Wave of Mining Project Closures Highlights Financial Challenges Ahead
Each day brings news of another critical minerals mining project shutting down, being mothballed, or placed on care and maintenance. This reality is stark for certain commodities: First Quantum Minerals is closing its Ravensthorpe nickel mine once again, BHP is reassessing Nickel West, and Arcadium closed its Mt Cattlin lithium operation in March.
Despite these setbacks, Western Australia's economy remains robust, driven by its mining and resources sectors. Treasurer Jim Chalmers' commitment of $7 billion over 10 years for a Critical Minerals Production Tax Incentive, offering a 10% tax credit to companies engaging in downstream processing, provides a positive outlook for the industry.
As the end of the financial year approaches, financial reporting requirements are critical for mining companies. A wave of mining asset impairments and inventory stockpile write-downs is anticipated, driven by commodity price cycles. Directors and business leaders are making difficult decisions that will impact balance sheets and company valuations, potentially leading to increased corporate activity, particularly in Western Australia. Corporate raiders may see opportunities to acquire high-quality assets at lower prices, benefiting marginal balance sheets.
Directors must confront the reality of rigorous impairment assessments and possible reductions in asset values. The Australian Securities and Investments Commission (ASIC) has highlighted this as a key issue for its financial reporting surveillance and audit inspection program. ASIC has provided an information sheet on its website to guide directors and audit committees on asset impairment testing for non-financial assets in company financial reports.
Eternal optimism that "next year will be different" can affect companies' forecasts and impairment assessments, potentially delaying necessary write-downs. Increased impairments, especially in the critical minerals sector, may occur depending on the reasonableness and supportability of business forecasts and assumptions.
Asset valuations and impairments can be lagging indicators, meaning that falls in asset values due to pricing cycles or other factors might not immediately result in write-downs. The key question for the mining and resources industry is whether mining boards have the relevant experience to manage the downturn. Some may answer 'yes,' while others may not, highlighting the varied preparedness across the industry.
