IAS 36 para 130, impairment disclosures, fvlcd basis used, fair value hierarchy under IFRS 13, assumptions, sensitivities

Glencore plc – Annual report – 31 December 2019

Industry: mining

6. Impairments

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1 Impairments recognised during the year are allocated to Glencore’s operating segments as follows: Marketing activities $201 million (2018: $92 million) and Industrial activities $2,207 million (2018: $1,551 million).

As part of a regular portfolio review, Glencore carries out an assessment of whether there are indicators of asset impairment or whether a previously recorded impairment may no longer be required.
The recoverable amounts of the property, plant and equipment and intangible assets were measured based on fair value less costs of disposal (FVLCD), determined by discounted cash flow techniques based on the most recent approved financial budgets and three-year business plans, which are underpinned and supported by life of mine plans of the respective operations. The valuation models use the most recent reserve and resource estimates, relevant cost assumptions generally based on past experience and where possible, market forecasts of commodity price and foreign exchange rate assumptions discounted using operation specific discount rates ranging from 6.6%–13.5% (2018: 7%–13.5%). The valuations remain sensitive to price and a deterioration/improvement in the pricing outlook may result in additional impairments/reversals. The determination of FVLCD uses Level 3 valuation techniques for both years.

As a result of the regular impairment assessment, the following significant impairment charges resulted:

2019
Property, plant and equipment and intangible assets
• Following the sharp further decline in cobalt prices over H1 2019 and in response thereof, significant updates were made to Mutanda’s mine plans, culminating in the decision to place the operation on temporary care and maintenance in December 2019, for future restart, once the current weak and oversupplied cobalt market sufficiently recovers. As a result, the Mutanda operations (Industrial activities segment) were impaired by $300 million to its estimated recoverable amount of $2,600 million, including continued value recognition for the long-term copper sulphide resource potential. The valuation remains sensitive to price and a prolonged temporary care and maintenance scenario and further deteriorations in these key assumptions may result in additional impairment. The operation specific discount rate used in the valuation was 13.5%. The short to long-term copper and cobalt price assumptions were $6,500/mt and $20.00–$27.00/lb, respectively. Should the copper and cobalt assumptions fall by 10% (across the curve), or should it be determined that the temporary care and maintenance scenario be prolonged for an additional 2 years, with all other assumptions held constant, a further impairment ranging between $317 million and $468 million would be recognised.
• During H1 2019, Glencore’s exploration licenses in Chad East expired and Glencore entered into discussions with the Government of the Republic of Chad with a view to extending the exploration licenses on terms acceptable to both parties. The discussions did not result in any agreement to extend the licenses. As a result, the full carrying value pertaining to the acreage held under exploration licenses ($538 million) (Industrial activities segment) was impaired. The expiry of the exploration licences has no impact on Glencore’s current production and development assets in the Mangara, Badila and Krim fields (Chad West), which are held under exploitation licences.
• During H1 2019, challenging warehousing conditions persisted and as a result, the remaining goodwill of $50 million related to the Access World warehousing business (Marketing activities segment) was impaired.
• Global LNG oversupply with resultant low spot gas prices, and to a lesser extent, higher EU carbon prices, placed considerable pressure on the API2 European coal market, the primary price reference market for our Colombian coal operations. This impact, including reflecting our latest Colombian mine-life approval expectations, resulted in a reduction in future production and revenue estimates. As a result, the Prodeco operation (Industrial activities segment) was impaired by $514 million, along with an inventory write down of $41 million to its estimated recoverable amount of $778 million. The valuation remains sensitive to price and a further deterioration in the pricing outlook may result in a further impairment. The operation specific discount rate used in the valuation was 8.1%. The short to long-term API2 price assumptions were $70–83/mt. Should the price assumptions fall by 10% (across the curve) with all other assumptions held constant, a further impairment of $466 million would be recognised.
• In November 2019, an agreement to dispose of the Oxidos and Cerro de Pasco operations (separately identifiable zinc and silver processing areas within the Volcan group) (Industrial activities segment), which predominantly comprise an oxide processing plant, environmental and rehabilitation provisions and old tailings dumps, was reached with $30 million due over a two year period plus a royalty, contingent upon the price of silver and gold over certain thresholds, estimated to be worth $100 million on a discounted basis. The transaction is subject to customary regulatory approvals and is expected to close during 2020. As a result of the agreed disposal, it has been determined that these operations meet the requirements of IFRS 5, which requires that its assets and liabilities be presented as current assets and liabilities “held for sale” as at 31 December 2019 at the lower of their carrying value or fair value less costs to sell, and as a result of this reclassification to assets held for sale, an impairment charge of $354 million was recognised as well as a VAT impairment of $24 million. Also see note 15.
• The balance of the impairment charges on property, plant and equipment (none of which were individually material) relate to specific assets where utilisation is no longer required or to projects no longer processed due to changes in production and development plans. As a result, the full carrying amount of these asses/projects was impaired, with $168 million recognised in our Industrial activities segment and $30 million recognised in our Marketing activities segment.

VAT receivables
As a result of the continued decline in the Zambian government’s cash flow position and continued challenge by the Zambian Revenue Authority on the validity of Mopani’s (Industrial activities segment) Value Added Tax (“VAT”) claims pertaining to 2013–15 submissions, such claims amounting to $127 million were impaired in full.

The balance of the impairment charges on VAT receivables (none of which were individually material) were recognised in our Industrial activities segment ($5 million) and in our Marketing activities segment ($6 million).

2018
Property, plant and equipment
• As a result of delays in various expansion programs, cost increases owing to inflation, tax and other regulatory pressures and, in particular, a materially lower acid price assumption (by-product from smelting), the Mopani copper operations in Zambia (Industrial activities segment) were impaired by $803 million, to its estimated recoverable amount of $1,427 million. The valuation remains sensitive to price and a further deterioration in the pricing outlook may result in additional impairment. The operation specific discount rate used in the valuation was 11.1%. The short to long-term copper and cobalt price assumptions were $6,500/mt and $27.22/lb, respectively, and acid price assumptions were $220/mt for 2019 and 2020 and $50/mt over the remaining life of mine. As at 31 December 2018, had the copper, cobalt and acid price assumptions fallen by 10%, a further $390 million of impairment would have been recognised. In addition, had operating costs risen by 5% as a result of further operational challenges and delays, a further $165 million of impairment would have been recognised.
• In Q4 2018, a significant downward revision in the amount and timing of copper oxide reserves at our Mutanda copper operations in the DRC was highlighted, which lowers near term forecast annual copper production. In addition, the significant increased costs and elevated political risk stemming from the introduction of the 2018 Mining Code, has reduced the value of the base business, as well as reduced the value and probability of approving the development of new facilities to treat the sulphide reserves. As a result of these changes, the Mutanda operations (Industrial activities segment) were impaired by $600 million, to its estimated recoverable amount of $3,006 million. The valuation remains sensitive to price and adverse applications of the 2018 Mining Code. A further deterioration in these assumptions may result in additional impairment. The operation specific discount rate used in the valuation was 13.5%. The short to long-term copper and cobalt price assumptions were $6,500/mt and $27.22/lb, respectively, and it was assumed that no super profits tax would be incurred. As at 31 December 2018, had the copper and cobalt price assumptions fallen by 10% and it was determined that super profits tax was due, a further impairment ranging between $479 million and $1,008 million would have been recognised.
• The balance of the impairment charges on property, plant and equipment (none of which were individually material) relate to specific assets where utilisation is no longer required or to projects no longer progressed due to changes in production and development plans. As a result, the full carrying amount of these assets/projects was impaired, with $49 million recognised in our Industrial activities segment.

Advances and loans – non-current
In 2018, certain loans and physical advances were restructured over the period due to various non-performance factors, resulting in the following impairments being recognised:
• $92 million impairment of a loan provided under an Energy related financing arrangement (Marketing activities segment). The estimated recoverable amount of the advance was $23 million.
• $99 million impairment of a financial loan arrangement (Industrial activities segment). The estimated recoverable amount of the loan was $155 million, see note 11.