IAS 36 para 130, impairment disclosures, mainly fvlcd basis, hierarchy under IFRS 13, climate change, COVID – 19 assumptions, sensitivities

Glencore plc – Annual report – 31 December 2020

Industry: mining

1. Accounting policies (extract 1)

CLIMATE CHANGE RELATED CONSIDERATIONS

The Group’s ambition on climate change is to achieve net zero total emissions by 2050. The accounting related measurement and disclosure areas most impacted by this position relate to the carrying value of our coal industrial assets where the underlying accounting determination is subject to estimation uncertainties in the medium to long term such as: impairments and impairment reversals and useful economic lives of assets. The policies and where applicable, key estimates and sensitivities pertaining to reasonably possible changes in estimates, most impacted by climate change are covered below.

CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (extract)

KEY SOURCES OF ESTIMATION UNCERTAINTY (extract)

(ii) Impairments and impairment reversals (notes 6 and 10)

Investments in associates and joint ventures, advances and loans, property, plant and equipment and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an individual asset or a cash-generating unit (CGU) may not be fully recoverable, or at least annually for CGUs to which goodwill and other indefinite life intangible assets have been allocated. Indicators of impairment may include changes in the Group’s operating and economic assumptions, including those arising from changes in reserves or mine planning, updates to the Group’s commodity supply, demand and price forecasts, or the possible impacts from emerging risks such as those related to climate change and the transition to a lower carbon economy. If an asset or CGU’s recoverable amount is less than its carrying amount, an impairment loss is recognised in the consolidated statement of income. For those assets or CGUs which were impaired in prior periods, if their recoverable amount exceeds their carrying amount, an impairment reversal is recorded in the consolidated statement of income. Future cash flow estimates which are used to calculate the asset’s or CGU’s recoverable amount are discounted using asset or CGU specific discount rates and are based on expectations about future operations, using a combination of internal sources and those inputs available to a market participant, which primarily comprise estimates about production and sales volumes, commodity prices (considering current and future prices and price trends including factors such as the current global trajectory of climate change), reserves and resources, operating costs and capital expenditures. Estimates are reviewed regularly by management. Changes in such estimates and in particular, deterioration in the commodity pricing outlook, could impact the recoverable amounts of these assets or CGUs, whereby some or all of the carrying amount may be impaired or the impairment charge reversed (if pricing outlook improves significantly) with the impact recorded in the statement of income.

As noted above and further described below in the ‘impairment or impairment reversals’ accounting policy, the Group carries out, at least annually, an impairment assessment. Following this review, indicators of impairment were identified for various CGUs, primarily due to a deterioration in the underlying commodity price environment most influencing the respective operation. Accordingly, the Group assessed the recoverable amounts of these CGUs and as at 31 December 2020, except for those CGUs disclosed in notes 6 and 10, the estimated recoverable amounts exceeded the carrying values. However, for certain CGUs where no impairment was recognised, should there be a significant deterioration in the key assumptions, a material impairment could result within the next financial year. A summary of the carrying values, the key / most sensitive assumptions and a sensitivity impact of potential movements in these assumptions for each such CGU with limited headroom (relative to its estimated recoverable amount) is below. In providing sensitivity analysis (and particularly on commodity price assumptions), a 10% change, representing a typical deviation parameter common in the industry, has in some cases been provided. Where a higher or lower percentage is reasonably possible on an operational assumption, this has been clearly identified.

Sensitivity to demand for fossil fuels

The impairment assessment assumes that through the remaining life of mine, there will continue to be a ready market for thermal coal at a Newcastle FOB export price of $80/tonne (6,000 NAR), South African FOB export price of $80/tonne and Colombian CIF price (destination: Rotterdam) of $65/tonne. The International Energy Agency (IEA) provides a comprehensive view of how the global energy system could develop in the coming decades through a number of scenarios. Our base case production decline profile is consistent with the demand decline profile of the IEA’s Paris-aligned scenarios. Should coal be displaced as a fuel for power generation more rapidly than currently expected, the resulting supply overhang could result in lower commodity prices. We have illustrated this by showing the various impairment scenarios versus current carrying values at possible commodity price curves consistent with the IEA’s scenarios:

  • Stated Policies scenario (STEPS) – the impact of existing policy frameworks and today’s announced policy intentions (consistent with our “Current Pathway” scenario)
  • Sustainable Development scenario (SDS) – the impact should additional policy mechanisms be implemented sufficient for full alignment with the Paris Goals (consistent with our “Rapid Transition” scenario)

The sensitivity prices set out below are those included in the documentation to the IEA’s World Energy Model 2020, except that IEA thermal coal prices are on a delivered basis. These have been adjusted to FOB pricing on the basis of forward freight costs.

The base case price used in the impairment assessment is higher than that in STEPS due to our assumption that such higher price will be required to induce the required investment to maintain supply levels under this scenario. Notwithstanding this assumption, we also consider prices in STEPS to be a reasonably possible change in our assumptions within the next financial year. Europe’s demand for thermal coal has reduced significantly in recent years, and this is currently the key market for Colombian coal. Accordingly we consider the SDS prices for Colombian coal to be a reasonably possible change in our assumptions within the next financial year and have sensitised Cerrejon against these. The SDS price sensitivities for Australia and South Africa are provided for additional information.

The sensitivities are presented on price alone and assume no mitigating actions, therefore the impairments in each scenario are likely higher than would transpire. In practice, in a sustained lower price environment, management would alter mine plans to cut operating and capital costs, potentially at the expense of future volumes, in order to reduce the overall NPV impact.

The IEA has also published a net zero emissions by 2050 scenario (consistent with our “Radical Transformation” scenario), but has not published price assumptions for this scenario. Our assumption is that demand (and therefore price) would be similar to SDS, but with large-scale uptake of carbon capture, utilisation and storage to mitigate the effects of such. In itself, this reflects that in all credible energy transformation scenarios, thermal coal will continue to be required as a transition fuel for several decades.

Coking coal prices have not been sensitised, reflecting limited alternatives in relevant industrial applications. We have not sensitised the NPV of our oil producing assets, reflecting the relatively low capital allocated to such.

Our life of mine planning reflects operating cash flows from Cerrejon until 2032, South African coal mines until 2043 and Australian coal mines until at least 2050. Production is weighted towards the earlier part of the mines’ lives. We have illustrated this by showing the year in which 50% of saleable coal would be extracted under the current plan, well within the next decade.

Sensitivity to project execution and ramp-up

Mutanda

The operations have been on care and maintenance since 2019 and have an accumulated impairment of $955 million. 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 short to long-term copper and cobalt price assumptions were $6,500-$6,250/mt and $16.00 – $25.00/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 of $357 million or $402 million, respectively, would be recognised. Bringing the operations back online more rapidly than the profile modelled may result in some or all of the accumulated impairment being reversed.

Koniambo

The impairment assessment on the Koniambo CGU was prepared on the assumption that Koniambo would reach steady-state capacity of circa 55ktpy contained nickel by 2028, and continue to produce at this rate until 2060. The assessment is sensitive to the ramp-up profile to steady-state production, and the assumed modification of Mineral Resources to Ore Reserves, and their eventual exploitation.

We have illustrated this by showing the effects of:

  • limiting Koniambo’s production ramp-up to around 85% of the base case level up to 2038;
  • limiting Koniambo’s production to currently defined Ore Reserves (17 years); and
  • a 10% change in the long-term nickel price.

Modification of Mineral Resources in place to Ore Reserves available for economic extraction depends on a number of modifying factors, including mining, processing, metallurgical, infrastructure, economic, marketing, legal, environmental, social and governmental factors. In a long-dated project, a lack of certainty about some of these factors over the timescales involved may mean that it is not currently appropriate to show the existing Mineral Resource converted to Ore Reserves. This does not mean that such Mineral Resource is without value.

Koniambo has previously been impaired. A favourable change in the long-term nickel price, or the quantum and/or timing of Koniambo’s ramp-up could result in a reversal of impairment.

(iii) Restoration, rehabilitation and decommissioning costs (note 22)

A provision for future restoration, rehabilitation and decommissioning costs requires estimates and assumptions to be made around the relevant regulatory framework, the magnitude of the possible disturbance and the timing, extent and costs of the required closure and rehabilitation activities. Most of these rehabilitation and decommissioning events are expected to take place many years in the future and the currently estimated requirements and costs that will have to be met when the restoration event occurs are inherently uncertain and could materially change over time.

In calculating the appropriate provision for the expected restoration, rehabilitation or decommissioning obligations, cost estimates of the future potential cash outflows based on current studies of the expected rehabilitation activities and timing thereof, are prepared. These forecasts are then discounted to their present value using a risk-free rate specific to the liability and the currency in which they are denominated.

Any changes in the expected future costs or risk-free rate are initially reflected in both the provision and the asset and subsequently in the consolidated statement of income over the remaining economic life of the asset. As the actual future costs can differ from the estimates due to changes in laws, regulations, technology, costs and timing, the provisions including the estimates and assumptions contained therein are reviewed regularly by management. A material change in the provision within the next 12 months could arise from changes in risk-free rates. The aggregate effect of changes within 12 months as a result of revisions to cost and timing assumptions is not expected to be material.

6. Impairments

1 Impairments recognised during the year are allocated to Glencore’s operating segments as follows: Marketing activities $228 million (2019: $201 million) and Industrial activities $5,719 million (2019: $2,207 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), or in certain cases value in use (VIU). In particular, market pressures regarding potential future investment in Coal mining operations have reduced the availability of an active market for acquiring such operations, and thus the recoverable amounts of our Coal CGUs have been measured using a VIU approach. The FVLCD or VIU of all CGUs are determined by discounted cash flow techniques based on the most recent approved financial budgets, underpinned and supported by the life of asset plans of the respective operations. The valuation models use a combination of internal sources and those inputs available to a market participant, which comprise the most recent reserve and resource estimates, relevant cost assumptions generally and where possible, market forecasts of commodity price and foreign exchange rate assumptions, discounted using operation specific post-tax real discount rates (unless otherwise indicated) ranging from 6.1% – 13.5% (2019: 6.6% – 13.5%). The valuations generally remain most 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. In providing sensitivity analysis (and particularly on commodity price assumptions), a 10% change, representing a typical deviation parameter common in the industry, has been provided. Where a higher percentage is reasonably possible on an operational assumption, that has been clearly identified.

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

2020

Property, plant and equipment and intangible assets

  • Volcan is a listed zinc / silver mining entity in Peru, in which the Group acquired a 63% controlling (23% economic) interest at the end of 2017 (Industrial activities segment). The operations primarily comprise two cash-generating units (Yauli and Chungar) and at the time of the acquisition, approximately one third of the value was ascribed to realising the future potential of various projects / resources. Due to the impact Covid-19 has had on the long-term outlook of the global economy, a comprehensive review of the life of mine plan and related expansion projects was carried out in Q2 2020 where it was determined that the related risk / confidence levels in deploying capital to longer-term greenfield projects and the probability of approving development and realisation of these projects had reduced. This, along with the shift in long-term zinc pricing, lead to an impairment of $2,347 million (related deferred tax obligations of $716 million were released) to its estimated recoverable amount of $1,503 million. The valuation assumes long-term zinc and silver prices of $2,400/t and $20.00/lb, respectively and an operation specific discount rate of 9.2%. Should the zinc and silver price assumptions fall by 10% (across the curve), a further impairment of $450 million would be recognised. A 10% reduction in estimated annual production over the life of mine could result in an additional impairment of $540 million.
  • As a result of persistent operational challenges, further technical analysis resulting in a reduced life of mine forecast, delays in key development projects and cost increases owing to inflation, tax and other regulatory pressures, a decision was made, in Q2 2020, to place the Mopani copper operations in Zambia (Industrial activities segment) on extended care and maintenance subject to government approval. In January 2021, an agreement was reached to sell Mopani to ZCCM (see note 15). At year end, the carrying value was determined with reference to the estimated fair value of the consideration receivable from the sale transaction noted above. The Mopani operations were therefore impaired by $1,041 million, to $861 million, reflecting the estimated fair value of the agreed sales terms. The valuation remains sensitive to price and production volumes and a deterioration in these assumptions could result in additional impairments. The operation specific discount rate used in the valuation was 10.5%. The short to long-term copper price assumptions were $7,900/mt – 6,300/mt. Should the copper price assumptions fall by 10% (across the curve), considering historical production performance, production volumes decline by 20%, a further $150 million and $235 million, respectively, of impairment would be recognised.
  • During H1 2020, pressure on the API2 European coal market (primary price reference market for our Colombian coal operations) increased as European economies continue to progress their decarbonisation trajectory, exacerbated by the significant drop in oil and gas prices (supply and demand factors). A review of Prodeco’s operations determined that, in addition to a deteriorating market environment, there were increasing challenges with respect to obtaining several key approvals from government agencies and other key stakeholders. In Q2 2020, an application was therefore made to place Prodeco on extended care and maintenance until these conditions improve. In Q4, the application was rejected and it was subsequently decided to relinquish the mining licenses. Consequently, the full carrying value of the mining operations related to such licenses ($835 million) (Industrial activities segment) were fully impaired (property, plant and equipment – $789 million and non-current advances and loans – $46 million).
  • As noted above, oil prices were significantly impacted by demand destruction from Covid-19, the lack of timely effective supply response from OPEC+ and the longer term outlook for oil prices also deteriorated due to updated expectations surrounding decarbonisation. In addition, Covid-19 disrupted and restricted international mobility, which had a particularly significant impact on our workforce arrangements in Chad, resulting in these fields being placed on care and maintenance in March. As a result, in Q2 2020, the Chad oil operations (Industrial activities segment) were impaired by $673 million to their estimated recoverable amount of $145 million. The valuation remains sensitive to Covid-19 related disruptions on international mobility and a timely restart of the operations in a safe and economic manner. Should such restart be prolonged by an extended period of time, an additional future impairment of the balance of the carrying amount could result.
  • In June 2020, it was determined to keep the Lydenburg chrome smelter (Industrial activities segment) on care and maintenance, reflecting the challenging operating and market environment across the South African ferrochrome industry, including unsustainably increasing electricity tariffs / supply interruption and other sources of real cost inflation. These macro factors outweigh the significant efforts made over the past years to make the operation more competitive, rendering its estimated fair value as negative. As a result, the entire carrying value of the Lydenburg smelter ($116 million) was impaired.
  • The global macro-economic impact of Covid-19 on refined petroleum product demand and resulting global refinery overcapacity has had a negative effect on refining margins. As a result, Astron (Industrial activities segment) has lowered its long term through-the-cycle outlook on refining margins by approximately 30%. As a result, the Astron oil refinery was impaired by $480 million to its estimated recoverable amount of $1,015 million, including its related downstream supply business. The operation specific discount rate used in the valuation was a pre-tax nominal discount rate of 12.3%. The valuation remains most sensitive to refining margins and a deterioration in these assumptions could result in additional impairments. Should the margin assumptions fall by $1/bbl (across the curve), a further $243 million of impairment would be recognised. Should the discount rate increase by 1%, a further $88 million of impairment would be 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 $62 million recognised in our Industrial activities segment.

Advances and loans – current and non-current

In Q2 2020, loans of $103 million were impaired in full due to financial difficulties faced by one of the Group’s associates (Marketing activities segment). The balance of the impairment charges on advances and loans (none of which were individually material) were recognised in our Marketing activities segment ($125 million) and our Industrial activities segment ($115 million), following the restructuring of certain loans and physical advances due to various non-performance factors.

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 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 long-term copper and cobalt price assumptions were $6,500/mt and $27.00/lb, respectively. As at 31 December 2019, had the future copper and cobalt assumptions fallen by 10% (across the curve), or had 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 have been 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 had 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. As at 31 December 2019, had the future price assumptions fallen by 10% (across the curve) with all other assumptions held constant, a further impairment of $466 million would have been 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 was subject to customary regulatory approvals and 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 progressed 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).

10. Investments in associates, joint ventures and other investments (extract)

Cerrejón

Included in share of income from associates is Glencore’s attributable share of impairment relating to Cerrejón amounting to $445 million (net of taxes of $211 million). As at 31 December 2020, the carrying amount of Glencore’s investment in Cerrejón amounts to $595 million (2019: $1,143 million) which is equivalent to its recoverable amount based on a VIU calculation. The impairment results from lower API 2 coal price assumptions and reduced production estimates, including updated via mine-life approval expectations. The operation specific discount rate used in the valuation was 7.9%. The short to long-term API 2 price assumptions were $57 – 65/mt. Should the price assumptions fall by 10% (across the curve), with all other assumptions held constant, a further impairment of $231 million would be recognised. A 10% reduction in estimated annual production over the life of mine could result in an additional impairment of $216 million.