Mining Financial Reporting Survey kpmg.ca. For Placement Only

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1 Mining Financial Reporting Survey 2012 kpmg.ca For Placement Only

2 Foreword KPMG s Mining Industry practice is pleased to present the Mining Financial Reporting Survey This document publishes the results of a survey of financial reporting under IFRS by 20 major mining companies. The information builds on KPMG s previous Global Mining Reporting Surveys. The 2012 Survey focuses on some of the key issues currently facing mining companies in an increasingly challenging operating environment. Companies need to grow through exploration and development and/or by acquisition, while at the same time ensuring that existing operations continue to be run effectively, and that mines are closed safely within legislative requirements. Timely and transparent financial reporting has a key role to play for mining financial executives who are looking to understand business performance and communicate it to external stakeholders. The purpose of this publication is to help you understand the financial statements of companies in the mining industry that have been prepared in accordance with International Financial Reporting Standards. This publication does not necessarily represent what KPMG might consider to be industry best practice; rather, the disclosures included in this publication represent a range of current presentation and disclosure practices that you may find useful. This publication does not critique specific disclosures or accounting policies. The issues studied have been limited to those that were most significant based on financial reporting for fiscal They provide a high-level overview of the requirements of IFRS, but do not give a detailed analysis of the underlying standards and interpretations. Additionally, this publication does not provide an exhaustive illustration of all disclosures required in a set of consolidated financial statements under IFRS, and does not consider separate or individual financial statements. Therefore, this publication should not be used as a substitute for referring to the standards and interpretations themselves. Care must be taken when applying the observations outlined in this document in a rapidly changing environment. While we hope this survey proves to be a useful guide, we encourage you to consult your local KPMG professionals for individual guidance. Editorial team: Lee Hodgkinson Partner & Canadian Mining Industry Leader David Oldham Partner, Mining Key contributors: Jessica Budd Heather Cheeseman Lianne Hannaway Sheila Magallon Dan Ricica

3 Mining Financial Reporting Survey 2012 Table of Contents Exploration and Evaluation (E&E) expenditure 3 Development costs 13 Impairment 23 Mine closure and rehabilitation 35 Business combinations and asset acquisitions 43

4 2 Exploration and Evaluation (E&E) expenditure Companies Surveyed for the Mining Financial Reporting Survey 2012: n Anglogold Ashanti Limited n Barrick Gold Corporation n BHP Billiton Limited n Cameco Corporation n Centerra Gold Inc. n Detour Gold Corporation n Eldorado Gold Corporation n First Quantum Minerals Ltd. n Gold Fields Limited n Goldcorp Inc. n Hudbay Minerals Inc. n Iamgold Corporation n Inmet Mining Corporation n Kinross Gold Corporation n Lundin Mining Corporation n Rio Tinto plc n Teck Resources Limited n Vale S.A. n Xstrata plc n Yamana Gold Inc.

5 Exploration and Evaluation (E&E) expenditure 3 1 Exploration and Evaluation (E&E) expenditure

6 4 Exploration and Evaluation (E&E) expenditure 1 Exploration and Evaluation (E&E) expenditure 1Key Messages FROM OUR SURVEY GROUP All companies presented an accounting policy for exploration and evaluation expenditure, while only one company presented an accounting policy for pre-e&e (pre-license) expenditure. Over one-half of the companies capitalized at least some of their E&E expenditure, with the remaining companies expensing all E&E expenditure as incurred. The differences in accounting policies and disclosures among the surveyed companies highlights the significant flexibility allowed by IFRS 6, as well as the lack of general guidance in all the IFRS Standards for mining activities, including terminology. IFRS 6 Exploration for and Evaluation of Mineral Resources, identifies E&E expenditures as those incurred in connection with the acquisition of rights to explore, investigate, examine and evaluate an area for mineralization to assess the technical feasibility and commercial viability of extracting the mineral resource from that area. E&E expenditures are those incurred after the entity has obtained the legal rights to explore a specific area, but before technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Those expenditures incurred before an entity has obtained the legal rights to explore would be considered preexploration expenditures. Those expenditures incurred after an entity has demonstrated the technical feasibility and commercial viability of extracting a mineral resource would be considered development expenditures. Pre-exploration expenditures and development expenditures must be identified and accounted for separately from E&E expenditures, in accordance with other IFRS Standards. The costs involved in E&E and development activities can be considerable, and years can pass between the start of exploration and commencement of production. Even with today s advanced technology, exploration is a risky and complex activity. The accounting for E&E expenditure is critical for ensuring that the financial statements of mining companies fairly represent their business activities.

7 Exploration and Evaluation (E&E) expenditure 5 All 20 companies included in the survey disclosed an accounting policy on E&E expenditures. IFRS 6 allows a company to choose an accounting policy of expensing or capitalizing each type of E&E expenditure. The Standard provides an illustrative list of E&E expenditures that may be capitalized, including the costs of topographical, geological, geochemical and geophysical studies, the acquisition of rights to explore, exploratory drilling, trenching, sampling and activities related to evaluating the technical feasibility and commercial viability of extracting a mineral resource. Figure 1.1 Accounting policy for E&E expenditure NUMBER OF COMPANIES All expensed as incurred 8 Some portion capitalized 12 Figure 1.2 End of E&E phase NUMBER OF COMPANIES Disclose point at which expenditures are no longer considered E&E Disclose point at which expenditures are no longer considered E&E and discuss impairment testing of E&E assets 8 8 Silent on matter 4

8 6 Exploration and Evaluation (E&E) expenditure Of the 20 companies surveyed, 60 percent capitalized at least some E&E expenditure and 40 percent expensed all E&E expenditure as incurred. Of the 12 companies surveyed that capitalized at least some E&E expenditure, seven of them did so when it became probable that future economic benefits or economic recoverability would be realized. It appears that this point is reached prior to the company achieving technical feasibility or commercial viability. While IFRS 6 does not require companies to distinguish between exploration expenditures and evaluation expenditures, 25 percent of companies surveyed distinguished each as a separate type of expenditure within their accounting policy disclosures. Sixty percent of these companies also disclosed separate accounting treatments for exploration expenditures and evaluation expenditures; for instance, exploration expenditures are expensed as incurred and evaluation expenditures are capitalized. Disclosure 1.1: The following accounting policy specifies that E&E expenditure is expensed as incurred until it is determined that it is likely to be realized. 1 Anglogold Ashanti Exploration and evaluation expenditure The group s accounting policy for exploration and evaluation expenditure results in certain items of expenditure being capitalized for an area of interest where it is considered likely to be recoverable by future exploitation. This policy requires management to make certain estimates and assumptions as to future events and circumstances, in particular whether an economically viable extraction operation can be established. Any such estimates and assumptions may change as new information becomes available. If, after having capitalized the expenditure, a judgement is made that recovery of the expenditure is unlikely, the relevant capitalized amount will be written off to the income statement. Of the five companies that distinguished between exploration expenditures and evaluation expenditures, four separately disclosed dollar amounts related to these two different types of expenditures. Of the 20 companies surveyed, 80 percent provided disclosure about the point at which expenditures are no longer considered E&E, most often by utilizing the IFRS 6 terms technical feasibility or commercial viability. Of the 16 companies that disclosed the point at which expenditures are no longer considered E&E, eight also provided some discussion of the impairment assessment process for E&E assets. The remaining four companies were silent on both matters. 1. Source: Anglogold Ashanti Limited, Annual Financial Statements 2011, p. 192.

9 Exploration and Evaluation (E&E) expenditure 7 Disclosure 1.2: The following accounting policy describes the difference between exploration expenditures and evaluation expenditures as well as their individual accounting treatments. 1 IAMGOLD Mineral exploration and evaluation costs Mineral exploration costs are charged to earnings in the period in which they are incurred. Evaluation costs are expenditures for activities that relate to the evaluation of the technical feasibility and commercial viability of extracting a mineral resource on sites where the Company does not have mineral deposits already being mined or constructed, and are capitalized as exploration and evaluation assets. Upon determination of technical feasibility and commercial viability of extracting a mineral resource, capitalized costs in exploration and evaluation assets are transferred into mine and other construction in progress, which are classified as a component of mining assets. The application of the Company s accounting policy for exploration and evaluation expenditures requires judgment in determining whether future economic benefits may be realized, which are based on assumptions about future events and circumstances. Estimates and assumptions made may change if new information becomes available. If, after expenditures are capitalized, any information becomes available suggesting that the expenditures are not recoverable, the amount capitalized is recognized in the consolidated statement of earnings as impairment in the period when the new information becomes available. Acquired exploration and evaluation expenditures Where E&E assets are acquired as part of a business combination, they are recognized initially at fair value as required by IFRS 3 Business Combinations. When E&E assets are acquired by themselves and not as part of a business combination, they are recognized at the fair value of the consideration paid. IFRS 6 does not explicitly state how to account for acquired E&E assets; nevertheless, companies have devised accounting policies to address this circumstance. Forty-five percent of surveyed companies did not disclose a specific accounting policy for acquired E&E expenditure. The 55 percent of companies surveyed that made specific disclosures about acquired E&E expenditures included companies that expense E&E expenditures and those that capitalize them. Therefore, while a company may have a policy to expense E&E expenditures as incurred, it appears that acquired E&E may still be capitalized. Four of the eight companies above (see Figure 1.1) that expense E&E expenditures as incurred disclosed that acquired E&E is capitalized. No company disclosed a policy of expensing acquired E&E expenditure. 1. IAMGOLD Corporation, Annual Financial Statements 2011, p. 86.

10 8 Exploration and Evaluation (E&E) expenditure Disclosure 1.3: The following accounting policy excerpt describes how acquired E&E expenditure is recognized. 1 Detour Purchased exploration and evaluation assets are recognized as assets at their cost of acquisition, or at fair value if purchased as part of a business combination. Disclosure 1.4: The following accounting policy excerpt describes how all E&E expenditures are expensed as incurred except for acquired E&E expenditure. 2 Inmet Exploration and evaluation expenditures We expense the costs of exploration and evaluation as incurred, except for the following: n in areas currently under development n where we can reasonably expect to convert existing mineral resources into mineral reserves or add additional mineral resources with further drilling and evaluations n the cost to acquire an early stage entity conducting primarily exploration and evaluation activities. In the first two instances, we capitalize costs as development expenditures. In the third instance, we capitalize costs as exploration and evaluation assets. 1. Source: Detour Gold Corporation, Annual Report 2011, p Source: Inmet Mining Corporation, Annual Report 2011, p. 85.

11 Exploration and Evaluation (E&E) expenditure 9 Disclosure and presentation of Exploration and Evaluation expenditures IFRS 6 requires mining companies to disclose the amounts of assets and liabilities, income and expenses, and operating and investing cash flows arising from E&E activities. Capitalized E&E expenditure, referred to commonly as E&E assets, is a separate class of asset that is measured initially at cost. E&E assets are classified as tangible or intangible assets depending on their nature. Tangible E&E assets may include the items of plant and equipment used for exploration activity, such as vehicles, drilling rigs and surveying equipment. Intangible E&E assets may include such items as the costs of exploration permits and drilling rights. Figure 1.3 Classification of E&E assets NUMBER OF COMPANIES Entirely as tangible assets Entirely as intangible assets Combination of tangible and intangible assets Entirely as separate type of asset

12 10 Exploration and Evaluation (E&E) expenditure All the companies in the survey group included disclosures of assets, income and expenses and operating or investing cash flows from E&E in different places in the notes to the financial statements. However all were silent about the liabilities arising from E&E activities. Where surveyed companies had an accounting policy under which at least some E&E expenditure is capitalized, 59 percent classified E&E assets entirely as tangible assets, 25 percent classified as a combination of tangible and intangible assets, eight percent classified entirely as intangible assets, and the remaining eight percent recognized E&E assets as a separate asset, which was labeled neither tangible nor intangible. Only one company surveyed showed the carrying value of E&E assets as a separate line item on the face of the statement of financial position. Eighty-five percent of surveyed companies disclosed their E&E expenditure for the period on the statement of operations. This result is not unexpected given the significance of exploration costs to mining companies. During the period, an entity presents cash flows classified by operating, investing and financing activities in the manner most appropriate to its business. When an entity elects to expense E&E expenditure as incurred, the related cash flows are classified as operating activities. Cash flows from investing activities include only expenditure that results in the recognition of an asset. Only two companies surveyed were explicit in their treatment of cash flows related to E&E expenditure (see Disclosure 1.5 for an example). Disclosure of E&E expenditure was seen in the cash flow statements of only three of the companies surveyed and all of these were included within investing activities. Disclosure 1.5: The following accounting policy excerpt describes how the entity classifies cash flows related to E&E expenditure. 1 Hudbay Cash flows associated with acquiring exploration and evaluation assets are classified as investing activities in the statement of cash flows; those associated with exploration and evaluation expenses are classified as operating activities. IFRS impact on E&E expenditure - first time adoption There was no standard that specifically addressed E&E activities until IFRS 6 was approved by the International Accounting Standards Board (IASB) in 2005, effective for annual periods beginning on or after January 1, Before adopting IFRS, a number of countries such as Canada had specific guidance and industry practice on E&E expenditure. However, there was limited consistency in practice among the different countries before the adoption of IFRS 6. The transition to IFRS gave mining companies the opportunity to revisit their policies for E&E activities, albeit with retroactive application in accordance with IFRS 1. Of the 20 companies surveyed, 14 had transitioned to IFRS for the first time in the years disclosed in the most recent financial statements. Four of these 14 recognized an adjustment upon transition relating to E&E expenditures, indicating a change in accounting policy from their previous GAAP to IFRS. Of these four companies, two capitalized certain E&E activities at an earlier point than under their previous GAAP, while two capitalized certain E&E activities at a later point than under their previous GAAP. The very limited inclusion of E&E expenditures in the cash flow statement is not unexpected if the company expenses E&E expenditures in arriving at net income. It would then not be disclosed in the cash flow statement for companies utilizing the indirect method, which is based on net income. 1. Source: Hudbay Minerals Inc., Annual Financial Statements 2011, p. 17.

13 Section or Brochure name 11

14 12 Exploration and Evaluation (E&E) expenditure

15 Exploration and Evaluation (E&E) expenditure 13 2 Development costs

16 14 Development costs 2 Development costs 2Key Messages FROM OUR SURVEY GROUP All companies surveyed disclosed an accounting policy for development costs; furthermore, 40 percent of the companies included a detailed description of which expenditures are considered to be development costs. However, differences exist among companies in the policies disclosed. This highlights the lack of specific guidance in IFRS with respect to mining activities outside the E&E phase. The absence of specific guidance for extractive activities other than those requiring E&E expenditures means that mining companies must exercise significant judgment when developing their accounting policies. The unit-of-production method is the preferred method used by the surveyed companies to depreciate mining assets. In the extractive industries, development costs are those related to gaining access to the identified mineral resource after the decision has been made to develop the ore body. These costs are usually incurred once the technical feasibility and commercial viability of extracting a mineral resource have been demonstrated, and an identified mineral reserve is being prepared for production. IFRS 6, Exploration for and Evaluation of Mineral Resources, is the only guidance in IFRS that specifically applies to companies in the extractive industries. The scope of IFRS 6 specifically excludes expenditures incurred after the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Although entities are required to identify and account for development expenditures separately from exploration and evaluation expenditures, the IFRS Standards do not contain a definition of development activities or expenditures specific to mining companies. Accordingly, mining companies must use judgment when applying IFRS to account for development expenditures and other activities outside the exploration and evaluation phase. The key areas of judgment are: n Determining when the technical feasibility and commercial viability of extracting a mineral resource are demonstrated and the E&E phase ends and the pre-production development phase commences n Determining which expenditures can be capitalized during the development phase

17 Development costs 15 n Determining when operational readiness is reached and the production phase and the depreciation and depletion of assets commences n Identifying and accounting for development costs incurred during the production phase of a mine. Commencement of the development phase (preproduction expenditures) Once the technical feasibility and commercial viability of extracting a mineral resource are established, IFRS 6 no longer applies and the development phase to gain access to the mineral resource is generally considered to have commenced. Significant judgment is required to assess when technical feasibility and commercial viability have been achieved. Various sources of information are used and include: approval by an appropriate level of management to develop the project; geologic and metallurgic information; history of conversion of mineral resources to reserves; existence of proven and probable reserves; commodity prices; estimated future cash flows; proximity of operating facilities; and any legal or other barriers to accessing the mineral deposit, including the ability to obtain necessary permits and sufficient financing. Eight of the companies surveyed linked the determination of technical feasibility and commercial viability to the point when economically recoverable mineral reserves have been established. One of those companies noted that this determination may be affected by management s assessment of certain modifying factors, including legal, environmental, social and governmental factors. Five companies specified other qualitative factors that are considered when determining whether a deposit is commercially viable and technically feasible. Seven companies did not disclose how they determine the technical feasibility or commercial viability of a mineral deposit. Disclosure 2.1 and 2.2: The following two excerpts describe the judgements applied by management to assess when a project is economically viable. 1, 2 Goldcorp The critical judgements that the Company s management has made in the process of applying the Company s accounting policies, apart from those involving estimations (note 6), that have the most significant effect on the amounts recognized in the Company s consolidated financial statements are as follows: (b) Economic recoverability and probability of future economic benefits of exploration, evaluation and development costs Management has determined that exploratory drilling, evaluation, development and related costs incurred which have been capitalized are economically recoverable. Management uses several criteria in its assessments of economic recoverability and probability of future economic benefit including geologic and metallurgic information, history of conversion of mineral deposits to proven and probable reserves, scoping and feasibility studies, accessible facilities, existing permits and life of mine plans. Yamana The preparation of consolidated financial statements in conformity with IFRS requires the Company s management to make judgements, estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and related notes to the financial statements. Although these estimates are based on management s best knowledge of the amount, event or actions, actual results may differ from those estimates. a) Critical Judgements in the Application of Accounting Policies Information about critical judgements and estimates in applying accounting policies that have most significant effect on the amounts recognized in the consolidated financial statements are as follows n Determination of economic viability of a project Management has determined that costs associated with projects under construction or developments including C1 Santa Luz, Ernesto/Pau-a-Pique, Pilar and Mercedes have future economic benefits and are economically recoverable. In making this judgement, management has assessed various sources of information including but not limited to the geologic and metallurgic information, history of conversion of mineral deposits to proven and probable mineral reserves, scoping and feasibility studies, proximity of operating facilities, operating management expertise, existing permits and life of mine plans. 1. Source: Goldcorp Inc., Annual Report 2011, p Source: Yamana Gold Inc., Annual Report 2011, p.70

18 16 Development costs Recognition and measurement of development costs in the pre-production phase During the development phase, mining companies capitalize the costs incurred to build the infrastructure necessary to extract the minerals, and the cost of the plant and equipment to be used in transporting and processing the product. These costs are capitalized in accordance with IAS 16 Property, Plant and Equipment. Of the companies surveyed, 15 disclosed a specific policy related to the accounting for pre-production development costs. However, only eight of the surveyed companies provided a detailed description of what they consider to be development costs. The types of costs included were: costs related to infrastructure to physically access ore, shaft systems, and waste rock removal; costs to define and delineate mineral deposits; and interest and financing costs related to development and construction. The remaining 12 companies surveyed did not disclose what would be considered a development cost incurred in the pre-production phase, or at best refer to such costs as those incurred to build a mine. Disclosure 2.3: The following excerpt describes the company s accounting policy for development costs. 1 Gold Fields Mining assets, including mine development and infrastructure costs and mine plant facilities, are recorded at cost less accumulated depreciation and accumulated impairment losses. Expenditure incurred to evaluate and develop new orebodies, to define mineralization in existing orebodies and to establish or expand productive capacity, is capitalized until commercial levels of production are achieved, at which times the costs are amortized as set out below. Moving into the Production Stage In accordance with IAS 16, costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of being operated in the manner intended by management should be capitalized. After this point, capitalization ceases and depreciation commences. In the mining industry, typically the development phase ends when the mine is capable of being operated as intended by management and it moves into the production stage. The point at which a mine is considered to be in the production stage varies due to the unique nature of each mine construction project. The assets at a mine are typically intended to extract ore from the mineral deposit and process it to produce a saleable product. Substantial amounts of time are often required to start up a mine and operate it as intended. In some cases, a mine may never reach the production levels expected in technical feasibility studies or the mine plan. In addition, operational management evaluates several factors when determining whether a mine is operating as intended, including the amount of material mined, the throughput, the recovery, and the production (quality and quantity). Accordingly, it is often difficult to identify the point at which a mine is capable of being operated as intended by management, and apply this assessment consistently to different mine sites. Management must select an accounting policy to determine when a mine site is operationally ready and use judgment to apply it consistently to different construction projects. Of the 20 companies surveyed, only eight discussed the point at which development is complete and how operational readiness is determined. Their disclosures included a list of the criteria used by management to determine when a mine is ready for its intended use. Criteria commonly used were: - Operating results have been consistently achieved - Reasonable testing period is completed - Demonstrated ability to produce saleable minerals and sustain ongoing production - Capital expenditures made in comparison to budget for development project 1. Source: Gold Fields Limited, Annual Report 2011, p.49.

19 Development costs 17 Disclosure 2.4 and 2.5: The below disclosure excerpts detail the factors considered to determine when production commences. 1, 2 AngloGold Ashanti The group assesses the stage of each mine construction project to determine when a mine moves into the production stage. The criteria used to assess the start date are determined by the unique nature of each mine construction project and include factors such as the complexity of a plant and its location. The group considers various relevant criteria to assess when the mine is substantially complete and ready for its intended use and moves into the production stage. Some of the criteria would include but are not limited to the following: n the level of capital expenditure compared to the construction cost estimates; n completion of a reasonable period of testing of the mine plant and equipment; n ability to produce gold in saleable form (within specifications and the de minimis rule); and n ability to sustain ongoing production of gold. When a mine construction project moves into the production stage, the capitalization of certain mine construction costs ceases and costs are either regarded as inventory or expensed, except for capitalizable costs related to mining asset additions or improvements, underground mine development or Ore Reserve development. Yamana Assets under construction consist of expenditures for the construction of future mines and include pre-production revenues and expenses prior to achieving commercial production. Commercial production is a convention for determining the point in time at which a mine and plant has completed the commissioning and has operational results that are expected to remain at a sustainable commercial level over a period of time, after which production costs are no longer capitalized and are reported as operating costs. The determination of when commercial production commences is based on several qualitative and quantitative factors including but not limited to the following: n A significant portion of planned capacity, production levels, grades and recovery rates are achieved at a sustainable level n Achievement of mechanical completion and operating effectiveness n Significant milestones such as obtaining necessary permits and production inputs are achieved to allow continuous and sustainable operations n Positive and sustainable cash flows. 1. Source: Anglogold Ashanti Limited, Annual Financial Statements 2011, p Source: Yamana Gold Inc., Annual Report 2011, p.93.

20 18 Development costs Due to the length of time required to start the production of a mine, companies may earn revenue from production prior to the date the mine is considered ready to be operated as intended by management. IAS 16 states that income and expenses related to incidental operations are recognized in profit or loss when they are not necessary to bring an item to the location and condition necessary for it to be capable of operating in the manner intended by management. Three of the companies surveyed stated that all revenue in the development stage is included in the cost of the constructed asset. One company stated that any revenue earned in the process of preparing an asset to be capable of operating in the manner intended by management is included in the cost of the constructed asset, but that any other revenue earned prior to the start up of the mine is recognized in the income statement. The remaining 16 companies did not disclose a policy for revenue earned in the development stage. This appears to demonstrate that at least some mining companies consider that an asset is capable of operating in the manner intended by management some period of time after production activities have commenced, due to the factors noted above. Accounting treatment post-production expenditure In the mining industry, development activities such as waste stripping and construction of infrastructure frequently continue to be carried out during the production phase. When these costs are incurred to access the ore body for production in the current period, they are typically considered operating costs and are included in the cost of inventory. In contrast, development costs to expand existing capacity or develop new ore bodies are capitalized in accordance with IAS 16 when it is probable that future economic benefits will flow to the company. Of the companies surveyed, 12 companies disclosed an accounting policy for capitalizing development costs incurred during the production phase indicating they are capitalized when they provide access to reserves in future periods; expand existing capacity; or generally, provide future economic benefits. Of the 12 companies that disclosed an accounting policy for development costs during the production phase, four specified that development costs incurred to maintain current production are included in operating costs. IFRIC 20 which is effective January 1, 2013 may impact this area going forward with respect to open pit mines. Figure 2.1 Capitalization of development costs during the production phase NUMBER OF COMPANIES Expand existing capacity 4 Provide access to reserves in future periods 4 Provide future economic benefit 4 Policy not disclosed 8 Disclosure 2.6: The following discloses the accounting policy for capitalization of costs during the production phase. 1 Goldcorp Capitalization of costs incurred ceases when the mining property has reached operating levels intended by management. Costs incurred prior to this point, including depreciation of related plant and equipment, are capitalized and proceeds from sales during this period are offset against costs capitalized. Development costs incurred to maintain current production are included in mine operating costs. These costs include the development and access (tunnelling) costs of production drifts to develop the ore body in the current production cycle. During the production phase of a mine, stripping costs incurred that provide access to reserves and resources that will be produced in future periods that would not have otherwise been accessible are capitalized. Capitalized stripping costs are amortized based on the estimated recoverable ounces contained in reserves and resources that directly benefit from the stripping activities. Costs for waste removal that do not give rise to future economic benefits are included in mine operating costs in the period in which they are incurred. 1. Source: Goldcorp Inc., Annual Report 2011, p.114.

21 Development costs 19 Barrick Disclosure 2.7: The following excerpt describes the accounting for underground mine development costs and open pit mining costs incurred in the production phase. 1 At our underground mines, Barrick incurs development costs to build new shafts, drifts and ramps that will enable Barrick to physically access ore underground. The time over which Barrick will continue to incur these costs depends on the mine life. These underground development costs are capitalized as incurred. Capitalized underground development costs incurred to enable access to specific ore blocks or areas of the underground mine, and which only provide an economic benefit over the period of mining that ore block or area, are depreciated on a UOP basis, whereby the denominator is estimated ounces/pounds of gold/copper in proven and probable reserves and a portion of resources within that ore block or area where it is considered probable that those resources will be extracted economically. Open Pit Mining Costs In open pit mining operations, it is necessary to remove overburden and other waste materials to access ore from which minerals can be extracted economically. The process of mining overburden and waste materials is referred to as stripping. Stripping costs incurred in order to provide initial access to the ore body (referred to as pre-production stripping) are capitalized as open pit mine development costs. Depreciation An entity is required to begin depreciating an asset when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. An asset is depreciated over its useful life using a method that reflects the pattern in which the asset s future economic benefits are expected to be consumed by the entity. All 20 companies surveyed utilized a combination of straight-line and unit-of-production depreciation methods for property, plant and equipment related to mining assets; the method used depended on the nature of the assets and how their future economic benefits are consumed. Sixty-five percent of the surveyed companies disclosed that the number of years used to depreciate an asset under the straight-line method cannot exceed the expected life of the mine. The unit-of-production method typically utilizes proven and probable reserves as its basis; however, some companies include other non-reserve material (mineral resources) in excess of proven and probable reserves depending on the degree of confidence in its extraction. 1. Source: Barrick Gold Corporation, Annual Report 2011, pp KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms

22 20 Development costs Figure 2.2 Basis of unit-of-production depreciation NUMBER OF COMPANIES Proven and probable reserves 14 Proven and probable reserves plus potential for non-reserve material 6 Fourteen of the surveyed companies used reserve material only as the basis for their unit-of-production calculation. Nine of these 14 companies specified that all mining assets, or a portion of mining assets, are depreciated using the unit-ofproduction method based on the reserves to which the asset relates. The remaining five companies did not specify whether assets were only depreciated based on the reserves to which the asset relates, or whether all proven and probable reserves were used as the basis. Six of the surveyed companies disclosed that additional non-reserve material (mineral resource) is, or may be included within, their unit-of-production basis. The amount of non-reserve material included in the basis for the unit-ofproduction calculation varied across the companies, but it always depended on a high degree of confidence in its economic extraction. The inclusion of non-reserve material requires further management judgment to determine the appropriate quantity to include. Since mineral resources often require development costs to access the ore in the future, it is unclear under IFRS whether future development costs should be included in the unit-ofproduction depreciation calculation. The companies surveyed that may include non-reserve material in the calculation of depreciation did not disclose any information about these considerations. Disclosure 2.8: The following accounting policy excerpt states that mining assets are depreciated using both the straight-line and unit-of-production methods. The unit-of-production method is based on proven and probable reserves. 1 BHP Billiton Depreciation of property, plant and equipment The carrying amounts of property, plant and equipment (including initial and any subsequent capital expenditure) are depreciated to their estimated residual value over the estimated useful lives of the specific assets concerned, or the estimated life of the associated mine, field or lease, if shorter. Estimates of residual values and useful lives are reassessed annually and any change in estimate is taken into account in the determination of remaining depreciation charges. Depreciation commences on the date of commissioning. The major categories of property, plant and equipment are depreciated on a unit of production and/or straight-line basis using estimated lives indicated below. However, where assets are dedicated to a mine, field or lease and are not readily transferable, the below useful lives are subject to the lesser of the asset category s useful life and the life of the mine, field or lease: n Buildings n Land n Plant and equipment n Mineral rights and Petroleum interests n Capitalized exploration, evaluation and 25 to 50 years not depreciated 3 to 30 years straight-line based on reserves on a unit of production basis based on reserves on a unit of production basis development expenditure 1. Source: BHP Billiton Limited, Annual Report 2011, p. 171.

23 Development costs 21 Disclosure 2.9: The following accounting policy excerpt states that mining assets are depreciated utilizing both the straight-line and unit-of-production methods. The straight-line number of years cannot exceed that of the life of the mine. The unit-of-production method is based on proven and probable reserves, and for some mines, on other mineral resources as well. 1 Rio Tinto Depreciation of non-current assets Property, plant and equipment is depreciated over its useful life, or over the remaining life of the mine if that is shorter and there is no alternative use for the asset. The useful lives of the major assets of a cash-generating unit are often dependent on the life of the orebody to which they relate. Where this is the case, the lives of mining properties, and their associated refineries, concentrators and other long lived processing equipment generally relate to the expected life of the orebody. The life of the orebody, in turn, is estimated on the basis of the life-of-mine plan. Where the major assets of a cashgenerating unit are not dependent on the life of a related orebody, management applies judgment in estimating the remaining service potential of long lived assets. In the case of smelters, factors affecting the remaining service potential include smelter technology and electricity contracts when the power is not sourced from the company s own electricity generating capacity. Depreciation commences when an asset is available for use. The major categories of property, plant and equipment are depreciated on a units of production and/or straight line basis as follows: Units of production basis For mining properties and leases and certain mining equipment, the consumption of the economic benefits of the asset is linked to the production level. Except as noted below, these assets are depreciated on a units of production basis. In applying the units of production method, depreciation is normally calculated using the quantity of material extracted from the mine in the period as a percentage of the total quantity of material to be extracted in current and future periods based on proved and probable reserves and, for some mines, other mineral resources. These other mineral resources may be included in depreciation calculations in limited circumstances and where there is a high degree of confidence in their economic extraction. Straight line basis Assets within operations for which production is not expected to fluctuate significantly from one year to another or which have a physical life shorter than the related mine are depreciated on a straight line basis. Development costs that relate to a discrete section of an orebody, and which only provide benefit over the life of those reserves, are depreciated over the estimated life of that discrete section. Development costs incurred which benefit the entire orebody are depreciated over the estimated life of the orebody. 1. Source: Rio Tinto Group, Annual Report 2011, pp

24 22 Impairment

25 Impairment 23 3 Impairment

26 24 Impairment 3 Impairment 3Key Messages FROM OUR SURVEY GROUP All companies disclosed an accounting policy on the impairment of nonfinancial assets. The level of disclosure varied among companies. However, those companies that had recognized significant impairment losses during the period provided more disclosure of the assumptions used to determine the recoverable amount for their impairment testing and specifics of their specific impairment loss. Few companies surveyed disclosed a sensitivity analysis, including key assumptions, that would cause the recoverable amount to equal the carrying amount. The valuation of non-financial assets is a complex issue for mining companies. Given the current market conditions and increasing volatility of capital and operating costs in the mining industry, regulators may put increased emphasis on the disclosures related to goodwill and the assumptions used to determine an asset s recoverable amount.

27 Impairment 25 A number of factors can have a significant impact on the recoverable amount of a mine or cash-generating unit (CGU). The volatility of commodity prices, foreign exchange rates, and market multiples combined with increasing capital and operating costs regularly require mining companies to consider potential impairment. Cash-generating units The impairment testing of non-financial assets is carried out in accordance with IAS 36 Impairment of Assets. Whenever possible, an impairment test is performed for an individual asset; otherwise, assets are tested for impairment in CGUs. A CGU is the smallest group of assets that generates cash inflows from continuing use that is largely independent of the cash inflows from other assets or groups. The composition of a CGU is often straightforward to determine in the mining industry because the assets grouped together in an individual mine will often constitute a single CGU. Accordingly, in this publication, the terms mine and CGU are used interchangeably when discussing impairment. However, when multiple mines share infrastructure or represent vertically integrated operations, the determination of CGUs can be more complex. In the first scenario, management judgment is required to determine whether the mining infrastructure at each site is capable of generating independent cash inflows or whether it is more appropriate for the mines and infrastructure to be grouped together as a single CGU. For vertically integrated operations, management needs to exercise judgment in considering whether there is an active market for any of the intermediate products, even if some or all of the output is used internally, to determine whether there are independent cash inflows and in fact the operation is composed of separate CGUs. Of the 20 companies surveyed, ten included detail on how CGUs were determined; eight disclosed general comments that assets were grouped together at the lowest level for which independent cash inflows are identified; and two did not provide any detail on how CGUs were determined. Six of the ten companies that provided details regarding the definition of a CGU stated that a CGU would typically represent an individual mine. Figure 3.1 Definition of a CGU NUMBER OF COMPANIES Details provided 10 General comments 8 No disclosure 2

28 26 Impairment Frequency and timing An entity must assess at each reporting date whether or not there are indicators of impairment. When an impairment indicator is identified, impairment testing is required. In addition, there is a requirement to test goodwill and indefinite-lived intangible assets for impairment at least annually, even when no indicator of impairment exists. In determining whether there is an impairment indicator, an entity considers both internal factors (e.g., adverse changes in performance) and external factors (e.g., adverse changes in the business or regulatory environment). Possible indicators of impairment for mining companies include the value of market capitalization compared to net carrying amount, lack of available cash and future financing when developing a mine, projects on hold, declines in long-term commodity price forecasts, capital expenditure over budget during the construction of a new mine, adverse forward exchange rates, increased production costs, and expected increases in mine closure and rehabilitation costs. Yes No Of the 20 companies surveyed, 16 have goodwill and therefore are required to test for impairment annually; eight of these companies disclosed that the annual impairment test was performed at the end of the fiscal year; five disclosed the annual test was performed at a point other than year-end, and one disclosed that the annual impairment test for each operating segment is performed at different times during the year. Figure 3.2 Annual requirement to test for impairment NUMBER OF COMPANIES NUMBER OF COMPANIES Yes - at fiscal year end Yes - at other than year end Yes varies by segment 1 4 Figure 3.3 Timing of annual impairment test disclosed Not disclosed 2 Not applicable 4 Of the companies surveyed, four disclosed that a triggering event for possible impairment resulted in a test being performed between the annual tests. Of these, two disclosed an external indicator (market capitalization, regulatory environment changes) as the possible trigger of impairment. One disclosed both external and internal indicators (planned closures and increased capital costs) as the possible triggers of impairment, and the other only made a general disclosure of impairment indicators.

29 Impairment 27 Disclosure 3.1: The following disclosure excerpt details Hudbay Minerals Inc s triggering events for impairment assessment of property, plant and equipment. 1 Hudbay As described in note 3j, at the end of each reporting period, the Group reviews the carrying amounts of its property, plant and equipment, exploration and evaluation assets and computer software to determine whether there is any indication of impairment. One of the factors management considers in making this assessment is whether the carrying amounts of the Group s net assets exceeds its market capitalization, in which case management applies judgment to determine the reason for the difference. Based on Hudbay s listed share price of $10.14 at December 31, 2011, the carrying amount of the Group s net assets exceeded its market capitalization by approximately $70,000. Management determined that this decline reflected a temporary correction in the market and was not a reflection of issues in any one of the Group s cash-generating units. Management concluded this decline was not an indicator of impairment as at December 31, Calculation of recoverable amount The recoverable amount of an asset or CGU is the higher of its fair value less costs to sell (FVLCS) and its value in use (VIU). Cash flow estimates to determine value in use should reflect the asset in its current condition, i.e., excluding future capital expenditures that will improve or enhance the asset s performance. In the mining industry however, significant capital expenditures are often required to access mineral reserves and resources in future periods. These capital expenditures can be included in a mine s FVLCS determined using a discounted cash flow model which also includes the cash inflows resulting from accessing mineral reserves and resources in future periods and the related capital expenditures based on a market participant s view. Accordingly, during a mine s life, a CGU s FVLCS may exceed its VIU because FVLCS includes the capital expenditures over the entire life of the mine and the additional cash flows generated by the additional resources whereas, VIU only includes near term capital expenditures to sustain current production. However, FVLCS may no longer exceed a CGU s VIU near the end of a mine s life when mineral reserves are nearing depletion and there are no significant capital expenditures requiring approval in the future to develop mineral resources. it is difficult to identify a market price for the asset. Accordingly the most common technique used to determine FVLCS in the mining industry is a discounted cash flow model. In that case, the assumptions used to determine fair value are consistent with those a market participant would make. Typically for mining companies, cash flow projections in a discounted cash flow model are based on an operation s mine plan, since that is the information a market participant would consider to determine the fair value of a mining operation. The cash flows extend over the entire estimated life of the mine based on the production levels and the amount of mineral reserves and resources at the mine. The amount of confidence in mineral reserves and resources would impact the value assigned to them by a market participant and accordingly, should be taken into account in the discounted cash flow model. Techniques sometimes include applying a factor to mineral resources that reflects the estimated conversion ratio to reserves, or applying a higher discount rate to mineral resources. In accordance with IAS 36, companies are required to make extensive disclosures about the estimates used to measure the recoverable amount of a CGU for which the carrying amount of goodwill allocated to that unit is significant in comparison to the entity s total carrying amount of goodwill. The required disclosures include the basis on which a CGU s recoverable amount has been determined, a description of key assumptions to which the recoverable amount is most sensitive, and a description of management s approach to determine the values assigned to each key assumption. When an entity records a material impairment loss, it must also provide extensive disclosures, including a description of the events and circumstances that led to the recognition of the impairment loss and the basis for the recoverable amount. In situations other than those quoted above, entities are also encouraged to disclose the assumptions used to determine the recoverable amount. The best evidence of fair value is a binding sale agreement, or failing that, a price derived from an active market or recent transaction for similar assets. If there is no binding sale agreement and no active market, then fair value can be determined based on valuation techniques that use the best information available to reflect the amount that a company could obtain at the reporting date from the disposal of the asset in an arm s length transaction between knowledgeable, willing parties. In our experience, given the significant differences among mines, 1. Source: Hudbay Minerals Inc., Annual Financial Statements 2011, p. 17.

30 28 Impairment Figure 3.4 Impairment loss in latest reporting period NUMBER OF COMPANIES Yes details provided 7 Yes limited details provided 2 No, however are required to perform impairment test annually 7 No, and no requirement to test 4 Of the 20 companies included in the survey, nine recognized an impairment loss in the latest annual reporting period. Of the nine companies that recognized an impairment loss, seven (or 78 percent) included commentary on the underlying conditions that gave rise to the impairment. For the two companies that did not disclose details, the impairment loss related to property, plant and equipment, and E&E assets. The level of disclosure varied; however, companies that recognized impairment losses provided more disclosure about the assumptions used in their impairment testing and details of the specific impairment losses incurred than companies with no impairment losses. Figure 3.5 Basis for the recoverable amount used in the required annual impairment test NUMBER OF IMPAIRMENT TESTS Fair value less costs to sell 14 Value in use 2 No disclosure 5 Of the 16 companies with an annual requirement to test for impairment, a total of 21 impairment tests were performed. There is a greater number of tests performed than companies surveyed because goodwill has been allocated to a lower level within the entity, such as operating segments. impairment tests. In the same 11 companies, two companies also disclosed that VIU was used for one of its segments. Five companies did not disclose the basis for determining the recoverable amount and only provided a general comment that the recoverable amount is the greater of FVLCS and VIU. Eleven companies indicated that they used the FVLCS basis to assess recoverable amount, comprising 14 individual

31 Impairment 29 Figure 3.6 Major assumptions disclosed by companies that performed impairment testing NUMBER OF COMPANIES Discount rate 15 Commodity Prices 15 Exchange rate 8 Inflation 3 Cash costs of production 6 Capital expenditures 7 Market multiple 3 Mine life 4 No disclosure 1 For mining companies, the recoverable amount of a CGU is significantly affected by the following assumptions: (i) commodity price assumptions and foreign exchange rates; (ii) estimates of reserves and resources; (iii) estimated exploration potential; and (iv) any event that might otherwise affect mine site production levels or costs. All but one of the companies surveyed that performed an impairment test provided qualitative and in some cases quantitative information about the key assumptions used to determine the recoverable amount. Disclosure 3.2: The following disclosure excerpt shows the company s key assumptions used to determine fair value less cost to sell. Teck Commodity Prices Commodity price assumptions are based on management s best estimates and are within the range of available analyst forecasts. Reserves and Resources Mineral reserves and mineral resources are included in projected cash flows based on mineral reserve and mineral resource estimates and exploration and evaluation work, undertaken by appropriately qualified persons. Mineral resources are included where management has a high degree of confidence in their economic extraction, even though additional evaluation is still required to meet the requirement of reserve classification. Goodwill Operating Costs and Capital Expenditures Operating costs and capital expenditures are based on life of mine plans and internal management forecasts. Cost assumptions incorporate management experience and expertise, current operating costs, the nature and location of each operation and the risks associated with each operation. Future capital expenditure is based on management s best estimate of required future capital requirements which generally is for the extraction and processing of existing reserve and resources. All committed and anticipated capital expenditures adjusted for future cost estimates have been included in the projected cash flows. Discount Rates Cash flow projections are discounted using a real, post-tax discount rate of 7%. Adjustments to the rate are made for any risks that are not reflected in the underlying cash flows. These rates are based on the weighted average cost of capital for a mining industry group and were calculated with reference to market information from third-party advisors. Foreign Exchange Rates Foreign exchange rates are based on latest internal forecasts for foreign exchange, benchmarked with external sources of information. Inflation Rates Inflation rates are based on management s best estimate, in conjunction with information provided by third-party advisors, and take into account the average historical inflation rates for the location of each operation and central banks inflation targets. Given the nature of expected future cash flows, the expected future cash flows used to determine the recoverable amount could change materially over time as they are significantly affected by the key assumptions described above. 1. Source: Teck Resources Limited, Annual Report 2011, pp

32 30 Impairment Discount Rate To determine VIU and FVLCS using a discounted cash flow model, the discount rate used is a market-related rate that reflects the current market assessment of risks specific to the asset or CGU. A market-related rate is the rate of return that investors would require if they were to choose an investment that would generate cash flows similar in terms of timing, risk and amount to those that the company expects to derive from the asset or CGU. To avoid double counting, the discount rate must not reflect risks that have been taken into account in estimating the cash flows. In the absence of a discount rate that can be derived directly from the market, IAS 36 refers to other starting points for determining an appropriate discount rate: the entity s weighted average cost of capital (WACC), the entity s incremental borrowing rate, and other market borrowing rates. However, these rates must be adjusted to reflect a market participant s view of risks, and are independent of the way in which the CGU is actually financed. Mining companies commonly have operations in many countries, resulting in the need for country-specific discount rates to be used for the impairment testing of assets in various countries. In accordance with IAS 36, an entity is required to disclose the discount rate used to determine VIU or FVLCS when it is determined using a discounted cash flows model. The specific discount rates used in impairment tests were disclosed by 11 of the companies surveyed. The other five companies that performed an impairment test included a general statement that an appropriate discount rate had been used. Of the 16 companies with an annual requirement to test for impairment, there were a total of 21 impairment tests performed. There is a greater number of tests performed than companies surveyed because goodwill has been allocated to at least the operating segment level. The numerical discount rate used to discount the projected cash flows in determining either the VIU or the FVLCS was disclosed for 16 of the 21 impairment tests performed. Ten companies indicated that they used the WACC as the starting point for determining the discount rate; this applies to 12 individual impairment tests. Four companies did not disclose the basis for determining the discount rate, but disclosed the specific numerical rate used. DESCRIPTION OF RATE NO. OF IMPAIRMENT TESTS WACC, post-tax 2 WACC per segment, real 2 WACC per segment, risk-adjusted 1 WACC per country, real 1 WACC specific to currency and CGU 4 WACC 2 Discount rate disclosed, no further description The rates disclosed by the companies that disclosed a numerical rate ranged from 4.3% to 18%. 4

33 Impairment 31 Sensitivity analysis When goodwill has been allocated to a CGU, entities are required to disclose a sensitivity analysis when a reasonably possible change in a key assumption would result in the CGU s carrying amount exceeding its recoverable amount. This disclosure requirement includes the amount by which the CGU s recoverable amount exceeds its carrying amount, the values assigned to the key assumptions and the amount by which the values assigned to the key assumptions must change in order for the CGU s recoverable amount to be equal to its carrying amount. IFRS does not define a reasonably possible change in a key assumption. Accordingly, management must determine the amount by which an assumption needs to change for a CGU s carrying amount to exceed its recoverable amount and use judgment to assess whether it is reasonably possible for the assumption to change by that amount. Of the 16 companies surveyed with goodwill, only four disclosed a sensitivity analysis of key assumptions. Three of the companies presented the sensitivity analyses in terms of what percentage change in a key assumption would result in the recoverable amount equaling the carrying amount of the CGU. One also disclosed the dollar impact of a change in a key assumption on the recoverable amount. Of the four companies that presented a sensitivity analysis, key assumptions identified were commodity prices, discount and exchange rates, and cash cost of production. This implies that those four companies believe the fair value of their mine is most sensitive to these factors. Figure 3.7 Sensitivity analysis disclosed impact in terms of NUMBER OF COMPANIES Yes Percentages 3 Yes Percentages and dollar amounts 1 No sensitivity analysis disclosed 12 Not applicable 4 Figure 3.8 Sensitivity analysis - key assumptions disclosed NUMBER OF COMPANIES Discount rate 3 Commodity prices 4 Exchange rates 3 Cash cost production 2

34 32 Impairment Disclosure 3.3: The following disclosure excerpt addresses the sensitivity analysis, including the key assumptions that would cause the recoverable amount to equal the carrying amount for each CGU where appropriate. 1 Kinross The key assumptions used in determining the recoverable amount (fair value less costs to sell) for each CGU are long-term commodity prices, discount rates, cash costs of production, capital expenditures, foreign exchange rates, and NAV multiples. The Company performed a sensitivity analysis on all key assumptions and determined that, other than as disclosed below, no reasonably possible change in any of the key assumptions would cause the carrying value of any CGU carrying goodwill to exceed its recoverable amount. As at December 31, 2011, the recoverable amounts for the Tasiast and Chirano CGUs are equal to their carrying amounts, after giving effect to the goodwill impairment charges noted above. As at December 31, 2010, the recoverable amounts for Tasiast and Chirano are equal to their carrying amounts as they were recorded at fair value in the acquisition of Red Back on September 17, 2010 and their recoverable amounts did not change in the period from September 17, 2010 to December 31, At December 31, 2011, the estimated recoverable amounts for the Round Mountain, Paracatu, and Maricunga CGUs exceed their carrying amounts by approximately $145 million, $970 million, and $271 million, respectively (December 31, 2010-$379 million, $2,342 million, and $147 million, respectively). The table below shows the amount by which certain key assumptions would be required to change, in isolation, in order for the estimated recoverable amount to equal the carrying amount for each of the Round Mountain, Paracatu, and Maricunga CGUs. Percentage increase/decrease required for recoverable amount to equal carrying value December 31, 2011 December 31, 2010 Key assumptions Round Mountain Paracatu Maricunga Round Mountain Paracatu Maricunga Long-term gold price (a) -34% -18% -10% -30% -30% -10% LOM production cash costs 22% 21% 9% 45% 36% 7% per ounce (b) (a) See Note 3(ix) for long term gold prices. (b) LOM production cash costs per ounce range from $757 to $879 for Round Mountain, Paracatu, and Maricunga in 2011 and $491 to $689 in In addition, at December 31, 2011, the LOM total capital expenditures would be required to increase by 35% (December 31, %), in isolation, in order for the recoverable amount of the Maricunga CGU to equal its carrying amount. However, the Company believes that adverse changes in any of the key assumptions would have associated impacts on certain other inputs into the long-term LOM plans, which may offset to a certain extent, the impact of the adverse change. 1. Source: Kinross Gold Corporation, Annual Report 2011, p.93.

35 Impairment 33

36 34 Mine closure and rehabilitation

37 Mine closure and rehabilitation 35 4 Mine closure and rehabilitation

38 36 Mine closure and rehabilitation 4 Mine closure and rehabilitation 4Key Messages FROM OUR SURVEY GROUP All companies identified mine closure and rehabilitation as a critical accounting estimate, and recognized a provision for it. The majority of the companies reflected the risk associated with the liability in the estimated future cash flows as opposed to the discount rate. Most companies provided a generic description of the assumptions used without disclosing specific information about how they were determined, making it difficult to compare the basis for such assumptions. The majority of companies recognized changes in the measurement of the provision as a reduction of or addition to the related asset.

39 Mine closure and rehabilitation 37 Due to environmental and other laws, as well as internal corporate social responsibility and sustainability policies, mining companies must complete mine closure and rehabilitation activities. These activities include restoration of damage caused to the environment as a result of mining activities, dismantling and decommissioning of mining infrastructure and ongoing monitoring and maintenance of closed sites. The extent of activity varies depending on the nature of environmental damage, the footprint of the site and regulatory and other requirements, but it often represents a significant cost of mining. Under IAS 37, Provisions, Contingent Liabilities and Contingent Assets, obligations for mine closure and rehabilitation incurred in installing or developing an asset are provided for in full immediately based on management s best estimate of the future cost of mine closure and rehabilitation and are discounted to net present value if the impact of discounting is material. Accounting estimates affecting the provision It is inherently difficult to estimate the future costs of mine closure and rehabilitation given that they will often occur several years into the future and the extent of disturbance and damage is not yet known. All companies surveyed identified mine closure and rehabilitation as a critical accounting estimate. While all companies noted that the cost of mine closure and rehabilitation is inherently uncertain, the extent of disclosure varied. Generally, the disclosure was limited to qualitative discussion of the factors that could cause a change in the estimate. The following factors were commonly disclosed by companies as having an impact on their estimate of provisions for mine closure and rehabilitation costs: changing laws and regulations determination of discount rate period over which expenditures are expected to be made, which is affected by mineral reserves and resources and the life of mine plan inflation rates Some companies also disclosed quantitative information about these estimates; however, it was difficult to determine how the companies estimated these amounts as the disclosures were unclear. uncertainty regarding extent of work required to complete mine closure Figure 4.1 Assumptions disclosed NUMBER OF COMPANIES Discount rate 14 Inflation 6 Total estimated cash flows 10 Period of expenditures 12

40 38 Mine closure and rehabilitation Disclosure 4.1: The following excerpt details the recognition and measurement of the closure and rehabilitation provisions, including management s significant judgements and estimates. 1 BHP Billton Closure and rehabilitation The mining, extraction and processing activities of the Group normally give rise to obligations for site closure or rehabilitation. Closure and rehabilitation works can include facility decommissioning and dismantling; removal or treatment of waste materials; site and land rehabilitation. The extent of work required and the associated costs are dependent on the requirements of relevant authorities and the Group s environmental policies. Provisions for the cost of each closure and rehabilitation program are recognized at the time that environmental disturbance occurs. When the extent of disturbance increases over the life of an operation, the provision is increased accordingly. Costs included in the provision encompass all closure and rehabilitation activity expected to occur progressively over the life of the operation and at the time of closure in connection with disturbances at the reporting date. Routine operating costs that may impact the ultimate closure and rehabilitation activities, such as waste material handling conducted as an integral part of a mining or production process, are not included in the provision. Costs arising from unforeseen circumstances, such as the contamination caused by unplanned discharges, are recognized as an expense and liability when the event gives rise to an obligation which is probable and capable of reliable estimation. The timing of the actual closure and rehabilitation expenditure is dependent upon a number of factors such as the life and nature of the asset, the operating licence conditions, the principles of the Group s Charter and the environment in which the mine operates. Expenditure may occur before and after closure and can continue for an extended period of time dependent on closure and rehabilitation requirements. The majority of the expenditure is expected to be paid over periods of up to 50 years with some payments into perpetuity. Closure and rehabilitation provisions are measured at the expected value of future cash flows, discounted to their present value and determined according to the probability of alternative estimates of cash flows occurring for each operation. Discount rates used are specific to the country in which the operation is located. Significant judgements and estimates are involved in forming expectations of future activities and the amount and timing of the associated cash flows. Those expectations are formed based on existing environmental and regulatory requirements or, if more stringent, Group environmental policies which give rise to a constructive obligation. When provisions for closure and rehabilitation are initially recognized, the corresponding cost is capitalized as an asset, representing part of the cost of acquiring the future economic benefits of the operation. The capitalized cost of closure and rehabilitation activities is recognized in property, plant and equipment and depreciated accordingly. The value of the provision is progressively increased over time as the effect of discounting unwinds, creating an expense recognized in financial expenses. Closure and rehabilitation provisions are also adjusted for changes in estimates. Those adjustments are accounted for as a change in the corresponding capitalized cost, except where a reduction in the provision is greater than the undepreciated capitalized cost of the related assets, in which case the capitalized cost is reduced to nil and the remaining adjustment is recognized in the income statement. In the case of closed sites, changes to estimated costs are recognized immediately in the income statement. Changes to the capitalized cost result in an adjustment to future depreciation. Adjustments to the estimated amount and timing of future closure and rehabilitation cash flows are a normal occurrence in light of the significant judgements and estimates involved. Factors influencing those changes include: n revisions to estimated reserves, resources and lives of operations; n developments in technology; n regulatory requirements and environmental management strategies; n changes in the estimated extent and costs of anticipated activities, including the effects of inflation and movements in foreign exchange rates; n movements in interest rates affecting the discount rate applied. 1. Source: BHP Billiton Limited, Annual Report 2011, p

41 Mine closure and rehabilitation 39 Measurement of the provision Under IAS 37, when the effect of time value of money is material, the amount of the provision should be the present value of the expenditures expected to settle the obligation. The discount rate should be a pre-tax rate that reflects the time value of money and the risks specific to the liability, unless the future cash flows are adjusted for these risks. When estimating the provision for environmental obligations, generally it is easier to adjust the cash flows for risk and to discount the expected cash flows at a risk-free interest rate. Adjusting the discount rate for risk is complex and involves a high degree of judgment. Of the companies surveyed, two stated that the discount rate reflects risks specific to the liability, 11 stated that the discount rate used was a riskfree rate or that the cash flows were adjusted for risk, and seven did not disclose how risk was measured. Figure 4.2 Measurement of Risk NUMBER OF COMPANIES Discount rate 2 Cash flows Not disclosed 7 11 A detailed description of the methods used to adjust the cash flows or discount rate for risk was disclosed by only three of the companies surveyed. This was surprising given that all companies identified the measurement of mine closure and rehabilitation provisions as a critical estimate. Six companies provided further description of how the discount rate was determined: two disclosed that the rate was specific to the country in which the mine is located; two disclosed that a US dollar real risk-free rate is used for all mines even though they are located in several different countries; and two disclosed that the rate was reflective of the expected maturity of the obligation. The variety of approaches and lack of detail in the description of the rates used make it difficult to compare the amounts by each company. ASSUMPTION NUMBER OF COMPANIES THAT DISCLOSED AMOUNTS USED (RANGE OR WEIGHTED AVERAGE) Long-term, risk free, pre-tax cost of borrowing 2 Risk-free interest rate 3 Pre-tax rate 6 Pre-tax rate that reflects the estimated maturity of each specific liability Discount rate that reflects current market assessments and the risks specific to the liability Current inflation adjusted pre-tax risk free interest rate 1 Risk-free rate specific to the country where the operation is located Long-term interest rate 1 Current US dollar real risk-free pre-tax discount rate The rates disclosed by the 14 companies that provided quantitative information about the discount rate ranged from 0.1 percent to 12.5 percent.

42 40 Mine closure and rehabilitation Recognition of the provision Under IAS 16 the cost of an item includes the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located. An entity incurs this obligation either when the item is acquired or as a consequence of having used the item during a particular period other than to produce inventories. Accordingly, the amount of a provision for mine closure and rehabilitation is generally included as part of the cost of the related asset. In the case of mine closure and rehabilitation costs, it can be difficult to determine the related asset or group of assets to which they relate. Of the companies surveyed, nine have a policy of capitalizing the costs of the mine closure and rehabilitation provision to the specific asset to which they relate, and 11 have a policy of capitalizing these costs to a general environmental asset that is depreciated over the entire life of the mine. The reason for the difference likely lies in the definition of what the related asset is. Given that mine closure and rehabilitation provisions involve significant estimates, the amount of the provision is subject to significant change. The cost of an item of property, plant and equipment includes not only the initial estimate of the costs related to dismantling, removal or restoration of property, plant or equipment at the time of installing the item, but also amounts recognized during the period of use for purposes other than producing inventory. IAS 16 does not distinguish between dismantling, removal or site restoration costs incurred at the beginning or end of the useful life of an asset and accordingly, the cost of an item of property, plant and equipment should include amounts recognized for mine closure and rehabilitation provisions even if the obligation arises only at the end of the useful life of the asset. However, the asset will have to be tested for impairment. In practice, given that there are no expected future benefits of mine closure and rehabilitation costs for a mine site that is no longer in production, the majority of the companies surveyed are recognizing the provision for mine closure and rehabilitation related to closed sites as expense immediately. Of the companies surveyed, 18 disclosed that changes in the measurement of a mine closure and rehabilitation provision are added to or deducted from the cost of the asset. Of these,10 specified that changes in the provision for closed mine sites are expensed immediately and two companies specified that changes in the provision due to the production of inventory are not capitalized to the cost of the asset.

43 Mine closure and rehabilitation 41 In addition to the policies for accounting for a change in mine closure and rehabilitation provisions, some companies also disclosed accounting policies for new provisions covering environmental damage or contamination that occurred during the production phase. Figure 4.3 Expense new provisions during the production phase NUMBER OF COMPANIES Environmental damage and/or systematic rehabilitation 7 All site damage 1 No policy disclosed 12 Of the companies surveyed, one disclosed that they expense provisions for environmental damage, such as clean up costs for unforeseen events. Two noted that systematic rehabilitation over the life of the mine is expensed. Four disclosed that provisions for environmental damage and systematic reabilitation are expensed. One stated that provisions for restoring all site damage after the start of production are recorded in the income statement as a cost of production.

44 42 Business combinations and asset acquisitions

45 Business combinations Section and or asset Brochure acquisitions name 43 5 Business combinations and asset acquisitions

46 44 Business combinations and asset acquisitions 5 Business combinations and asset acquisitions 5Key Messages FROM OUR SURVEY GROUP The most common form of fair value adjustments were to property, plant and equipment, and to mining rights and deferred taxes. Goodwill was recognized by seven of nine companies that reported a business combination in the most recent financial report. Acquisitions determined to be business combinations typically had reserves in the acquired projects, while acquisitions determined to be asset acquisitions typically only had resources. Overview Growth by acquisition is an important aspect of the global mining industry, and looks to be a continuing trend in the near to medium-term future as the ability of mining companies to generate organic growth through exploration success becomes increasingly difficult and costly. The level of business combination activity is affected by the availability of capital something that is currently very scarce for smaller mining companies. As commodity prices and the outlook for mature economies continue to be extremely volatile, and as the growth of developing economies looks more uncertain, some companies may choose to divest non-key assets, creating opportunities for others. The current market has effectively created two tiers of mining companies; smaller companies that may be unable to fund their project requirements, or meet cash calls or debt payments, and larger companies that are cash rich. This creates an environment conducive to acquisitions.

47 Business combinations and asset acquisitions 45 Of the 20 companies included in the survey, 13 disclosed acquisition of mining properties in their most recent financial report. Mining industry acquisitions generally can fall into one of three categories: acquisitions of businesses (business combinations), acquisitions of a collection of assets and liabilities (asset acquisitions), and transactions involving a joint venture. Of the 13 companies that disclosed an acquisition of mining property, nine recognized business combinations. Of the nine companies that recognized business combinations, four recognized more than one business combination. The following figure identifies the percentage of acquired mining properties that were accounted for as either business combinations or asset acquisitions. No surveyed companies recognized transactions involving a joint venture. Figure 5.1: Mining property acquisitions PERCENTAGE OF MINING PROPERTY ACQUISITIONS Business combination Asset acquisition

48 46 Business combinations and asset acquisitions Definition of a Business For an acquisition to be accounted for as a business combination under IFRS 3 Business Combination, the operations must meet the definition of a business, which is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. An integrated set of activities and assets does not need to be conducted and managed as a business at the acquisition date, as long as it is capable of being conducted and managed for that purpose. Therefore, the activities and assets acquired are assessed as they exist at the acquisition date from the view of a market participant, rather than based on how they were used by the seller or how they might be used by the specific acquirer. Business Combination vs. Asset Acquisition For mining companies, careful consideration of whether the definition of a business has been met is required; for example, whether exploration licenses are acquired, the stage of development, level of feasibility study (preliminary or definitive) and whether the project has been approved for development by the board of directors. This is important as specific circumstances may result in different outcomes. When an entity acquires a group of assets or net assets that do not constitute a business, it accounts for the acquisition as an asset acquisition. As such, it allocates the cost of the acquisition among the individual identifiable assets and liabilities in the group based on their relative fair values at the date of acquisition. No goodwill arises on an asset acquisition, and the direct costs incurred on the transaction are generally capitalized as part of the assets acquired. On the other hand, if the acquirer determines that a business combination has occurred, purchase accounting is applied which generally requires that all identifiable assets, acquired liabilities and contingent liabilities assumed are measured at fair value. This may include assets or liabilities that may have not been previously recognized by the acquiree. In a business combination, the possibility also exists for goodwill to arise. In addition, in a business combination the acquirer is required to expense all costs associated with the acquisition as a period cost. The determination of whether a transaction constitutes a business combination or an asset acquisition can be an area of significant judgment, as there is no clear definition of what level of mineralization or other factors would be considered to represent an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return. A possible approach to make this determination is illustrated by the following diagram, which demonstrates that the closer a mining project is to being a developed mine, the higher the expectation that it would qualify as a business. However, the ultimate determination must be based on an assessment of the specific facts and circumstances.

49 Business combinations and asset acquisitions 47 Greenfield Resources Reserves Developed Mine Asset Acquisition Asset or Business Acquisition? Business Acquisition The previous analysis of the transactions entered into by the companies suggests that the acquisition of reserves does tend to lead to a conclusion of a business combination, and the acquisition of resources does tend to lead to a conclusion of an asset acquisition. However, examples were noted whereby transactions involving the acquisition of resources resulted in business combination accounting. On the contrary, an example was noted whereby a transaction involving the acquisition of reserves resulted in asset acquisition accounting. Irrespective of the type of acquisition that occurs, fair value adjustments ultimately result. Of the nine companies that recognized business combinations, only two disclosed the difference between the pre-acquisition carrying amounts and the fair values on acquisition. Figure 5.2 Fair value adjustments for business combinations NUMBER OF BUSINESS COMBINATIONS Non-controlling interests Inventory Deferred tax balances Companies recognizing a business combination are required to disclose fair values of the assets and liabilities acquired. There is no requirement to disclose the adjustments made to the pre-acquisition carrying value of acquired assets and liabilities to arrive at fair value. Of the three business combinations disclosed by companies included in the survey for which there were fair value adjustments disclosed, the most common fair value adjustments were to property, plant and equipment, and mineral interests and deferred tax balances. Receivables Property, plant and equipment & mining rights 1 3 While only a small percentage of surveyed companies disclosed this information, the nature of the fair value adjustments is consistent with what would be expected in the mining industry.

50 48 Business combinations and asset acquisitions Goodwill Goodwill represents future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Goodwill arising in a business combination is measured initially as the excess of the cost of the business combination over the acquirer s interest in the net fair value of the acquired identifiable assets, liabilities and recognized contingent liabilities. Internally generated goodwill is never recognized. When an acquired set of activities and assets is a business, goodwill may be recognized. An entity should disclose factors that make up the goodwill recognized; for example, expected synergies resulting from combining operations. In determining whether goodwill is present and whether the acquired set of activities and assets is a business, the acquirer should consider whether elements of goodwill, such as buyerspecific synergies, are present. Of the nine companies that reported a business combination in the years included in the most recent financial report, seven reported recognition of goodwill, and all seven disclosed the factors that gave rise to the goodwill. FACTORS GIVING RISE TO GOODWILL Requirement to recognize deferred tax liability for the difference between the assigned values and the tax bases of assets acquired and liabilities assumed at amounts that do not reflect fair value. Potential to develop additional higher-cost reserves, intensify efforts to develop the more promising acquired properties and to reduce efforts to develop the less promising acquired properties in the future, the going concern value of the Company's capacity to replace and augment reserves through completely new discoveries and the requirement to record a deferred tax liability for the difference between the assigned values and the tax bases of the assets acquired and liabilities assumed in a business combination. NO. OF BUSINESS COMBINATIONS 7 1 Synergies between the acquired assets and current operations. 1 The scarcity of large, long-life copper deposits; the ability to capture financing, tax and operation synergies by managing these properties within a copper business unit; the potential to expand production through operational improvements and increases to reserves through exploration at the Lumwana property, which is located in one of the most prospective copper regions in the world; the recognition of a deferred tax liability for the difference between the assigned values and the tax bases of assets acquired and liabilities assumed at amounts that do not reflect fair value. The going concern value implicit in our ability to sustain and grow this project by increasing reserves and resources through new discoveries; the ability to capture unique synergies that can be realized from managing this project within our South America regional business unit. 1 1

51 Business combinations and asset acquisitions 49 Disclosure 5.1 and 5.2: The following notes extracted from financial statements illustrate disclosures of business acquisitions. 1, 2 Barrick Acquisitions and Divestitures For the years ended December Cash paid on acquisition 1 Equinox $7,482 $ - Cerro Casale Oil and Gas acquisitions Tusker Gold Limited - 74 REN - 36 $ 7,760 $ 828 Less: cash acquired (83) $813 Cash proceeds on divestiture 1 $ 7,677 (15) Sedibelo $ 44 $ - IPO of African Barrick Gold Plc Osborne - 17 Pinson 15 - $ 59 $901 1 All amounts represent gross cash paid on acquisition or received on divestiture. 2 There was no change in control as a result of the IPO of ABG, and consequently the net proceeds received were recorded as a financing cash inflow on the consolidated statement of cash flows. A) Acquisition of Equinox Minerals Limited On June 1, 2011, Barrick acquired 83% of the recorded voting shares of Equinox Minerals Limited ( Equinox ), thus obtaining control. Throughout June Barrick obtained a further 13% of the voting shares and obtained the final 4% on July 19, Cash consideration paid in second quarter 2011 was $7,213 million, with a further $269 million paid in third quarter 2011, for total cash consideration of $7,482 million. Barrick has determined that this transaction represents a business combination with Barrick identified as the acquirer. Barrick began consolidating the operating results, cash flows and net assets of Equinox from June 1, Equinox was a publicly traded mining company that owns the Lumwana copper mine in Zambia and the Jabal Sayid copper project in Saudi Arabia. These operations form part of Barrick s copper business unit which was established in the fourth quarter. The tables below present the purchase cost and our final allocation of the purchase price to the assets and liabilities acquired. This allocation was finalized in fourth quarter 2011 to reflect the final determination of the fair values of the assets and liabilities acquired. The significant adjustments were to increase property plant and equipment by $819 million and deferred income taxes by $769 million, with a corresponding net increase to goodwill of $79 million. There were no significant adjustments made to the consolidated statements of income after applying these adjustments retroactively to the acquisition date. Purchase Cost Cash paid to Equinox shareholders in June 2011 $ 6,957 Cash paid to Equinox shareholders in July Cost of Equinox shares previously acquired 131 Payouts to Equinox employees on change of control 125 Total Acquisition Cost $ 7,482 Cash acquired with Equinox (83) Net Cash Consideration $ 7,399 The purchase cost was funded from our existing cash balances and from proceeds from the issuance of long-term debt of $6.5 billion. Summary of Final Purchase Price Allocation Assets Fair Value at Acquisition Current assets $ 366 Buildings, plant and equipment 1,526 Lumwana depreciable mining interest 1,792 Lumwana non-depreciable mining interest 2,258 Jabal Sayid non-depreciable mining interest 902 Intangible assets 66 Goodwill 3,506 Total assets $10,416 Liabilities Current liabilities $359 Deferred income tax liabilities 2,108 Provisions 59 Debt 408 Total liabilities $2,934 Net assets $7,482 In accordance with the acquisition method of accounting, the acquisition cost has been allocated to the underlying assets acquired and liabilities assumed, based primarily upon their estimated fair values at the date of acquisition. Barrick primarily used a static discounted cash flow model (being the net present value of expected future cash flows) to determine the fair value of the mining interests, and used a replacement cost approach in determining the fair value of buildings, plant and equipment. Expected future cash flows are based on estimates of projected future revenues, expected conversions of resources to reserves, expected future production costs and capital expenditures based on the life of mine plan as at the acquisition date. The excess of acquisition cost over the net identifiable assets acquired represents goodwill. 1. Source: Barrick Gold Corporation, Annual Report 2011, pp Source: Kinross Gold Corporation, Annual Report 2011, pp

52 50 Business combinations and asset acquisitions Goodwill arose on this acquisition principally because of the following factors: 1) the scarcity of large, long-life copper deposits; 2) the ability to capture financing, tax and operational synergies by managing these properties within a copper business unit in Barrick; 3) the potential to expand production through operational improvements and increases to reserves through exploration at the Lumwana property, which is located in one of the most prospective copper regions in the world; and 4) the recognition of a deferred tax liability for the difference between the assigned values and the tax bases of assets acquired and liabilities assumed at amounts that do not reflect fair value. The goodwill is not deductible for income tax purposes. Since it has been consolidated from June 1, 2011, Equinox contributed revenue of $569 million and segment income of $46 million. Revenues and net income of the combined Equinox and Barrick entities would have been approximately $14.7 billion and approximately $4.4 billion, respectively, for the 12 months ended December 31, 2011 had the acquisition and related debt issuances occurred on January 1, Acquisition related costs of approximately $85 million have been expensed, with approximately $39 million presented in other expense and $45 million in realized foreign exchange losses relating to our economic hedge of the purchase price presented in gain (loss) on non-hedge derivatives. Kinross Acquisitions and Dispositions Acquisition of Red Back On September 17, 2010 (the acquisition date ), Kinross completed its acquisition of Red Back through a plan of arrangement, whereby Kinross acquired all of the issued and outstanding common shares of Red Back that it did not already own. As a result of this acquisition, the Company expanded operations into West Africa. In Ghana, the Company holds a 90% interest in the Chirano Gold mine ( Chirano ) with the Government of Ghana having a 10% carried interest. In Mauritania, the Company holds a 100% interest in the Tasiast mine ( Tasiast ). Total consideration for the acquisition was approximately $8,720.4 million, including the fair value of the previously owned interest of $789.6 million. Non-controlling interest was measured at 10% of the fair value of Chirano s net identifiable assets at the acquisition date. Red Back shareholders received Kinross common shares, plus 0.11 of a Kinross common share purchase warrant for each Red Back common share held. As a result of the transaction, Kinross issued million common shares and 25.8 million common share purchase warrants. The Company also issued 8.7 million fully vested replacement options to acquire Kinross common shares to previous Red Back option holders. As the purchase is a business combination, with Kinross being the acquirer, results of operations of Red Back have been consolidated with those of Kinross commencing on the acquisition date. Total consideration paid of $8,720.4 million was calculated as follows: Common shares issued (416.4 million) $ 7,678.3 Fair value of warrants issued (25.8 million) Fair value of options issued (8.7 million) 91.2 Shares previously acquired Total Purchase Price $ 8,720.4 In finalizing the purchase price allocation during 2011, the Company adjusted the preliminary purchase price allocation as set out below. The adjustments recorded resulted in an increase to goodwill of $272.0 million from the amount previously reported. The following table sets forth the final allocation of the purchase price to assets and liabilities acquired. Cash and cash equivalents Accounts receivable and other assets Preliminary Adjustments Final $ $ Inventories (3.4) Property, plant and equipment (including mineral interests) Accounts payable and accrued liabilities 3,527.1 (321.7) 3,205.4 (103.4) 2.6 (100.8) Deferred tax liabilities (752.0) 69.0 (683.0) Provisions (11.8) (5.9) (17.7) Other long-term liabilities (22.5) (12.5) (35.0) Non-controlling interest (68.8) (0.1) (68.9) Goodwill 5, ,539.0 Total Purchase Price $ 8,720.4 $ - $ 8,720.4 The goodwill recognized is attributed to the optionality to develop additional higher-cost reserves, to intensify efforts at developing the more promising acquired properties and to reduce efforts at developing the less promising acquired properties in the future, the going concern value of the Company s capacity to replace and augment reserves through completely new discoveries and the requirement to record a deferred tax liability for the difference between the assigned values and the tax bases of the assets acquired and liabilities assumed in a business combination. None of the goodwill is expected to be deductible for tax purposes.

53 Business combinations and asset acquisitions 51 During the year ended December 31, 2011, the Company recorded an impairment charge related to the goodwill recognized in the Red Back acquisition. See Note 8. As a result of reflecting the final purchase price adjustments retrospectively, the consolidated financial statements for the year ended December 31, 2010 have been recast. The consolidated statements of operations for the year ended December 31, 2011 and 2010 include revenue of $723.2 million and $194.8 million respectively, operating loss of $2,736.6 million and operating earnings of $1.6 million, respectively, for the former Red Back properties. For the year ended December 31, 2010, production cost of sales and depreciation, amortization and depletion increased by $2.0 million and $17.4 million, respectively; whereas income tax expense, finance expense, and income attributable to non-controlling interests decreased by $5.7 million, $0.1 million, and $1.0 million, respectively. As a result, net earnings attributed to common shareholders decreased by $12.6 million. As at December 31, 2010, inventories, property, plant and equipment, accounts payable and accrued liabilities, deferred tax liabilities, and non-controlling interest decreased by $5.4 million, $338.0 million, $2.7 million, $74.7 million, and $0.9 million, respectively; whereas goodwill, provisions, and other long-term liabilities increased by $272.0 million, $7.0 million, and $12.5 million, respectively. As a result, accumulated deficit increased by $12.6 million. Pro forma Information Basis of Presentation The following pro forma results of operations have been prepared as if the Red Back acquisition had occurred at January 1, The pro forma consolidated financial statement information is not intended to be indicative of the results that would actually have occurred, or the results expected in future periods, had the events reflected herein occurred on the dates indicated. Any potential synergies that may be realized and integration costs that may be incurred have been excluded from the pro forma financial statement information, including Red Back transaction costs. Pro Forma Assumptions and Adjustments Certain adjustments have been reflected in this pro forma consolidated statement of operations to illustrate the effects of purchase accounting where the impact could be reasonably estimated. The adjustments are as follows: a) To increase depreciation expense to reflect depreciation of the fair value increment on property, plant, and equipment (including mineral interests); b) To expense exploration costs that had been deferred in accordance with the Company s E&E policy under IFRS; c) To adjust accretion on asset retirement obligations for the period prior to acquisition to reflect the impact of IFRS; and d) To record the tax effect of all the above listed adjustments. Year Ended December 31, 2010 Revenue $ 3,337.9 Net Earnings $ 839.9

54 52 Mining Financial Reporting Survey 2012 Notes

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56 KPMG s Global Mining Network: Wayne Jansen Global Head of Mining KPMG in South Africa T: E: [email protected] Helen Cook KPMG in Australia T: E: [email protected] Eduardo Martins KPMG in Brazil T: E: [email protected] Lee Hodgkinson KPMG in Canada T: E: [email protected] Daniel Camilleri KPMG in Chile T: E: [email protected] Melvin Guen KPMG in China T: +86 (10) E: [email protected] Lydia Petrashova KPMG in Russia T: +7 (495) E: [email protected] Jacques Erasmus KPMG in South Africa T: E: [email protected] Richard Sharman KPMG in the UK T: E: [email protected] Roy Hinkamper KPMG in the US T: E: [email protected] The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Printed in Canada. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.