Capital

Article Dean Dorton

Risk factors impacting the mining industry during 2016:

  1. Production Management
  2. Pricing
  3. Customer Concentration
  4. Declining Capital Sources
  5. Regulatory Changes and
    Political Uncertainty
  1. Global Competition
  2. Cost Management
  3. Modernization
  4. Cybersecurity
  5. Social Awareness
  1. Production Management
    Maximizing the economic efficiency of production is a competitive advantage for mining companies that do it well. Production is impacted by financial, geological, and even social factors. Mining companies that effectively manage these factors and maximize production in areas that return the most value to their company will be more successful. Additionally, companies that invest in maximizing the efficiency of their production abilities will be most prepared to take advantage of market improvements in their industry.
  2. Pricing
    Contract prices continue to be extremely volatile. Mining companies may be forced to service unfavorable contracts in order keep cash flowing and to maintain relationships with customers. Moreover, companies may want to “keep a toe” in the water to monitor contract prices as they are negotiated for short and long term orders. The best way to understand the existing market is to be in some form of sales negotiations with the customers.
  3. Customer Concentration
    Many mining companies sell most of their products to a small number of customers, which creates a significant risk to the companies’ revenue streams. The coal mining sector ships coal primarily to power plants or industrial sites. Environmental regulations have made the economics of running a coal burning power plant very difficult. Economic fluctuations, both domestic and abroad, make industrial applications unstable. Limestone producers are impacted by governmental contracts and proximity to construction projects. Companies should offset this risk by seeking to diversify their customer base through geographic expansion or alternative uses for their products.
  4. Declining Capital Sources
    Certain segments of the mining industry have lost favor with public investors and, consequentially, many financial institutions. Finance arrangements are difficult to obtain, and when obtained may come with high fees and interest. Companies should consider alternative capital sources such as international institutions, brokers, and even customers. These alternative capital sources may offer a form of strategic alliance, such as in marketing existing products, or helping to develop additional assets.
  5. Regulatory Changes and Political Uncertainty
    Regulatory and political issues can be a significant obstacle in the mining industry. Environmental agencies can block or hamper access to strategic mining areas. Certain regulations threaten the way in which extracted minerals are used, thus decreasing demand. Changing tax laws, such as Tangible Asset Regulations, can have a significant impact on companies if not properly considered.
  6. Global Competition
    Mining has grown from a local market to a national and now global market. As domestic demand declines, U.S. companies are forced to look internationally for revenue opportunities. This requires an understanding of historical relationships, trade barriers, currency values, and international regulatory requirements. Mining companies must follow and understand international markets in order to compete at the global level.
  7. Cost Management
    Failing to budget and monitor costs properly is a significant risk. Successful companies monitor their costs in great detail. It is very important for the accounting department and the production teams to be in sync in order to maximize the value of financial data given to management in a timely fashion. Companies must also manage legacy costs such as reclamation and employee benefits, which may not impact current operations, but do impact current cash flow.
  8. Modernization
    In various sectors of the mining industry, external factors impacting performance are changing very rapidly. Additionally, the average age of a mine worker across most sectors has increased for several years in a row. This indicates that the industry is not hiring and retaining young workers. Technologies used today are often similar to those used a decade ago, and often by the same people. By the nature of their operations being capital intensive, mining companies are not very nimble organizations. Companies that can modernize operations to the specifications of their market through new technologies and innovative tactics will be positioned to recognize cost savings and improve their market position.
  9. Cybersecurity
    Operators need to be proactive in cybersecurity by implementing effective controls to prevent and detect cyber-crime. Potential effects of an operator network infiltration can include theft of customer payment information, employee identify theft, and shutdown of operations.
  10. Social Awareness
    Mining companies have a unique role in the local, state, and national community. Worker safety should always be top priority, and companies must consider the impact of their actions within each unique community. Illegal or unethical practices will damage a company’s reputation and may make national headlines, and legitimate closing of a project due to financial reasons may generate significant reputational damage as well. Mining companies should consider the impact that closing a project will have on that community and the local economy.

For more information, contact Bill Kohm at bkohm@deandorton.com or (859) 425-7625, or Justin Hubbard at jhubbard@deandorton.com or (859) 425-7604.


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Article Dean Dorton

The rules for Materials and Supplies, the third topic in our series, define materials and supplies to include items costing $200 or less.

These rules require non-incidental items to be capitalized and deducted when used or consumed, not necessarily in the year acquired.  Items are considered non-incidental if an inventory or record of consumption is maintained.  Items that are incidental (not inventoried or tracked) are to be deducted when paid or incurred if the item is one of the following:

  1. Is a component acquired to maintain, repair, or improve a unit of tangible property, that you own, lease or service and that is not acquired as part of any single unit of property, including rotable and temporary spare parts (rotables) and standby emergency spare parts;
  2. Consists of fuel, lubricants, water and similar items that you reasonably expect to  consume in 12 months or less, beginning when first used in your  operations;
  3. Is a unit of property than has an economic useful life of 12 months or less, beginning when first used or consumed in your operations;
  4. Is a unit of property that has an acquisition cost or production cost of $200 or less; or
  5. Is identified in published guidance (such as the Federal Register or in the Internal Revenue Bulletin) as materials and supplies.

What this means to you:  Through the Material and Supplies rules, incidental items meeting the above-mentioned criteria may accelerate your deductions by expensing items in the current year, rather than electing to capitalize them and depreciating over the useful life.

If you would like additional information or have any questions, please contact Jeff Crumpley (jcrumpley@deandorton.com) or Faith Crump (fcrump@deandorton.com).

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Article Dean Dorton

The De Minimis Safe Harbor rules, the second topic in our series, allow you to annually elect to expense certain expenditures if you have a written policy in place at the beginning of your tax year.  Generally, if you have a policy in place, this rule must be applied when you spend less than a certain dollar amount on tangible property; inventory, amounts paid for land, and certain rotable and temporary spare parts are excluded from this provision.

Here are some additional highlights (and what you should consider including in your written capitalization policy):

  • Must be in place by beginning of your tax year, which is January 1st for many taxpayers.
  • May elect to expense up to $500, or $5,000 for taxpayers with an applicable financial statement (AFS), per invoice or item; generally, an AFS is an audited financial statement, required to be filed with the SEC or provided to a federal or state government or agency.
  • Must be consistent with your book capitalization policy.

What this means to you: Through using the De Minimis Safe Harbor rules you may accelerate your deductions by expensing items in the current year, rather than depreciating over the useful life.

If you would like additional information or have any questions, please contact Allison Carter (alcarter@deandorton.com) or Faith Crump (fcrump@deandorton.com).

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