2

19.5

96.7

10.2

3.0

2.0

7.1

19.0

1.9

1.2

22.1

19.0

1.9

1.2

22.1

page four


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page five

NorandaInc

BeneficialInterest

(%)

Category 31 Dec2002

(000 tonnes)

GradeCopper

%

GradeZinc%

GradeLead

%

GradeSilverg/mt

GradeMolybdenium

%

Copperdeposits

Zincdeposits

Antamina

Brunswickmine

33.8

100.0

MeasuredIndicated

TotalInferred

MeasuredIndicated

Total

25,00035,00060,00033,000

1,1901,7922,982

0.500.470.480.99

0.180.450.34

0.200.290.250.99

8.388.898.69

----

3.213.433.34

4.75.95.413

7610895

0.030.030.030.02

---

Notes to the above statement include:

The mineral resources are shown on a 100 percent basis.

Resource estimates are prepared in accordance with CIMusing estimation methodologies and parametersappropriate to each project.


The mineral resources are shown on a 100 percent basis.

Resource estimates are prepared in accordance with CIMusing estimation methodologies and parametersappropriate to each project.

All of these companies have disclosed reserves in tonnes

and grade, as well as the projected commodity prices usedto determine the reserves. Only Noranda has disclosed thequality of contained metal.

In addition to reserve disclosures, all except FreeportMcMoran and Phelps Dodge (the two U.S.-based companiesin the group) have disclosed information on resources intheir annual reports.

The following disclosures on resources have been extractedfrom the Noranda 2002 annual report:

Mineral resources (in addition to mineral reserves)


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There is no internationally agreed set of definitions for reserves and resources.

We also looked at five diversified mining companies: AngloAmerican, BHP Billiton, MIM, Rio Tinto and Xstrata. All areinvolved in the mining of coal as well as metals. AngloAmerican has substantial precious metals operations inaddition to coal and base metals. Xstrata does not provideany disclosure of reserves. The other four are largelyconsistent with their disclosures. The frameworks used areas follows:

COMPANY FRAMEWORK

Anglo American (See note below)BHP Billiton JORC

MIM JORCRio Tinto JORC

Note: Anglo American uses the JORC Code for some of its operations. For others there is no indication of the framework used, and definitions are not provided.

Anglo American is the only company in this group to providecalculations of contained metal quantities, where applicable.None of these companies disclose the commodity pricesused to determine reserves.All four have disclosed information on resources as well.The following are extracts from the disclosures made byAnglo American in its annual report:

page six


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page seven




The measured and indicated resources are additional tothe ore reserves and are stated as at 31 December2002, unless otherwise stated.

For Collahaus, all resources are contained within aUS$1.15/lb Cu pit.

Special considerations arise in the case of reserves ofindustrial minerals as there are no spot or forward marketsfor such minerals. How does a company that producesindustrial minerals establish that there is a market for allof the reserves it has quantified? In the United States theSEC has traditionally required a final feasibility study aswell as a sales contract or binding letter of intent as evidenceof the ability to produce and sell industrial minerals profitably,but will allow minerals to be designated as non-reservematerial if a company expects to be able to continue toeconomically market the industrial minerals. (4)

Our review revealed inconsistencies in the disclosure ofreserves. A few companies did not disclose any reserveinformation with their financial statements. (We recognisethis may be available elsewhere). The companies providingdisclosure use a number of different frameworks forcategorising reserves and, in some cases, resources. Webelieve that an industry-developed common set of definitions,as well as agreed disclosures to supplement the financialstatements, would be helpful.

Copper

Collahuas-Oxide & mixed

Contained

metal 2002(000 t)

Grade

2001%Cu

Grade

2002%Cu

Tonnes (m)

2001

Tonnes (m)

2002

Measuredindicated

Measured &indicated

Classification Contained

metal 2001(000 t)

-Sulphide

-Low Gradesulphide

Measuredindicated

Measured &indicated

Measuredindicated

Measured &indicated

0.030.23

0.26

5.576.5

82.0

15.6112.4

128.0

0.030.66

0.69

5.576.5

82.0

15.7112.4

128.1

1.081.22

1.20

0.830.87

0.87

0.450.46

0.46

1.260.88

0.90

0.870.87

0.87

0.450.46

0.46

0.32.8

3.1

46665

711

71529

601

0.45.9

6.2

48664

712

70521

592

Marble with veins of calc-silicate mineralsThis rock results from the thermal metamorphism of limestone around igneous rocks


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The manner in which a mineral or metal occurs in the earths crust determinesthe type of mining operation required to extract it and the costs to developa mine, as well as the amount of waste produced in the extraction process.

Mining companies carry out the various stages ofdevelopment necessary prior to production over a longperiod of time, at high cost and in some cases with ahigh level of risk and uncertainty as to future commercialbenefits. Adopting an appropriate accounting treatmentfor the costs incurred at each stage is therefore essential.Unfortunately, there is little specific guidance as to theextent to which costs associated with finding, acquiringand developing mineral reserves should be expensedimmediately or deferred. The IASB Steering Committee,however, offered tentative conclusions for accountingfor the costs incurred at each stage.

In their exploration and development activities, miningcompanies typically carry out six pre-production stages:

Prospecting. Normally undertaken before mineralrights in an area have been acquired. Involvesinvestigating an areas geological data and carrying outgeochemical and geophysical surveys, as well asexploratory drilling and trenching.

Staking of claims and acquisition of interests. Relatesto obtaining a legal right to explore for, develop andproduce minerals.

Exploration. Involves activities similar to prospecting,but carried out in greater detail on areas with sufficientmineral potential to warrant exploration for commerciallyrecoverable resources.

Accounting for explorationand mine development

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page nine


EXPLORATION

Evaluation and appraisal. Determines the technicalfeasibility and commercial viability of mineral deposits foundduring exploration and the designation of proven andprobable reserves. At this stage, decisions are made as towhether to develop a particular area.

Development. Pre-production activities undertaken to gainaccess to mineral reserves. Typically includes sinking shafts,

permanent excavations, building transport infrastructureand initial removal of overburden (see stripping costsbelow).

Construction. Establishes and commissions facilities, (e.g.,buildings, machinery and equipment) to extract and transportminerals. Some construction may occur during thedevelopment stage.

Our review of the financial statements of the twenty-onecompanies revealed a reasonable commonality of treatmentof exploration and development pre-production costs, with

some detailed variation. The majority of these companiesexpense exploration costs as incurred except when aproperty is considered viable for future production or whenproven and probable reserves have been established.Costs are subsequently capitalised until commercialproduction commences or could commence.

The exploration and evaluation accounting policies of RioTinto and Xstrata are of interest (both follow UK GAAP):

Rio TintoDuring the initial stage of a project, full provision is madefor the costs thereof by charge against profits for the year.Expenditure on a project after it has reached a stage atwhich there is a high degree of confidence in its viability is

carried forward and transferred to tangible fixed assets ifthe project proceeds. If a project does not prove viable, allirrecoverable costs associated with the project are writtenoff. If an undeveloped project is sold, any gain or loss isincluded in operating profit, such transactions being anormal part of the Groups activities. Where expenditure iscarried forward in respect of a project that may not proceedto commercial development for some time, provision ismade against the possibility of non-development by chargeagainst profits over a period of up to seven years. When itis decided to proceed with development, any provisionsmade in previous years are reversed to the extent that the

costs are recoverable.

Rio Tinto is the only company we reviewed that disclosesthe potential for reversal of provisions against capitalisedcosts made in previous years.


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XstrataExploration and evaluation expenditure for each area ofinterest, other than that acquired from the purchase ofanother mining company, is carried forward as an assetprovided that one of the following conditions is met:

Such costs are expected to be recouped throughsuccessful development and exploration of the area ofinterest or, alternatively, by its sale; or

Exploration and evaluation activities in the area of

interest have not yet reached a stage which permits areasonable assessment of the existence or otherwise of

economically recoverable reserves, and active andsignificant operations in relation to the area arecontinuing.

Exploration expenditure which fails to meet at least oneof the conditions outlined above is written off. Identifiableexploration and evaluation assets are recognised at theircost of acquisition. Exploration assets are reassessed ona regular basis, and these costs are carried forward providedthat at least one of the conditions outlined above is met.

The tentative views reached by the IASB SteeringCommittee were:

Pre-acquisition prospecting, appraisal and exploration costs Charge to expense when incurred

Direct and incidental property acquisition costs Recognise as an asset

Post-acquisition exploration and appraisal costs Initially recognise as an asset pending thedetermination of whether commercially recoverablereserves have been found. Some ceiling should

be imposed.

Development costs Recognise as an asset

Construction costs that relate to a single mineral cost centre Capitalise as part of the costs of that cost centre

Construction costs that relate to more than one mineral Account for them in the same way as other property,cost centre plant and equipment under IAS 16

Post-production exploration and development costs Treat the same way as any other exploration ordevelopment costs

page ten


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page eleven


E X P L O R AT I O N

In the United States, the SECs industry Guide 7 tries to

distinguish between the exploration stage and thedevelopment stage. Guide 7 defines development stageas any activity in the preparation of an establishedcommercially minable deposit (reserve) for its extraction,which is not already in production. The exploration stageis defined as all activities involved in the search for mineraldeposits (reserves), which is not in the development orproduction stage. Therefore, if proven or probable reserveshave been demonstrated the project is in the developmentor production stage. If no reserves have been demonstratedthen whatever activity is being performed on or for a mineralproperty is termed exploration. This stage can include

drilling, sampling, assaying, metallurgical testing, engineeringstudies, economic feasibility studies and project permitting.

The SEC staff will generally not allow the capitalisation ofexploration and development costs before completion of afinal or bankable feasibility study and the designation ofproven and probable reserves. The SEC staff has alsostated that the acquisition cost for an exploration stagemining property should generally be viewed as an explorationexpense and expensed as incurred. (2) The SEC expects,however, that there will also be circumstances wherecapitalisation of these costs is required. The determination

of whether to capitalise amounts for the acquisition of anexploration property is highly dependent upon the specificfacts and circumstances of the property acquired.

Borrowing costsWith the exception of one company reviewed, all disclosetheir accounting policy regarding the treatment of borrowingcosts. All capitalise costs relating to the financing of majorcapital projects. Because of the high cost of major capitalprojects and the time it takes to complete them, borrowingcosts during the construction phase can be significant.

Sale of product during the development stage

None of the companies reviewed disclosed their accountingtreatment of revenues derived from the sale of productduring the development stage, probably because suchrevenues are not material to the financial statements. Thealternatives are to record sales as revenue, in which casethe cost of sales would presumably need to be computed,or to credit revenues against the cost of the project to whichthey relate.In its exposure draft of Improvements to InternationalFinancial Reporting Standards, the IASB has proposed thefollowing accounting for incidental revenue during thedevelopment stage:

Some operations occur in connection with the constructionor development of an item of property, plant and equipment,but are not necessary to bring the asset to the location andworking condition necessary for it to be capable of operatingin the manner intended by management. These incidentaloperations may occur before or during the construction ordevelopment activities. For example, income may be earnedthrough using a building site as a car park until constructioncommences. Because incidental operations are notnecessary to bring an asset to the location and workingcondition necessary for it to be capable of operating in the

manner intended by management, the income and relatedexpenses of incidental operations are recognised in profitor loss for the period, and included in their respectiveclassifications of income and expense in the incomestatement.

On the other hand, under the exposure draft, if the operationsare necessary to bring the asset to operating condition,then net sales proceeds received during activities necessaryto bring the asset to the location and working conditionnecessary for it to be capable of operating properly, arededucted from the cost of the asset.


E X P L O R AT I O N

Limestone Breccia sedimentary rockFound in transitional environments near continental margins


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Of the twenty-one companies surveyed, eleven specificallyinclude an accounting policy for stripping costs and fiveothers have policies that can be construed as incorporatingdeferred costs related to stripping. In each of these sixteencompanies stripping costs are deferred in certaincircumstances.

The following extracts of disclosures from 2002 publishedreports illustrate the variation of reported practice:

WMC ResourcesCapital development for open pit mines includes both theinitial pre-production removal of overburden and ongoingpost-production waste removal.

All costs of post-production waste removal (stripping) fromopen pit mines are accumulated and deferred on the balancesheet as part of the total of mine properties and minedevelopment. These costs include the cost of drilling,blasting, loading and haulage of waste rock from the openpit to the waste pile. These costs are predominantly in thenature of payments to mining, blasting and other contractingcompanies or costs of internal labour and materials usedin the process. These costs are amortised on a units ofproduction basis.

Phelps DodgeMine exploration costs and stripping costs to maintainproduction of operating mines are charged to operationsas incurred. Mine development expenditures at new mines,and major development expenditures at operating minesoutside existing pit limits that are expected to benefit futureproduction beyond a minimum of one year, are capitalisedand amortised on the units of production method. Majordevelopment expenditures at operating mines include thecost to remove overburden to prepare unique and identifiableareas outside the current mining area for such futureproduction.

BHP BillitonStripping ratios are a function of the quantity of ore minedcompared with the quantity of overburden, or waste, requiredto be removed to mine the ore. Deferral of costs to thebalance sheet is made, where appropriate, when actualstripping ratios vary from average stripping ratios. Deferralof costs to the balance sheet is not made where ore isexpected to be evenly distributed.

Costs, which have previously been deferred to the balancesheet (deferred overburden removal costs), are includedin the profit and loss account on a unit of production basis

Stripping costsCompanies that engage in open pit mining (surface miningto extract ore deposits by making progressively larger anddeeper pits) can incur significant stripping costs in removingoverburden and waste rock. Such costs arise during bothmine development (pre-production stripping to reach theore) and production.

Capitalising pre-production stripping costs as part of thecosts of developing a mine is generally accepted practice.For post-production stripping costs, two methods of

accounting are used. The first, which expenses costs asincurred, is normally employed when the stripping ratio (ratioof ore extracted to waste material) over the life of the mineis expected to be relatively even. The second method, whichdefers stripping costs using a life-of-mine based accountingmodel, is normally used by companies where the strippingratio varies substantially during the life of a mine. It involvesdeferring costs when the actual stripping ratio incurredexceeds the expected average life-of-mine stripping ratioor recording a liability when the actual stripping ratio is lessthan the expected average life-of-mine ratio.

page twelve


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FINANCIAL REPORTINGMINING

EXPLORATION

page thirteen

utilising average stripping ratios. Changes in estimates ofaverage stripping ratios are accounted for prospectivelyfrom the date of change.

In November 2002, the SEC staff announced that they wereevaluating the accounting for post-production strippingcosts. (2) In the interim, the SEC expects mining companiesto include detailed disclosures in their financial statementsand operating and financial review. These disclosures shouldinclude:

Deferred charges and credits to be reported as separatelines in the balance sheet apart from property, plant andequipment and long-lived assets

Cash flows associated with deferred stripping should beclassified as a component of operating cash flows ratherthan investing cash flows

The accounting methods used to measure and recogniseproduction stage deferred stripping costs and credits

The circumstances under which costs associated withwaste rock removal are deferred

The method used to defer and amortise post-productionstripping costs

The reserve quantities used to develop the waste-toore-ratio

The basis on which deferred costs or credits are evaluatedfor loss in value

A statement that accounting for stripping costs smoothesthe cost over the life of the mine rather than expensingthe actual cost in each period

A statement that some mining companies expense suchcosts as incurred

The waste-to-ore ratio used by each mine and changesthereto from period to period

The extent to which the life of mine waste-to-ore ratiodiffers from the actual ratio during the period

No accounting standard specifically addresses the matterof stripping costs; however, the definition of an asset in theIASB Framework is relevant. An asset is a resourcecontrolled by an enterprise as a result of past events andfrom which future economic benefits are expected to flowto the enterprise. Not all costs that satisfy this definitionwill qualify for recognition on the balance sheet. Even if itis probable that future economic benefits will flow to theenterprise an asset can only be recognised if it has a costor value that can be measured reliably. Some might questionwhether deferred stripping costs meet the definition ofan asset.

The IASB Steering Committees Issues Paper gives, as anexample of assets in extractive industry enterprises, thecost of accessing known mineral reserves. The SteeringCommittees tentative view regarding post-productiondevelopment costs was to treat them as any otherdevelopment costs, i.e., to capitalise costs as an asset. Itis not clear, however, whether ongoing stripping would becontemplated as a development cost.

There is little specific accounting guidance as to the extent to which the costs associated with finding, acquiring and developing mineral reserves should be expensed immediately or deferred.


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Issues to consider regarding the amortisation of capitalisedcosts in the mining industry include:

The method used in calculating amortisation The reserve base used when the unit of production methodis adopted

Amortisation methodsMining companies usually consider two main methods foramortising pre-production costs:

Straight-line. Assets are written down by equal annualamounts over their estimated useful lives. This method isappropriate where annual production is expected to berelatively stable.

Unit of production. Assets are written down by the proportionthat the resources extracted in a period, correspond to total

resources. This method is appropriate when production isexpected to vary from one year to another.

Some companies use both methods in their financialstatements.

Reserve baseIn matching costs with revenues under the unit of productionmethod, the choice of reserve base used to amortisecapitalised costs is important. Available options include:

Proven and probable reserves Proven developed reserves Proven reserves (both developed and undeveloped)

The IASB Steering Committee discussed this issue inits report but did not reach a tentative conclusion aboutwhich basis is preferred.

A fundamental accounting issue for mining companies is how the costs capitalised during pre-production should be allocated through periodic charge to the income statement as mineral isproduced. The generally accepted accounting principle is that the amortisable amount should beallocated on a systematic basis over its useful economic life, using a method that reflects as far aspossible the pattern in which its economic benefits are consumed.

Amortisation of capitalisedcosts related to mineral reserves

page fourteen


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AM OR TI SAT IO N

page fifteen

Regardless of the reserve base chosen, it is important thatall costs, both past and future, appropriate for the reserveclassification be included in the depreciation basis. Forexample, if undeveloped reserves are included in the basis,development costs expected to be incurred to access thosereserves should be taken into account in the calculation.In the United States, however, the SEC staff has noted thatestimated future costs should not be taken into account inamortisation calculations in filings with the commission. (2)

Our review indicated that a mining company would typicallyamortise its pre-production costs using the unit of production

method and the amount of proven and probable reserves.Eleven of the twenty-one companies reviewed did so while

a further seven companies followed the unit of productionbasis but used more generalised language in talking aboutreserves. None of the companies reviewed made referenceto whether undeveloped reserves are included in theiramortisation calculations.

The following extracts of disclosed accounting policiesillustrate the variation found in practice:

NewmontProven and probable reserves are amortised on a unit ofproduction basis over the respective mine lives. Undevelopedmineral interests are amortised on a straight-line basis overtheir estimated useful lives taking into account residualvalues. At such time as an undeveloped mineral interest isconverted to proven and probable reserves, the remainingunamortised balance is amortised on a unit of productionbasis as described above.

Norilsk Nickel.Mine development costs are amortised on a straight-linebasis using the life of mine method, based on estimatedproven and probable mineral reserves, over the lesser ofseventy years or their expected useful lives.

Placer DomeFor mineral properties, capitalised development, buildingsand machinery, the unit of production method is appliedwhere the mine operating plan calls for production fromwell-defined mineral ore reserves. Where total mineral

reserves are not determinable because ore-bearingstructures are open at depth or are open laterally, thestraight-line method is applied over the estimated life ofeach mine.

The tentative view of the IASB Steering Committee is touse unit of production depreciation for all capitalised pre-production costs with two exceptions:

Use straight-line depreciation for capitalised constructioncosts that serve a single mineral cost centre if the economiclife of the asset is less than the life of the reserves.

Follow IAS 16 for capitalised construction costs that servetwo or more cost centres.

At the AICPA SEC Regulations Committees InternationalPractices Task Force November 2002 meeting, the SECrepresentative noted the following points: (2)

Reserve quantities used to calculate depreciation, depletionand accumulated retirement obligation provision ratesshould be derived from Industry Guide 7 reserves, calculatedusing current price and cost assumptions.

The determination of proven and probable reserves, asdetermined by Industry Guide 7, is required prior to thecapitalisation of mine development costs. Accordingly, thereserve quantities used to measure the financial results ofa mining operation are also limited to proven and probablereserves (contained in the area currently being mined)

Unless management has reasonable certainty that reservequantities will actually be processed, proven and probablereserve quantities contained in stockpiled inventory shouldnot be recognised and used for financial accounting andreporting purposes. This is the case even though it ispossible that these reserve quantities may meet the IndustryGuide 7 criteria to be classified as proven and probablereserves if it is expected they will be economic to process.

The SEC staff is interpreting current commodity prices asthe average of the last three years average annual prices.


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Mining operations typically require a high level of capitalinvestment in order to develop, extract and process minerals

The operational life of many mining projects runs intoseveral decades

The selling price of many minerals fluctuates widely

To review non-current assets for possible impairment, it isgenerally necessary to estimate future cash flows from thoseassets and compare the amount so calculated with the

carrying amount of the same assets. For companies thatreport in accordance with U.S. GAAP, estimated future cashflows are initially calculated on an undiscounted basiswhereas those that report in accordance with InternationalFinancial Reporting Standards (or U.K. GAAP) use adiscounted basis.

Issues to consider in estimating future cash flows include:

The reserve categories to be used to measurerecoverable quantities

The commodity prices to be used

The choice of discount rate (where required)

Our review of the financial statements of the twenty-onemining companies revealed a general absence of disclosures

about the above matters. Three companies made referenceto reserves, three to commodity prices and four to discountrates. Assumptions about future currency exchange rates,which can also be significant in estimating future cash flows,are not discussed.

Assets should not be carried on the balance sheet at an amount in excess oftheir recoverable amount. The measurement and recognition of asset impairmentis an important issue in the mining industry for the following reasons:

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Accounting for Impairment


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IMPAIRMENT

page seventeen

Industry Guide 7 provides SEC guidance regarding thereserve categories for estimating future cash flows andrequires companies to use proven and probable reserve

quantities as determined in accordance with the guide.The tentative view reached by the IASB Steering Committeesupports this principle. IAS 36 discusses the appropriatediscount rate to be used in computing the value in use ofnon-current assets, referring to a pre-tax rate that reflectscurrent market assessments of the time value of moneyand the risks specific to the asset.

Barrick and Rio Tinto are two companies that discloseinformation about their discount rate:

Barrick. The discount factor is our estimate of the riskadjusted rate used to determine the fair value of our mining

properties in a transaction between willing buyers andsellers.

Rio Tinto. The discount rate applied is based upon theGroups weighted average cost of capital with appropriateadjustment for the risk associated with the relevant unit.Estimates of future net cash flows are based on ore reservesand mineral resources for which there is a high degree ofconfidence of economic extraction.

IAS 36 requires cash flow projections to be based onreasonable and supportable assumptions that representmanagements best estimate of the set of conditions that

will exist over the remaining useful life of the asset, and bebased on the most recent financial budgets/forecastsapproved by management.

Goldfields and Newmont provide such disclosure:

Goldfields. The following estimates and assumptions

were made by management when reviewing the long-termassets for impairments: a gold price of US$320 per ouncebeing R103,000 kilogram; the extraction of proved andprobably reserves as per the most recent life of mine plan;and working costs and capital expenditure estimates asper the most recent life of mine plan.

Newmont. Future cash flows include estimates ofrecoverable ounces, gold prices (considering current andhistorical prices, price trends and related factors), productionlevels, capital and reclamation costs, all based on detailedengineering life of mine plans.

Once a company has determined that an asset is impaired,a reduction in the carrying amount of the asset needs tobe recorded and the charge recorded in the incomestatement for that period. Of the companies reviewed,thirteen recorded an impairment charge in either 2002 orthe previous year. Although there was some variation asto where the impairment was recorded within the incomestatement, there was general consistency in recording theimpairment within the results of operations. Teck Cominco,however, recorded impairments after operating profit andbefore net earnings, while Goldfields recorded an impairmentafter profit, before tax and exceptional items.


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Mining companies normally incur significant costs at mine sites after the minerals have beenextracted and the mine is closed. Such costs include those to remove plant and other facilitiesand to restore the area in a manner required by law or in accordance with a companys ownaccepted practices. In addition, reclamation and other environmental obligations frequentlyarise during ongoing operations. The question is how to account for such costs.

The options are to:

Expense costs as incurred

Accrue costs by incrementally increasing a provisionover the life of the mine

Provide for the present value of the total future costsexpected to be incurred in making good past damageand other related closure costs when the obligation isincurred. The amount capitalized is then amortised overthe life of the mine

Historically, asset removal and site rehabilitation costswere charged to expense at the time that they wereincurred. This practice was accepted because the costswere significantly lower than they are currently and therewere few regulations requiring companies to rehabilitate

sites. The situation today could not be more different.Governments have introduced stringent environmentaland rehabilitation requirements, the public as a wholehas become more environmentally conscious anddemanding, and mining companies themselves haveintroduced their own codes of environmental practice.The result is that the future cash outlays can indeed besignificant.

In 1999 the International Accounting Standards Boardissued IAS 37 Provisions, Contingent Liabilities andContingent Assets. The same standard was issued inthe United Kingdom as FRS 12. This standard statesthat a provision should be recognised only when all ofthe following criteria are met:

An enterprise has a present obligation (legal orconstructive) as a result of a past event

Accounting for site rehabilitationand environmental costs

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SITE REHA BILITATION

page nineteen

From 2004 most of the worlds leading mining companies will provide for asset retirement at the time the obligation arises.

It is probable that an outflow of resources embodyingeconomic benefits will be required to settle the obligation

A reliable estimate can be made of the provision

The standard states that no provision is recognised for

future operating costs; only those obligations that arisefrom past events existing independently of an enterprisesfuture actions are recognised as provisions. An appendixto the standard indicates that the estimated costs of removingan oil rig and restoring damage resulting from installationshould be provided for when the rig is installed, but thatrestoration costs that might arise from the future extractionof oil should be recognised as a liability only when the oilis extracted and the restoration obligation arises. Theexample is analogous to situations in the mining industryrelating to the removal of plant and restoration ofmine sites.

IAS 37 and FRS 12 brought about a significant change inthe way mining companies reporting under IFRS or U.K.GAAP account for such costs. From 1999, these companieshave accrued site-decommissioning costs on a discountedbasis when mines become operational and have includedthe corresponding amount in the cost of the assets to bedepreciated. Liabilities for ongoing rehabilitation necessitatedby mining operations are accrued as they arise.

In June 2001, the U.S. Financial Accounting StandardsBoard issued SFAS No. 143 Accounting for Asset RetirementObligations, which is effective for accounting periodscommencing January 1, 2003. In accordance with this

statement, asset retirement obligations need to berecognised when they are incurred if a reasonable estimateof fair value can be made. The initial measurement will beat fair value and the asset retirement cost capitalised aspart of the assets carrying value and subsequently allocatedto expense over the assets useful life. This statement isvery much in accord with the principles in IAS 37, as theyapply to the mining industry, as well as with the tentativeviews formed by the IASB Steering Committee.

Nine of the twenty-one companies we reviewed made aprovision in 2002 on a discounted basis at the time a liabilityfor rehabilitation arose and included this amount in the costof assets. Eleven companies accrued the costs on asystematic basis over the life of the mine, including fivethat report in accordance with U.S. GAAP and have adopted

the provisions of SFAS No. 143 in 2003. With Canadianaccounting standards to be aligned with SFAS 143 from2004, most of the worlds leading mining companies willprovide for asset retirement at the time the obligation arises.

Of interest is the policy of Inco, whereby estimated futureremoval and site restoration costs are charged to earningson a straight-line basis over the estimated remaining life ofthe related business operation. Companies more frequentlyuse a unit of production basis.

Few companies disclose information regarding theiraccounting for ongoing environmental programmes, but

those that do, expense the costs as incurred.

The following accounting policy from Anglo Americanaddresses both site rehabilitation and ongoing environmentalcosts:

An obligation to incur restoration, rehabilitation andenvironmental costs arises when environmental disturbanceis caused by the development or ongoing production of amine or quarry. Costs arising from the installation of plantand other site preparation work, discounted to its presentvalue, are provided for and capitalised at the star t of eachproject, as soon as the obligation to incur such costs arises.

These costs are charged against profits over the life of theoperation through the depreciation of the asset and theunwinding of the discount on the provision. Costs forrestoration of subsequent site damage, which is createdon an ongoing basis during production, are provided for attheir net present values and charged against profits asextraction progresses.


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Chalcedony onyxThis mineral forms in cavities in rocks of different types, especially lava

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International Financial Reporting Standards currently permitmerger accounting in certain limited circumstances. Theyalso require the amortisation of goodwill and other intangibles.The IASB, however, has issued a proposal that wouldessentially align the accounting for business combinations,goodwill and other intangibles with U.S. GAAP, endamortisation and require impairment testing of intangibles.

In its November 2000 Issues Paper, the IASB SteeringCommittee indicated a growing concern that companies

that had paid more than market value for assets allocatedthe total purchase price as property cost and thensubsequently recorded an impairment on those assets.This approach may have obscured the fact that the originalpurchase price paid for the assets was too high. For thisreason, some argue that the excess purchase considerationshould be recorded as goodwill. Others add that the purchaseprice in such circumstances may, and often does, includegoodwill. There are yet others who oppose the recognitionof goodwill in a mining acquisition on the grounds thatseparately identifiable goodwill does not arise. The steeringcommittee did not develop a tentative view.A few of the companies we reviewed do not show goodwillon their balance sheet and do not refer to goodwill in theiraccounting policies. The remainder all include a policy ofrecognising goodwill in accounting for business combinations.None of the companies we reviewed has an explicit policyof not attributing purchase consideration to goodwill.

The following examples illustrate the diversity of accountingpolicies mining companies are disclosing in their annualreports:

Anglo AmericanWhere an investment in a subsidiary, joint venture or anassociate is made, any difference between the purchaseprice and the fair value of the attributable net assets isrecognised as goodwill. Goodwill is amortised over itsestimated useful life up to a maximum of twenty years. Theunamortised balance is reviewed on a regular basis and,if an impairment in value has occurred, it is written off inthe period in which the circumstances are identified.

In November 2002, Anglo American acquired a 100 percentinterest in Compaia Minera Disputada de Las CondesLimitada, a company engaged in the mining of copper inSouth America. Notes to the financial statements show thatno goodwill arose on this acquisition but that there was afair value adjustment of $746 million to the book amount oftangible fixed assets acquired, reflecting the revaluation ofreserves and resources, land and buildings, and plant andequipment to fair value.

NewmontIn February 2002, Newmont acquired a 100 percent interestin Normandy Mining, then Australias largest gold companywhich was accounted for using the purchase method. Fairvalues were attributed to items disclosed as intangibleassets: proven and probable reserves, undeveloped mineral

interests and other intangible assets. After allocating fairvalues, a residual purchase price of $1,894.3 million wasallocated to goodwill.

accounting rules for business combinations are evolving but still do not

provide any guidance for transactions within this industry.

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C O M B I N AT I O N

Additional disclosures of interest include:

Intangible assets, including proven and probable reservesand undeveloped mineral interests, were adjusted toestimated fair value based on the quantity of material, theestimated future production costs and capital expenditurerequired to produce the material at each site.

Proven and probable reserves, other mineralised materialand around-mine exploration potential have been valuedbased on estimated discounted cash flows from futureproduction of each class of material. Other explorationpotential has been valued based on recent marketcomparables for sales of similar properties.

Newmont also discloses that in 2001 it completed a mergerwith Battle Mountain Gold Company that was accountedfor as a pooling of interests. The 2002 financial statementsinclude that companys financial data as if Battle Mountainhad always been part of Newmont.

Placer DomeThe treatment adopted by Placer Dome on its acquisitionof Aurion Gold in 2002 was similar to that adopted byNewmont. Fair values were attributed to mineral properties

and mine development and to undeveloped mineral interests,with the residual purchase price of $200 million allocatedto goodwill.

Placer Dome, however, does not disclose any intangibleassets other than goodwill on its balance sheet. One wouldpresume that undeveloped mineral interests have beenincluded in tangible assets, unlike Newmont.

XstrataOn the acquisition of a subsidiarythe purchaseconsideration is allocated to assets and liabilities on thebasis of the fair value at the date of acquisition. Thosemineral reserves and resources that are able to be reliablyvalued are recognised in the assessment of fair values onacquisition. Other potential reserves and resources andmineral rights, for which, in the Directors opinion, valuescannot reliably be determined, are not recognised. Whenthe cost of acquisition exceeds the fair value attributable tothe Groups share of the identifiable net assets, the differenceis treated as purchased goodwill. This is amortised on astraight-line basis over its useful economic life up to a

maximum of twenty years.

Xstrata made a $2 billion acquisition of coal mining operationsin 2002 but has attributed the entire purchase considerationto intangible and tangible assets, and has not raised goodwill.Intangible assets are stated to include export rights andmineral rights.

The accounting policies reviewed above indicate a lack ofconsistency regarding the assets to which value is attributedin an acquisition, the way the assets are classified (whichimpacts amortisation) and the approach to goodwill. This

area of accounting in the mining industry should receivehigh priority in terms of initiatives to improve consistency.


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The cost of developing a large mining project can exceedone billion U.S. dollars, sometimes by a considerable margin,and the return that will be earned on this massive investmentis difficult to predict. It is therefore not surprising that mostlarge mining companies are involved in joint ventures orsimilar arrangements for at least some of their miningactivities in order to spread risk.

The nature of these joint undertakings can vary widely, fromowning a share of the individual assets used in a jointventure to owning a stake in a freestanding entity. Theaccounting also varies depending on the nature of thearrangement. Under IAS 31, jointly controlled assets (asdescribed in the standard) are accounted for usingproportionate consolidation. For jointly controlled entities,(as described in the standard) the benchmark accountingtreatment is proportionate consolidation, but equityaccounting is an allowed alternative. In the United Kingdom,

FRS 9 calls for a method that is essentially proportionateconsolidation for a joint arrangement that is not an entityand for gross equity accounting for joint ventures. Thelatter is equity accounting with slightly expanded disclosures.In the United States, an interpretation of APB 18 is commonlyused in the mining industry to account for unincorporated

joint ventures using proportionate consolidation; however,equity accounting has to be used for incorporated jointventures. In Canada, proportionate consolidation is requiredfor all joint ventures as defined.

A study by the so-called G4+1 group of accounting standard

setters led to a publication in 1999 entitled Reporting Interestsin Joint Ventures and Similar Arrangements. (5) This studyadvocated the use of equity accounting for what IAS 31defines as a jointly controlled operation. To the best of ourknowledge, the subject has not been addressed since 1999by any of the standard setters that made up the G4+1 group.In addition, the IASB Steering Committee did not developa tentative conclusion regarding the accounting for joint

ventures. The income recorded under equity accountingand proportionate consolidation is the same, but thepresentation on the balance sheet is dramatically different.

Of the twenty-one companies we reviewed, four make nomention of joint ventures and are presumed not to haveany. The accounting polices of the remaining seventeen,not surprisingly, fall into the following groups depending onwhich accounting standards are applied:

Two companies follow IRFS or national standardsaligned with IFRS and account for joint ventures using theproportionate consolidation method

Five companies follow U.K. GAAP and use the grossequity method for joint ventures. All but one state that theyuse proportionate consolidation to account for jointarrangements that are not entities

Five companies follow U.S. GAAP and account for jointventures using proportionate consolidation. Of thesecompanies, three state that this method is used forunincorporated joint ventures

Three companies follow Canadian GAAP and account for joint ventures using proportionate consolidation

Two companies follow accounting standards of othercountries and account for joint ventures using the equitymethod

Clearly, proportionate consolidation is the preferred optionfor the majority of the worlds major mining companies. Itremains to be seen what the standard setters decide in theyears ahead.

Proportionate consolidation is the preferred option forthe majority of the worlds major mining companies.

Accounting for joint ventures and related undertakings

GoldForms mainly in hydrothermal veins, often associated with quartz and sulphides

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The currency that an international mining enterprise usesto keep its books can impact dramatically on its financialstatements, yet the subject receives little coverage in annualreports and was not addressed in the IASB SteeringCommittee's Issues Paper. Most of the commodities thatare produced by mining companies and sold in internationalmarkets are priced in US dollars regardless of the destinationof the customer. This is true of precious metals, base andferrous metals, as well as coal. Production outside of theUnited States, however, is in countries whose nationalcurrency is not the US dollar; accordingly most of theoperating costs would normally be incurred in local currency.Loan finance and capital purchases may be denominatedin US dollars, local currency or even a third currency. Whatcurrency then should such a company use for keeping itsbooks and preparing its financial statements?

Some guidance is provided in Interpretation SIC-19 of theStanding Interpretations Committee of the IASB, issued in2000 and entitled Reporting Currency Measurement andPresentation of Financial Statements under IAS 21 andIAS 29. This interpretation refers to both a reporting

currency, which IAS 21 defines as the currency used inpresenting the financial statements, and a measurementcurrency, which is a currency for measuring items in financial statements. Measurement currency is sometimesreferred to as functional currency. For example, supposea U.S. company has a copper mining subsidiary in Chile.In all likelihood, the U.S. parent will present its financialstatements in dollars (the reporting currency), but does theChilean subsidiary keep its records in dollars and translatecosts as they are incurred from pesos into dollars? Or doesit keep its records in pesos and translate revenues as theyare earned from dollars into pesos?

Generally, companies in other industries use the currencyof the country in which they are domiciled as their reportingcurrency, and some countries require this. It is, however,common for large companies in the mining industry to usethe U.S. dollar as their reporting currency, regardless ofwhere they are domiciled. Of the twenty-one companieswhose annual reports we reviewed, fourteen use the U.S.dollar as their reporting currency and eleven of these arenot U.S.-based companies. The remaining seven use theirdomestic currency as their reporting currency. Five of theseven, however, have most or all of their operations in theirhome country.

The position with measurement currency is more complex.Very few of the companies we reviewed say anything at allabout their policies regarding measurement currency.SIC-19 states: The measurement currency should provideinformation about the enterprise that is useful and reflectsthe economic substance of the underlying events andcircumstances relevant to the enterprise. If a particularcurrency is used to a significant extent in, or has significantimpact on, the enterprise, that currency may be an

appropriate currency to be used as the measurementcurrency.

Unfortunately, neither SIC-19 itself nor the examples in theappendices provide guidance for determining measurementcurrency in cases where revenues are earned in onecurrency and the majority of costs are incurred in another,the situation many mining companies face.

Whether an international mining company uses the U.S.dollar or local currency as the measurement currency canhave a dramatic impact on its reported financial position

when the dollar is the reporting currency.

Currenciesused in financial statements

Very fewcompaniessay anything at all about their policies regarding measurement currency.

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C U R R E N C I E S

page twenty-seven

If local currency is the measurement currency, underInternational (and most other) Financial Reporting Standardsthe assets and liabilities are translated into dollars atreporting dates using the exchange rates at that date. The

adjustment is booked through reserves and hence doesnot affect reported income, but in a year when there arelarge swings in exchange rates, the adjustment can greatlyaffect shareholders funds reported on the balance sheet.

Our review of the 2002 financial statements of four majordiversified mining groups revealed the following disclosuresin the Statement of Total Recognised Gains and Losses.All four report under U. K. accounting standards. All havesubstantial operations in Australia and (with the exceptionof Rio Tinto) South Africa. The currencies of these twocountries declined significantly against the U.S. dollar in

2001 and then recovered in 2002.

All four use the U.S. dollar as the reporting currency andamounts below are in millions of dollars:

The currency adjustments are significant. Anglo Americans2002 currency adjustment represents 16 percent ofshareholders funds; the equivalent percentages for RioTinto and Xstrata are 8 percent and 18 percent.

Disclosures in Xstratas financial statements suggest thatits subsidiaries in Australia and South Africa use the localcurrencies as their measurement currency, but this is notstated explicitly. This presumption is supported by the size

of the adjustments booked through the Statement of TotalRecognised Gains and Losses in 2001 and 2002. BHPBilliton refers to the translation of financial statements ofentities that have a functional currency other than the U.S.dollar, but the relatively smaller size of the currencyadjustment in 2002 suggests that most of BHP Billitonsoperations may be using the dollar as the functional currency.Rio Tinto states that some of its subsidiaries outside theUnited States use the dollar as the functional (measurement)currency, but the reported results suggest that a meaningfulpart of the groups operations is using local currencies asthe measurement currency. Anglo American does not

disclose its policy on functional currency, but the financial

statements suggest that most, if not all, of its operationsuse local currency as the functional currency.

Barrick, a large gold mining company based in Canada,

uses the U.S. dollar as its reporting currency and is one ofonly a few companies that clearly states its policy onmeasurement currency:

BarrickThe functional currency of all our operations, except forour Argentinean operations where it is the Argentineanpeso, is the United States dollar (the U.S. dollar). Exceptfor our Argentinean operations, we remeasure balancesinto U.S. dollars as follows:

Non-monetary assets and liabilities using historical rates

Monetary assets and liabilities using periodendexchange rates

Income and expenses using average exchange rates,except for expenses related to assets and liabilitiesremeasured at historical exchange rates

Gains and losses from remeasurement of foreign currencyfinancial statements into U.S. dollars, and from foreigncurrency transactions, are included in earnings.

For our Argentinean operations, we translate assets and

liabilities into U.S. dollars using period-end exchange rates;and revenues and expenses using average rates. We recordthe resulting translation adjustments in a cumulativetranslations adjustment account in Other ComprehensiveIncome (OCI), a part of shareholders equity.

Either the International Accounting Standards Board, orthe industry itself, may wish to address the apparent lackof consistency in choosing a measurement currency andthe impact that the choice can have on the financialstatements of an international mining company.

Company 2002 Profit 2002 Currency 2001 Profit 2001 CurrencyAdjustments Adjustments

Anglo American 1,563 2,531 3,085 (2,986)

BHP Billiton 1,465 25 1,964 (712)

Rio Tinto 651 579 1,079 (449)

Xstrata 142 626 11 (168)


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Accounting for Impairment

Accounting Policy Disclosure Number of companies

Impairment accounting policy disclosed 18

No disclosure of accounting policy 3

Income Statement Disclosure Number of companies

Exceptional item before total operating profit 2

Separate line within costs and expenses 5

Part of net operating costs / other costs 4

Separate item after operating profit 1

Exceptional item after profit before tax and exceptional items 1

Amortisation of capitalised costs related to mineral reserves

Description of basis of amortisation Number of companies

Unit of production basis and proven and probable reserves 11

Unit of production basis and life-of-mine / estimatedeconomic life / well-defined mineral ore reserves 7

Based on future production 1

Ratio between production and estimated capacity 1

Straight line over useful economic life 1

Tables analysing certain accounting policies and disclosures

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Currencies used in financial statements

Reporting Currency Number of Companies

U.S. dollar U.S. based companies 3

U.S. dollar non-U.S. based companies 11

Local currency 7

Measurement Currency

Explicit disclosure of policy 3

Partial disclosure of policy 3

U.S. dollar reporting currency with no disclosure 8

Local currency as reporting currency 7

Accounting for site rehabilitation and environmental costs

Basis for Provision Number of companies

Provision made on a discounted basis at the timethe liability arises and added to the cost of the asset 9

Accrue over life of mine 11*

Other 1

*Includes five companies reporting under U.S. GAAP that have adopted SFAS No. 143 in 2003

FINANCIAL REPORTINGM I N I N G

TABLES

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Company Report and period Accounting framework

Anglo American plc Annual report for the year U.K. accounting standardsended 31 December 2002

AngloGold Limited Annual report for the year International Accountingended 31 December 2002 Standards and South African GAAP

Ashanti Goldfields Annual report for the year U.K. accounting standardsCompany Limited ended 31 December 2002

Barrick Gold Corporation Annual report for the year U.S. GAAPended 31 December 2002

BHP Billiton Plc Annual report for the year U.K. accounting standardsended 30 June 2002

Corporacion Nacional Consolidated financial Chilean accounting principlesdel Cobre de Chile statements for the year ended

31 December 2001

Compaa Vale do Rio Doce Annual repor t for the year Brazilian accounting principlesended 31 December 2002

Falconbridge Limited Annual report for the year Canadian GAAPended 31 December 2002

Freeport McMoRan Annual report for the year U.S. GAAPCopper & Gold Inc ended 31 December 2002

Gold Fields Limited Annual report for the year International Accountingended 30 June 2002 Standards and South African GAAP

Inco Limited Annual report for the year Canadian GAAPended 31 December 2002

MIM Holdings Limited * Annual report for the year Australian GAAPended 30 June 2002

Company reports reviewed

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Company Report and period Accounting framework

Newmont Mining Corporation Annual report for the year U.S. GAAPended 31 December 2002

Noranda Inc Annual report for the year Canadian GAAPended 31 December 2002

OJSC MMC Norilsk Nickel Consolidated financial statements International Accounting Standardsfor the year ended31 December 2002

Phelps Dodge Corporation Form 10 k for the year U.S. GAAPended 31 December 2002

Placer Dome Inc Annual report for the year U.S. GAAPended 31 December 2002

Rio Tinto Plc Annual report for the year U.K. accounting standardsended 31 December 2002

Teck Cominco Limited Annual repor t for the year Canadian GAAPended 31 December 2002

WMC Resources Limited Annual report for the year Australian GAAPended 31 December 2002

Xstrata plc Annual report for the year U.K. accounting standardsended 31 December 2002

* MIM Holdings Limited was acquired by Xstrata plc in June 2003


COMPANY REPORTS

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1. Extractive Industries. An Issues Paper issued for comment by the

IASC Steering Committee on Extractive Industries. (International

Accounting Standards Committee, 2000.)

2. AICPA SEC Regulations Committee International Practices Task

Force. November 25, 2002 Highlights, SEC Staff Comments Regarding

Extractive Industries. (American Institute of Certified Public

Accountants, 2002.) Available at:

http://www.aicpa.org/download/belt/iptf2002 11 25.pdf

3. CIM: Mineral Resource and/or Reserve Classification: Categories,

Definitions and Guidelines. (The Canadian Institute of Mining,

Metallurgy and Petroleum, 1996.)

JORC: Australasian Code for Reporting of Mineral Resources and

Ore Reserves (The JORC Code). (The Joint Ore Reserve Committee

of the Australasian Institute of Mining and Metallurgy, Australian

Institute of Geoscientists and Minerals Council of Australia (JORC),

1999.)

SAMREC: South African Code for Reporting of Mineral Resources

and Mineral Reserves. (The SAMREC Working Group on the

Compilation of the Main South African Code, 1999)

4. AICPA SEC Regulations Committee International Practices Task

Force. March 4, 2003 Highlights, Issues in the Extractive Industries.

(American Institute of Certified Public Accountants, 2003.) Available

at http://www.aicpa.org/download/belt/2003 03 04.pdf

5. J. Alex Milburn, Peter D Chant, principal authors, Reporting Interests

in Joint Ventures and Similar Arrangements. (Australian Accounting

Standards Board, Canadian Accounting Standards Board, International

Accounting Standards Committee, New Zealand Financial Reporting

Standards Board, United Kingdom Accounting Standards Board,

United States Financial Accounting Standards Board, 1999.)


REFERENCES

References

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Robin Fryer(Global Leader)New York, USA+ 1 212 492 3835

Tony Zoghby(Africa)Johannesburg, South Africa+ 27 11 806 5130

Miller Templeton(South America)Santiago, Chile+ 56 2 270 3198

Bob Francis(North America)Toronto Canada+ 1 416 601 6174

Chris Brant(Asia Pacific)Melbourne, Australia+ 61 3 9208 7150

Urs Landolt(Europe)Zurich, Switzerland+ 41 1 421 6227

The Deloitte Mining Industry Leadership Team

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0310 Delo It Te Mining

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