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

Glencore plc – Annual report – 31 December 2018

Industry: mining

  1. Impairments

glen5

1 2017 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 $1,551 million (2017: $318 million) and Energy products $92 million (2017: $310million).

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% – 13.5% (2017: 7% – 12%). 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:

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 (Metals and minerals 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. Should the copper, cobalt and acid price assumptions fall by 10%, a further $390 million of impairment would be recognised. In addition, should operating costs rise by 5% as a result of further operational challenges and delays, a further $165 million of impairment would be 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 (Metals and minerals segment) 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 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. Should the copper and cobalt price assumptions fall by 10% and it be determined that super profits tax is due, a further impairment ranging between $479 million and $1,008 million 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 $49 million recognised in our Metals and minerals segment.

Advances and loans – non-current

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 (Energy segment). The estimated recoverable amount of the advance is $23 million.
  • $99 million impairment of a financial loan arrangement (Metals and minerals segment). The estimated recoverable amount of the loan is $155 million, see note 11.

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 was recognised in the Chad oil operations (Energy products segment). The remaining recoverable value of the Chad oil operations was $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 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.

 

 

 

Advertisements