Raiders to dive into mining tsunami

The mercury’s rising as miners prepare their financial reporting requirements ahead of June 30.

Each passing day seems to bring with it news of another critical minerals mining project shutting down, being mothballed or placed on care and maintenance.

Queen’s classic Another one bites the dust comes to mind, or perhaps a better comparison is the opening lines of their anthem Bohemian Rhapsody: “Is this the real life, is this just fantasy. Caught in a landslide, no escape from reality”.

The reality is certainly difficult for certain commodities: First Quantum Minerals is closing its Ravensthorpe nickel mine (again), BHP is running the ruler over Nickel West, and Arcadium announced it was closing its Mt Cattlin lithium operation in March.

Yet all is not lost, as evidenced by the enduring power of Western Australia’s economy in recent state and federal budgets, driven by our mining and resources sectors.

Furthermore, and certainly very positive for industry, Treasurer Jim Chalmers committed $7 billion over 10 years for a Critical Minerals Production Tax Incentive, providing a 10 per cent tax credit to companies undertaking downstream processing that value-adds to raw minerals.

But financial reporting requirements are critical for all mining houses as June 30 approaches.

Now, the real reality is this: we could see a tsunami of mining asset impairments and/or inventory stockpile write-downs in the coming weeks.

These will be driven in most part by well-publicised commodity price cycles, as directors and business leaders make difficult but necessary decisions that will affect balance sheets and company valuations.

We also suspect this, in turn, will drive corporate activity, especially in WA.

And as all good corporate raiders do, they will smell the blood in the water as companies deliver on their relevant fiduciary responsibilities, so we anticipate a jump in acquisitions of good quality assets on the cheap (which will serve to benefit marginal balance sheets).

And all good directors need to confront this reality: essentially, it’s time to face the music in terms of frank and rigorous impairment assessments, and possible associated reductions in asset values.

My technical reporting colleagues have cited this as the number one issue for the Australian Securities and Investments Commission’s financial reporting surveillance and audit inspection program.

ASIC prepared an information sheet, available on its website, to help guide directors and audit committees with questions to ask about asset impairment regarding testing of non-financial assets for impairment in the financial report of a company.

However, generally speaking, there’s an eternal optimism that ‘next year will be different’.

This can affect companies making the forecasts on which impairment assessments rely.

Potentially, it seems that optimism is a trap to avoid a bad news story from reporting entities (before big write-downs inevitably occur).

So, we could see increased impairments coming through, especially in the critical minerals space.

But it all depends on forecasts used by the business, and whether the assumptions behind them are reasonable and supportable.

It’s also important to note that asset valuations and associated impairments may sometimes be a lagging indicator.

So, when (not if) there’s a fall in asset values due to pricing cycles or other factors, many may be hoping for a temporary dip, thus delaying the time between any movement in commodity prices and a resulting write-down in asset values.

My question to the mining and resources industry is: do mining boards have the relevant experience to manage the downturn? Some will answer ‘yes’, others will not.

At RSM, we’re advising clients to look at this early.

It’s imprudent to start thinking about it on June 30, given the need to meet financial reporting deadlines.

As Freddie Mercury sang: Don’t stop me now, The show must go on, and We will rock you.

Ideally, we can all come out of this singing a line or two from 'We Are the Champions.'

FOR MORE INFORMATION

If you would like to learn more about the topics discussed in this article, please contact your local RSM office.

This article appeared first in Business News.