Mining Reporting Survey 2017 - KPMG

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Mining Reporting Survey 2016

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Estimates & judgments

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Other reporting

Companies surveyed The following companies were surveyed in compiling our Mining Reporting Survey 2016: IFRS Companies

US GAAP companies

–– Agnico Eagle

–– Gold Fields Limited

–– Freeport-McMoRan Inc.

–– Alamos Gold Inc.

–– Goldcorp Inc.

–– Newmont Mining Corporation

–– Anglo American plc

–– HudBay Minerals Inc.

–– AngloGold Ashanti Limited

–– IAMGOLD Corporation

–– Barrick Gold Corporation

–– Kinross Gold Corporation

–– BHP Billiton Limited

–– Lundin Mining Corporation

–– Cameco Corporation –– Centerra Gold Inc. –– Detour Gold Corporation –– Eldorado Gold Corporation –– First Quantum Minerals Ltd. –– Glencore plc

–– New Gold Inc. –– Rio Tinto plc –– Teck Resources Limited –– Vale S.A. –– Yamana Gold Inc.

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Foreword KPMG’s Mining practice is pleased to present the Mining Reporting Survey 2016. This document publishes the results of a survey of reporting by 25 major mining companies from across the globe. The information presented builds on a quarter century of KPMG’s previous Mining Reporting Surveys. The mining industry has continued to face significant uncertainty, volatility and pressure for cost containment since our 2014 survey. This unpredictable business environment has given rise to a number of reporting trends geared towards providing stakeholders and users of the financial statements with a more transparent view of a company’s position.

Editorial team

This year’s survey focuses on five key sections: Estimates and Judgments, Non-GAAP Measures, Risks, Valuation and Other Reporting Trends. Disclosures in these areas are becoming increasingly prevalent, as companies try to provide stakeholders with supplemental information on various risks impacting their businesses, as well as disclosure of the critical judgments and estimates management is required to make in managing and mitigating those risks.

Daniel Ricica—Partner, Mining

One interesting trend that we have seen emerge in this year’s survey was the increase in alternative forms of financing, such as streaming. Since our 2014 survey we saw a five-fold increase in the number of companies which disclosed entering into streaming arrangements, as well as continued enhancement of those disclosures by the companies entering into them.

Lee Hodgkinson—National Industry Leader, Mining

Key contributors Michael Woeller Katherine Wetmore Justin Chartrand Hendra Beekman

While we hope this survey will be a useful guide, we encourage you to consult your local KPMG professional for guidance that is tailored to your circumstance. We look forward to discussing the results of this year’s survey with you.

Jessica Budd

Sincerely,

Krista Bennatti-Roberts

Daniel Ricica Partner, Mining

Laura Brand

Anh Hoang Laura Sokalsky

Roxanne Gagnon

Mining Reporting Survey 2016 © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Contents Estimates & judgments

Risks

Non-GAAP measures

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Valuation

Other reporting trends Mining Reporting Survey 2016 © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Estimates & judgments

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Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Key messages In preparing financial statements, management is required to exercise significant judgment and make estimates. While common across all industries, mining companies are required to make some unique and especially complex estimates and judgments due to the nature of their operations. Many of these require management to consider both financial and non-financial information in determining the amounts to recognize in their financial statements. Consistent with the results of our 2014 survey, companies disclosed a wide range of estimates and judgments required in the preparation of their financial statements.

In this year’s survey, reflecting the growing importance of this form of financing, 30% of companies disclosed streaming arrangements as an area of judgment. The estimates and judgments disclosed by companies surveyed vary significantly in the nature and number of estimates and judgments disclosed, as well as in the presentation of the financial statement disclosures. In this year’s survey, we separately analyze disclosure of areas of estimation from those of management judgments.

Disclosure of estimates and judgments

Only two areas, impairment or reversal of impairment of non-financial assets and income taxes, were disclosed by all of the surveyed companies as either an estimate, a judgment, or both. A further three areas, mineral reserves and resources (disclosed by 91% of surveyed companies), reclamation provisions (96%), and depreciation, depletion and amortization (87%), were disclosed by 20 or more of the companies surveyed.

IAS 1 Presentation of Financial Statements ( IAS 1) requires an entity to disclose information about the assumptions it makes concerning the future, as well as other major sources of estimation uncertainty at the end of the reporting period. Assumptions requiring disclosure are those that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. IAS 1 also requires an entity to disclose the judgments that have the most significant effect on the amounts recognized in the financial statements. The judgments requiring disclosure are intended to be separate from those involving estimation that management has made in the process of applying the entity’s accounting policies.

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Of the 23 IFRS companies surveyed, 10 disclosed estimates and judgments separately in their financial statements. The remaining 13 companies disclosed both estimates and judgments together. However, irrespective of approach taken for the disclosure of estimates and judgments, most companies surveyed provided sufficient discussion to allow a reader to distinguish between areas of estimation and judgment. Given that estimates and judgments were easily distinguishable for the IFRS companies surveyed, we have included separate data for the two areas throughout this section. Both of the US GAAP companies surveyed disclosed only significant estimates, which we would expect, given that US GAAP does not explicitly require disclosure of judgments. Each of the companies disclosed 10 estimates in their financial statements, and the nature of the estimates were consistent with those most commonly disclosed by the IFRS companies surveyed; however, the disclosures include less detail when compared against the disclosures provided by the IFRS companies surveyed. Since US GAAP companies are not required to disclose information in respect to judgments, the two companies reporting under US GAAP are excluded from the analysis throughout the remainder of this section.

Common estimates and judgments The table on the right outlines the 20 most common estimates and judgments disclosed by the companies in this year’s survey. The data demonstrates that certain areas, such as the commencement of commercial production and streaming arrangements, are consistently disclosed as only requiring judgment, and other areas, such as the quantity of recoverable metal in inventory, are consistently disclosed only as estimates. However, most areas are disclosed by the companies surveyed as having elements of both estimation and judgment.

Estimates & judgments

Non-GAAP measures

Other reporting

Valuation

Risks

Figure 1.1—Common estimates and judgments Area

Estimate only

Judgment only

Both

Either

Impairment and/or reversal of impairment

13

0

10

23

Income taxes

10

2

11

23

Reclamation and rehabilitation provisions

19

0

3

22

Mineral reserves and resources and/or LOM

11

0

10

21

Depreciation, depletion and amortization

19

0

1

20

Deferred stripping

13

1

1

15

Contingent liabilities Valuation (NRV) of inventory

4

3

6

13

11

0

1

12

FV of assets acquired in a business combination

5

1

4

10

Capitalization of E&E costs

1

6

2

9

Commencement of production

0

9

0

9

Recoverable metals in inventory

8

0

0

8

Control, joint control, significant influence

0

8

0

8

Streaming arrangements

0

7

0

7

FV of financial instruments

3

1

2

6

Post-retirement benefits

5

0

0

5

Functional currency

0

5

0

5

Share-based payments

4

0

0

4

Asset acquisition vs. business combination

0

3

0

3

Revenue recognition

2

0

0

2

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The number of estimates and judgments disclosed by the companies surveyed ranged from six to 13. While three of the four companies who disclosed 13 estimates and judgments separated their disclosure of the two topics, there does not appear to be a relationship between the format of the disclosure and the number of estimates and judgments disclosed. Exactly half of the companies who disclosed 10 or more estimates and judgments structured their disclosure of the two topics separately, and the other half discussed the two topics concurrently.

Number of estimates disclosed

Figure 1.2—Number of estimates disclosed

Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Quantitative disclosure IAS 1 requires disclosure of the nature and carrying amount as of the end of the reporting period for assets and liabilities affected by significant estimation uncertainty. Some of the companies surveyed made these quantitative disclosures in the estimates and judgments note to the financial statements. Other companies made a direct cross-reference from the estimates and judgments note to the amounts of the assets and liabilities disclosed elsewhere in the financial statements. The standard recognizes that sometimes it is impracticable to disclose the extent of the possible effects of sources of estimation uncertainty as at the reporting date. In such cases, an entity is required to disclose that, based on existing knowledge, it is reasonably possible that outcomes within the next financial year that are different from the assumption made at the reporting date could require a material adjustment to the carrying amount of the asset or liability affected. Entities must, however, disclose the nature and carrying amount of the asset or liability affected by the assumption.

13 12 11 10 9 8 7 6 0 1 2 3 4 5 6 Number of companies

Figure 1.3—Quantitative disclosures Nature of quantitative disclosures provided

Number of companies

Carrying amounts included in the estimates and judgments note

3

Cross-reference to specific notes, when required

5

General cross-reference to other financial statement notes

1

Combination of cross-references to specific notes and carrying amounts included in the estimates and judgments note

1

No quantification of the carrying amounts or cross-reference

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Specific estimates and judgments

Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Example A.1

Streaming arrangements

Source: Teck Resources Ltd., Annual Financial Statements, Pages 18 – 19

Since the publication of our 2014 survey, one notable change has been the increasing prevalence of alternative financing arrangements, including streaming arrangements. Of the 23 IFRS companies surveyed, 10 have entered into streaming arrangements, and seven of these companies have disclosed that significant judgments are required by management in determining the accounting for these arrangements. In contrast, in our previous survey, two of the 20 IFRS companies surveyed had entered into streaming arrangements, only one of which disclosed the judgments required by management in accounting for the arrangement. The accounting for streaming arrangements can often be complex. The accounting treatment is typically determined based on the specific facts and circumstances of each individual arrangement. In our experience, each streaming arrangement contains different and sometimes unique terms; therefore, significant judgment may be required on the part of management in order to determine the appropriate accounting treatment for streaming arrangements. Most of the companies surveyed made reference to the specific streaming arrangement entered into by the company during the reporting period when discussing the nature of the judgments required.

Streaming transactions When we enter into a long-term streaming arrangement linked to production at specific operations, judgment is required in assessing the appropriate accounting treatment of the transaction on the closing date and in future periods. We consider the specific terms of each arrangement to determine whether we have disposed of an interest in the reserves and resources of the respective operation. This assessment considers what the counterparty is entitled to and the associated risks and rewards attributable to them over the life of the operation including the contractual terms related to the total production over the life of the arrangement as compared to the expected production over the life of the mine, the percentage being sold, the percentage of payable metals produced, the commodity price referred to in the ongoing payment and any guarantee relating to the upfront payment if production ceases. For both of the streaming arrangements entered into during the year (Note 5(b) and (c)), there is no guarantee associated with the upfront payment and we are effectively disposing of the interest in the gold and silver mineral interests at each of these operations over the life of the arrangement. Accordingly, we consider these arrangements a disposition of a mineral interest. When the ongoing payment is based on future commodity prices at the date deliveries are made, this may be considered an embedded derivative (Note 27(c)). The valuation of embedded derivatives in these arrangements is an area of estimation and is determined using discounted cash flow models. These models require a variety of inputs, including, but not limited to, contractual terms, market prices, forward curve prices, mine plans and discount rates. Changes in these assumptions could affect the carrying value of derivative assets or liabilities and the amount of unrealized gains or losses recognized in other operating income (expense).

Each of the surveyed companies who disclosed that judgment was required in determining the accounting treatment for the streaming arrangement disclosed at least one specific judgment made on the part of management. Figure 1.4 outlines the nature of the judgments disclosed by the seven companies included in this year’s survey. Figure 1.4—Streaming arrangements Judgments in accounting for streaming arrangements

Number of companies

Existence of embedded derivatives within the arrangement

2

Classification of the entire arrangement as a financial instrument

4

Whether the arrangement transfers business risks and rewards to the counterparty

3

Whether the time value or financing component is significant to the arrangement

2

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Reserves and resources The estimation of reserves and resources forms the basis of a company’s life of mine plans and is an integral part of a mining company’s operations. This nonfinancial estimate impacts a wide range of accounting estimates in a company’s financial statements. In this year’s survey, 21 of the 23 IFRS companies surveyed disclosed reserves and resources as an area of estimation or judgment. Of these companies, 10 disclosed both estimation uncertainty and judgments required in determining reserves and resources, and 11 disclosed only estimation uncertainty. All but one of the companies that disclosed reserves and resources as an area of estimation uncertainty included a discussion of the specific assumptions resulting in the estimation uncertainty or the judgments management applied in determining reserves and resources. The accompanying table highlights the common areas of estimation or judgment involved in reserve and resource determination.

Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Of the 21 IFRS companies that disclosed reserves and resources as an area of estimation uncertainty, 18 also specifically disclosed the key accounting estimates affected by reserves and resources, which included: –– Depreciation, depletion and amortization expense –– Capitalization of production phase stripping costs –– Forecasting the timing of payments related to the environmental rehabilitation provision –– Impairment testing for non-financial assets and goodwill –– Mineral exploration and evaluation, including the determination of technical feasibility and commercial viability –– Determination of the fair value of mineral rights acquired in a business combination –– Consideration of whether assets acquired meet the definition of a business or should be accounted for as an asset acquisition –– Recognition of deferred income tax amounts.

Figure 1.5—Reserves and resources Area of estimation or judgment in reserve and resource determination

Number of companies

Commodity prices

20

Production cost estimates

18

Foreign exchange rates

14

Interpretation of geological data (size, grade, and/or shape of ore body)

13

Recovery rate

11

Capital cost estimates

8

Engineering and production techniques and technologies

8

Discount rates

6

Commodity demand

4

Ability to receive or renew mining permits/licenses

4

Inflation rates

3

Example A.2 Source: Barrick Gold Corporation, 2015 Annual Financial Statements, Pages 109 – 110 Life of Mine (“LOM”) Plans and Reserves and Resources Estimates of the quantities of proven and probable mineral reserves and mineral resources form the basis for our LOM plans, which are used for a number of important business and accounting purposes, including: the calculation of depreciation expense; the capitalization of production phase stripping costs; and forecasting the timing of the payments related to the environmental rehabilitation provision. In addition, the underlying LOM plans are used in the impairment tests for goodwill and non-current assets. In certain cases, these LOM plans have made assumptions about our ability to obtain the necessary permits required to complete the planned activities. We estimate our ore reserves and mineral resources based on information compiled by qualified persons as defined in accordance with the Canadian Securities Administrators’ National Instrument 43-101 Standards of Disclosure for Mineral Projects requirements. As at December 31, 2015, we have used a per ounce gold price of $1,000 short-term and $1,200 long-term to calculate our gold reserves, compared with $1,100 per ounce short and long-term used as at December 31, 2014. Refer to notes 18 and 20.

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Reclamation and rehabilitation provision As the majority of reclamation work does not occur until the end of the life of a mine, the reclamation and rehabilitation provision is generally presented as the net present value of the estimated future cash flows. The provision must also be updated as disturbances occur and new information becomes available to management over the life of the mine, such as changes in the nature of required reclamation activities, revised cost estimates, changes in laws and regulations, and extensions to the life of the mine. The minimum amount of reclamation work to be undertaken is often dictated by legal and regulatory authorities governing the jurisdiction where the mining operations are located. All but one of the companies surveyed disclosed reclamation and rehabilitation provisions as an area of management judgment or a source of estimation uncertainty. Of these companies, three disclosed both estimation uncertainty and judgments required in determining the reclamation and rehabilitation provision, and 19 disclosed only estimation uncertainty. The common areas of estimation in determining reclamation and rehabilitation provisions are outlined in the table below. Figure 1.6—Reclamation and rehabilitation provision Key estimates or assumptions

Number of companies

Reclamation costs

17

Discount rate

15

Timing of future cash flows

14

Changes to regulatory requirements

11

Technological changes

11

Magnitude of the disturbance

8

Inflation rate

7

Foreign exchange rates

4

Geological changes

4

The three companies who disclosed that judgment was required in accounting for reclamation and rehabilitation provisions noted the following judgments:

Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Example A.3 provides an excerpt from Goldcorp Inc.’s statements on estimated reclamation and closure costs.

Example A.3 Source: Goldcorp Inc., 2015 Annual Financial Statements, Pages 23 – 26 Estimated reclamation and closure costs The Company’s provision for reclamation and closure cost obligations represents management’s best estimate of the present value of the future cash outflows required to settle the liability which reflects estimates of future costs, inflation, movements in foreign exchange rates, assumptions of risks associated with the future cash outflows and assumptions of probabilities of alternative estimates of future cash outflows, and the applicable risk-free interest rates for discounting those future cash outflows. Significant judgments and estimates are required in forming assumptions of future activities, future cash outflows and the timing of those cash outflows. These assumptions are formed based on environmental and regulatory requirements and the Company’s environmental policies which may give rise to constructive obligations. The Company’s assumptions are reviewed at the end of each reporting period and adjusted to reflect management’s current best estimate and changes in any of the above factors can result in a change to the provision recognized by the Company. At December 31, 2015, the Company’s total provision for reclamation and closure cost obligations was $702 million (December 31, 2014 – $695 million). The undiscounted value of these obligations is $1,914 million (December 31, 2014 – $1,827 million). For the purpose of calculating the present value of the provision for reclamation and closure cost obligations, the Company discounts the estimated future cash outflows using the risk-free interest rate applicable to the future cash outflows, which is the appropriate US Treasury risk-free rate which reflects the reclamation lifecycle estimated for all sites, including operating and inactive mines and development projects. For those sites with a greater than 100-year reclamation lifecycle, a long-term risk-free rate is applied. For the year ended December 31, 2015, the Company applied a 20-year risk-free rate of 2.67% (2014 – 3.0%) to all sites with the exception of those sites with a reclamation lifecycle of greater than 100 years where a 5.0% (2014 – 5.0%) risk-free rate was applied, which resulted in a weighted average discount rate of 4.1% (2014 – 4.2%). Changes to reclamation and closure cost obligations are recorded with a corresponding change to the carrying amounts of the related mining properties (for operating mines and development projects) and as production costs (for inactive and closed mines) for the period. Adjustments to the carrying amounts of related mining properties can result in a change to future depletion expense.

–– Determining whether a present obligation existed at the reporting date –– Determining the regulatory and constructive requirements applicable –– Selection of a discount rate –– Determining the timing and extent of cash flows.

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Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Depreciation, depletion and amortization Mining is a capital intensive industry, often requiring significant upfront costs to develop a mine as well as ongoing capital expenditures to maintain or expand production. Many mining companies have also grown by acquisition, requiring them to recognize assets acquired at fair value. As a result, the carrying amount of property, plant and equipment (PP&E) often represents a high proportion of a mining company’s assets. The determination of the period over which these assets should be depleted can therefore have a significant impact on the financial statements. One of the challenges for mining companies in determining the period over which to depreciate its PP&E is the fact that while an ore body is a depletable resource, there is significant uncertainty regarding the total amount of material that will be extracted over a mine’s life. Factors such as ongoing exploration activities, variable commodity prices and changing input costs have a significant impact on the mine plan, and therefore the total material extracted. It is common for a mine’s life to continue to be extended over time, requiring regular updates to the useful lives of the related assets; this can lead to significant variation in the amount of depreciation charged over the life of a mine. The unit-of-production method is commonly used in the mining industry to depreciate mineral reserves and property, plant and equipment. This method typically utilizes proven and probable reserves as its basis; however, some companies include other non-reserve material such as mineral resources, in excess of proven and probable reserves, depending on the degree of confidence in its extraction. The inclusion of non-reserve material requires further management judgment to determine the quantity to include in the depreciation base. Figure 1.7—Depreciation Basis for unit-of-production calculation Reserves

Number of companies 13

May include non-reserve material

8

Not specifically disclosed

2

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Commencement of production A key area of estimation and judgment for mining companies, where there is little standardized guidance available, is the determination of the commencement of the production stage of a mine. Usually, this is the point at which the mining company determines a mine is ready to be operated in the manner intended by management, such that depreciation of the long-lived assets commences. The assets at a mine are typically intended to extract ore from the mineral deposit and process it to produce a saleable product. However, the determination of when a mine has reached this production stage varies due to the unique nature of each project, and requires careful assessment of the relevant facts and circumstances for each project in order to appropriately apply management’s accounting policy. The determination of when a mine is in production and ready for its intended use can have a pervasive impact on financial statements. Typically, this is the point when revenue is initially recognized and depreciation of mining assets commences, whereas costs previously incurred to develop and test the mine assets and any incidental revenues earned during this period are capitalized. Given the complex factors which must be assessed when making this determination and the significant impact it can have on the financial statements, it is no surprise that several companies disclose this as a significant judgment. Nine of the 23 IFRS companies surveyed disclosed that commencement of production is an area of significant management judgment, and provided general commentary on how the start of the production stage is determined. None of the surveyed companies disclosed estimation uncertainty associated with the commencement of production.

Estimates & judgments

Non-GAAP measures

Risks

Other reporting

Valuation

Examples of some of the factors disclosed by companies as impacting the judgment in respect of the commencement of production include: –– Ability to sustain ongoing production –– The transfer of operations from development personnel to operational personnel has been completed –– Consideration of specific factors such as recoveries, grades, or inventory build-up –– The operating effectiveness of the site’s refinery –– Whether the necessary permits are in place to allow continuous production –– Whether there is a sustainable level of production inputs available. Figure 1.8—Factors considered in assessing commercial production Factors considered in assessing commercial production

Number of companies

Ability to sustain production

8

Completion of testing of facilities

6

Ability to produce saleable product

4

Consistent operating result at a predetermined capacity

4

Level of capital expenditure compared to budgets

3

Completion of construction

2

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Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Non-GAAP measures

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Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Key messages All companies surveyed reported non-GAAP measures in addition to information presented in the financial statements prepared in accordance with IFRS or US GAAP. Below is a summary of the most common non-GAAP measures disclosed by the 25 companies surveyed, in order of frequency. Figure 2.1—Most commonly disclosed non-GAAP measures Comparable GAAP Measures Cash costs

21

All-in-sustaining costs

14

Adjusted net earnings

13

EBITDA/Adjusted EBITDA

12

Net debt

11

Adjusted operating cash flow

10

1

1 2

Number of companies

Free cash flow2

6

Adjusted operating earnings/margin

4

Debt-to-equity/net debt-equity

3

Compared to 6 companies surveyed in KPMG’s 2014 Financial Reporting Survey Compared to 3 companies surveyed in KPMG’s 2014 Financial Reporting Survey

Non-GAAP measures defined Many companies report certain figures regarding their financial performance in addition to the financial statements which they may consider to be useful to users of their financial information. A non-GAAP measure generally can be defined as a numerical measure of financial performance that does not meet GAAP criteria for presentation in financial statements. Such measures are typically presented in Management Discussion and Analysis (MD&A), press releases, offering documents and other investor presentations, and are commonly referred to as non-GAAP, or non-IFRS, measures. Unlike amounts determined in accordance with GAAP, there is generally no standard definition of non-GAAP measures, and similar measures may not be comparable between different companies. One of particular relevance to the mining industry is the AISC for which the World Gold Council (WGC) introduced guidelines for calculating the figure. While this guidance is widely used, significant judgment is required and there is no requirement to follow the formula outlined by the WGC. Securities regulators in various jurisdictions have established rules regarding the use of non-GAAP measures that require specific supporting disclosures to ensure that non-GAAP measures are not misleading to an investor, including: –– All non-GAAP measures should be clearly identified

Of the companies surveyed, 23 also disclosed a calculation of “average realized price,” which was generally calculated as the total revenue divided by the units sold during the year. All-in-sustaining costs (AISC) were disclosed by all 14 primary gold producers. Companies surveyed that did not disclose AISC did not produce gold as the primary metal.

–– Companies should provide an explanation of the usefulness of each non-GAAP measure to investors –– A quantitative reconciliation to the most directly comparable GAAP measure in the financial statements should be disclosed –– Non-GAAP measures should not be given greater prominence than the comparable GAAP measure.

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The Securities and Exchange Commission (SEC) recently updated its guidance on non-GAAP measures, and specifically identified prohibited practices3, which included misleading financial measures, per share non-GAAP liquidity measures and inappropriate adjustments for tax expenses4. SEC Chair Mary Jo White reiterated during the Reuter’s Summit in May 2016 that presentation of a GAAP measure has to be of equal or greater prominence than presentation of a non-GAAP measure, so as not to be misleading5. In its revised guidance, SEC staff provided examples of presentation approaches that would cause non-GAAP measures to be more prominent than the comparable GAAP measures, including: –– Omission of the comparable GAAP measure from an earnings release headline that includes a non-GAAP measure –– Presenting a non-GAAP measure so as to emphasize the non-GAAP measure over the comparable GAAP measure (for instance, using bold, italicized or larger font compared to the comparable GAAP measure) –– Placing a non-GAAP measure before the most directly comparable GAAP measure –– Providing discussion and analysis of a non-GAAP measure without similar discussion of the comparable GAAP measure in a location with equal or greater prominence.

Items specifically relevant to mining companies include Earnings Before Interest and Tax (EBIT) or Earnings Before Interest, Tax and Amortization (EBITA) and Free Cash Flow, as these are measures that are commonly disclosed by mining companies based on the results noted above. Of particular interest to the SEC staff is the reconciliation of EBIT/EBITDA to net income as presented in income statements as the most comparable GAAP measure. Operating income would not be considered the most directly comparable GAAP financial measure because EBIT and EBITDA adjust for items that are not included in operating income.

Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

As noted in Figure 2.1, six of the 25 companies surveyed presented free cash flow, which is up from three companies surveyed in our 2014 survey. It is generally understood that to calculate Free Cash Flow, one would deduct capital expenditures from cash flows from operations as presented in the statement of cash flows under GAAP. However, as free cash flow does not have a uniform definition, to avoid presenting a measure that may be misleading, SEC staff guidance specifically outlines that companies should clearly outline how the measure is calculated. Furthermore, SEC staff noted that companies should be cautious in describing the usefulness of the measure so as not to imply that free cash flow represents something it does not, such as cash available for discretionary expenditures, for instance, if mandatory debt payments have not been included. SEC guidance differentiates between non-GAAP measures that are performance measures, and non-GAAP measures that are liquidity measures. SEC staff guidance prohibits the use of non-GAAP liquidity measures presented on a per share basis. Examples of non-GAAP liquidity measures that are prohibited from being presented on a per share basis include EBIT/EBITDA and free cash flow. The assessment of whether per share data is prohibited is dependent on whether the measure can be used to assess a company’s liquidity, regardless of the use or presentation of the measure strictly as a performance measure. In other words, the SEC has stated that it intends to focus on the substance of the measure in its determination as to whether the non-GAAP measure is appropriately presented on a per share basis.

SEC Compliance & Disclosure Interpretations (“C&DIs”), Non-GAAP Financial Measures, issued May 17, 2016. KPMG Defining Issues, SEC Staff Warns about Non-GAAP Financial Measures, May 2016, No. 16-2 5 SEC Chair Mary Jo White was interviewed at the Reuters Financial Regulatory Summit in Washington, May 17, 2016 3 4

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Cash costs There is no generally accepted definition used in the industry to calculate cash costs, and significant variance in practice exists; however, cash costs are typically calculated as cost of sales or production costs, adjusted for non-cash and other items, and are presented on a per ounce or a per pound/ton basis, depending on the primary metal being produced. The adjustments to cost of sales typically include depreciation, reclamation costs and inventory movement, among others.

Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

The nature of adjustments applied to the most comparable GAAP measure were based on each company’s specific operations and financial statement disclosures, and varied by company. Figure 2.3—Cash costs: Adjustments Adjustments applied to comparable GAAP measures

Twenty6 of the twenty-five companies surveyed disclosed a measure of cash costs for the most recently completed financial year. Where diversified miners disclosed the measure, it was disclosed separately for each product.

Number of companies

Treatment, refining and freight

15

Non-cash inventory adjustments (including NRV)

12

Royalties and volume-based taxes

10

Other non-recurring and abnormal costs

6

Social development and reclamation costs

4

Of the companies surveyed, most stated that the cash costs measure is intended to provide investors with additional information to help the company to monitor its operating performance, and to help investors evaluate the effectiveness, efficiency, and cash-generating capabilities of its mining operations.

Costs attributable to NCI

4

Share based payment and pension adjustments

3

Regional and corporate G&A

3

Hedge and non-hedge derivative gains/losses

3

The most comparable GAAP measure, or starting point of the calculation, was generally cost of sales, as presented in the income statement; however, companies used a variety of calculation approaches, most of which were variations of cost of sales, including the following:

Pre-production revenue

2

Figure 2.2—Comparable GAAP measures Comparable GAAP measure disclosed

Number of companies

Cost of sales

9

Production costs

7

Operating expenses

3

Mining and processing

1

Site production and delivery

1

There is also variation in presentation on a co-product or by-product basis. Generally, by-products are considered to be secondary products that result from the process designed to extract the primary product and tend to be smaller in volume and revenue. Co-products are typically products produced jointly with another product, and usually have equal economic significance to the company. Of the 20 companies that presented a measure of cash costs, 17 disclosed how by-product credits were considered in the calculation. All 17 companies that disclosed cash costs on a by-product basis did so by adjusting the most comparable GAAP measures for by-product revenues. Figure 2.4—Cash costs: By-product and co-product basis Cash costs presentations

Number of companies

Presented net of by-product revenues only

6

11

Presented on a by-product and co-product basis

5

Not disclosed/determinable

3

Presented on a gross and by-product basis

2

Compared to 16 companies surveyed in KPMG’s 2014 Financial Reporting Survey

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Example B.1 details IAMGOLD Corporation’s reconciliation of total cash costs per ounce sold to the most comparable GAAP measure, cost of sales.

Non-GAAP measures

Other reporting

Valuation

Risks

Example B.2 details New Gold Inc.’s calculation of total cash costs per ounce sold on a gross basis, net of by-products and on a co-product basis.

Example B.1

Example B.2

Source: IAMGOLD Corporations, 2015 Annual Financial Statements, Page 35

Source: New Gold Inc., 2015 Annual Financial Statements, Page 86



Cash Costs and All-in Sustaining Costs (“AISC”) per Ounce Reconciliation Tables

The following table provides a reconciliation of total cash costs per ounce produced for gold mines to cost of sales, excluding depreciation expense as per the consolidated financial statements. Three months ended December 31, ($ millions, except where noted)

2015

Years ended December 31, 2015

2014

Three months ended December 31

2014

(in millions of U.S. dollars, except where noted)

Continuing operations Cost of sales1, excluding depreciation expense

$

Less: cost of sales for non-gold segments2, excluding depreciation expense Cost of sales for gold segments, excluding depreciation expense

219.6 $ 0.9



2.7

2.0

182.5

708.0

685.9

— (0.6)

(1.8)

(2.5)

(20.4)

2.4

(6.3)

(3.8)

Realized non-hedge derivative losses3

10.2



31.2



Impact of production interruption at Westwood

(7.8)



(28.2)



Stock movement

Other mining costs4

(39.4)

(5.7)

(42.7)

(27.6)

Cost attributed to non-controlling interests5

(11.8)

(11.5)

(47.2)

(45.2)

(69.5)

(15.4)

(95.0)

(79.1)

149.2 $

167.1 $

613.0 $

606.8

181

218

730

739

Total cash costs - owner-operator

$

Attributable gold production6 - owner-operator (000s oz) Total cash costs7,8 - owner-operator ($/oz)

$

820 $

766 $

840 $

822

Total cash costs - joint ventures

$

15.6 $

23.5 $

59.7 $

100.8

18

23

76

Attributable gold production - joint ventures (000s oz) 7,8

Total cash costs Total cash costs

- joint ventures ($/oz)

7,8

7,8,9

Total cash costs

4 5 6 7 8 9

($/oz)

95

$

877 $

995 $

787 $

1,055

$

164.8 $

190.6 $

672.7 $

707.6

199

241

806

834

825 $

788 $

835 $

848

Total attributable gold production6 (000s oz)

3

687.9

(0.3)

By-product credit (excluded from cost of sales)

2

710.7 $

218.7

Adjust for:

1

182.5 $

$

The following table reconciles these non-GAAP measures to the most directly comparable IFRS measure on an aggregate and mine by mine basis.

As per note 26 of the Company sconsolidated financial statements. on-gold segments consist of xploration and evaluation and Corporate. xcludes net loss on early termination of derivative contracts. Includes write-down of inventories and other administrative costs. Adjustments for the consolidation of Rosebel (95 ) and ssakane (90 ) to their attributable portion of cost of sales. old commercial production does not include Westwood pre-commercial production for the year ended ecember 31, 2014 of 10,000 ounces. Total cash costs per ounce produced may not calculate based on amounts presented in this table due to rounding. Consists of Rosebel, ssakane, Westwood (commercial production), ouska, Sadiola and atela, on an attributable basis. Includes realized hedge and non-hedge derivative losses for the fourth uarter and year ended ecember 31, 2015 of $58 and $55 per ounce produced, respectively.

TOTAL CASH COSTS AND AISC RECONCILIATION Operating expenses Treatment and refining charges on concentrate sales (1)

Adjustments

Year ended December 31

2015

2014

2015

2014









2013

116.4

123.1

419.6

411.1

435.5

8.9

8.8

32.9

34.5

29.4

(11.1)

(8.7)

(9.4)

(8.1)

(13.3)

Total cash costs before by-product revenue

114.2

123.2

443.1

437.5

451.6

By-product copper and silver sales

(62.4)

(80.0)

(253.0)

(321.8)

(303.8)

51.8

43.2

190.1

115.7

147.8

133,005

104,224

428,852

371,179

391,823

389

414

443

312

377

580

695

661

675

712

51.8

43.2

190.1

115.7

147.8

21.0

35.4

119.2

126.0

157.0

1.7

1.5

6.3

10.2

11.6

Corporate G&A including share-based compensation

5.2

6.6

26.7

32.1

34.4

Reclamation expenses

1.8

1.4

4.6

5.4

1.5

Total all-in sustaining costs

81.5

88.1

346.9

289.2

352.4

All-in sustaining costs per gold ounce sold ($/ounce) All-in sustaining costs per gold ounce sold on a co-product (2) basis ($/ounce)

613

845

809

779

899

737

957

903

952

1,042

Total cash costs net of by-product revenue Gold ounces sold Total cash costs per gold ounce sold ($/ounce) (2) Total cash costs per gold ounce sold on a co-product basis ($/ounce) Total cash costs net of by-product revenue Sustaining capital expenditures, excluding capitalized (3) exploration Sustaining exploration - expensed and capitalized (4)

1. 2. 3. 4.

Adjustments include non-cash items related to inventory write-downs. Amounts presented on a co-product basis remove the impact of other metal sales that are produced as a by-product of our gold production and apportions the cash costs to each metal produced on a percentage of revenue basis. See “Total Sustaining Capital Expenditure Reconciliation” below to reconcile sustaining capital expenditures to mining interests per the statement of cash flows. Includes the sum of corporate administration costs and share-based payment expense per the income statement, net of any non-cash depreciation within those figures.



86

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All-in-sustaining costs Traditionally, cash cost reporting focused primarily on mining and processing costs incurred, ignoring costs related to sustaining capital. In 2013, the WGC, published a Guidance Note on “all-in sustaining costs” and “all-in costs” metrics. The metrics were developed in conjunction with a group of member companies assembled by the WGC to develop additional non-GAAP measures intended to provide further transparency with regards to gold production costs.

Estimates & judgments

Non-GAAP measures

Valuation

Risks

Other reporting

Figure 2.5 is an excerpt from the World Gold Council’s Guidance Note detailing the items that it believes companies should consider in the calculation of AISC. Figure 2.5—Guidance note on non-GAAP metrics GUIDANCE NOTE ON NON-GAAP METRICS – ALL-IN SUSTAINING

Source: WorldAND Gold ALL-IN Council, COSTS Guidance Note on Non-GAAP Metrics—All-in Sustaining Costs COSTS and All-in Costs US $ / gold ounces sold On-Site Mining Costs (on a sales basis) On-Site General & Administrative costs Royalties & Production Taxes Realised Gains/Losses on Hedges due to operating costs Community Costs related to current operations Permitting Costs related to current operations rd 3 party smelting, refining and transport costs Non-Cash Remuneration (Site-Based) Stock-piles / product inventory write down Operational Stripping Costs By-Product Credits Sub-Total (Adjusted Operating Costs)

Income Statement Income Statement Income Statement Income Statement

(a) (b) (c) (d)

Income Statement

(e)

Income Statement

(f)

Income Statement

(g)

Income Statement Income Statement Income Statement Income Statement

(h) (i) (j) (k) Note: this will be a credit (l) = (a) + (b) + (c) + (d) + (e) + (f) + (g) + (h) + (i) + (j) + (k)

Corporate General & Administrative costs (including share-based remuneration) Reclamation & remediation – accretion & amortisation (operating sites) Exploration and study costs (sustaining) Capital exploration (sustaining) Capitalised stripping & underground mine development (sustaining) Capital expenditure (sustaining) All-in Sustaining Costs

Income Statement

(m)

Income Statement

(n)

Income Statement Cash Flow Cash Flow

(o) (p) (q)

Cash Flow

(r) (s) = (l) + (m) + (n) + (o) + (p) + (q) + (r)

Community Costs not related to current operations Permitting Costs not related to current operations Reclamation and remediation costs not related to current operations Exploration and study costs (non-sustaining) Capital exploration (non-sustaining) Capitalised stripping & underground mine development (non-sustaining) Capital expenditure (non-sustaining)

Income Statement

(t)

Income Statement

(u)

Income Statement

(v)

Income Statement Cash Flow Cash Flow

(w) (x) (y)

Cash Flow

(z)

All-in Costs

= (s) + (t) + (u) + (v) + (w) + (x) + (y) + (z)

Notes: Notes: All companies using this guidance are encouraged to disclose both their all-in sustaining costs and all-in costs and reconcile these metrics to their GAAP reporting. It is not expected that companies will disclose all 1. Allcost companies individual items. using this guidance are encouraged to disclose both their all-in sustaining costs and all-in costs and reconcile these metrics to their GAAP reporting. It is not expected that companies will disclose all individual cost items. The use of the sub-total (adjusted operating costs) may be helpful for certain companies in providing reconciliation to historical metrics but it is not expected that all companies will provide disclosure at this level. The sub-total (adjusted operating costs) metric may not be © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Mining Reporting Survey 2016

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Of the 25 companies surveyed, 16 companies produce gold, although two of those companies focused on metals other than gold. Of the 14 primary gold producers, all disclosed a measure identified as ‘all-in sustaining costs’ in their most recently completed annual disclosures. Nine of the companies disclosed that they are following the WGC Standards and have applied such requirements to their disclosure of the AISC metric. The five remaining primary gold producers disclosed an AISC measure, but did not make specific reference to the World Gold Council definition of the measure. It is worth noting that one non-gold producing company gave guidance on an AISC measure, but did not disclose its historical AISC performance. Of the 14 companies that disclosed an AISC measure, five also disclosed an all-in cost measure included in the WGC guidance outlined in Figure 2.5. As the calculation of AISC includes items not readily identifiable from the financial statements and accompanying notes, it is not possible to conclude whether or not all companies surveyed have fully applied the World Gold Council guidance. The AISC non-GAAP measure is typically presented on a per ounce sold basis, consistent with the WGC guidance. Twelve of the surveyed companies presented the AISC measure on an ounces sold basis. Two companies presented the measure on an ounces produced basis. One challenge in determining AISC is defining what is considered to be “sustaining” expenditure. Non-sustaining costs are defined by the WGC as those incurred at new operations and related to “major projects” at existing operations that will materially increase production; all other costs are considered sustaining. The guidance does not define what is meant by “major projects” and management must therefore apply judgment to determine which costs are qualified as sustaining and non-sustaining. Of the 14 companies that disclosed an all-in sustaining costs measure, eight provided a specific definition of sustaining capital expenditures, which is an increase from two of 10 companies included in our 2014 survey. Of the companies that defined sustaining capital expenditure, definitions tended to focus on capital expenditures required to maintain existing operations and levels of production, and execute on the current mine plan. By contrast, non-sustaining capital expenditures were generally defined as those expenditures incurred to generate incremental production, were expansionary in nature or related to infrastructure enhancements.

Estimates & judgments

Non-GAAP measures

Other reporting

Valuation

Risks

Example B.3 is an excerpt taken from Gold Fields Limited’s 2015 MD&A, and provides their definition of sustaining capital expenditure. Example B.3 Source: Gold Fields Limited, MD&A, 2015, page 9 “Sustaining capital expenditure represents the majority of capital expenditures at existing operations, including underground mine development costs, ongoing replacement of mine equipment and other capital facilities and other capital expenditures at existing operations…”

Example B.4 is an excerpt taken from New Gold Inc.’s 2015 MD&A, and provides their approach for determining sustaining capital expenditure. Example B.4 Source: New Gold Inc., MD&A, 2015, Pages 62, 66 “To determine sustaining capital expenditures, New Gold uses cash flow related to mining interests from its statement of cash flows and deducts any expenditures that are non‐sustaining. Capital expenditures to develop new operations or capital expenditures related to major projects at existing operations where these projects will materially increase production are classified as non‐sustaining and are excluded. The table “Sustaining Capital Expenditure Reconciliation” reconciles New Gold’s sustaining capital to its cash flow statement. The definition of sustaining versus non‐sustaining is similarly applied to capitalized and expensed exploration costs. Exploration costs to develop new operations or that relate to major projects at existing operations where these projects are expected to materially increase production are classified as non‐sustaining and are excluded.” Sustaining Capital Expenditure Reconciliation Tables Three months ended December 31 (in millions of U.S. dollars, except where noted)

Year ended December 31

2015

2014

2015

2014

2013

169.6 (0.8) (144.8) (2.7) -

88.7 (10.5) (1.3) (36.2) (3.0) (1.4)

389.5 (15.4) (245.5) (7.1) -

279.3 (31.2) (23.3) (80.5) (13.0) (1.4)

289.3 (32.0) (15.8) (21.2) (60.8) -

(0.3)

(0.9)

(2.3)

(3.8)

(2.5)

21.0

35.4

119.2

126.0

157.0

TOTAL SUSTAINING CAPITAL EXPENDITURE Mining interests per statement of cash growth capital expenditure (1) New Cerro San Pedro growth capital expenditure(2) Rainy River growth capital expenditure Blackwater growth capital expenditure Other non-sustaining capital expenditure(3) Sustaining capitalized included in mining interests Total sustaining capital expenditures, excluding capitalized 1. 2. 3.

Current year and prior year growth capital expenditures at New relate to the mill expansion and scoping study/preliminary economic assessment and for the C-zone. Growth capital expenditures at Cerro San Pedro related to capitalized stripping costs for Phase 5 in the prior-year period. Other non-sustaining capital expenditures includes costs incurred to replace the Company’s revolving credit facility.

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Example B.5 provides an excerpt taken from Kinross Gold Corporation’s MD&A, and provides their definition of sustaining capital costs.

Non-GAAP measures

Valuation

Risks

Other reporting

Example B.6 details Barrick Gold Corporation’s calculation of all-in sustaining costs, calculated on a per ounce sold basis. MANAGEMENT’S DISCUSSION AND ANALYSIS

Example B.5

Example B.6

Source: Kinross Gold Corporation, MD&A, 2015, Page 56

For the years Source: Barrick Gold Corporation, 2015 Annual Financial Statements, Page 80

Reconciliation of Gold Cost of Sales to Cash Costs per ounce, All-in Sustaining Costs per ounce and All-in Costs per ounce For the three months ended Dec. 31

ended Dec. 31

(e) “Other operating expense – sustaining” is calculated as “Other operating expense” as reported on the consolidated statement of operations, less other operating and reclamation and remediation expenses related to non-sustaining activities as well as other items not reflective of the underlying operating performance of our business. Other operating expenses are classified as either sustaining or nonsustaining based on the type and location of the expenditure incurred. The majority of other operating expenses that are incurred at existing operations are considered costs necessary to sustain operations, and are therefore classified as sustaining. Other operating expenses incurred at locations where there is no current operation or related to other non-sustaining activities are classified as nonsustaining. (f) “Reclamation and remediation - sustaining” is calculated as current period accretion related to reclamation and remediation obligations plus current period amortization of the corresponding reclamation and remediation assets, and is intended to reflect the periodic cost of reclamation and remediation for currently operating mines. Reclamation and remediation costs for development projects or closed mines are excluded from this amount and classified as non-sustaining. (g) “Exploration and business development – sustaining” is calculated as “Exploration and business development” expenses as reported on the consolidated statement of operations, less non-sustaining exploration expenses. Exploration expenses are classified as either sustaining or non-sustaining based on a determination of the type and location of the exploration expenditure. Exploration expenditures within the footprint of operating mines are considered costs required to sustain current operations and so are included in sustaining costs. Exploration expenditures focused on new ore bodies near existing mines (i.e. brownfield), new exploration projects (i.e. greenfield) or for other generative exploration activity not linked to existing mining operations are classified as nonsustaining. Business development expenses are considered sustaining costs as they are required for general operations. (h) “Additions to property, plant and equipment – sustaining” represents the majority of capital expenditures at existing operations including capitalized exploration costs, capitalized stripping and underground mine development costs, ongoing replacement of mine equipment and other capital facilities and other capital expenditures and is calculated as total additions to property, plant and equipment (as reported on the consolidated statements of cash flows) net of proceeds from the disposal of certain property, plant and equipment, less capitalized interest and non-sustaining capital. Non-sustaining capital represents capital expenditures for major growth projects as well as enhancement capital for significant infrastructure improvements at existing operations. Nonsustaining capital expenditures during the year ended December 31, 2015 relate to projects at Tasiast, Chirano and La Coipa. (i) “Portion attributable to Chirano non-controlling interest” represents the non-controlling interest (10%) in the ounces sold from the Chirano mine.

($ millions, except per ounce information in dollars)

Cost of sales Cost of sales applicable to non-controlling interests1 Cost of sales applicable to ore purchase arrangement Cost of sales applicable to power sales Other metal sales Realized (gains)/losses on hedge and non-hedge Non-recurring items2 Treatment and refinement charges

A B C D E F

Total production costs Depreciation Impact of Barrick Energy

G H

Cash costs General & administrative costs Rehabilitation – accretion and amortization (operating sites) Mine on-site exploration and evaluation costs Mine development expenditures3 Sustaining capital expenditures3

2013

$ 5,794 (514) – (72) (183) (8) – 11

$ 6,220 (387) (46) (15) (189) (20) – 6

$ 1,573 (174) – (6) (40) 51 (90) 4

$ 1,508 (132) – (17) (45) 4 – 3

$ 5,067

$ 5,028

$ 5,569

$ 1,318

$ 1,321

$ (1,441) –

$ (1,267) –

$ (1,453) (57)

$ (424) –

$ (332) –

$ 3,626

$ 3,761

$ 4,059

$ 894

$

180 132 39 549 522

299 123 20 653 569

298 136 61 1,101 904

44 23 9 88 142

81 29 6 141 208

2014

$ 1,200

$ 1,454

989

$ 5,048

$ 5,425

$ 6,559

M

12

29

23

(1)

19

J K

12 114

11 152

10 117

3 23

3 44

L L L L L L L L

(81) 47 33 (1) – 39 80 16

195 19 287 29 – – 14 27

1,998 132 223 83 29 – – 24

(81) 5 – – – 1 24 2

103 5 65 4 – – – 22

$ 6,188

$ 9,198

6,960 (676) 6,284

7,604 (430) 7,174

$ 5,319

All-in costs

2015

2014

$ 5,897 (620) – (32) (169) 128 (151) 14

I J K L L

All-in sustaining costs Community relations costs not related to current operations Rehabilitation – accretion and amortization not related to current operations Exploration and evaluation costs (non-sustaining) Non-sustaining capital expenditures3 Pascua-Lama Cortez Goldstrike thiosulfate project Bulyanhulu CIL Pueblo Viejo Hemlo Arturo Other

2015

Reference

6,793 (709) 6,083

Ounces sold – consolidated basis (000s ounces) Ounces sold – non-controlling interest (000s ounces)1 Ounces sold – equity basis (000s ounces)

$ 1,176

$ 1,719

1,801 (165) 1,636

1,741 (169) 1,572

Total production costs per ounce4

$

833

$

800

$

776

$ 806

$

839

Cash costs per ounce4 Cash costs per ounce (on a co-product basis)4,5

$ $

596 619

$ $

598 618

$ $

566 589

$ 547 $ 566

$ $

628 648

All-in sustaining costs per ounce4 All-in sustaining costs per ounce (on a co-product basis)4,5

$ $

831 854

$ $

864 884

$ $

915 938

$ 733 $ 752

$ $

925 945

All-in costs per ounce4 All-in costs per ounce (on a co-product basis)4,5

$ $

876 899

$ 986 $ 1,006

$ 1,282 $ 1,305

$ 719 $ 738

$ 1,094 $ 1,114

1. Relates to interest in Pueblo Viejo and Acacia held by outside shareholders. 2. Non-recurring items consist of $10 million of severance costs from the closure of our Golden Sunlight mine, $116 million of costs arising from a change in our supplies inventory obsolescence provision and inventory impairments at Buzwagi, and $24 million in abnormal costs at Pueblo Viejo and at Veladero. These costs are not indicative of our cost of production and have been excluded from the calculation of cash costs. 3. Amounts represent our share of capital expenditures. 4. Total production costs, cash costs, all-in sustaining costs, and all-in costs per ounce may not calculate based on amounts presented in this table due to rounding. 5. Amounts presented on a co-product basis remove the impact of other metal sales (net of non-controlling interest) from cost per ounce calculations that are produced as a by-product of our gold production.

80

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Financial Report 2015

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Adjusted net earnings Adjusted net earnings is commonly disclosed as a non-GAAP measure by intermediate to senior mining companies. The measure is typically calculated as net earnings per the income statement adjusted for items management does not consider reflective of the underlying business. Figure 2.6—Calculation of adjusted net earnings Adjusted earnings calculation

7 8

2016 Survey Applicable

Adjusted

2014 Survey Applicable

Adjusted

Foreign currency gains or losses

13

10

11

7

Unrealized gain or loss on financial instruments

12

9

11

87

Impairment charges and reversals

11

11

15

138

Gain/loss and one-time charges for acquisition / disposal

10

8

10

10

Impairment on available-for-sale securities

8

8

9

8

Restructuring/severance related costs

7

7

2

2

Revisions in estimates for reclamation and closure cost obligations

7

6

5

3

Share-based payments

13

1

11

2

Other tax items

11

5

11

11

Includes realized and unrealized gain/loss on derivative instruments and other financial instruments Includes adjustments for impairment of non-financial assets and inventory

Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Of the 25 companies surveyed, 139 disclosed some measure of adjusted net earnings. Several items were adjusted for by almost all companies, including impairment charges and reversals, foreign exchange-related items, and derivative gains/losses gains or losses10. Several companies also adjust net earnings for revisions to reclamation provisions, structuring and severance-related costs, impairment of available-for-sale investments and tax-related adjustments relating to a previous period. The remaining adjustments are made by only a few companies, and may be more unique to the specific facts and circumstances of their businesses. In addition, at least one company surveyed also adjusted net earnings for the following items: –– Insurance losses –– Minority interest share of adjustments –– Litigation settlement. Of the 13 companies that disclose adjusted earnings, 10 also disclosed adjusted earnings on a per share basis, with four choosing to disclose both basic and diluted adjusted earnings per share. 9

Compared to 11 companies surveyed in KPMG’s 2014 Financial Reporting Survey Compared to the following commonly adjusted items noted in KPMG’s 2014 Financial Reporting Survey: impairment of long-lived assets, gains/losses and one-time charges for acquisition and disposal of assets, and tax-related items

10 

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Example B.7 details Newmont Mining Corporation’s reconciliation of net earnings to adjusted net earnings and adjusted earnings/share (basic and diluted). Example B.7 Source: Newmont Mining Corporation, Annual Financial Statements, Page 84

Net income (loss) attributable to Newmont stockholders . . . . . . . . . . . . . . . . Loss (income) from discontinued operations (1) . . . . . . . . . . . . . . . . . . . . . . Impairment of investments (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment of long-lived assets (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring and other (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition costs (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss (gain) on asset and investment sales (6) . . . . . . . . . . . . . . . . . . . . . . . . . Gain on deconsolidation of TMAC (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclamation charges (8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ghana Investment Agreement (9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Abnormal production costs at Batu Hijau (10) . . . . . . . . . . . . . . . . . . . . . . . . Boddington contingent consideration (gain) loss (11) . . . . . . . . . . . . . . . . . . . TMAC transaction costs (12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax adjustments (13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Net income (loss) per share, basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss (income) from discontinued operations, net of taxes . . . . . . . . . . . . . . Impairment of investments, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment of long-lived assets, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . Restructuring and other, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition costs, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss (gain) on asset and investment sales, net of taxes . . . . . . . . . . . . . . . . . Gain on deconsolidation of TMAC, net of taxes . . . . . . . . . . . . . . . . . . . . . . Reclamation charges, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ghana Investment Agreement, net of taxes. . . . . . . . . . . . . . . . . . . . . . . . . . Abnormal production costs at Batu Hijau, net of taxes . . . . . . . . . . . . . . . . . Boddington contingent consideration (gain) loss, net of taxes . . . . . . . . . . . TMAC transaction costs, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted net income (loss) per share, basic . . . . . . . . . . . . . . . . . . . . . . . . . . .

$

Net income (loss) per share, diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss (income) from discontinued operations, net of taxes . . . . . . . . . . . . . . Impairment of investments, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment of long-lived assets, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . Restructuring and other, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition costs, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss (gain) on asset and investment sales, net of taxes . . . . . . . . . . . . . . . . . Gain on deconsolidation of TMAC, net of taxes . . . . . . . . . . . . . . . . . . . . . . Reclamation charges, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ghana Investment Agreement, net of taxes. . . . . . . . . . . . . . . . . . . . . . . . . . Abnormal production costs at Batu Hijau, net of taxes . . . . . . . . . . . . . . . . . Boddington contingent consideration (gain) loss, net of taxes . . . . . . . . . . . TMAC transaction costs, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted net income (loss) per share, diluted . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average common shares (millions): Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (2) (3) (4) (5)

$

$ $

$

Years Ended December 31, 2015 2014 2013

220 $ (27) 74 22 17 12 (69) (49) 94 18 — — — 195 507 $

508 $ 40 15 11 21 — (54) — 10 — 28 — — (34) 545 $

(2,534) (61) 92 2,783 36 — (246) — — — — (12) 30 535 623

0.43 $ (0.05) 0.14 0.04 0.03 0.02 (0.13) (0.09) 0.18 0.03 — — — 0.38 0.98 $

1.02 $ 0.08 0.03 0.02 0.04 — (0.11) — 0.02 — 0.06 — — (0.07) 1.09 $

(5.09) (0.12) 0.18 5.59 0.07 — (0.49) — — — — (0.02) 0.06 1.07 1.25

0.43 $ (0.05) 0.14 0.04 0.03 0.02 (0.13) (0.09) 0.18 0.03 — — — 0.38 0.98 $

1.02 $ 0.08 0.03 0.02 0.04 — (0.11) — 0.02 — 0.06 — — (0.07) 1.09 $

(5.09) (0.12) 0.18 5.59 0.07 — (0.49) — — — — (0.02) 0.06 1.07 1.25

516 516

499 499

498 498

Loss (income) from discontinued operations is presented net of tax expense (benefit) of $11, $(18) and $28, respectively. Impairment of investments is presented net of tax expense (benefit) of $(41), $(6) and $(13), respectively. Impairment of long-lived assets is presented net of tax expense (benefit) of $(20), $(6) and $(1,566), respectively and amounts attributed to Mining Reporting Survey 2016 of $(14), $(9) and $(3), respectively. noncontrolling interest income (expense) Restructuring and other is presented netliability of tax expense and (benefit) of $(12), $(13) andnetwork $(23), of respectively amounts attributed toKPMG noncontrolling © 2016 KPMG LLP, a Canadian limited partnership a member firm of the KPMG independentand member firms affiliated with International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. interest income (expense) of $(5), $(6) and $(8), respectively. Acquisition costs are presented net of tax expense (benefit) of $(7), $- and $-, respectively.

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Key messages Revisiting a quote from our earlier publication, Insights into Mining, Issue Six, “most industry insiders would describe the past three years as anxious for mining companies, as commodity prices continued to slide down from record highs reached earlier in the century”.1 We took a close look at the depth to which these risks have been described by the 25 global firms surveyed, including examples of risk definitions, quantification and mitigating strategies. The risks disclosed within these public filings were summarized into unique categories; the risks disclosed by at least 75% of the surveyed group are charted below, representing the most frequently disclosed risk categories.

When compared to the top risks for mining companies in 2015 2, there is a strong correlation between the top 10 risks and the most frequently disclosed risks by our 25 surveyed companies. Particularly so for commodity price, which was disclosed by all companies surveyed, and remains at the top of the mining industry’s risk registers. Figure 3.2—Top 10 surveyed risks vs. top disclosed risks Top 10 risks in 2015 3 2015 Rank

Percentage of companies disclosing risk in 2015

Commodity price risk

1

100%

Ability to access and replace reserves, including access to new projects

2

92%

Description

Figure 3.1—Most frequently disclosed risks Commodity price Community relations, social license risk Ability to access and replace reserves Key talent and unionized labour risk Regulatory non-compliance risk Environmental risk Tenement stability risk Liquidity risk Legal and litigation risk

Permitting risk

3

64%

Community relations, social license

4

92%

Liquidity risk

5

80%

Environmental risk

6

84%

Controlling operating costs

7

56%

Capital allocation

8

36%

Controlling capital costs

9

36%

Economic slowdown

10

52%

Political uncertainty risk

The balance of this section will look at disclosures around the four most frequently disclosed risks.

Antibribery and corruption risk It and cybersecurity risk Health and safety risk

KPMG Insights into Mining, Issue #6, 2015. Public disclosures included an inspection of: – Annual Reports , including Management Discussion and Analysis – Annual Information Form (for Canadian-listed entities under National Instrument 51-102) – SEC form 10-K (for U.S. domestic issuers) – SEC form 20-F (for foreign private issuers listed in the U.S.). 3 KPMG Insights into Mining, Issue #6, 2015. 1

0 5 10 15 20 25

2

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Commodity price risks Commodity price largely drives success and failure in the mining industry, and is closely tied to other key risks such as access to replace resources and reserves, and ability to deliver on what was forecasted in the life of mine plan. It is therefore no surprise that it is the industry’s most commonly disclosed risk, appearing in at least one public filing for all 25 companies surveyed. The prominence of commodity price risk in public disclosure is consistent with the feedback provided during KPMG’s Mining Executive Forum in North America. The results of this survey identified commodity price risk as the number one perceived risk among industry executives in 2014 and 2015. Commodity price risk can be defined as the risk that variability in commodity prices will result in reduced profitability, asset impairment and balance sheet constraints. Low commodity prices can impact future operational risks as well, by sterilizing an ore body that would otherwise be mineable with a small increase in commodity prices. Variability in commodity prices can result in adjustments to reserve estimates and life-of-mine plans, and can impact project feasibility. It also impacts investor confidence and share prices. Non-financial statement disclosure All 25 companies surveyed disclosed commodity price risks in one or both of their AIF or their MD&A (or 10-K or 20-F for non-Canadian issuers). Of the 25 surveyed, 14 companies used quantification in their disclosure of commodity price risk to demonstrate the impact a change in commodity price could have on production; 14 provided illustrative examples in their disclosure and 11 provided commentary on mitigation policies or procedures. Financial statement note disclosure

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Example C.1 provides an excerpt from Kinross Gold Corporation’s 2015 MD&A disclosure, which highlights the actual 2015 realized price in order to give context to the commodity price risk. Example C.1 Source: Kinross Gold Corporation, MD&A, 2015, Page 41 Gold Price and Silver Price The profitability of Kinross’ operations is significantly affected by changes in the market price of gold and silver. Gold and silver prices fluctuate on a daily basis and are affected by numerous factors beyond the control of Kinross. The price of gold and/or silver can be subject to volatile price movements and future serious price declines could cause continued commercial production to be impractical. Depending on the prices of gold and silver, cash flow from mining operations may not be sufficient to cover costs of production and capital expenditures. If, as a result of a decline in gold and/or silver prices, revenues from metal sales were to fall below cash operating costs, production may be discontinued. The factors that may affect the price of gold and silver include industry factors such as: industrial and jewelry demand; the level of demand for the metal as an investment; central bank lending, sales and purchases of the metal; speculative trading; and costs of and levels of global production by producers of the metal. Gold and silver prices may also be affected by macroeconomic factors, including: expectations of the future rate of inflation; the strength of, and confidence in, the US dollar, the currency in which the price of the metal is generally quoted, and other currencies; interest rates; and global or regional political or economic uncertainties. In 2015, the Company’s average gold price realized decreased to $1,159 per ounce from $1,263 per ounce in 2014. If the world market price of gold and/or silver continued to drop and the prices realized by Kinross on gold and/or silver sales were to decrease further and remain at such a level for any substantial period, Kinross’ profitability and cash flow would be negatively affected. In such circumstances, Kinross may determine that it is not economically feasible to continue commercial production at some or all of its operations or the development of some or all of its current projects, which could have an adverse impact on Kinross’ financial performance and results of operations. Kinross may curtail or suspend some or all of its exploration activities, with the result that depleted reserves are not replaced. In addition, the market value of Kinross’ gold and/or silver inventory may be reduced and existing reserves may be reduced to the extent that ore cannot be mined and processed economically at the prevailing prices. Furthermore, certain of Kinross’ mineral projects include copper which is similarly subject to price volatility based on factors beyond Kinross’ control.

In addition to the non-financial statement disclosures noted above, all 25 companies disclosed commodity price risk in their financial statements. Of these companies, 13 defined the impact of price variability on the financial statements and 17 discussed mitigation efforts. Of the 17 companies who discussed mitigation, 14 cited hedging policies and three referred to operational measures. The 13 companies who discussed commodity price hedging were either engaged in commodity price hedging activities at the date of the disclosure or discussed hedging as an example of a potential strategy.

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Example C.2 is an excerpt from Hudbay Mineral Inc.’s 2015 MD&A disclosure, which provides a detailed view of their approach to strategic risk management and mitigation. Example C.2 Source: Hubay Minerals Inc., MD&A, 2015, Page 38 Base Metals Price Strategic Risk Management Our strategic objective is to provide our investors with exposure to base metals prices, unless a reason exists to implement a hedging arrangement. We may hedge base metals prices from time to time to ensure we will have sufficient cash flow to meet our growth objectives, or to maximize debt capacity (and correspondingly minimize equity dilution) to the extent that third party financing may be needed to fund growth initiatives. However, we generally prefer to raise financing for attractive growth opportunities through equity issuance if the only alternative is to engage in a substantial amount of long term strategic metals price hedging. We may also hedge base metals prices to manage the risk of putting higher cost operations into production or the risk associated with provisional pricing terms in concentrate purchase and sales agreements. During 2015, we entered into copper hedging transactions intended to manage the risk associated with provisional pricing terms in concentrate sales agreements. As at December 31, 2015, we had copper price fixed for floating swaps in place on approximately 170 million pounds of copper at an average fixed receivable price of US$2.37/lb associated with provisional pricing risk in concentrate sales agreements. These swaps settle in January to April, 2016. To provide a service to customers who purchase zinc from our plants and require known future prices, we enter into fixed price sales contracts. To ensure that we continue to receive a floating or unhedged realized zinc price, we enter into forward zinc purchase contracts that effectively offset the fixed price sales contracts with our customers. From time to time, we enter into gold and silver forward sales contracts to hedge the commodity price risk associated with the future settlement of provisionally priced deliveries. We are generally obligated to deliver gold and silver to Silver Wheaton prior to the determination of final settlement prices. These forward sales contracts are entered into at the time we deliver gold and silver to Silver Wheaton, and are intended to mitigate the risk of subsequent adverse gold and silver price changes. Gains and losses resulting from the settlement of these derivatives are recorded directly to revenue, as the forward sales contracts do not achieve hedge accounting, and the associated cash flows are classified in operating activities. Our swap agreements are with counterparties we believe to be creditworthy and do not require us to provide collateral.

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Community relations and social license risk Mining is often a disruptive process that inevitably impacts the surrounding community. Due to the size and economic importance of many mineral assets, they are often the subject of public scrutiny. This public scrutiny has brought corporate social responsibility initiatives to the forefront of strategic planning. It has also made community relations and social license risk a topic of public disclosure, with 23 of the 25 companies surveyed disclosing the risk at least once. Community relations and social license risk is the potential reputational damage or lack of constituent support resulting from the perceived or actual impact of mining or exploration activities on the environs. Examples include a breakdown in cooperation from traditional land owners (e.g. aboriginal populations), or social media outcry following an environmental incident. Community relations and social license encompasses social, economic, environmental, health and safety risks as they relate to the local people or ecosystem. Of the companies disclosing community relations or social license risk, 16 provided examples and five discussed mitigation in at least one of their related disclosures. See the Glencore disclosure below for an example. Example C.3, taken from Glencore plc’s 2015 Annual Report describes downside report | Governance | Financial statements | Additional information risk; and comments on their risk managementStrategic strategy.

Example C.3 Source: Glencore plc, Annual Financial Report, 2015, Page 35 Risk Community relations

Comments

The continued success of our existing operations and our future projects are in part dependent upon broad support and a healthy relationship with the respective local communities. A perception that we are not respecting or advancing the interests of the communities in which we operate, could have a negative impact on our ‘‘social licence to operate’’, our ability to secure access to new resources and our financial performance. The consequences of negative community reaction could also have a material adverse impact on the cost, profitability, ability to finance or even the viability of an operation and the safety and security of our workforce and assets. Such events could lead to disputes with governments, with local communities or any other stakeholders, and give rise to reputational damage. Even in cases where no adverse action is actually taken, the uncertainty associated with such instability could negatively impact the perceived value of our assets.

We believe that the best way to manage these vital relationships is to adhere to the principles of open dialogue and cooperation. In doing so, we engage with local communities to demonstrate our operations’ contribution to socio-economic development and seek to ensure that appropriate measures are taken to prevent or mitigate possible adverse impacts on the communities, along with the regular reporting as outlined on our website at: www.glencore.com/sustainability/ourapproach-to-sustainability/communities/engagement/.

Employees The maintenance of positive employee and union relations and the ability to attract and retain skilled workers, including senior management are key to our success. This can be challenging, especially in locations experiencing political or civil unrest, or in which they may be exposed to other hazardous conditions. Many employees are represented by labour unions under Mining Reporting Survey 2016 various collective labour agreements. Their employing company may not be able to satisfactorily renegotiate © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.its collective labour agreements when they expire and may face tougher negotiations or higher wage demands than would be

We understand that one of the key factors in our success is a good and trustworthy relationship with our people. This priority is reflected in the principles of our sustainability programme and related guidance, which require regular, open, fair and respectful communication, zero tolerance for human rights violations, fair remuneration and, above all, a safe working environment, as outlined on our website at: www.glencore.com/careers/our-people/.

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Ability to access and replace reserves The ability to access and replace reserves, including access to new projects, is defined as the risk that production levels may not be maintained if reserves are not continually replaced (i.e. to offset depletion, or to sustain growth). The increased importance of mineral reserves-related risks reflects the declining discovery rate of new, high quality ore deposits in low-risk jurisdictions. Growth through costeffective acquisition is likely to become more difficult and more competitive as discoveries continue to decline. Resource and reserve replacement is also top of mind due to decreased exploration and development spending in the industry during the recent slump in commodity prices. Of the 25 companies surveyed, 23 disclosed the ability to access and replace reserves, including access to new projects, as a business risk. This disclosure tied with community relations/social license risk for the second most commonly disclosed risk. This is consistent with KPMG’s Mining Executive Forum survey which ranked the risk second in 2015 (up from 10th in 2014). The feasibility of mineral extraction is directly related to the commodity price. Of the 25 companies surveyed, 21 have material gold reserves and therefore disclosed gold reserves pricing. Gold resource pricing was disclosed by 16 companies. As an example, the average reserve gold pricing disclosure (which affects reserve versus resource classification) is shown in Figure 3.3. The data provided is based on the primary price disclosed by each company with material gold reserves or resources.

Estimates & judgments

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Valuation

Other reporting

Example C.4 is an excerpt taken from Barrick Gold Corporation’s 2015 MD&A disclosure, and addresses both the downside and upside risk related to mineral reserve access, going on to outline the focus on growth strategy. Example C.4 Source: Barrick Gold Corporation, MD&A, 2015, Page 38 Resources and reserves, growth and production outlook Like any mining company, we face the risk that we are unable to discover or acquire new resources or that we do not convert resources into production. As we move into 2016 and beyond, our overriding objective of growing free cash flow per share is underpinned by a strong pipeline of organic projects and minesite expansion opportunities in our core regions. Uncertainty related to these opportunities exists (potentially both favorable and unfavorable) due to the speculative nature of mineral exploration and development as well as the potential for increased costs, delays, suspensions and technical challenges associated with the construction of capital projects. Risk modification approach: –– Exploration activities including minesite exploration and global programs; –– Strategic business development activities; –– Enhance project design to stagger capital outlay and optimize timing of cash flows; –– Identify opportunities to improve project economics; –– Leverage existing or develop new business partnerships with those who share a mutual interest in achieving the Company and project objectives; –– Defer, cancel, or sell projects that cannot achieve desired capital allocation targets.

Figure 3.3—Gold reserve and resource pricing disclosures 2015

Minimum (USD)

Maximum (USD)

Mean (USD)

Median (USD)

Reserves

1,000

1,449

1,168

1,200

Resources

1,100

1,500

1,314

1,314

Of the companies surveyed, 12 included specific examples of the risk of being unable to access and replace reserves and resources; nine of these companies disclosed mitigating factors. Mitigating factors generally focused on strong development plans and growth strategies. None of the companies surveyed quantified the impact of this risk.

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Risk Community relations

Key talent and unionized labour risk Key talent and unionized labour risk is a broader category that includes more specific risks such as: –– Reliance on key personnel –– Union relations and labour force relations –– Availability of skilled labour

Valuation

Other reporting

Comments

Example C.5 provides an excerpt from Glencore plc’s 2015 Annual Report, which The continued success of our existing operations and our We believe that the best way to manage these vital relationships future projects are in part dependent uponof broad support and response, is to adhere toor the principles of open actions dialogue and relating cooperation. includes a high-level outline their risk mitigating a healthy relationship with the respective local communities. In doing so, we engage with local communities to demonstrate A perception that we are not respecting or advancing the our operations’ contribution to socio-economic development to laour risk. As evidenced in this disclosure, companies continue to experience a interests of the communities in which we operate, could have a and seek to ensure that appropriate measures are taken to negative impact on our ‘‘social licence to operate’’, our ability to prevent or mitigate possible adverse impacts on the challenge attracting a talented workforce to increasingly remote locations. secure access to new resources and our financial performance. communities, along with the regular reporting as outlined The consequences of negative community reaction could also on our website at: www.glencore.com/sustainability/ourhave a material adverse impact on the cost, profitability, ability approach-to-sustainability/communities/engagement/. to finance or even the viability of an operation and the safety and security of our workforce and assets. Such events could lead to disputes with governments, with local communities or any other stakeholders, and give rise to reputational damage. Even in cases where no adverse action is actually taken, the Source: Glencore Financial 2015, Page 35 uncertainty associatedplc, withAnnual such instability couldReport, negatively impact the perceived value of our assets.

Example C.5

–– Ability to attract and retain top talent

Employees

–– Reliance on contractors and related contract risk.

The maintenance of positive employee and union relations and the ability to attract and retain skilled workers, including senior management are key to our success. This can be challenging, especially in locations experiencing political or civil unrest, or in which they may be exposed to other hazardous conditions. Many employees are represented by labour unions under various collective labour agreements. Their employing company may not be able to satisfactorily renegotiate its collective labour agreements when they expire and may face tougher negotiations or higher wage demands than would be the case for non-unionised labour. In addition, existing labour agreements may not prevent a strike or work stoppage.

Of the 25 companies surveyed, 22 disclosed labour risk in some form. Ten of these companies provided an example of a risk occurrence; nine defined the impact of this risk occurrence, while only one company disclosed mitigating factors.

Risks

We understand that one of the key factors in our success is a good and trustworthy relationship with our people. This priority is reflected in the principles of our sustainability programme and related guidance, which require regular, open, fair and respectful communication, zero tolerance for human rights violations, fair remuneration and, above all, a safe working environment, as outlined on our website at: www.glencore.com/careers/our-people/.

Example C.6, taken from Cameco Corporation’s 2015 MD&A, provides an example of a specific, location-focused labour risk related to their collective agreement at a single operation, along with a high-level qualitative impact. Example C.6 Source: Cameco Corporation, MD&A, 2015, Page 64 Labour relations The current collective agreement between AREVA and unionized employees at the McClean Lake operation expires in May 2016. There is risk to our 2016 and 2017 production outlook for Cigar Lake if AREVA is unable to reach an agreement and there is a labour dispute.

Glencore Annual Report 2015

07_Risk_p28_35_v58.indd 35

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Other reporting

Example C.7, a broader, corporation-wide example. AngloGold Ashanti Limited provides a detailed disclosure in their 2015 20-F, including example occurrences and a qualitative impact assessment. Example C.7 Source: AngloGold Ashanti Limited, 2015 Form 20-F, Page 31 – 32 Labour unrest, activism and disruptions (including protracted stoppages) could have a material adverse effect on AngloGold Ashanti’s results of operations and financial condition. AngloGold Ashanti’s employees in South Africa, Ghana, Guinea and Argentina are highly unionised and unions are active at some of its other operations. Trade unions, therefore, have a significant impact on the general labour relations environment, including labour relations at operational level. The extent of the unions’ influence also impacts the socio-economic and socio-political operating environments, most notably in South Africa. Union involvement in wage negotiations and collective bargaining increases the risk of strike action. In South Africa, the emergence of the Association of Mining Construction Union (AMCU) challenging the dominance of the longstanding National Union of Mineworkers (NUM) lends itself to conflict, inter union rivalry and a risk of labour relations instability. Management expects that unions will continue to use their collective power and ability to withhold labour to advocate for improved conditions of employment, labour regulatory change, political and social goals in the future. Under the prevailing unstable global economic climate in particular, unions could utilise disruptions, strikes and protest action to oppose restructuring and downscaling of the mining industry. In South Africa, a variety of legacy issues such as housing, migrant labour, poor service delivery and youth unemployment can lead to communities and unions working together to create instability in and around mining operations. As such, there is a risk to the safety of people and damage to company infrastructure and property. The contagion effect of the wave of unprotected strike action and labour unrest which occurred in South Africa and particularly in the mining sector during 2012 led to a six-week unprotected strike at all of AngloGold Ashanti’s Sout11 African operations in September 2012. The strike action was fuelled by several issues, including the emergence of AMCU, expectations of higher wage increases, and general social and economic conditions. Similar disruptions in the future may have a material adverse effect on the company’s results of operations and financial condition. In South Africa, a three-year wage agreement was reached in 2015 with unions representing the majority of the company’s employees. This agreement was extended to all employees irrespective of their union affiliation. However, AMCU did not sign the agreement and challenged the extension of the agreement’s terms to its members. The success of challenges like these could have an adverse impact on the company’s financial condition as a result of increases in labour costs. See “-Increased labour costs could have a material adverse effect on AngloGold Ashanti’s results of operations and financial condition”. In South Africa, the broader labour relations climate remains fragile. Unresolved issues emanating from the 2015 wage review could result in strike action. The labour relations climate is further exacerbated by a number of other issues such as (i) pressure building amongst all unions and employees regarding legislation reform affecting pensions and provident funds; (ii) demonstrations by the citizenry and students about public services and free education; (iii) public outcry relating to racism; and (iv) the effect of confrontations between political parties in the lead-up to elections, all of which may have repercussions in the workplace. In South Africa, companies’ ability to undertake a restructuring of mining operations that could result in layoffs or redundancies is curtailed by governmental intervention. Going forward, management expects that the Department of Minerals and Energy will invoke its powers to intervene in any such restructuring process and will be able to place external pressure on mining companies due to its control over the renewal and cancellation of mining rights. Any future labour unrest and disruptions could have a material adverse effect on AngloGold Ashanti’s results of operations and financial condition.

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Risks Risks

Valuation Valuation

Other Other reporting reporting

Valuation

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Key messages Fiscal 2015 continued to be a challenging year for mining companies as 21 of the 23 companies surveyed (US GAAP filers excluded) recorded an impairment in the latest reporting period. In the 2014 Mining Reporting Survey, 16 of the 20 companies surveyed recorded an impairment loss in the 2013 fiscal year. The valuation of non-financial assets is a complex issue for mining companies especially given the current uncertainty of market conditions and the volatility of capital and operating costs in the mining industry. The impairment testing of non-financial assets is carried out in accordance with IAS 36 Impairment of Assets. There are a number of factors that can have a significant impact on the recoverable amount of a mine or cash-generating unit (CGU). The volatility of commodity prices, foreign exchange rates, and market multiples combined with increasing capital and operating costs require mining companies to consider potential impairments regularly.

Cash-generating units Whenever possible, an impairment test is required to be performed for an individual asset; otherwise, assets are tested for impairment in CGUs. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The composition of a CGU is often straightforward to determine in the mining industry because the assets grouped together in an individual mine will often constitute a single CGU. However, when multiple mines share infrastructure or represent vertically integrated operations, the determination of CGUs can be more complex. In the first scenario, management judgment is required to determine whether the mining infrastructure at each site is capable of generating independent cash inflows or whether it is more appropriate for the mines and infrastructure to be grouped together as a single CGU. For vertically integrated operations management needs to exercise judgment in considering whether there is an active market for any of the intermediate products, even if some or all of the output is used internally, to determine whether there are independent cash inflows and the operation comprises separate CGUs.

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Reserve uncertainty and/or declines

Impairment indicators An entity must assess at each reporting date whether there are indicators of impairment. When an impairment indicator is identified, impairment testing is required. In addition, there is a requirement to test goodwill for impairment at least annually, even when no indicator of impairment exists. In determining whether there is an impairment indicator, an entity considers both internal factors (e.g., adverse changes in performance) and external factors (e.g., adverse changes in the business or regulatory environment). Possible indicators of impairment for mining companies may include: –– The carrying amount of the net assets of the entity is more than its market capitalization –– Lack of available cash and future financing when developing a mine –– Projects being put on hold or care and maintenance –– Declines in long-term commodity price forecast

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Figure 4.1—Impairment triggers Impairment trigger

Number of companies

Commodity price declines

11

Reserve uncertainty and/or declines

6

Market capitalization

5

Of the 23 companies surveyed, 21 companies recorded an impairment charge during the year. Of the 21 companies that recorded an impairment charge, 19 disclosed specific impairment indicators. The most prominent impairment indicators disclosed included six companies that identified reserve reduction and/ or uncertainty around future production resources; 11 companies that identified commodity price declines and five companies that identified carrying value of net assets exceeding market capitalization. In addition, most companies identified asset-specific factors as the underlying conditions giving rise to the impairment, including changes to mine plan, abandonment, suspension or delay in projects, and increasing operating and capital costs.

–– Capital expenditure over budget during the construction of a new mine

Impairment reversal

–– A material decrease in reserves and resources

Consistent with IAS 36, entities must assess at the end of each reporting period whether there is any indication that an impairment loss recognized in prior periods for an asset, other than goodwill, which no longer exists or may have decreased. If any such indicators exists, the entity shall estimate the recoverable amount of that asset. The recoverable amount of an asset or CGU is the higher of its fair value, less costs of disposal (FVLCD), and value in use (VIU). Value in use is the present value of future cash flows expected to be derived from an asset or cashgenerating unit. In the entity’s assessment, consideration is given to both external and internal sources of information.

–– Adverse forward exchange rates –– An increase in long term interest rates –– Increased production costs –– Expected increases in mine closure and rehabilitation costs.

The above examples are indicators of possible impairments that are considered in assessing whether impairment testing is required; they do not necessarily lead to mandatory impairment testing. For example, an entity may consider any deficiency gap between the net assets and market capitalization in its determination of whether an impairment test is required, which might not necessarily lead it to conclude that there is an indication of impairment, provided reasonable explanations can be given. Another example might include a profitable low cost mine that would not substantially be impacted by a decline in long term commodity prices.

An impairment loss is not reversed when the increase in recoverable amount is caused only by the passage of time (i.e. unwinding of the discount used to calculate VIU). An impairment loss for goodwill is never reversed. The maximum amount of a reversal is the amount necessary to restore the assets of the CGU to their pre-impairment carrying amounts, less subsequent depreciation or amortization that would have been recognized had, no impairment charge been recorded. A reversal of an impairment loss is generally recognized in profit or loss. Consistent with IAS 36, an entity must provide relevant disclosures, including information on the events and circumstances that led to the reversal of the impairment loss.

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A reversal of an impairment loss on a revalued asset is recognized in profit or loss to the extent that it reverses an impairment loss on the same asset that was previously recognized as an expense in profit or loss. Any additional increase in the carrying amount of the asset is treated as a revaluation increase. Of the 23 companies surveyed, 20 included disclosures on their accounting for reversal of previous impairments. 13 of the 23 companies included specific disclosures including details on timing of when the reversal would occur and the method of calculating the reversal amount (i.e. carrying amount is increased to the recoverable amount but not beyond the carrying amount net of depreciation or amortization, which would have arisen if the prior impairment loss had not been recognized). Seven of the 20 companies included general commentary within their accounting policies, indicating that an assessment for reversals occurred; however no other specific details, such as timing of when reversals should occur or the method of calculating the reversal amount were provided. Three companies did not disclose any policies or discussion over the assessment of reversals of impairments of non-financial assets.

Figure 4.2—Policy disclosure for reversals of impairment Policy disclosure

Number of companies

Specific reversal policy

13

General reversal policy

7

No reversal policy disclosed

3

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Risks

Valuation

Other reporting

Example D.1 details Goldcorp Inc.’s disclosure of their policy on reversals of impairment charges previously taken. Example D.1 Source: Goldcorp Inc., 2015 Annual Financial Statements, Page 18 The recoverable amount of a mine site is the greater of its FVLCD and VIU. In determining the recoverable amounts of each of the Company’s mine sites, the Company uses the FVLCD as this will generally be greater than or equal to the VIU. When there is no binding sales agreement, FVLCD is estimated as the discounted future after-tax cash flows expected to be derived from a mine site, less an amount for costs to sell estimated based on similar past transactions. When discounting estimated future after-tax cash flows, the Company uses its after-tax weighted average cost of capital. Estimated cash flows are based on expected future production, metal selling prices, operating costs and capital expenditures. If the recoverable amount of a mine site is estimated to be less than its carrying amount, the carrying amount is reduced to its recoverable amount. The carrying amount of each mine site includes the carrying amounts of mining properties, plant and equipment, goodwill and related deferred income tax balances, net of the mine site reclamation and closure cost provision. In addition, the carrying amounts of the Company’s corporate assets are allocated to the relevant mine sites for impairment purposes. Impairment losses are recognized in net earnings in the period in which they are incurred. The allocation of an impairment loss, if any, for a particular mine site to its mining properties and plant and equipment is based on the relative carrying amounts of those assets at the date of impairment. Those mine sites which have been impaired are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. When an impairment loss reverses in a subsequent period, the revised carrying amount shall not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset previously, less subsequent depreciation and depletion. Reversals of impairment losses are recognized in net earnings in the period in which the reversals occur.

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Of the 23 companies surveyed, 19 did not record any impairment reversals in the period. Of the four companies which recorded an impairment reversal in the period, two of the reversals related to impairment previously recorded in investment in associates. One company did not include any disclosure over the trigger for reversal while the other indicated the reversal pertained to the improved financial position and operating results of its associate, which resulted in a reversal of impairment previously recorded on a loan to the associate. The remaining two companies recorded a reversal on PP&E impairments previously taken, of which, one company did not include any disclosure over the trigger for reversal. The other company indicated the reversal was due to a CGU’s production returning to normal operations and foreign currency impacts. Figure 4.3—Reversals of impairment recorded in fiscal 2015 Reversals of impairment

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IFRS 13 Fair Value Measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase consistency and comparability, IFRS 13 establishes a fair value hierarchy based on the inputs to valuation techniques used to measure fair value. The inputs are categorized into three levels—the highest priority is given to unadjusted quoted prices in active markets for identical assets or liabilities, and the lowest priority is given to unobservable inputs. In measuring the fair value of an asset or a liability, an entity selects those valuation approaches and techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value. In our experience, given the significant differences between mines, without a specific agreement, it is difficult to identify a market price for the asset. The following valuation approaches are typically used when determining an asset’s fair value:

Number of companies

–– Income approach

Reversals of impairment

4

No reversals

19

–– Market approach –– Cost approach.

Calculation and disclosure of recoverable amount The recoverable amount of an asset or CGU is the higher of its FVLCD and VIU. Cash flow estimates to determine VIU should reflect the asset in its current condition, i.e., excluding future capital expenditures that will improve or enhance the asset’s performance. In the mining industry; however, significant capital expenditures are often required to access mineral reserves and resources in future periods. These capital expenditures can be included in a mine’s FVLCD, determined using a discounted cash flow model, which also includes the cash inflows resulting from accessing mineral reserves and resources in future periods and the related capital expenditures based on a market participant’s view. Accordingly, during a mine’s life, a CGU’s FVLCD may exceed its VIU because FVLCD includes the capital expenditures over the entire life of the mine and the additional cash flows generated by the additional resources, whereas VIU only includes capital expenditures to sustain current production. FVLCD may no longer exceed a CGU’s VIU near the end of the mine life when mineral reserves are nearing depletion and there are no significant capital expenditures requiring approval in the future to develop mineral resources.

Figure 4.4 provides generally appropriate valuation appraoches, as outlined by the Canadian Insitute of Mining, Metallurgy and Petroleum. Figure 4.4 - Standards and guidelines for valuation of mineral properties Source: CIMVAL, Standards and guidelines for valuation of mineral properties, February 2003, Page 22

The Canadian Institute of Mining, Metallurgy and Petroleum on valuation of mineral properties (“CIMVAL”) code provides for the following generally considered approaches categorized by type of mineral properties: Valuation Approach

Exploration Properties

Mineral Resource Properties

Development Properties

Production Properties

Income

No

In some cases

Yes

Yes

Market

Yes

Yes

Yes

Yes

Cost

Yes

In some cases

No

No

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The most common valuation approach used for production or development properties is the income approach using a discounted cash flow model. In that case, the assumptions used in determining fair value are consistent with those that a market participant would make. Typically, for mining companies, cash flow projections in a discounted cash flow model are based on an operation’s mine plan, since that is the information a market participant would consider to determine the fair value of a mining operation. The cash flows extend over the entire estimated life of the mine based on the production levels and the amount of mineral reserves and resources at the mine. The amount of confidence in mineral reserves and resources would impact the value assigned to them by a market participant and accordingly, should be taken into account in the discounted cash flow model. Techniques sometimes include applying a factor to mineral resources that reflects the estimated conversion ratio to reserves, or applying a higher discount rate to mineral resources. In accordance with IAS 36, companies are required to make extensive disclosures regarding the estimates used to measure the recoverable amount of a CGU for which the carrying amount of goodwill allocated to that unit is significant in comparison to the entity’s total carrying amount of goodwill. The required disclosures include the basis on which a CGU’s recoverable amount has been determined, a description of key assumptions to which the recoverable amount is most sensitive, and a description of management’s approach to determine the values assigned to each key assumption.

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Of the 23 companies surveyed, 20 companies had goodwill, and therefore the annual requirement for impairment testing. Of these 20 companies, 17 disclosed that the recoverable amount used in impairment tests was determined using the FVLCD and one company used VIU only. However, two companies had goodwill that had been allocated to multiple CGUs within the entity, which for certain CGUs VIU was used and for others FVLCD was used. Two companies did not disclose the basis used for determining the recoverable amount, and only provided a general comment that the recoverable amount is the greater of FVLCD and VIU.

Figure 4.5—Basis for the recoverable amount used in the required annual impairment test Basis used for recoverable amount

Number of companies

FVLCD

17

Varies per level of CGUs

2

VIU

1

Of the 21 companies that recorded an impairment charge, 20 disclosed the discounted cash flow model as their choice of valuation method. Figure 4.6—Impairment charges recorded in fiscal 2015 Impairment charge

Number of companies

Both PPE and goodwill

12

PPE only

8

Goodwill only

1

No impairment

2

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When an entity records an impairment loss, it is also required to provide extensive disclosures, including a description of the events and circumstances that led to the recognition of the impairment loss and the basis for the recoverable amount. In situations other than those mentioned above, entities are encouraged to disclose the assumptions used to determine the recoverable amount. Example D.2 details Vale S.A.’s disclosure of the underlying conditions that gave rise to the impairment charge recorded.

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For mining companies, the recoverable amount of a CGU is significantly affected by the following assumptions: –– Commodity price assumptions and foreign exchange rates –– Discount rates –– Estimated operating and capital expenditures –– Estimates of reserves and resources –– Estimated exploration potential –– Any event that might otherwise affect mine site production levels or costs.

Example D.2 Source: Vale S.A., 2015 Annual Financial Statements, Pages 216 – 217 Impairment of non-current assets Coal The reduction in estimated future coal prices combined with the increase of logistics costs decreased the estimated net recoverable amount of Mozambique assets, causing an impairment of US$2,403. The Coal assets in Australia were also impacted by the prices and the revision to the future mining plans in 2015, recording an impairment of US$635. The impairment of US$343 registered in 2014 relates to Integra and Isaac Plans which were sold during the fourth quarter of 2015. Nickel During the impairment test for 2015, the Company identified that the indicators which caused an impairment to be recognized in previous years for Onca Puma were no longer applicable. This was mainly due to the recovery of Onca Puma’s production returning to normal operations for more than two years. Part of the impairment in the amount of US$1,617 registered in 2012 was reversed in 2014. The amount of US$252 was reversed in 2015.

Figure 4.7—Major assumptions disclosed by companies who have annual requirement for impairment testing Assumptions disclosed

Number of companies

Discount rate

20

Commodity price

17

Mine life

6

Exchange rate

5

All 20 companies that had the annual requirement for impairment testing provided qualitative and, in some cases, quantitative information regarding the key assumptions used in determining the recoverable amount. There is, however, significant diversity of disclosures between companies.

In 2015, VNL was identified as a separate CGU (previously part of the Canada Nickel CGU) as there was a change in location of processed ore (feed of nickel concentrate) from the VNL mine that is now expected to be processed in Long harbor instead of Ontario’s Sudbury operations. A reduction of long term nickel price projections, that significantly reduced the recoverable values of the VNC and VNL CGUs, combined with carrying values that reflect significant capital investments in new processing facilities in recent years, resulted in an impairment loss in the amount of US$4,922 for these CGUs. Of the total goodwill (note 13), US$1,863 is allocated to the Nickel CGUs which was tested based on FVLCS determined using cash flows based on approved budgets and market assumptions, considering mineral reserves and resources and additional value calculated by experts, costs and investments based on the best estimate of past performance and sales nickel prices using a range from 13,000 to 20,000 (US$ per ton). Cash flows used are designed based on the life of each CGU and considering a discount rates range from 6% to 8%.

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Significant inputs, such as commodity prices, used in the determination of the recoverable amount should be based on reasonable and supportable assumptions that represent management’s best estimate of the use of the asset over its estimated useful life. External sources used as the basis for assumptions generally carry more weight than internal sources. Appropriate sources of commodity prices might include: an analysis of forward prices, market commodity price forecasts consensus from financial analysts, and existing long term sales contracts. Furthermore, some entities will typically use long term commodity prices in their impairment tests that are higher than the prices used in their reserve statement. Of the 20 companies which had the annual requirement for impairment testing, 17 companies disclosed the commodity price used. The common commodity prices disclosed pertain to gold, copper and silver, as illustrated in the table below. Figure 4.8—Commodity prices used by companies who have annual requirement for impairment testing Commodity

# Companies Disclosed

2015—Range (USD)

2015—Spot Price (USD)**

2014—Range (USD)

2014— Spot price (USD)** 1,206

Gold ($/oz)

11

1,100 – 1,300

1,060

1,275 – 1,300

Copper ($/lb)

7

2.30 – 3.00

2.12

3.00 – 3.30

2.86

Silver ($/oz)

6

15.50 – 20.50

13.82

17.60 – 22.00

15.97

*Data obtained from Kitco.com

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Example D.3 details key inputs and sources used by Centerra Gold Inc. in determining the recoverable amount. Example D.3 Source: Centerra Gold Inc., 2015 Annual Financial Statements, Pages 14 – 15 Impairment of non-current assets The best evidence of FVLCD is the value obtained from an active market or binding sale agreement. Where neither exists, FVLCD is based on the best information available to reflect the amount the Company could receive for the CGU in an arm’s length transaction, which the Company typically estimates using discounted cash flow techniques. Where the recoverable amount is assessed using discounted cash flow techniques, the resulting estimates are based on detailed mine and/ or production plans. Expected future cash flows reflect long term mine plans, which are based on detailed research, analysis and iterative modeling to optimize the level of return from investment, output and sequence of extraction. The mine plan takes account of all relevant characteristics of the ore body, including waste to ore ratios, ore grades, haul distances, chemical and metallurgical properties of the ore impacting on process recoveries and capacities of processing equipment that can be used. The mine plan is therefore the basis for forecasting production output in each future year and for forecasting production costs. The Company’s cash flow forecasts are based on estimates of future commodity prices which are derived through the analysis of gold forward prices and by considering the average of the most recent market commodity price forecasts consensus from a number of recognized financial analysts. These assessments can differ from current price levels and are updated periodically. The discount rates applied to the future cash flow forecasts represent a real after tax discount rate based on the Company’s estimated weighted-average cost of capital adjusted for the risks specific to the CGU. The Company’s weighted-average cost of capital is used as a starting point for determining the discount rates, with appropriate adjustments for the risk profile of the countries in which the individual CGUs operate. For value-in-use, recent cost levels are considered together with expected changes in costs that are compatible with the current condition of the business. The cash flow forecasts are based on best estimates of expected future revenues and costs, including the future cash costs of production, sustaining capital expenditure, closure, restoration and environmental clean-up.

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Discount rates and NAV multiples In determining VIU and FVLCD using a discounted cash flow model, the discount rate(s) shall be a pre-tax rate(s) that reflect current market assessments of the time value of money and the risks specific to the asset for which the future cash flow estimates have not been adjusted. A rate that reflects current market assessments of the time value of money and the risks specific to the asset is the return that investors would require if they were to choose an investment that would generate cash flows of amounts, timing, and risk profile equivalent to those that the entity expects to derive from the asset or CGU. To avoid double counting, the discount rate must not reflect risks that have been taken into account for estimating the cash flows or through the application of a net asset value (NAV) multiple. In the absence of a discount rate that can be derived directly from the market, IAS 36 refers to other starting points in determining an appropriate discount rate; the entity’s weighted average cost of capital (WACC), the entity’s incremental borrowing rate, and other market borrowing rates. However, these rates must be adjusted to reflect a market participant’s view of risks for the particular asset or CGU. Commonly, the following specific risks are considered by companies in determining an appropriate discount rate: Lower Shorter Stable Producing Larger

Discount Rate Life of mine Country risk Development risk Size premium

Higher Longer Riskier Development Smaller

In accordance with IAS 36, an entity is required to disclose the discount rate used in the impairment test. Such discount rates used in impairment tests were disclosed by all of the 20 companies that have an annual requirement to test goodwill impairment. The discount rates disclosed by the 20 companies ranged from three percent to 14.5%. The low end of the range likely applied to producing properties in lowrisk jurisdictions, while the high end of the range likely applied to development properties, and/or properties facing moderate-to-high country risk. Also, most companies stated that the discount rates were in real terms, presumably to be consistent with cash flows prepared in real dollars (i.e., excluding inflation in both discount rate and cash flows).

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A small minority of companies also applied a NAV multiple to the discounted cash flow value to arrive at fair value. A NAV multiple is the multiple of the price of a mineral property as implied by the company’s market capitalization or transaction amount to its net asset value (“NAV”) and is generally only seen in gold asset valuations. The following factors are generally considered to impact NAV multiples: Additional mineralization—Relates to production over and above the existing mine plan. It can be the result of any of the following, or a combination thereof: –– Higher than anticipated metal prices leading to reduced cut-off grades –– Increases in anticipated resource mineralization or discovery of new economically-mineable resources identified through additional drilling –– Reduction in metal extraction costs as a result of technological improvement. Additional mineralization over and above the existing mine plan can extend mine life or expand current production, which leads to a premium to NAV. The quantum of the premium is dependent on the market’s expectation of mineralization beyond that included directly in the NAV calculation. Loosely, this additional mineralization is commonly referred to as “optionality”. Discount rate—Consistent with the above, the discount rate should represent the required rate of return that an investor would command given the risks inherent in achieving the expected future cash flows. However, NAV calculations and the resulting implied NAV multiples are typically based on a real discount rate of five percent for gold properties and eight percent for base-metal properties, and are seldom adjusted for current market rates of return and investor sentiment. More importantly, such rates are rarely varied, up or down, for relative country risk and relative project risk. A development project in a risky jurisdiction should command a higher discount rate than a producing property in a relatively less risky domicile. If the cost of capital that an investor requires is greater than the industry standard rate used in the NAV calculation, then the price of the property would theoretically trade or transact at a discount to its NAV. This is one of the primary reasons that the NAV multiple for a development company is generally less than for a producing property. Likewise, this is a key explanation as to why a company with properties in less risky jurisdictions is often priced at a premium to a company holding assets in riskier parts of the world. Assuming that a company has already reflected such risks directly into the discount rate selected in its valuation, no further adjustment for risks should be made through the NAV multiple applied.

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Key messages In a time of unfettered access to information, stakeholders are expecting a great deal more from companies through various additional forms of reporting beyond traditional GAAP financial statements. All 25 companies surveyed had a Corporate Responsibility (CR) report available as part of their public disclosure. Of these companies, 14 obtained assurance over some aspect of their CR report.

Enhanced auditor reporting Enhanced auditor reporting is the terminology used to describe changes to the standard audit report to include additional relevant information, such as a description of the key audit matters. It is already applicable to four of the 25 companies surveyed. Recently, investors and users of financial statements have demanded more information than has historically been disclosed in a traditional auditors’ financial statements report. In a time when transparency and trust in capital markets has become increasingly important and valued, users want to know more than just whether a company was issued a pass or fail audit opinion. The call for increased transparency has led to new requirements for auditors to provide insight into their key audit matters, and how these key matters have been addressed. Expanded auditor reporting standards were issued by the International Auditing and Assurance Standards Board in January 2015, and for those following the International Standards on Auditing (ISAs), enhanced auditor reporting is effective for December 2016 year ends. Many local laws and regulations governing financial statement audits are based on the ISAs, and therefore, it is expected that those jurisdictions will model their enhanced audit reporting standards on the ISAs, with certain jurisdictions even expanding upon them. For example, while Canada has not yet adopted a new standard on expanded auditor reporting as part of the Canadian Audit Standards, other regions, such as the UK and the EU have implemented requirements independent of, and in addition to the ISAs, such as

requiring information on audit tenure, independence, non-audit services, explanation of materiality, and overview of scope.1 Examples of other countries that are implementing enhanced auditor reporting standards include Australia and Canada. The Australian Auditing and Assurance Standards Board (AUASB) have now approved and released the revised standards with an application date for years ending on or after 15 December 2016 and it is expected that the Auditing and Assurance Standards Board in Canada will adopt a standard in late 2016/early 2017 with an effective date of implementation for 2018 calendar year ends.

Changes to the auditors’ report based on the ISAs The following are the most significant audit report changes that are expected to eventually impact all listed companies: –– The report will be reordered, with the audit opinion required to be presented first –– Revised and expanded descriptions of management and auditor responsibilities –– Description of key audit matters –– Disclosure of the engagement partner’s name.

Why these changes matter Investors are expected to benefit from enhanced reporting as it will provide more information that can be utilized in evaluating and comparing financial information of companies. For audit committees, the change in requirements will add to the dialogue between auditors and the audit committees to ensure that management disclosures are aligned with auditors’ publicized expanded reporting.

1

KPMG Enhanced Auditor Reporting, Providing insight and transparency, July 2015

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Key audit matters Key audit matters included in enhanced auditor reporting are determined by the auditor and are issues that were of significance in the audit. The auditor will present the written description based on their professional judgment, so they may vary from auditor to auditor. Key audit matters will be specific to the company being reported on. Four of the 25 companies surveyed report in a jurisdiction (the United Kingdom) where expanded auditor reporting requirements have been adopted. Therefore, the remainder of the survey results will concentrate on those companies. The number of key audit matters reported varied by surveyed company, with two disclosing four, one disclosing five, and the last one disclosing seven. The most common key audit matters for mining companies surveyed were impairment and taxation, with all surveyed companies’ auditors reporting on these key audit matters. As well, two companies’ auditors reported closure and rehabilitation provisions as a key audit matter. The remainder were specific to the company and circumstances.

Estimates & judgments

Non-GAAP measures

Risks

Other reporting

Valuation

Figure 5.1—Key audit matters reported Key audit matters reported

Number of companies

Impairments / asset valuation

4

Taxation

4

Closure and rehabilitation provisions

2

Corporate asset transactions

1

Special items and remeasurements

1

Specific transactional-based audit matters

1

Capital preservation / debt reduction plan

1

Revenue recognition

1

Fair value measurements within the marketing operations

1

Classification of financial instruments

1

Credit and performance risk

1

Defined benefit pension plan surpluses and deficits

1

Finance transformation—shared services transition

1

Materiality reported A requirement for UK reporting is to report on the materiality used during the audit, including the benchmark, and the percentage of the chosen benchmark. Across the companies surveyed, audit materiality for half was based on a threeyear normalized average pre-tax profit, while for the other half was based on group profit before tax and exceptional items. The applied percentage ranged from below five to six percent.

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Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Example E.1 is an excerpt from BHP Billiton Limited’s audit report as an example of an enhanced auditors’ report, as required by the UK auditing standards.

Example E.1 Source: BHP Billiton Limited, 2015 Annual Financial Statements, Page 285 B. KPMG UK’s separate opinion to the members of BHP Billiton Plc in relation to IFRSs as issued by the International Accounting Standards Board (‘IASB’) As explained in note 41 ‘Basis of preparation and measurement’ to the Group financial statements, the Group, in addition to complying with its legal obligation to apply IFRSs as adopted by the EU, has also applied IFRSs as issued by the IASB. In our opinion the Group financial statements have been properly prepared, in all material respects, in accordance with IFRSs as issued by the IASB.

Independent auditors’ reports of KPMG LLP (‘KPMG UK’) to the members of BHP Billiton Plc and of KPMG (‘KPMG Australia’) to the members of BHP Billiton Limited For the purpose of these reports, the terms ‘we’ and ‘our’ denote KPMG UK in relation to UK responsibilities and reporting obligations to the members of BHP Billiton Plc and KPMG Australia in relation to Australian responsibilities and reporting obligations to the members of BHP Billiton Limited. The BHP Billiton Group (‘the Group’) consists of BHP Billiton Plc, BHP Billiton Limited and the entities they controlled from time to time during the financial year.

A. KPMG UK’s opinion to the members of BHP Billiton Plc on the financial statements is unmodified In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of BHP Billiton Plc’s affairs as at 30 June 2015 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union (‘EU’); • the BHP Billiton Plc company financial statements have been properly prepared in accordance with UK Accounting Standards; and • the financial statements have been prepared in accordance with the requirements of the UK Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

The risks of material misstatement that had the greatest effect on our audit were as follows: Our response

Asset valuation Refer to note 43 ‘Significant accounting policies’ (Impairment and reversal of impairment of non-current assets), note 44 ‘Application of accounting estimates, assumptions and judgements’ (Application of critical accounting policies and estimates – Property, plant and equipment and Intangible assets – recoverable amount) and section 3.14.1 Risk and Audit Committee Report (Significant issues – Carrying value of long-term assets). As at 30 June 2015 the Group’s balance sheet includes property, plant and equipment amounting to US$94.1 billion and intangible assets amounting to US$4.3 billion. The assessment of the recoverable value of these assets, or for the relevant cash-generating unit (‘CGU’), incorporates significant judgement in respect of factors such as future production levels, commodity prices, operating/capital costs and economic assumptions such as discount rates, inflation rates and foreign currency rates. Impairment charges recorded during the year included: • Petroleum – Hawkville assets US$2.3 billion and goodwill US$0.5 billion (pre tax); • Nickel West US$0.4 billion (pre tax); • Other impairments US$0.8 billion (pre tax).

Our procedures included, among others: • Testing the design and operation of internal controls over valuation of the Group’s assets including those to determine any asset impairments or impairment reversals; • Evaluating the Group’s assumptions and estimates to determine the recoverable value of its assets, including those relating to production, cost, capital expenditure, discount rates and foreign exchange rates.

• • • •

9 Shareholder information

The risk

8 Glossary

2. Our audit approach A. Our assessment of the risks of material misstatement In arriving at our audit opinion on the financial statements our considerations include any changes year-on-year in the Group’s operations and the broader market that may influence the audit risk profile of the Group. Compared to the prior year, the following elements resulted in a change in the risk of material misstatement and a consequential change in our audit effort: • the demerger of South32 increased our focus on asset valuation, taxation, internal controls and the financial reporting implications of the transaction; • the decrease in restructuring and portfolio management, excluding the demerger of South32, resulted in a corresponding decrease in audit effort over this risk; and • the completion of the global IT platform (1SAP) project in 2014 resulted in reduced audit effort this year on IT system deployment and development, however the effective operation of IT controls and processes remains a key audit focus area.

7 Financial Statements

C. KPMG Australia’s opinion to the members of BHP Billiton Limited on the Group financial statements is unmodified In our opinion: (a) the Group financial statements, including the Directors’ declaration, are in accordance with the Australian Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2015 and of its performance for the financial year ended on that date; and (ii) complying with Australian Accounting Standards and the Australian Corporations Regulations 2001; (b) the Group financial statements also comply with IFRSs as issued by the IASB as disclosed in note 41 ‘Basis of preparation and measurement’.

1. Report on the financial statements We have audited the Group financial statements which comprise: • the Group Consolidated Balance Sheet at 30 June 2015; • the Group Consolidated Income Statement and Consolidated Statement of Comprehensive Income for the year then ended; • the Group Consolidated Statement of Changes in Equity and Consolidated Cash Flow Statement for the year then ended; and • the notes to the Group financial statements, which include a summary of significant accounting policies and other explanatory information. In addition: • KPMG UK has audited the BHP Billiton Plc company financial statements for the year ended 30 June 2015, which comprise the unconsolidated parent company balance sheet and related notes; and • KPMG Australia considers the Directors’ declaration to be part of the Group financial statements when forming its opinion.

6 Legal proceedings

7.6 Independent Auditors’ reports

This included using our corporate finance and modelling specialists to compare these assumptions against external benchmarks (for example, commodity prices and discount rates) and considering the assumptions based on our knowledge of the Group and its industry; Assessing the appropriateness of the Group’s identification of individual CGUs; Validating the mathematical accuracy of cash flow models and agreeing relevant data to the latest production plans and approved budgets; Performing sensitivity analyses on assets with a higher risk of impairment, or with the potential for a reversal of a previously recognised impairment; and Assessing the adequacy of the Group’s disclosures in respect of asset carrying values and impairment testing.

BHP Billiton Annual Report 2015

285

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Estimates & judgments

Home

Regulatory reporting It is not just shareholders of mining companies who are looking for more information, regulators are also requiring expanded reporting, most recently noted around payments made to governments. For example, in Canada, The Extractive Sector Transparency Measures Act (ESTMA or the Act) requires companies that are engaged in the commercial development of oil, gas or minerals to report annually on their payments over $100,000 made to all levels of governments in all jurisdictions globally.2 Payments include taxes, royalty fees, production entitlements, bonuses, dividends and infrastructure improvement payments. The reporting requirements become effective for the first financial year commencing after June 1, 2015. For calendar year-end companies, the first report will cover payments made in 2016 and must be issued by May 2017. 3 Similarly, the Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank) issued by the SEC also requires companies that extract minerals, oil and gas to report on their payments to governments. An effective date for Dodd-Frank reporting has not yet been issued, but it is expected that companies with filing requirements under both ESTMA and Dodd-Frank should be able to utilize their ESTMA reports to also meet their Dodd-Frank reporting requirements. In general, the rules relating to regulatory reporting are complex and require judgment to be applied to individual facts and circumstances. Regulatory reporting requirements are typically very prescriptive and focus on the disclosure of payment data only. For example, the ESTMA template does not provide companies the opportunity to give context for, or explanations in the data, disclose any methodologies or assumptions made or share their story or key messages with stakeholders. This creates an opportunity to have a more fulsome discussion on the amount of government payments made by a company through other means of corporate social responsibility/sustainability reports, annual reports, or integrated reports to provide stakeholders with a greater understanding of the type and nature of payments made to certain governments. An example of this would be BHP Billiton which provides an in-depth view and understanding of the payments made to governments through its Economic contribution and payments to governments report.4  PMG, Extractive Sector Transparency Measures Act (ESTMA), March 3, 2016 K Ibid. 4 HBP Billiton Limited, 2015 Economic contributions and payments to governments report, September 10, 2015 2

3t

Non-GAAP measures

Risks

Other reporting

Valuation

2 2015 total payments to governments

Example E.2

Source: BHP Billiton Limited, 2015 Economic contributions and payments to governments report, Page 2 BHP Billiton pays taxes, royalties and other payments in accordance with the tax regulations and laws applying in the jurisdictions in which we operate. This section outlines our payments 2015 total payments to governments to governments by country in 2015. Payments to Ref Business

Projects

Description

governments (US$M) (1)

Australia 1

Petroleum and Potash

North West Shelf

Joint interest offshore oil and gas fields in Western Australia

2

Petroleum and Potash

Bass Strait

Joint interest offshore oil and gas fields in Victoria

3

Petroleum and Potash

Australia Production Unit – Western Australia

Operated offshore oil and onshore gas processing facilities in Western Australia

4

Petroleum and Potash

Australia Production Unit – Victoria

Operated offshore oil and onshore gas processing facilities in Victoria

5

Petroleum and Potash

Head Office entities

Petroleum and Potash Head Office entities in Australia

6

Copper

Olympic Dam

Underground mine and processing, smelting and refining facilities producing copper cathode, uranium oxide, gold and silver

7

Iron Ore

Western Australia Iron Ore

Integrated iron ore mines, rail and port operations in the Pilbara region of Western Australia

8

Iron Ore

Head Office entities

Iron Ore Head Office entities in Australia

9

Coal

Queensland Coal

BHP Billiton Mitsubishi Alliance – Open-cut and underground metallurgical coal mines in the Bowen Basin and the Hay Point Coal terminal, Queensland

10

Coal

New South Wales Energy Coal

Open-cut energy coal mine and preparation plant in New South Wales

11

Coal

Head Office entities

Coal Head Office entities in Australia

12

Group and Unallocated Nickel West

Integrated sulphide mining, concentrating, smelting and refining operation in Western Australia

13

Group and Unallocated Corporate Head Office

Corporate Head Office entities in Australia

5,245.0

BHP Billiton Mitsui Coal – Two open-cut metallurgical coal mines in the Bowen Basin, Central Queensland

Chile 14

Copper

Escondida

Open-cut mine and processing facilities, producing copper concentrate and copper cathode, located in northern Chile

15

Copper

Pampa Norte

Two open-cut mines, producing copper cathode in northern Chile

16

Copper

Head Office entities

Copper Head Office entities in Chile

1,125.6

United States 17

Petroleum and Potash

Onshore US (Fayetteville)

Onshore shale liquids and gas fields in Arkansas

18

Petroleum and Potash

Onshore US (Haynesville)

Onshore shale liquids and gas fields in Louisiana

19

Petroleum and Potash

Onshore US (Permian Basin, Eagle Ford) Onshore shale liquids and gas fields in Texas

20 Petroleum and Potash

Gulf of Mexico

Offshore oil and gas fields in the Gulf of Mexico

21

Petroleum and Potash

Head Office entities

Petroleum and Potash Head Office entities in the United States

22

Copper

Head Office entities

Copper Head Office entities in the United States

23

Coal

New Mexico Coal

Energy coal mine in New Mexico

24

Group and Unallocated Corporate Head Office

644.2

Corporate Head Office entities in the United States

Algeria 25

Petroleum and Potash

Algeria Joint Interest Unit

Joint interest onshore oil and gas unit

139.9

Canada 26

Petroleum and Potash

Potash

Jansen Potash Project

27

Copper

Head Office entities

Copper Head Office entities in Canada

Trinidad and Tobago Production Unit

Operated offshore oil and gas fields

42.6

Pakistan Production Unit

Operated onshore oil and gas fields

27.9

79.9

Trinidad and Tobago 28

Petroleum and Potash

Pakistan 29

Petroleum and Potash

United Kingdom 30 Petroleum and Potash 31

United Kingdom Production Unit

Group and Unallocated Corporate Head Office

Operated offshore oil and gas fields Corporate Head Office entities in the United Kingdom

(40.8) (2)

Indonesia 32

Coal

1.2

IndoMet

Seven coal contracts of work covering a large metallurgical coal resource

33 Petroleum and Potash; Iron Ore

Head Office entities

Petroleum and Potash and Iron Ore Head Office entities for Businesses located in Brazil

34 Petroleum and Potash

Head Office entities

Petroleum Head Office entities in Argentina

35

Copper

Head Office entities

Copper Head Office entities in Peru

9.2

36 Iron Ore

Head Office entities

Iron Ore Head Office entities in Liberia

0.5

Other 17.8 3.5

Marketing and Corporate Head Offices for activities in Switzerland

3.1

38 Group and Unallocated Marketing and Corporate Head Offices

Marketing and Corporate Head Offices for activities in Singapore

5.8

39 Group and Unallocated Marketing and Corporate Head Offices

Marketing and Corporate Head Offices for activities in The Netherlands

2.5

37

Group and Unallocated Marketing and Corporate Head Offices

40 Group and Unallocated Marketing and Corporate Head Offices

Marketing and Corporate Head Offices for activities in China

41

Marketing and Corporate Head Offices for activities in India, Japan and Mongolia

Group and Unallocated Marketing and Corporate Head Offices

Total

1.1 0.6 7,309.6

(1) Payments to governments have been prepared on the basis set out in section 9 ‘Basis of report preparation’. (2) The negative US$40.8 million includes refunds received in FY2015 in respect of Petroleum Revenue Tax (PRT) paid in FY2014 (US$3.7 million), and corporate income taxes paid in FY2012 (US$41.8 million). Corporate income tax and PRT paid in respect of FY2014, FY2013 and FY2012 (excluding refunds received in FY2015) was US$13.9 million, US$119.2 million, and US$102.5 million respectively.

2

Economic contribution and payments to governments Report 2015

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Corporate responsibility reporting Financial reporting is a key component of corporate communication; however, companies, key stakeholders and financial statement users alike recognize that it does not tell the whole story. Environmental, social and corporate governance issues are increasingly impacting a company’s ability to operate, generate profit and create value, as well as impact the sustainability of a company’s business. No other industry likely understands this or is more impacted than the mining industry. It is therefore no surprise that the most recent KPMG Survey of Corporate Responsibility Reporting prepared in 2015 found that of the 15 sectors surveyed globally, the mining sector had the highest rate of CR reporting.5 This is supported by all 25 mining companies surveyed having a published CR report available as part of their public disclosure. The frequency with which these reports are issued varies across the companies surveyed, however the majority (88%) report annually, again highlighting the importance of these reports to the industry. Figure 5.2—Frequency with which CR reports are issued Frequency of CR reports Annually

Number of companies 22

Biannually

2

Other

1

Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

There are a number of global reporting initiatives providing guidance for sustainability reporting, including, the Global Reporting Initiative (GRI’s Sustainability Reporting Standards), the Organisation for Economic Co-operation and Development (OECD Guidelines for Multinational Enterprises), the United Nations Global Compact (the Communication on Progress), and the International Organization for Standardization (ISO 26000, International Standard for social responsibility).6 Of the 25 mining companies surveyed, all but two, reported utilizing the GRI’s standards as the main reporting framework with which they were in accordance. However, some companies also noted that their CR report followed other voluntary reporting initiatives. For example, 56% identified that their report also followed the OECD Guidelines for Multinational Enterprises. The GRI’s most recent version of the Sustainability Reporting Guidelines, G4, requires reporters to enhance their stakeholder and materiality process by explaining within their report the process to define material issues (called ‘Material Aspects’), and focus on these Material Aspects throughout the report, including a discussion of how the organization manages those Material Aspects.7 Reports in accordance with GRI guidelines issued after December 31, 2015 must follow G4.8 Of the 23 companies utilizing the GRI’s standards, 20 applied the G4 guideline, all being reports covering the 2015 year. For the three companies that did not follow G4, their most recent CR report was for a reporting period prior to 2015. The enhanced materiality assessment under G4 drives the types of indicators to be disclosed and analyzed by reporters. As expected, there was consistency in the Material Aspects disclosed by the companies surveyed, with some common examples including, energy consumption and water withdrawal.

KPMG, Currents of Change, 2015 Global Reporting Initiative website, September 2016 7 KPMG, Climate Change and Sustainability, GRI’s G4 Guidelines: the impact on reporting, 2013 8 Ibid. 5 6

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Example E.3 is an excerpt taken from Gold Fields Limited’s disclosures on management approach (DMAs). Example E.3 Source: Gold Fields Limited, 2015 GRI G4 Content Index, Page 10 Specific standard disclosures: Disclosures on management approach (DMAs) Aspects DMA

Cross reference

Further explanation and/or reason for omission

Health and safety Occupational health and safety

Ch 4, pg 68 – 73 Ch 2.3, pg 38 Ch 5.2, pg 111

Gold Fields has an approved health and safety policy that forms part of the sustainable development framework. All our operations are OHSAS 18001 certified, which requires training at different levels across the workforce, and which compels us to develop and implement plans with clear objectives and targets. All our operations are also audited against the OHSAS 18001 certification, which determines our adherence to agreed standards and targets and outlines corrective actions in the case of non-compliance. The SH&SD Committee, by reporting directly to the Board, is the highest responsible body looking after health and safety. Health and safety issues are captured within the quarterly sustainable development report that is submitted to the committee. At management level, the highest level of operational responsibility for health and safety issues lies with the relevant Regional Executive Vice-Presidents with the Regional Heads of Sustainable Development providing strategic support and playing an oversight and co-ordination role with regard to health and safety reporting (including the regional SH&SD Committee reports). All of Gold Fields’ regional operations are required to implement health, safety and wellness strategies, together with associated action plans. These address: – Occupational safety – Occupational health – Employee wellness – Community health and wellbeing In addition, these strategies and action plans define relevant management structures, resource allocations and reporting requirements.

Estimates & judgments

Non-GAAP measures

Risks

Other reporting

Valuation

Assurance Whether companies obtained external assurance over their CR reporting, and the level and scope of the assurance obtained varied across company and jurisdiction. We expect this percentage to increase as non-financial information continues to become more relevant to both companies and their stakeholders. Just over half of the companies surveyed obtained assurance over some aspect of their CR reporting. Figure 5.3—Companies that obtained assurance over some aspect of their CR report Assurance for CR reporting

Number of companies

Assurance obtained

14

No assurance obtained

11

The level of assurance varied, with half of companies obtaining at least some level of assurance, given there is no current requirement for an audit in most jurisdictions. Figure 5.4—Level of assurance obtained Level of assurance

Number of companies

Limited assurance

7

Reasonable assurance

3

Partly reasonable and partly limited

3

Moderate assurance

1

Most of these companies obtained assurance over selected indicators within their CR report, with the most common being greenhouse gas emissions, water management and/or consumption and energy consumption. Figure 5.5—Frequency of assurance over specific CR Report Indicators Indicator

Number of companies

Water management/consumption

14

Greenhouse gas emissions

13

Energy consumption

12

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Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Example E.4 provides an excerpt from Gold Fields Limited’s Independent Assurance Provider’s Report on Selected Sustainability Performance Information. Example E.4 Source: Gold Fields Limited, 2015 Annual Financial Statements, Page 139 The Gold Fields Integrated Annual Report 2015

7.2 Independent Assurance Provider’s Report to the Directors of Gold Fields Limited Report on Selected Sustainability Performance Information We have undertaken an assurance engagement on selected sustainability performance information, as described below, and presented in the Integrated Annual Report of Gold Fields Limited (Gold Fields) for the year ended 31 December 2015 (the Report). This engagement was conducted by a multi-disciplinary team of health, safety, social, environmental and assurance specialists with extensive experience in sustainability reporting. Subject matter (presented in compliance with subject matter 4 of the International Council of Mining and Metals’ (ICMM) Sustainable Development Framework: Assurance Procedure). We are required to provide reasonable assurance on the selected sustainability performance information set out in the table below. The selected sustainability performance information described below has been prepared in accordance with Gold Fields’ reporting criteria that accompanies the selected sustainability performance information on pages 143 to 146 (the accompanying Gold Fields reporting criteria). Reasonable Assurance (RA)

Unit

Environment Total CO2 equivalent emissions, Scope 1 – 3

Tonnes CO2e

Total energy consumed (GJ)/ounce of gold produced

Total GJ of energy consumed per ounce of gold produced

Total energy consumed (GJ)/total tonnes mined

Total GJ of energy consumed per tonne mined

Number of environmental incidents – Level 3 and above

Number

Electricity

MWh

Diesel

kℓ

Total water withdrawal

mℓ

Total water recycled/re-used per annum

mℓ

Water intensity

kℓ withdrawn per ounce of gold produced

Health Number of cases of silicosis reported

Number of cases

Number of cases of noise induced hearing loss reported

Number of cases

Number of new cases of cardio respiratory tuberculosis reported

Number of new cases

Number of cases of malaria tested positive per annum

Number of positive cases

Number of South African and West African employees in the highly active anti-retroviral therapy (HAART) programme

Number of employees

Percentage of South African and West African workforce on the voluntary counselling and testing (VCT) programme

Percentage of workforce

Safety Total recordable injury frequency rate (TRIFR)

Rate

Number of fatalities

Number

Social Total socio economic development (SED) spend in US dollars US Dollars

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Conflict-Free Gold Standard The Conflict-Free Gold Standard was developed by the World Gold Council and is defined by the council as, “a common approach by which gold producers can assess and provide assurance that their gold has been extracted in a manner that does not cause, support or benefit unlawful armed conflict or contribute to serious human rights abuses or breaches of international humanitarian law.”9 “The Standard is intended to act as an Industry Programme, as defined by the OECD Supplement on Gold to ‘support and advance the recommendations of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas’. It is expected that conformance with the Standard, in addition to existing business controls and practices, will result in conformance with the OECD Guidance and the accompanying Supplement on Gold.”10 Ten of the 25 companies surveyed are World Gold Council members, with eight of these 10 companies issuing a Conflict-Free Gold Report covering either of the last two reporting years (2014 and/or 2015). Two companies that are not World Gold Council members issued Conflict-Free Gold Reports, though only one of these obtained external assurance over the report. World Gold Council members are not required to issue a Conflict-Free Gold Report, though per the standard, it is expected that World Gold Council member companies and other companies involved in the extraction of gold will use the standard.11 Assurance was obtained over the Conflict-Free Gold Report by ten of the eleven companies that issued one, as this is a requirement of the standard.

9 10 11

World Gold Council, Conflict-Free Gold Standard, October 2012 Ibid. Ibid.

Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Example E.5 is an excerpt from Kinross Gold Corporation’s Conflict-Free Gold Report . Example E.5 Source: Conflict-Free Gold Report for Kinross Gold Corporation, June 2016, Page 1

Conflict-Free Gold Report for Kinross Gold Corporation Kinross Gold Corporation (together with its affiliates, “Kinrossn), believes that responsible mining and related activities can play an important role in achieving sustainable development and alleviating poverty in developing countries. In advancing these goals, we do not condone, support or in any other way accept the use of gold mining to support conflict and as such, Kinross has adopted the Conflict-Free Gold Standard (the “Standard”). This Conflict-Free Gold Report summarizes Kinross’ conformance to the requirements of the Standard for the year-ended 31 December 2015. This report will be updated on an annual-basis. Responsibility for implementation of the Standard is held by the Vice-President of Safety & Sustainability who reports to the Chief Operating Officer. The Chief Operating Officer reports to the Chief Executive Officer who then reports, on a quarterly basis, to the Corporate Responsibility Committee of the Board of Directors. Reporting Boundary The reporting boundary of this Conflict-Free Gold Report includes all mining and processing operations for which Kinross is the majority owner and has direct control. It does not include properties that are not producing gold or gold bearing materials such as exploration sites, projects under development, or properties in the reclamation phase. This is consistent with the reporting boundaries that Kinross publicly discloses in its Corporate Responsibility Report. The sites are as follows: • Fort Knox (Alaska, US) • Round Mountain (Nevada, US) • Kettle-River Buckhorn (Washington, US) • Kupol (Russia) • Dvoinoye (Russia) • Tasiast (Mauritania) • Chirano (Ghana) • Maricunga (Chile) • Paracatu (Brazil) Standard’s Requirements The Standard is comprised of assessments Parts A-E: • Part A – Conflict Assessment • Part B – Company Assessment • Part C – Commodity Assessment • Part D – External Sources of Gold Assessment, and • Part E – Management Statement of Conformance Part A of the Standard requires companies to assess whether they are adhering to international sanctions and to undertake a risk assessment based upon the recognition of conflict.

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Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Other CR reporting In addition to CR reports and Conflict-Free Gold Reports, companies also made public other non-financial reports such as Towards Sustainable Mining, Carbon Disclosure Project Employment Equity Report, CDP (formally called the Carbon Disclosure Project), Voluntary Principles on Security and Human Rights, and UN Global Company Communication on Progress reports.

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Estimates & judgments

Non-GAAP measures

Risks

Valuation

Other reporting

Additional Insights from KPMG Mining We hope that you have found the information within this report both insightful and valuable. KPMG’s Mining Practice publishes a wide range of content in order to aid our clients to stay abreast of industry trends and developments. The following are the key publications that the group produces.

Insights into Mining

Insights into Mining Sept 2016

Insights into Mining is a periodic e-newsletter focused on current topics relevant to the mining industry. Recent topics of discussion have included non-GAAP measures, ESTMA, post-merger integration, and incremental innovation, to name a few. kpmg.ca/mining-insights

Country Mining Guides

Country Mining Guides Sept 2016

kpmg.ca

kpmg.ca

Growing global demand for precious and base metals has driven mining companies to explore investments in areas rich in natural resources, such as Latin America. Our Country Mining Guides provide a general overview of the type of government, economic and fiscal policy, regulatory and sustainability environment, taxation, infrastructure, labour relations and employment situation, inbound and outbound investment, key commodities and a list of major mining companies within each respective country. kpmg.ca/mining-country-mining

Mining M&A Newsletter

A guide to Canadian Mining Taxation

The Mining M&A Newsletter is a semi-annual publication that reviews M&A transactions, purchases, acquisitions of remaining interest, and recapitalizations involving major mining commodity players in the global mining sector.

The KPMG member firm in Canada produced a tax guide for the mining sector that outlines provisions of Canada’s federal and provincial income tax laws applicable to domestic and foreign mining activities. The mining tax guide summarizes the provincial statutes that impose mining taxes and royalties on those engaged in domestic mining activities, and describes other law and rules relevant to mining activities in Canada.

kpmg.ca/mining-ma

kpmg.ca/mining-tax-guide

Resourceful Thinking Resourceful Thinking is a series of articles focusing on strategic planning, supplier relationships and technology in the global mining industry. kpmg.com/resourcefulthinking

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Contact us If you would like to discuss this report or any financial reporting trends within the industry, please contact: Lee Hodgkinson National Industry Leader, Mining Partner, Audit T: 416 777 3414 E: [email protected]

Philippa Wilshaw Vancouver Mining Industry Leader Partner, Audit T: 604 691 3039 E: [email protected]

Daniel Denis Montreal Mining Industry Leader, Partner, Advisory T: 514 985 1285 E: [email protected]

Lisa Dunville Saskatoon Mining Industry Leader, Partner, Audit T: 306 934 6272 E: [email protected]

Daniel Ricica Partner, Mining T: 416 777 3465 E: [email protected]

kpmg.ca

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2016 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 13465 The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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Mining Reporting Survey 2017 - KPMG

Mining Reporting Survey 2016 kpmg.ca/mining Home Estimates & judgments Non-GAAP measures Risks Valuation Other reporting Companies surveyed T...

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