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

Glencore plc – Annual report – 31 December 2017

Industry: mining

  1. Impairments

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1 Includes impairment reversals of $243 million relating to Energy products as detailed below.

2 Impairments recognised during the year are allocated to Glencore’s operating segments as follows: Metals and minerals $318 million (2016: $50 million) and Energy products $310 million (2016: $1,218 million).

As part of a regular portfolio review, Glencore carries out an assessment of whether there is an indication 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 7% – 12% (2016: 7% – 11%). 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:

2017

Property, plant and equipment

  • Following a modest downward revision, compared to prior year, of the long-term oil price assumption used to determine the remaining recoverable value of the E&P assets, offset by a combination of improved pricing differentials for the Chad crude oil blend (Doba) and further cost savings, an overall impairment charge of $278 million has been recognised in the Chad oil operations (Energy products segment). The remaining recoverable value of the Chad oil operations is $1,221 million. The valuation remains sensitive to price and further deterioration or improvement in the pricing outlook may result in additional or reversal of impairment. The short- to long-term Brent crude oil price assumptions used in the valuation were $65 – $70 per barrel and should these decrease or increase by 10%, a further $535 million of impairment or reversal would be recognised.
  • In January 2018, a farm-down agreement to divest a 50% interest in the Bolongo licence in Cameroon was signed. As a result, the remaining recoverable value of the retained 37.5% working interest (on the assumption that the Cameroon State National Oil Company will exercise its back-in right to the Oak development) was impaired by $81 million, to its recoverable value of $142 million. The valuation remains sensitive to price and further deterioration or improvement in the pricing outlook may result in additional or reversal of impairment. The short- to long-term Brent crude oil price assumptions used in the valuation were $65 – $70 per barrel and should these decrease or increase by 10%, a further $13 million of impairment or reversal would be recognised.
  • The Alen field gas production in Equatorial Guinea is currently reinjected back into the field. A project to commercialise gas production has now progressed sufficiently, resulting in a partial reversal of impairments of $243 million in the Equatorial Guinea oil operations (Energy products segment) and an increase in the recoverable value to $394 million. The valuation remains sensitive to price and further deterioration or improvement in the pricing outlook may result in additional or reversal of impairment. The short- to long-term Brent crude oil price assumptions and the Henry Hub price assumption used in the valuation were $65 – $70 per barrel and $3 per million Btu respectively. Should these decrease or increase by 10%, a further $75 million of impairment or reversal would be recognised.
  • As a result of certain life of mine optimisation and design updates, alongside the finalisation phase of Katanga’s whole ore leach project and its successful commissioning in late 2017, it was determined that certain processing equipment and non-current inventories were no longer required and therefore the full carrying value of these assets were impaired by $76 million.
  • The balance of property, plant and equipment related impairment charges (none of which were individually material) relates to specific assets where utilisation is no longer required or projects progressed due to changes in production and development plans. As a result, the full carrying value of these assets/projects was impaired, with $186 million recognised in our Metals and minerals segment.

Investments

  • Following strategic reviews of a copper and gold exploration investment and a coal investment it was determined, for the time being, to cease further development and, as a result, the full carrying value of each investment, $56 million and $45 million respectively, was impaired.

Advances and loans – non-current

  • Glencore has reviewed the carrying value of its interest in subordinated debt and preference shares of a coal port following the insolvencies of certain third party shippers which impact the expected return on these investments and as a result, such loans were impaired by $149 million, to their estimated recoverable amount of $139 million.

2016

Property, plant and equipment

  • Due to changes in estimated reserve life and revised mining plans, the estimated mine life of Tahmoor in Australia (Energy products segment) was reduced from 2020 to 2017. As a result, the carrying value of this operation was impaired by $168 million, to its estimated recoverable amount of $100 million, which is expected to be depleted over the following year as the mine approaches its completion.
  • As a result of a write down of appraisal expenditure and certain operational challenges at the Equatorial Guinea oil operations (Energy products segment), an impairment charge of $311 million has been recognised resulting in a remaining recoverable value of $194 million. The valuation remains sensitive to price and further deterioration in the pricing outlook may result in additional impairment. The short- to long-term Brent crude oil price assumptions used in the valuation were between $50 – $75 per barrel and should these fall by 10%, a further $46 million of impairment would be recognised.
  • During 2016, Glencore’s long-term oil price assumptions were revised downwards, which together with delayed work programmes, resulted in a $622 million impairment of the onshore Chad oil operations (Energy products segment), to their estimated recoverable amount of $1,480 million. The valuation remains sensitive to price and further deterioration in the pricing outlook may result in additional impairment. The short- to long-term Brent crude oil price assumptions used in the valuation were between $50 – $75 per barrel and should these fall by 10%, a further $695 million of impairment would be recognised. The balance of property, plant and equipment related impairment charges (none of which were individually material) arose due to changes in production and development plans and resulted in impairments of $50 million and $117 million being recognised in our Metals and minerals and Energy products segments respectively.
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