In November 2021, I posted a blog post about the connection between feasibility studies, valuation, and impairment analysis. I recently came across a comment letter by SEC staff that, I believe illustrates this connection. In this post, I wanted to quickly point out how this comment letter illustrates this connection and the fact that the SEC staff are on watch for issues such as these.
If you haven’t already read my earlier post on the issue, let me suggest you read that post first. It should give you the background to understand this post. Unless you are already familiar with these concepts and their connection. In which case, you can read on.
In August 2021, the SEC staff wrote to comment on Western Uranium & Vanadium Corporation’s (WSTRF:US – OTC) annual report (10-K) for the fiscal year ended December 31, 2020. In the comment letter, the staff raised several issues but comment #2 is the one of interest here. According to the SEC staff, Western Uranium had “estimated future cash flows from the … mineral assets as of December 31, 2020, and determined there was no impairment.” The SEC staff’s objection to this comes from disclosure elsewhere in the 10-K where Western Uranium had said that “none of these properties are operational and that an option to acquire an incremental 51% interest in mineral rights within the Hansen/Taylor Ranch Project expired in 2019. You indicate that no reserves have been established, that you have no exploration or mining plans for the properties, and have not verified, assessed or prepared any estimates of mineralization.”
The point here is, the value of the mineral properties in question, the status of the project and the mineral potential (mineral rights, mineral resources and mineral reserves), and the cash flow analysis for impairment testing are all connected. So any disclosure that seems to suggest that mineral potential has diminished would also affect the value at this time and should affect the impairment analysis. Unfortunately, as I pointed out in my previous post on this, mining engineers and geologist are often not trained on these issues. This often leads to a disconnect between the engineers and geologist, on one hand, and the accountants on the other. This could lead to issues such as these. I hope this example illustrates the point I was trying to make in the previous post. Let me know your thoughts on this below.