The IGO Ltd (ASX: IGO) share price is down 5% after the company’s disappointing update with a hefty asset write-down.
This miner is involved in mining and the value chain relating to future-facing technologies including the electrification of transport, energy storage and renewable energy generation. It’s involved in nickel, copper, cobalt and lithium.
Asset impairment
The miner is in the process of allocating, for accounting purposes, the purchase price of Western Areas.
Having concluded its purchase price allocation process and life of mine budget relating to the Forrestania and Cosmos assets, it announced it expects to record a pre-tax impairment expense of between A$880 million and A$980 million for FY23.
The impairment relates to the value of those two assets, reflecting higher capital and operating costs, challenges to the mine production schedule and delays in development at Cosmos.
It also said it had withdrawn its guidance for Cosmos.
The company said that the impairment will not impact FY23 EBITDA (EBITDA explained). It noted cashflows utilised in determining the impairment value are based on reserves only, and the consensus nickel price and foreign exchange forecasts which are “materially different to spot prices” (meaning the current price).
However, this doesn’t include changes to the value of IGO’s holding in Panoramic Resources Ltd (ASX: PAN), which was acquired as part of the Western Areas acquisition.
Leadership commentary
The board and management recognise the huge write-down and have engaged leading independent consultants to better understand risks and opportunities in the current life of mine plan, capital cost estimates and schedule.
This review is expected to be completed in the December quarter and will result in a revised plan which will detail how the ASX mining share will “drive optimum value” from Cosmos.
It’s expecting to be able to provide further detail of this review in the June quarterly result, scheduled to be released on 31 July 2023.
IGO acting CEO Matt Dusci said:
Recording a significant impairment against the WSA assets is disappointing. While the project development team has made solid progress to advance Cosmos towards first production, capital and operating cost escalation and unforeseen operational challenges have impacted the value of the project. A detailed independent review of the project development strategy and mine plan has now commenced and will provide a comprehensive assessment of the risks and opportunities for Cosmos. We will keep the market updated as this review progresses.
As a long-life nickel asset, Cosmos remains important to our nickel business and provides potential downstream optionality via our aspirations to develop an Integrated Battery Materials Facility in Western Australia.
Final thoughts on the IGO share price
It’s disappointing for shareholders to see close to $1 billion seemingly lost in (accounting) value. The question will be how much profit and cash flow the company can make in the coming years, which is hard to say with a resource business.
