ICAI Valuation Standard 304 Valuation of Assets in the Extractive Industries

The Exposure Draft of the ICAI Valuation Standard includes paragraphs set in bold type and plain type, which have equal authority. Paragraphs in bold type indicate the main principles. (This Exposure Draft of the ICAI Valuation Standard should be read in the context of its Introduction and Framework for the preparation of Valuation Report in accordance with ICAI Valuation Standards).

Objective

1. The objective of this Standard is to prescribe specific guidelines and principles which are applicable to the valuation of assets (including rights or interests) in the Extractive Industries that are not dealt specifically in another Standard.

2. The Standard is not applicable and does not cover the assets downstream (or assets involved in the distribution of products to retailers or fabricators) from the metal refineries or mineral processing plants or petroleum refineries and natural gas processing plants.

3. The importance of valuing assets of Extractive Industries arises from the fact that the reported and intangible form of the said assets may not reflect the true value of the said assets. Unlike valuation of many other industries, valuation of assets in extractive industry is based on depleting mineral assets, the knowledge of which is imperfect prior to the commencement of extraction. It is therefore essential that the valuation incorporates the risks associated with each stage of mining. Certain areas where valuation of assets of Extractive Industries are required are as below:

a. Accounting and financial reporting
b. Transaction purposes
c. Financing
d. Bankruptcy / restructuring
e. Litigation
f. Impairment testing analysis
g. Mergers and Acquisitions
h. Initial Public Offerings
i. Grant or acquisition of Rights
j. Tax computations

4. The principles enunciated in this Standard shall be applied in conjunction with the principles prescribed and contained in the Framework for the Preparation of Valuation Report in accordance with ICAI Valuation Standards.

Scope

5. This Standard shall be applied for valuation of Extractive Industries assets including interests/ rights held by entities involved in the Extractive Industries / in natural resource properties including mining industry and petroleum industry but not including activities focused on the extraction of water from earth.

6. Valuation of Extractive Industry assets (including interests / rights) is necessary to assess the availability of capital for supporting the continuity of the said Industry as well as to help in the effective use of Mineral and Petroleum natural resources. Some exploration and evaluation assets are treated as intangibles (e.g. drilling rights), whereas others are considered as tangible (e.g. vehicle and drilling rigs).

7. Valuers and users of valuation are required to make a distinction among real property, personal property, and business interests involved in the stages of ownership, processing and measurement.

8. Valuation of Extractive Industries assets may require placing of reliance on a Technical Expert or accredited specialists specific to the industry.

Definitions and Important Terms

9. Exploration Area or Property: A Mineral or Petroleum real property interest for which the economic viability has not been established but which is being actively explored for Mineral deposits or Petroleum accumulations.

10. Exploration for and evaluation of mineral resources: It is defined as the search for mineral resources, including minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting the mineral resource.

11. Extraction: Deposits of Extractive Industries are generally located in remote locations and are majorly or completely buried below the surface of the land and below the floor of water bodies. The means of production would necessarily be in the form of extraction of natural resources from the earth. Examples of depleting / wasting natural resources are: metallic mineral deposits containing metals such as gold, silver, copper, platinum, iron, etc., non-metallic minerals such as coal, diamonds, gemstones, limestone, salt, etc., construction material like sand, crushed stone, dimension stone, etc. and petroleum deposits such as oil, natural gas and its variants, other gases, etc. Valuable minerals are extracted by mining in a surface mine (Surface mine also includes a quarry used to produce construction material) (open pit, open cut, open cast or strip mine) or an underground mine. Extraction can also be undertaken through wells (in situ leaching of salts and uranium minerals) or dredging the floors of water bodies for resources such as diamonds, alluvial gold, gravel, etc.

12. Extractive Industries: The term “Extractive Industries” refers to the industry engaged in mining operations and the extraction of oil and gas; however, excludes industry engaged in extraction of water from the earth. Extractive Industries engage in processes that involve different activities that lead to the extraction of raw materials from the earth such as oil, metal, minerals and other aggregates. These processes take place within host and home countries of operating companies as well as consuming markets. There is no distinction between the extraction methods employed, with some metals being recovered by fluid dynamics and in situ recovery techniques that are identical to those used in secondary oil recovery. Geothermal energy production is also an extractive industry, and again the technology of hot water or steam production is similar to that developed with fluids like natural gas. One characteristic that differentiates the Extractive Industries from the other industries is the wasting / depletion of natural resources.

13. Highest and Best Use: Valuation of the property should be based on the Highest and Best Use of the resources. Therefore, due consideration should be given to non-Petroleum and non-Mineral uses of the property. Additionally, the impact of any changes to the exploration or other strategies should be considered for any economic impact. Thus, the Valuer needs to assess the best probable use which is legally permissible, financially feasible and physically possible, thus resulting in the highest value of the subject property.

14. Mineral: A mineral is a naturally occurring material on the earth’s crust and includes metallic minerals, fuel minerals, industrial minerals, precious stones, aggregates, etc. Definition of Minerals does not include Petroleum.

15. Mineral Reserve: Combined [Mineral] Reserves International Reporting Standard Committee (CRIRSCO) defines Mineral Reserve to be the economically mineable part (adjusted for diluting materials and allowances for losses) of a measured or indicated mineral resource demonstrated by at least a preliminary feasibility study (which considers mining, metallurgical, economic, marketing, social, governmental and legal factors). Reserves are further subdivided into Probable Mineral Reserves and Proved Mineral Reserves in the order of increasing confidence.

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