Write-offs - the painful lessons are recorded

March 02, 2013

Corporate giants make mistakes, as do smaller businesses and governments. Accounting rules dictate that once projects or investments can no longer support a valuation of assets based on future cash flows they must be written down. Three recent write-downs have a northern context.

• Newmont Mining Corp. wrote off $1.6 billion worth of its investment in the Hope Bay project in Nunavut and announced it would give priority to other projects within its global collection of mining properties. The Hope Bay project, which covers an 80-kilometre greenstone belt, is believed to hold at least nine million ounces of gold. A new privately-held firm called TMAC Resources Inc. signed a letter of intent with Newmont Dec. 17 to acquire Hope Bay prior to a deadline of March 31, 2013. The main reasons for the write-down would include out-of-control costs, hardline demands from the Kivalliq Inuit Association for benefits sharing and internal demands to conserve capital.
• Agnico-Eagle was forced to write off more than $681 million from its investment in the Meadowbank gold mine in Nunavut. With total estimated capital and operating costs of $4.2 billion at that time and total expected revenues of only $3.5 billion, resulted in a write-off. In 2012, 152 Inuit workers from Baker Lake, 55 per cent of the mine’s total Inuit workforce, were employed at Meadowbank. The main reasons for the write-down would include high levels of absenteeism/turnover from the Inuit workforce and poorly estimated ore reserves.
• BHP Billiton wrote-off $2.84 B last year after acquiring some natural gas assets in the Fayetteville shale in the US for $4.75B. The assets were not located in the North, but BHP did sell its controlling stake in the Ekati, Canada’s first ever diamond mine, to diamond retailer Harry Winston Diamond Corp. for $500-million (U.S.), well below what analysts expected. The main reasons for the write-down of the Fayetteville shale assets - paid too much for natural gas assets just before prices declined.
• Rio Tinto bought Alcan Aluminum at the market peak in 2007 paying $38 B. The company has written off $14 B from this transaction. It paid too much for the Alcan assets. The upshot is that now Rio Tinto has put its 58.7-per-cent interest in Iron Ore Co. of Canada is up for sale and the company has hired investment bankers to facilitate a transaction.  The mines have been in production since 1954.

 

Commentary

Even giant corporations run by really smart people make mistakes. Write-offs are an important recognition through financial statements that future cash flows must support the carrying value of assets.

The suggested ‘lessons learned’ for these big corps:

• Ensure workable agreements are in place with the indigenous peoples before starting the big investments.
• Triple check your resource estimates.
• Control costs.
• Have realistic labour force expectations and plans.
• Do not assume commodity prices will continue upwards forever and do not buy at the top of the commodity cycle.

Sources

• a)http://www.nunatsiaqonline.ca/stories/article/65674newmont_prepares_to_sell_nunavuts_hope_bay_gold_project/



• b)http://www.nunatsiaqonline.ca/stories/article/65674meadowbank_a_reality_check_for_nunavut_mining_aem_executive/



• c)"The Rush and the Reckoning" Globe and Mail, 16-Feb-2013, p.B1, B6.



• d)http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/dented-by-aluminum-rio-tinto-aims-to-unload-iron-ore-co/article9201005/?goback=.gde_3944851_member_218996184