Inventories, accounting for by products, IAS 2, disclosure of inventory at NRV (fair value less costs to sell)

Impala Platinum Holdings Limited – Annual report – 30 June 2020

Industry: mining

8. INVENTORIES

1 The fair value exposure on purchased metal and resultant inventory has been designated as a hedged item and is included in the calculation of the cost of inventories. The fair value exposure relates to adjustments made to commodity prices and US$ exchange rates from the date of delivery until the final pricing date as per the relevant contract.

The net realisable value (NRV) adjustment impacted by prevailing metal prices at the reporting date included in inventory comprised R230 million (2019: Rnil) for refined metal and R211 million (2019: Rnil) for in-process metal.

Included in refined metal in the prior year is ruthenium on lease to third parties of 25 600 ounces. Metal lease fee income is disclosed in note 24.

Purchased metal consists mainly of Impala Refining Services inventory.

All the inventory in Impala Canada, valued at R384 million, was pledged as security under the Company’s credit facility and term loan (refer note 16.6).

Estimates and judgements

Inventory valuation

Metals classification between main and by-products are determined based on an assessment of the relative metal content for each segment. The relative metal content of the recently acquired Impala Canada, mining on the Canadian Shield, differs materially from what is mined in the Bushveld Complex in South Africa or the Great Dyke in Zimbabwe.

The African operations treat platinum, palladium, rhodium and nickel as main products and other precious and base metals produced, as by-products, for the purposes of inventory valuation.

Impala Canada’s mining and processing process does not form part of the African operations’ production process and inventory is valued independently. Impala Canada treats palladium as a main product and all other precious and base metals as by-products for inventory valuation purposes.

The average cost of normal pre-smelter production for mining metal is determined by dividing mining production cost with mining output on a 12-month rolling average basis. The normal cost of purchased metal is measured based on the acquisition cost determined on a six-month rolling average basis. Refining costs (further conversion through smelter, base metal refinery (BMR) and precious metal refinery (PMR)) are determined by dividing normal refining costs with total output (both mining and purchased) on a 12-month rolling average basis.

During the current year Covid-1 9 impacted on costs. Additional spend was incurred specifically related to Covid-19 as well as abnormal production costs (note 21 EJ ), which would otherwise form part of normal production costs. Cost of sales was therefore adjusted to distinguish these costs from normal production-related costs and presented separately. Normalised 12-month rolling mining production was calculated assuming that normal production ceased at the end of March 2020 and recommenced in June 2020 when sufficient ramp up to normal production has been achieved. The lockdown impacted on the processing and refining activities of the Group which resulted in the disproportionate refining of purchased inventory, and resultantly disproportionate stock levels between purchased and mining metal, which impacted on the valuation of inventory.

Change in in-process metal estimate

Quantities of recoverable metal are reconciled to the quantity and grade of ore input as well as the quantities of metal actually recovered (metallurgical balancing). The nature of this process inherently limits the ability to precisely monitor recoverability levels. As a result, the metallurgical balancing process is constantly monitored and the engineering estimates are refined based on actual results over time. The Group conducts periodic counts (usually annually) at the refineries to assess the accuracy of inventory quantities. Based on these counts, changes in engineering estimates of metal contained in-process resulted in a pre-tax increase in metal inventory of R1 329 million (2019: R404 million). Tolerances of up to 2% of annual throughput of the joint products are regarded as normal levels of estimation uncertainty in the measurement of work in progress quantities.

Accounting policy

Inventory

Metal inventories

Costs incurred in the production process are appropriately accumulated as stockpiles, metal in-process and product inventories.

In-process and final inventories are carried at the lowest of its average cost of normal production and net realisable value. Costs relating to inefficiencies in the production process are charged to the income statement as incurred.

Net realisable value tests are performed, at least, on each reporting date and represent the expected sales price of the product based on prevailing metal prices, less estimated costs to complete production and bring the product to sale.

The average cost of normal production includes total costs incurred on mining, smelting and refining, including depreciation, less net revenue from the sale of by-products at the point where by-products become separately identifiable, allocated to main products based on the relative sales value of main products sold. Stock values are adjusted for upstream intra-group transactions with subsidiaries and equity-accounted entities within the Group, eliminating intra-group profits in profit or loss and share of profit from equity-accounted entities, where applicable.

Refined by-products are valued at net realisable value and quantities of in-process metals are based on latest available assays. Recoverable metal quantities are continually tested for reasonableness by comparing the grade and quantity of ore input with the metal actually recovered. Engineering estimates are used to determine recoverable metal quantities and these estimates and the methodologies applied are improved on an ongoing basis. Metal quantity adjustments relating to prior years are adjusted without affecting production or impacting the calculation of unit cost per ounce produced during the current year.

Operating metal lease receipts are accounted for in profit or loss and the metal is carried as inventory.

Stores and materials

Stores and materials are valued at the lower of cost or net realisable value, on a weighted average basis. Obsolete, redundant and slow-moving stores are identified and written down to net realisable value which is the estimated selling price in the ordinary course of business, less selling expenses.