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 2019

Industry: mining

8. INVENTORIES

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# Refer note 31: During the current year, the fair value exposure on purchased metal and resultant stock 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 included in inventory in the prior period comprises R250 million for refined metal and R1 268 million for in-process metal.

Included in refined metal is ruthenium on lease to third parties of 25 600 ounces (2018: 45 000 ounces). Metal lease fee income is disclosed in note 24.

Purchased metal consists mainly of inventory held by Impala Refining Services.

No inventories are encumbered.

Estimates and judgements
Platinum, palladium, rhodium and nickel are treated as main products and other platinum group and base metals produced as by-products. Average cost of normal pre-smelter production for mining metal are determined by dividing mining production cost with mining output on a 12-month rolling average basis. Purchased metal is measured based on acquisition cost determined on a six-month rolling average basis.

Refining costs (further conversion through smelter, BMR and PMR) are determined by dividing refining costs with total output (both mining and purchased) on a 12-month rolling average basis.

Change in engineering estimate
Quantities of recoverable metal are reconciled by comparing the grades of ore to 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. Changes in engineering estimates of metal contained in-process resulted in an increase of in-process metal of R404 million (2018: R435 million).

Change in accounting estimate
Due to the increase in the value of nickel, relative to total revenue for the Group, management has changed the classification of nickel from a by-product to a main product with effect from 1 July 2018. In terms of IFRS, by-products by nature should be immaterial. When assessed, total by-product revenue including nickel would be in excess of 10% of total revenue. Nickel therefore can no longer be considered immaterial and a by-product.

Following the reclassification of nickel as a main product, the metal inventory cost allocation methodology was reassessed and amended to allocate production costs, net of by-product revenue, based on relative sales value. In the previous years, production costs, net of by-product revenue, was allocated on the basis of ounces. However, given that nickel is measured in tonnes, a different basis of cost allocation was required.

This change in cost allocation methodology resulted in an overall increase in inventory value of R510 million.

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 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 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 of ore 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 quantities are adjusted without affecting production and impacting the calculation of unit cost per ounce produced.

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.