European Journal of Scientific Research
ISSN 1450-216X Vol.27 No.3 (2009), pp.372-383
© EuroJournals Publishing, Inc. 2009...
Compliance Regimes in Publicly-listed Mining Firms: Mineral Resources and
Financial Reporting Issues                      ...
374                                                                                                            Jay Stephen...
Compliance Regimes in Publicly-listed Mining Firms: Mineral Resources and
Financial Reporting Issues                      ...
376                                                                                                         Jay Stephen C....
Compliance Regimes in Publicly-listed Mining Firms: Mineral Resources and
Financial Reporting Issues                      ...
378                                                                                     Jay Stephen C. Siy

Generally Acce...
Compliance Regimes in Publicly-listed Mining Firms: Mineral Resources and
Financial Reporting Issues                      ...
380                                                                                                  Jay Stephen C. Siy

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Compliance Regimes in Publicly-listed Mining Firms: Mineral Resources and
Financial Reporting Issues                      ...
382                                                                                 Jay Stephen C. Siy

results show that ...
Compliance Regimes in Publicly-listed Mining Firms: Mineral Resources and
Financial Reporting Issues                      ...
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  1. 1. European Journal of Scientific Research ISSN 1450-216X Vol.27 No.3 (2009), pp.372-383 © EuroJournals Publishing, Inc. 2009 http://www.eurojournals.com/ejsr.htm Compliance Regimes in Publicly-Listed Mining Firms: Mineral Resources and Financial Reporting Issues Jay Stephen C. Siy Institute of Management, College of Social Sciences University of the Philippines Baguio, Baguio City, Philippines E-mail: jaystephensiy@gmail.com Abstract This paper tackles risk-driven compliance regimes in the mining industry. The study documents the separate evolution of two frameworks, mineral resource disclosure and financial reporting, which results to a patchwork of conventions in public reporting. A comparative study of extractive companies is also performed. The examination delves into the annual reports and full financial statements of the largest publicly-traded mining firms, which collectively account for more than 80% of market capitalization in 2007. The sample data geographically represent companies from both traditional and emerging mining jurisdictions globally. The findings indicate reduced comparability as a result of: (i) divergence in mineral reporting guidelines; (ii) policy differences between IFRS and national accounting standards; (iii) non-disclosure of mineral resources and/or the lack of accounting guidance; and, (iv) non-existence of integrating mechanism between the two regimes. Whilst standardization is in progress, the fact remains that there is no global accounting and mineral standard for extractive firms. The ensuing diversity prevents meaningful assessment by users undermining investment attractiveness and the ability to communicate achievements and potentials. Keywords: Mineral resources, compliance regimes, financial reporting standards JEL Classification Codes: L72, M41, M42 1. Introduction Mining is an unconventional trade. It is characterized by substantial levels of investment stretch out for long periods of time in activities that are highly uncertain. Companies may spend millions of dollars on exploration only to find out that variables such as development and production risk, changing technology, time horizons, market risk, and the legal and political environment render the project uneconomical (Cortese, et al., 2008). Such are the risks associated with extractive operations that Wise and Spear (2002) describe them as being endemic to the industry. The need to deal with risks acts as a strong driver towards the creation of compliance regimes. These are enforceable, semi-legal systems which are evident in technical fields such as banking (Basel II) and accountancy (IFRS) (Franklin, 2005). In the case of mining, regulatory systems governing mineral disclosure and financial reporting predominate. Developments in the former focus on setting standards for mineral resources and reserves. Guidance for financial reporting, on the other hand, continues to evolve. The release of International Financial Reporting Standard 6 (IFRS 6) seeks to
  2. 2. Compliance Regimes in Publicly-listed Mining Firms: Mineral Resources and Financial Reporting Issues 373 address accounting issues relating to mine exploration and evaluation activities. In addition, a comprehensive accounting standard for the industry is in the works. The dilemma with the mining compliance regimes is one of convergence. There is no internationally agreed set of definitions for mineral resources and reserves or a global standard governing their classification and reporting (PricewaterhouseCoopers, 2008). In its comparison of mineral reporting practices and accounting policies, the International Accounting Standards Board (IASC Foundation, 2008) concedes that some differences seem to be attributable to the fact that the definitions were developed and updated independently of each other. The disparity is evident in current practice. Mineral resources and reserves (MRR) are not reflected in the financial statements of most extractive firms. Further, no specific guidance is provided as to disclosure in the accompanying notes. These despite the fact that MRR are the most important information about a mining company (Stephenson and Weatherstone, 2006). The objective of this paper is to examine the public reporting practices in the mining industry. The study focuses on two compliance frameworks, mineral disclosure and financial reporting. In the following section, the significant developments in mineral and financial reporting are discussed. The paper then proceeds to evaluate how MRR influence the preparation and presentation of financial statements. Interspersed therein is a comparative study of listed mining companies to corroborate the assertions made. Finally, the conclusions are presented. 2. Previous Research, Methodology and Sample Data Portions of the study draw on related researches. It builds on the work of Vaughan and Felderhof (2001) and updates their study on the comparison of mineral reporting codes. This paper extends the examination to the reporting codes of Chile, Peru and the Philippines. The last two, however, are virtual ‘clones’ as both adopted the Joint Ore Reserves Committee (JORC) Code in its entirety. In 2002, Goldsmith analyzed the effects of MRR on financial statements particularly, their impact on operational performance. This paper revisits his work but also evaluates how the impact of MRR is influenced by accounting policies in sampled firms. To empirically support the findings, a comparative study of the annual reports of forty (40) publicly-listed mining companies is performed. The focus is to evaluate the comparability of the mineral reporting practices of these firms. The comparison extends to financial reporting where the impact of MRR on company financial statements is examined. The sampled companies account for more than 80% of the global mining business in 2007 based on market capitalization. This according to the Hong Kong and Shanghai Banking Corporation (HSBC) Global Mining Index, the recognized benchmark for investing in natural resource companies. The index is composed of 31 sub-categories including a comprehensive list of the largest global mining entities. 3. Discussion Public reporting in mining companies is diversity in action. Despite the early and repeated recognition of a need for a standardized approach (Cortese, et al., 2008; Weatherstone, 2000), the industry subscribes to a patchwork of conventions. This is evident in the various mineral and financial reporting standards discussed in Sections 3.1 and 3.2. 3.1. Development in Mineral Reporting The reporting of mineralization developed haphazardly over time. Early initiatives saw most countries creating their own standards. There was however no attempt for a reporting framework that will transcend international boundaries (Stephenson, 2000). Since the implementation of the JORC Code in 1989 and the founding of the Committee for Mineral Reserves International Reporting Standards
  3. 3. 374 Jay Stephen C. Siy (CRIRSCO) thereafter, considerable progress was made towards a standardized approach to mineral reporting. The formation of the latter was a step for increased harmonization as it brought together the mineral reporting codes and guidelines in Australia (JORC), Chile (Institute of Mining Engineers of Chile-IIMCh), Canada (Canadian Institute of Mining, Metallurgy and Petroleum-CIM), South Africa (South African Mineral Resource Committee-SAMREC), the United States (Society for Mining, Metallurgy and Exploration, Inc.-SME), the United Kingdom, Ireland and Western Europe (Pan European Reserves Reporting Committee-PERC). Except for the CIM Guidelines, the reporting codes share the underlying principles of Materiality, Transparency and Competence (Competency for the SAMREC Code) in their development and application. The SME Guide (2007) includes two additional principles, Consistency between Financial and Technical Reports and Consistency between Financial Markets while Impartiality is the fourth principle in the SAMREC Code (2006). Diagram 1: The CRIRSCO Framework for Mineral Reporting Exploration Results Mineral Resources Mineral Reserves Inferred Increasing level of geological Indicated Probable knowledge and confidence Measured Proved Consideration of mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors (the “modifying factors”) Source: CRIRSCO Following the CRIRSCO framework, estimates of mineralization are reported in two categories, Mineral Resources and Mineral Reserves. Ore Reserves are synonymous to Mineral Reserves but the JORC and IIMCh Codes (2004) prefer the former as it assists in maintaining the distinction between resource and reserve. All other guidelines allow the use of the terms interchangeably depending upon the nature of the mineral involved. Accordingly, the basic definitions are as follows: A ‘Mineral Resource’ (MRO) is a concentration or occurrence of material of intrinsic economic interest in or on the earth’s crust in such form and quantity that there are reasonable prospects for eventual economic extraction. The location, quantity, grade, geological characteristics and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge. Mineral Resources are sub-divided, in order of increasing geological confidence, into Inferred, Indicated and Measured categories. An Inferred MRO is that part for which tonnage, grade and mineral content can be estimated based on geological evidence and assumed, but not verified, geological and/or grade continuity. Because the estimates are based on information which may be limited or of uncertain quality and reliability, Inferred MRO has a lower level of confidence than that applying to an Indicated MRO. The uncertainty surrounding such estimate precludes the notion that all or part of this type of mineralization will be upgraded to an Indicated or Measured MRO as a result of further exploration.
  4. 4. Compliance Regimes in Publicly-listed Mining Firms: Mineral Resources and Financial Reporting Issues 375 Indicated and Measured MRO are that part for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with reasonable and high levels of confidence, respectively. Both are based on exploration, sampling and testing information gathered through appropriate techniques. The difference lies in the geological and/or grade continuity. In the former, locations are too widely or inappropriately spaced to confirm continuity but are spaced closely enough for such to be assumed. For the latter, the sample spacing is close enough to confirm geological and/or grade continuity. A ‘Mineral Reserve’ (MRE) is the economically mineable part of a Measured or Indicated Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments and studies have been carried out and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could reasonably be justified. Mineral Reserves are sub-divided in order of increasing confidence into Probable Mineral Reserves and Proved Mineral Reserves (Proven Mineral Reserves is the term used in the CIM Guidelines and SME Guide). Probable and Proved MRE are the economically mineable part of Indicated and Measured MRO, respectively. A Proved MRE has the highest confidence level in reserve estimates. There is direct relationship between Indicated MRO and Probable MRE and between Measured MRO and Proved MRE (refer to Diagram 1). However, there are circumstances when uncertainties relating to the modifying factors result to a lower confidence level for the reserve than the parallel resource category. This explains how Measured MRO converts to Probable instead of Proved MRE (dashed line, Diagram 2). Conversely, an Indicated MRO could never be converted directly to a Proved MRE without first being upgraded to Measured MRO. In the foregoing, note how MRO estimates are derived primarily from geoscientific information whereas MRE estimates are reliant on the analysis of the modifying factors. For MRO, the term ‘reasonable prospects for eventual economic extraction’ implies an initial judgment on the technical and economic considerations likely to affect extractive potential. The assumptions made in relation to the estimates should be clearly disclosed in a public report. For MRE, the national reporting codes require appropriate assessments and studies to be carried out. The CIM Guidelines specifically want reserves to be demonstrated by at least a Preliminary Feasibility Study. At the minimum, the SAMREC Code necessitates a Pre-Feasibility Study for a project or a Life of Mine Plan for an operation. For its part, the SME Guide requires a Mineral Reserves Declaration Report to be prepared. It contains the results of fairly detailed evaluation, analyses and studies to affirm that extraction is reasonably justified. These include mining methods, configurations and mineral production processes. All other guidelines expect the Mineral Reserve Statement to disclose sufficient details indicating the source and type of mineralization, assessment techniques and key assumptions, among others. The MRR report is signed by the ‘Competent Person’. Under CRIRSCO, the ‘Competent Person’ is a member of a professional society for earth scientists or mineral engineers, or has other appropriate qualifications. He must have a minimum of five years experience which is relevant to the style of mineralization, type of deposit and the activity which that person is undertaking. He is called ‘Qualified Person’ in Canada (CIM, 2005) and ‘Qualified Competent Person’ in Chile (IIMCh Code, 2004). Phillips (2000) discussed the liability of Competent Persons and Company Directors for resource and reserve disclosure. All CRIRSCO member countries recognize Competent Persons from different mining jurisdictions. This is by virtue of membership in Recognized Overseas Professional Organizations (ROPO) or for the SME Guide, Recognized Professional Organizations (RPO) overseas.
  5. 5. 376 Jay Stephen C. Siy Table 1: Compliance Regimes in Global Mining Firms Primary Listing Mining Company Mineral Reporting Framework Financial Reporting Framework Australia Fortescue Metals Group JORC Code IFRS Newcrest Mining JORC Code IFRS Australia and UK* BHP Billiton (1) JORC Code IFRS Rio Tinto (2) JORC Code IFRS Brazil Vale (3) US SEC-Industry Guide 7 US GAAP Canada Barrick Gold (9) CIM Guidelines US GAAP Cameco CIM Guidelines Canadian GAAP Goldcorp CIM Guidelines Canadian GAAP Kinross Gold CIM Guidelines Canadian GAAP Teck Cominco CIM Guidelines Canadian GAAP Chile Codelco JORC Code IFRS China China Coal Energy JORC Code IFRS China Shenhua Energy (4) JORC Code IFRS Jiangxi Copper Not disclosed IFRS Yanzhou Coal Mining Not disclosed IFRS Zijin Mining Group Not disclosed IFRS India Neyveli Lignite Unknown basis for MRR disclosure Indian GAAP NMDC (8) Unknown basis for MRR disclosure Indian GAAP Indonesia Bumi Resources Not disclosed Indonesian GAAP Inco Indonesia CIM Guidelines Indonesian GAAP Peru Buenaventura Mining Unknown basis for MRR disclosure Peruvian GAAP Russia Norilsk Nickel (7) JORC Code IFRS Polyus Gold JORC Code IFRS South Africa AngloGold Ashanti CIM, JORC and SAMREC IFRS Anglo Platinum SAMREC Code IFRS Gold Fields SAMREC Code IFRS Impala Platinum Holdings SAMREC Code IFRS Kumba Iron Ore SAMREC Code IFRS United Kingdom Anglo American (5) JORC and SAMREC Codes IFRS Antofagasta JORC Code IFRS ENRC JORC Code IFRS Kazakhmys JORC Code IFRS Lonmin Not disclosed IFRS Vedanta Resources Not disclosed IFRS Xstrata (6) Not disclosed IFRS United States Consol Energy US SEC-Industry Guide 7 US GAAP Freeport McMoRan (10) US SEC-Industry Guide 7 US GAAP Newmont Mining US SEC-Industry Guide 7 US GAAP Peabody Energy US SEC-Industry Guide 7 US GAAP Southern Copper US SEC-Industry Guide 7 US GAAP Parentheses connote the ten largest mining companies by market capitalization * BHP Billiton and Rio Tinto are dual listed companies To the rest of the world, the JORC Code emerged as the most important template for the development of mineral reporting standards. The CRIRSCO adopted its MRR categories and their definitions from the said Code. The national reporting codes of Canada, Chile and South Africa are patterned after it. Weatherstone (2000) claimed that the JORC Code is the ‘de facto’ best practice in its field. This is affirmed in Table 1 where half of the ten largest mining companies and more than a third of the sampled firms, including four of the world’s top five use the Code as a basis for mineral reporting. As part of their internal policies, these firms adopted the JORC Code as a minimum standard for disclosing mineralization and exploration results. Its Australian origin did not prevent wider acceptance from mining companies overseas. An important factor in the success of the JORC Code was the regulatory backing of the stock exchanges in Australia and New Zealand making compliance mandatory for all companies listed or listing in those exchanges. A similar development transpired in Canada and South Africa with the active involvement of the local stock exchanges in crafting their respective codes. The same however cannot be said of the market regulators in the United Kingdom and the United States. This is evident in the absence of the PERC and SME Guides in Table 1.
  6. 6. Compliance Regimes in Publicly-listed Mining Firms: Mineral Resources and Financial Reporting Issues 377 In the review of annual reports, ten companies failed to subscribe to any mineral reporting framework. Buenaventura Mining, Neyveli Lignite and NMDC did not identify the basis of their MRR disclosures. The rest of the firms provided no details as to the quantity of ore bodies possessed or the breakdown per category. The degree of compliance varied even for CRIRSCO-based standards. China Coal Energy and China Shenhua Energy both violated the provisions of the JORC Code. The firms reflected insufficient quantitative information with respect to the various MRR categories. Conversely, two companies reported the use of more than one framework. Anglo American used the SAMREC Code for consolidated subsidiaries which are primary listed in South Africa. While one of those subsidiaries, AngloGold Ashanti adhered to the CIM Guidelines and the JORC Code for its respective operations in Canada and Australia. In the case of American mining companies, the Industry Guide 7 of the United States Securities and Exchange Commission (SEC) rules supreme. Vale of Brazil also reports under this regime in the absence of a local mineral reporting code. The SEC does not patronize the reporting standard developed by the SME. In its place, the market regulator requires strict adherence to its own standard. The Industry Guide 7 is a simplistic disclosure guidance which is 3 pages in length. It was last updated in March 1981. The guideline, in its present form, may not be responsive to the market realities facing extractive companies. In terms of content, the SEC only allows the disclosure of mineral reserves and derives them differently from the CRIRSCO-based standards. It bars the reporting of quantitative estimates, such as tonnages and grades, for all mineralization except for two recognized reserve categories, Probable or Indicated and Proven or Measured. These terminologies are a source of confusion with their similarity to the MRO categories of CRIRSCO. The non-disclosure of MRO disadvantages companies by understating their reported mineral assets. This may affect the calculation of future income negatively reducing the investment attractiveness of these firms. Apparently, CRIRSCO users benefit from more realistic depiction of their earnings potential but the SEC thinks differently. Its main purpose is to safeguard the investing public (Abbott, 1985) which explains the restrictive definitions of mineralization categories in its guidelines. The SEC believes its reserves-only standard is more appropriate in light of incidences like the Bre-X scandal. Even for reserve estimates, public reporting is only allowed after the completion of full feasibility studies. There are rare instances, however, when estimates other than reserves can be reported. These are when (i) such information is required to be divulged by foreign and state law or (ii) such estimate has been previously provided to an entity that is offering to acquire, merge, or consolidate with, the registrant or otherwise to acquire the registrant’s securities. As mentioned earlier, another key area of difference is the inputs used in estimating mineral reserves. The CRIRSCO standards envisage the use of reasonable investment assumptions, including the use of projected long term commodity prices. These includes long range commodity price forecasts which are prepared by in-house specialists largely using future estimates of supply and demand and long term economic outlooks. However, for United States reporting, the SEC requires historical price data to be utilized. Only when historical data is unavailable are listed-mining firms allowed to use ‘reasonable forward looking estimates’. In so doing, reserves reported under such guideline may vary considerably from CRIRSCO-based estimates. Mineral estimates by geologists and engineers are relied upon heavily by accountants and company executives. They serve as crucial inputs to financial reporting and decision-making in the mining industry. The relationship, however, is not one-sided. All efforts towards a mineral standard will be for naught if mineralization cannot be reported in a company’s financial statements. 3.2. Development in Financial Reporting In the area of financial reporting, two frameworks predominate among the listed mining firms examined. There are 24 firms which follow the IFRS and 7 firms which subscribes to the United States
  7. 7. 378 Jay Stephen C. Siy Generally Accepted Accounting Principles (US GAAP). All other companies in Table 1 adhere to the national accounting standards in Canada, India, Indonesia and Peru. Recent developments on these standards focus on increasing convergence with IFRS. The result is outright adoption in the case of Peruvian GAAP and the expected transition of Canadian GAAP in 2011. In the United States, financial statements prepared under IFRS will be allowed, without the need for reconciliation with US GAAP, prior to adoption in 2014. For 2007 reporting, the accounting pronouncements in Canada, India and Indonesia are largely aligned with IFRS. Their policy differences, together with US GAAP, are discussed in the context of Section 3.3. In spite of the progress noted earlier, the fact remains that there is no globally recognized accounting standard for extractive companies. Existing IFRS and US GAAP have limited applicability as they do not address industry reporting needs comprehensively. In search for uniformity in accounting practices, the IASB embarked on its extractive industries project in 1998. It strives for convergence with the Financial Accounting Standards Board (FASB), the accounting standard setter in the United States, with its ‘modified joint’ approach. The undertaking focuses on upstream activities, which in the mining context pertains to all aspects of the search for, finding, and extraction of minerals. It seeks to develop an acceptable approach to settling financial reporting differences in the sector. Issues of mineralization are of primary focus. These concern the definition, recognition, measurement and disclosure of MRR in the financial statements and whether or not such estimates should be reflected in the first place. Ultimately, the objective is to create an IFRS on accounting for extractive activities. The extractive activities research project has a chequered history. It resulted to the issuance of an Issue Paper in November 2000. Subsequent to this, however, minimal development has taken place. The initiative suffered its first setback amidst the restructuring at the International Accounting Standards Committee (IASC), the IASB’s predecessor. It was removed from the active list of research topics in 2001 due to time constraint (IASB, 2003). The second setback came in 2002 when the IASB (2004) announced that it could not complete the project in time for the implementation of International Accounting Standards (IAS) in many territories. With its initial timeframe not met, the IASB came up with an interim measure. IFRS 6-Exploration for and Evaluation of Mineral Resources was issued in December 2004. Effective 1 January 2005, it and the rest of the standards were adopted by the European Union and several other countries worldwide. At this point, it is clear that the industry lacks an integrating framework for both mineral and financial reporting. Still, advancement on both fronts is evident with the increased adoption of IFRS and CRIRSCO-compliant standards. In the study, two out of three mining firms employ either standard in public reporting. While strides are being made in mineral reporting, enforceability is still an issue. In Table 1, seven companies did not disclose their MRR. This is on top of three other firms whose basis for reported mineralization cannot be verified. In financial reporting, on the other hand, noncompliance is less of an issue compared to the impact of MRR on company financial statements. 3.3. Resources and Reserves: Impact on Financial Statements Estimates of mineralization are crucial to the determination of mining companies’ financial results. They underpin much of the value that investors place on the natural resource assets of extractive businesses. Financial reporting contends not only with the presentation of MRR but how financial statements are impacted in terms of financial position and earnings. This is demonstrated by MRR’s direct impact on key accounting policies. Shifts in mineral projections influence asset carrying values and returns through periodic charges against income as a result of depreciation, depletion or amortization. In the same manner, obligations arising from mine restoration, rehabilitation and closure are shaped by changes in MRR. Accounting of mine stripping, exploration and evaluation costs is also significantly affected by these estimates. The aforementioned are critical areas of judgment which can alter a mining company’s resource valuation, profitability and net worth. The same transactions are repeatedly singled out as the greatest source of estimation uncertainty for listed mining companies.
  8. 8. Compliance Regimes in Publicly-listed Mining Firms: Mineral Resources and Financial Reporting Issues 379 3.3.1. Exploration and Evaluation Costs In mine accounting, the policy on pre-production exploration and evaluation (E&E) costs vacillates between vague to overly prescriptive guidance. On one end is Indian GAAP with no specific policy for the treatment of such costs. IFRS 6 is not much different. Firms are allowed to continue with current treatment for exploration and evaluation costs as long as these are consistent and reliable. Although an interim measure, this deviates from the uniformity thrust of the extractive industries project. For Canada and the US, the mineral reporting policies of their market regulators heavily influence cost treatments. Under US GAAP, E&E are charged to the income statement. This is consistent with the SEC’s policy where development costs incurred prior to the establishment of proven and probable reserves are expensed. Users of Canadian GAAP, on the other hand, are not precluded from capitalizing E&E so long as MRO is determined to exist. Also, recoupment of costs should be imminent via production or sale. A more lenient treatment is prescribed by Indonesian GAAP where deferral is allowed whenever permit to explore is valid and (1) significant exploration is in progress or (2) exploration cost is expected to be recovered through eventual extraction or sale of mining right. Similar to IFRS, the current policies under Indonesian and Canadian GAAP perpetuate choice among accounting methods. The diversity in accounting practice of users of the said regimes (a and c to h) is shown in Table 2. This is in sharp contrast with firms reporting under US GAAP (b). Several companies, notably those governed by IFRS and Indian GAAP (i) did not disclose E&E policies altogether. Two other IFRS users (d and g) failed to specifically address their evaluation costs. The impact of MRR is most evident in the deferral of E&E costs. The recognition of these costs as mining assets or as a component thereof entails subsequent depreciation upon the start of mining operations. The periodic charge against income is derived using the units-of-production method which is based on MRR. Besides estimates of MRR, the timing of deferral also influences the changes in depreciation. Mining firms that capitalize E&E earlier (h; evaluation costs, f) will have more costs to amortize over the life of mine compared to those that do so after project viability is established (exploration costs, f; evaluation costs, c and e). Table 2: Treatment of Exploration and Evaluation Costs Cost of Evaluation Mining Company Cost of Exploration Activities Activities (a) China Shenhua Energy, Codelco, Vedanta Resources Expensed as incurred (b) mining companies reporting under US GAAP Expensed until (c) Anglo American, Antofagasta, Inco Indonesia, Kinross Gold, Rio project viability is Expensed as incurred Tinto established; deferred thereafter (d) Buenaventura Mining Treatment not disclosed (e) AngloGold Ashanti, Anglo Platinum, BHP Billiton, Cameco, China Expensed until Coal Energy, Impala Platinum, Kumba Iron Ore, Lonmin, Zijin project viability is Mining established; deferred Expensed until project viability thereafter (f) Goldcorp, Gold Field, Teck Cominco is established; deferred Deferred; expensed thereafter only if project is not viable (g) Norilsk Nickel Treatment not disclosed (h) Bumi Resources, ENRC, Fortescue Metals Group, Kazakhmys, Deferred; expensed only if project is not viable Newcrest Mining, Polyus Gold, Xstrata (i) Jiangxi Copper, Neyveli Lignite, NMDC, Yanzhou Coal Mining Treatment not disclosed 3.3.2. Stripping Costs The accounting of mine stripping costs is another area where industry practice varies. IFRS and Indian GAAP provide no specific guidance in this regard. As a result, users of the said frameworks (Table 3-
  9. 9. 380 Jay Stephen C. Siy b, d, e and g) treat stripping costs differently. The lack of guidance also results to non-disclosure in a considerable number of firms (h). Fortunately, there are policies under Canadian, Indonesian and US GAAP that deal with these costs. Development or pre-production stripping is deferred in all three regimes. Under Canadian GAAP, production stripping costs are accounted for according to the benefits received by the entity. Companies can opt to defer these costs as betterment of mining properties or include them as component of inventory cost. For US GAAP, the latter treatment is required. Indonesian GAAP, on the other hand, allows production stripping to be deferred or expensed depending upon the mine stripping ratio. In the study, several treatments of stripping costs persist. Some firms charge these costs directly against income in the period incurred (d; production stripping, e and f) or indirectly as inventory cost reflected as part of cost of goods sold upon sale (production stripping, a to c). Others defer stripping costs as part of mining property which is subsequently amortized on a units-of-production basis after operation commences. For development stripping (a to c and e to g), and deferred production stripping costs (a, e and f), amortization results to periodic charges against income over the life of mine (‘periods of benefit’) which tends to vary based on the changes in MRR. With respect to production stripping, a deferral approach dependent on the mine stripping ratio predominates (e and f). These costs are deferred when actual is higher than average mine stripping ratio. In periods when the reverse is true, an appropriate amount of deferred cost is written off. When the stripping ratio is expected to be constant during the life of mine, production stripping is expensed as incurred. The ratio is based on mined MRE for the period. Table 3: Treatment of Mine Stripping Costs Mining Company Development Production (a) Mining companies reporting under Canadian GAAP Choice between (b) Codelco, ENRC, Kazakhmys deferral and Deferred inventory cost (c) Mining companies reporting under US GAAP Inventory cost (d) China Coal Energy, China Shenhua Energy, Vedanta Resources Expensed as incurred Expensed as incurred (e) Anglo American, AngloGold Ashanti, Anglo Platinum, BHP Deferred or Billiton, Gold Field, Newcrest Mining, Neyveli Lignite, NMDC, Rio expensed depending Tinto, Xstrata Deferred on stripping ratio (f) Mining companies reporting under Indonesian GAAP (g) Buenaventura Mining (h) Antofagasta, Fortescue Metals Group, Impala Platinum, Jiangxi Copper Kumba Iron Ore, Lonmin, Norilsk Nickel, Polyus Gold, Treatment not Treatment not disclosed disclosed Yanzhou Coal Mining, Zijin Mining 3.3.3. Decommissioning, Restoration and Closure Costs Extractive firms are subjected to environmental regulations in the various jurisdictions where they operate. More often than not, the regulations obligate the restoration of mined areas as well as the proper decommissioning and closure of mining assets such as tailing dams, etc. As such, provisions for asset retirement obligations (ARO) are recorded as soon as production commences. This not only involves the recognition of a liability, equal to the present value of the ARO, but also the capitalization of corresponding cost as Property, Plant and Equipment. The expected timing of decommissioning, restoration and closure costs is dependent on the life of mine plan. This, in turn, is based on resources and reserves. The same is true for the subsequent depreciation of the capitalized cost. In accounting for ARO, companies reporting under Canadian and US GAAP follow similar guidance. Prior to recognition, both standards require that a legal obligation exists and that reasonable estimates of fair value be made. For IFRS, Indian and Indonesian GAAP, a liability is recorded as long as the probability of an obligation is ‘more likely than not’. Also, the ability to estimate fair value is not required. ‘Best estimates’ will suffice. While Indian GAAP closely resembles IFRS, there are important differences. Users of the former can recognize a provision using undiscounted cash flows
  10. 10. Compliance Regimes in Publicly-listed Mining Firms: Mineral Resources and Financial Reporting Issues 381 and not capitalize the corresponding cost as asset. The latter is evident in the case of Neyveli Lignite and NMDC. 3.3.4. Amortization and Depreciation Charges In mine depreciation, two methods are widely used: Straight-Line and Units-of-Production (UOP). Both are also employed in amortizing intangibles. Irrespective of regime, the reduction in income as a result of these charges is influenced by mineralization. Shifts in mineral estimates invariably affect asset useful lives and life of mine plans. These, in turn, determine amortization and depreciation. Note that capitalized asset retirement, stripping and E&E costs are all depreciable. In Table 4, the amortization and depreciation bases of the mining companies examined are shown. Mineral reserves are the overwhelming choice for CRIRSCO and Industry Guide 7 users (a to c and e to h), difference in definition notwithstanding. The same is true for firms with undisclosed frameworks (j and l). A few (b and c) specifically use proved reserves in depreciating particular assets. Two companies (d and m) utilize mineral resources and reserves, the latter under an undisclosed framework. Other companies (i and n) did not divulge their bases. The choice of depreciation base has significant implication. Employing a larger base, i.e. resources and reserves, results to smaller charges against income over the period of benefit as opposed to a smaller base like mineral reserves. Hence, CRIRSCO-based reserves translate to less depreciation compared to its SEC-defined counterpart. The use of a fraction of total reserves, therefore, results to the largest depreciation charge. Table 4: Basis for Amortization and Depreciation Charges Mining Company Basis Definition Source (a) Anglo American, Antofagasta, BHP Billiton, China Shenhua Energy, ENRC, Fortescue Metals Group, Newcrest Mining, Norilsk Nickel, Proved and Probable Reserves Polyus Gold Proved Reserves (mining structures) JORC Code (b) China Coal Energy Proved and Probable Reserves (mining rights) (c) Kazakhmys Proved Reserves (d) Rio Tinto Mineral Resources and Reserves (e) Barrick Gold, Inco Indonesia Proven and Probable Reserves CIM Guidelines (f) Mining companies reporting under Canadian GAAP (g) Mining companies reporting under US GAAP except Barrick Gold Proven and Probable Reserves Industry Guide 7 (h) AngloGold Ashanti, Anglo Platinum, Gold Fields, Impala Platinum Proved and Probable Reserves SAMREC Code (i) Kumba Iron Ore Not disclosed (j) Buenaventura Mining, Lonmin, Yanzhou Coal Mining, Zijin Mining ‘Proven and Probable Reserves’ (k) Vedanta Resources ‘Proved and Probable Reserves’ (l) Neyveli Lignite, NMDC ‘Estimated Mineable Reserves’ Not disclosed (m) Xstrata ‘Estimated Recoverable Resources and Reserves’ (n) Jiangxi Copper, Bumi Resources, Codelco Not disclosed 4. Conclusion This study examines compliance regimes in the mining business. The diversity in industry reporting is attributed to the separate evolution of mineral disclosure and financial reporting. The lack of convergence is evident in current practice. MRR are not reflected in the financial statements of most extractive firms. This despite their pervasive impact on financial reporting and industry stature as primary assets. The proliferation of financial and mineral reporting standards complicates matters. Compared to CRIRSCO-based guidelines, Industry Guide 7 understates MRR with its reserves-only disclosure. Different accounting policies, on the other hand, vary MRR’s influence on the financial statements. An empirical examination of publicly-listed mining firms validates these findings. The
  11. 11. 382 Jay Stephen C. Siy results show that the comparability of sampled companies is hampered by (i) divergence in mineral reporting guidelines; (ii) policy differences between IFRS and national accounting standards; (iii) non- disclosure of mineralization and/or the lack of accounting guidance; and, (iv) non-existence of integrating mechanism between the two regimes. The need for a consistent and reliable approach to public reporting becomes increasingly important with the rapid globalization of the mining industry. Investors rely in no small part to information and assertions made in company reports as bases for decision-making. Diversity in reporting practices deters meaningful assessment by users undermining the ability to raise capital and the effective communication of achievements and potentials. References [1] Abbott, Jr., D., 1985. “SEC Reserve Definitions- Principles and Practice”, Colorado Professional Geologist (15:1), pp. 7-11. [2] CIM Standing Committee on Reserve Definitions, 2005. “CIM Definition Standards on Mineral Resources and Mineral Reserves”, The Canadian Institute of Mining, Metallurgy and Petroleum, Montreal. [3] Cortese, C., Irvine, E., Kaidonis, M., 2008. “Extractive industries accounting and economic consequences: past, present and future”, Accounting Forum, University of Wollongong. 28 pp. [4] Franklin, J., 2005. “Risk-driven global compliance regimes in banking and accounting: the new Law Merchant”, Law, Probability and Risk (4:4), pp. 237-250. [5] Goldsmith, T., 2002. “Resources and Reserves-Their Impact on Financial Reporting, Valuations and the Expectation Gap”, Council of Mining and Metallurgical Institute Congress, AusIMM, Cairns, pp. 1-5. [6] Institute of Mining Engineers of Chile (IIMCh), 2004. “Code for the Certification of Exploration Prospects, Mineral Resources and Ore Reserves”, Institute of Mining Engineers of Chile, Santiago. [7] International Accounting Standards Board (IASB), 2004. “Exposure Draft: ED6 exploration for and evaluation of mineral resources”, International Accounting Standards Committee Foundation, London. [8] International Accounting Standards Board (IASB), 2008. “Extractive Activities Research Project”, International Accounting Standards Committee Foundation, London. [9] International Accounting Standards Board (IASB), 2003. “IASB Project Summary: Extractive Industries”, International Accounting Standards Committee Foundation, London. [10] Joint Ore Reserves Committee (JORC), 2004. “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves”, The Australasian Institute of Mining and Metallurgy, Melbourne. [11] Pan-European Reserves Reporting Committee, 2001. “Code for Reporting of Mineral Exploration Results, Mineral Resources and Mineral Reserves”, Institute of Materials, Minerals and Mining, London. [12] Philips, R., 2000. “The Liability of Company Directors and Competent Persons in Resource/Reserve Disclosure”, Proceedings of the Codes Forum, Mineral Industry Consultants Association, Sydney, p. 110-118. [13] PricewaterhouseCoopers, 2007. “Financial reporting in the mining industry, International Financial Reporting Standards”, PricewaterhouseCoopers International Limited, New York. [14] Stephenson, P.R., 2000. “The JORC Code- Its Operation and Application”, Proceedings of the Codes Forum, Mineral Industry Consultants Association, Sydney, p.81-89. [15] Stephenson, P.R. and Weatherstone, N., 2006. “Developments in International Mineral Resource and Reserve Reporting”, First International Mine Conference 2006, AusIMM, Melbourne. 26 pp.
  12. 12. Compliance Regimes in Publicly-listed Mining Firms: Mineral Resources and Financial Reporting Issues 383 [16] Society for Mining, Metallurgy, and Exploration, Inc. (SME), 2007. “2007 SME Guide for Reporting Exploration Information, Mineral Resources, and Mineral Reserves”. Society for Mining, Metallurgy, and Exploration, Inc., Littleton. [17] South African Mineral Resource Committee (SAMREC), 2006. “South African Code for Reporting of Mineral Resources and Reserves”, South African Institute of Mining and Metallurgy, Marshalltown. [18] Vaughan, W.S. and Felderhof, S., 2002. “International Mineral Resource and Mineral Reserve Classification and Reporting Systems”, Annual Institute Proceedings, Rocky Mountain Mineral Law Foundation, 48, 56 pp. [19] Weatherstone, N., 2000. “Rio Tinto’s Adoption of the JORC Code”, Proceedings of the Codes Forum, Mineral Industry Consultants Association, Sydney, pp. 101-108. [20] Wise, T. and Spear, N., 2002. “Factors and forces of the extractive industry environment, and their implications for accounting measurement and financial reporting”, Petroleum Accounting and Financial Management Journal (21:3), pp. 1-28.

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