Deloitte criticises mines over US$75bn impairments

Mining companies, including Barrick Gold (Above) have been criticised for the enormous US$75bn in impairment charges incurred globally. Image:Protest Barrick

Pointing a finger at mining companies over "impaired decision-making"‚ the report finds they have been the authors of their own fate.

The report points out there has been an "astonishing" total of $75bn in impairment charges made by miners over the past two years.

The Deloitte report does not go into detail but South Africa's mining firms have been minor contributors to the overall impairment charge.

The biggest hit was taken by AngloGold Ashanti‚ which this year took an impairment charge of US$2.4bn against various of its operations‚ but mainly on mines located in West Africa.

Harmony took an impairment of R2.7bn against its Hidden Valley mine in Papua New Guinea‚ while Impala Platinum reported a R1bn impairment charge.

These amounts pale into insignificance against the US$8.7bn impairment reported by Barrick Gold and the US$7.6bn reported by GlencoreXstrata following the acquisition of Xstrata.

Mining companies need to provide answers

"If the past year made anything clear it is that mining companies have a lot to answer for‚" the Deloitte report says. "In their relentless pursuit of growth in response to pressure from investors and analysts‚ companies developed massive project pipelines. Some also developed marginal mines hoping commodity prices would buoy poor project economics.

Deloitte has questioned the US$7.6bn impairment charge for costs incurred in the Xstrata merger. Image: GlencoreXstrata

"The quick decline of marginal projects into unsustainable ones raises the question of how well mining companies set project assumptions‚ review capital project feasibility studies and manage the investment appraisal process," the report says.

The report describes some of the mining company forecasting and planning processes as being created by "best guesses" from across the enterprise without focusing intently on the risks that can cause performance variances.

Financial taps dribbling

According to the Deloitte report‚ equity markets have shut off their financial taps. For the first time in a decade the Toronto Stock Exchange saw no mining IPOs (initial public offerings) for the first quarter of 2013 while financing on the Australian Securities Exchange also dropped precipitously.

The report notes: "Key commodities such as iron ore and coal are threatening to tip into over-supply because of slower Chinese economic growth while‚ despite weaker commodity prices‚ costs continue to escalate and many governments are still demanding a growing piece of the pie.

It says that as a result share prices‚ revenues and profits are falling and debt levels are rising with gold miners particularly hurt.

Deloitte advises miners to be robust in their project scoping processes‚ governance systems and risk and control mechanisms. "They need to hone their project management performance in areas that frequently lag‚ such as project scheduling‚ contractor readiness and project tracking‚" the report says.

"Until mining companies improve core competence in these areas‚ they are bound to face rising investor discontent‚ capital scarcity and stock market under-performance," Deloitte warns.