On the connection between mine feasibility studies, valuation, and impairment analysis

Most mining engineers are taught how to do mine feasibility studies in school but not all are familiar with property valuation and impairment tests. However, valuation and impairment analysis are also key aspects of the mining business that mining engineers should familiarize themselves with as they develop in their careers. In this post, I’m going to try to explain these terms, show the relationships between them, and discuss the role of mining engineers (and mine engineering work) in these.

Of the three terms, mining engineers are most familiar with as it is covered by many mining texts. A feasibility study (used here to cover studies of different levels of technical studies – scoping, pre-feasibility, and feasibility studies) is a study that assesses the economic and technical feasibility of a mineral project to ascertain whether mineral resources can be exploited economically. The assessment in a feasibility study covers mining, processing, metallurgical, economic, marketing, legal, environmental, infrastructure,
social, and governmental factors (the so called “modifying factors”).

Valuation is the process of assigning a value to a mineral property similar to the process an appraiser uses to put value on a real estate property. Standards such as the SME Standards provide professional guidance on how to do this. Impairment analysis is the process one uses to determine whether a firm should record an impairment (loss) against an asset. Impairment occurs when an asset “suffers a depreciation in fair market value in excess of the book value of the asset on the company’s financial statements” (Investopedia 2021). Once a mining company has established the value of a mining property (the asset) in its accounting, the firm uses depreciation to reduce the asset value over time. However, if the fair market value of the mining property, for whatever reason, drops below what is on the books (“the book value”), then the company ought to take an impairment loss.

While these three activities are different, they are related in some important ways. Mining professionals use mine feasibility studies to determine whether a project can move forward or not as well as to estimate mineral reserves on a property. Both facts (a project that can move towards production and the existence of reserves) should affect the value of a property. In other words, the results of a feasibility study have significant consequences for the valuation process (that is not to say a mineral property has no value if there is no feasibility study; e.g., an exploration property with significant exploration results can have value beyond the value of the land). A feasibility study and impairment analysis both take a forward-look at a mineral property. Technically, impairment loss is “a decrease in net carrying value of an asset greater than the future undisclosed cash flow of the same asset” [emphasis added] (Investopedia 2021) whereas feasibility studies also require cashflow analysis. Thus, management should take care to ensure the assumptions (e.g., commodity prices, interest rates, discount rates etc.) of the feasibility study and impairment analysis are similar (not the same) and reflect management’s long-term view of the market and investment environment.

The role engineers play in feasibility studies is often obvious – they develop mine designs and evaluate the technical and economic feasibility. Some mining engineers (with the right training) conduct valuations but understand the differences between feasibility studies and appraisals. But even those without such training can conduct feasibility studies and other resource and reserve assessments to support mineral property appraisals. While impairment tests are often conducted by accountants, engineers can support such analysis with their knowledge of the technical capabilities of the equipment, plant etc. In all these, engineers and geologist should educate themselves so they can support their companies with the highest professional and ethical standards.

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