Mine Design MINE 484
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This 34 page Class Notes was uploaded by Joannie Pacocha on Saturday September 12, 2015. The Class Notes belongs to MINE 484 at West Virginia University taught by Staff in Fall. Since its upload, it has received 17 views. For similar materials see /class/202723/mine-484-west-virginia-university in Engineering Chemical at West Virginia University.
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Date Created: 09/12/15
Depreciation and Depletion For Prefeasibility Studies MinE 306 Exploration and Valuation Depreciation and Depletion Prefeasibility Studies often are completed prior to having all the information needed or engineering completed Depreciation and Depletion are NonCash deductions from income for tax calculations with the simplifying assumption that losses can be taken when incurred against other income perhaps from other activities of your company MinE 306 Exploration and Valuation Income Taxes I Income taxes are calculated as a percentage of taxable income I Taxable income is the remaining dollars after deductions from gross revenue for a cash operating costs a indirect costs a noncapitalized exploration and development costs a startup costs or loss on mine development a tax depreciation based on longterm investments 1 tax depletion MinE 306 Exploration and Valuation Income Taxes The federal and state tax rates and deductions are set by government policy to control economic activity and raise income for public projects If deductions depletion depreciation or other are raised a project is more attractive policy encourages mining If deductions are lowered or eliminated a project is less attractive MinE 306 Exploration and Valuation Depreciation Depreciation is the tax deduction given to recover the cost of investments over the tax E of the item as defined by the IRS Pub 946 u The useful life is the time that an asset can remain in service and provide benefit as expected after which it is replaced At the end of a project s economic life the cumulative remaining depreciation is added to income as if the item was sold for that amount for preliminary economics I E I I E MinE 306 Exploration and Valuation Depreciation begins P Depreciation begins when an asset is placed in service not when purchased Use half year convention for most projects If asset is idled continue to depreciate it I Stop taking depreciation when a cost basis is fully recovered a asset is retired from service or abandoned n asset is sold MinE 306 Exploration and Valuation Depreciation IRS Reform Act of 1986 changed the way assets were depreciated The Modified Accelerated Cost Recovery System MACRS is used since 1986 a Double Declining Balance using 200 or 150 switching to Straight Line a or the optional Straight line methods are accepted Half year conventions are used in many cases depreciation starts in the middle of the year the asset was placed in service MinE 306 Exploration and Valuation MACRS IRS Publication 946 ch4 Modi ed Accelerated Cost Recovery System MACRS is used by most businesses Two systems are used with four methods a General Depreciation System GDS used for most business oil amp gas and mining projects 200 double declining balance changing to straight line I 150 DDB changing to SL Straight line 1 Alternate depreciation system ADS used for tax exempt farming or assets used outside the US Straight line longer cost recovery time than GDS MinE 306 Exploration and Valuation MACRS MACRS lets you deduct more in the early years of the recovery period or tax life of the property than straight line methods Determine the cost basis and tax life The cost basis is the total depreciation you can take over the tax life of the property Multiply the total depreciation by a yearly factor from IRS tables for each year from when asset is placed in service This is the annual depreciation amount for that year If half year convention is used make sure to select the proper table A1 from IRS publication 946 MinE 306 Exploration and Valuation i Straight Line Method Straight line depreciation lets you deduct the same amount each year over the tax life of the property Determine the cost or other basis the percentage of business use and tax life Multiply the basis by the business use to find the total depreciation you can take over the tax life or recovery period of the property The annual depreciation amount is the total depreciation divided by the recovery period in years If half year convention is used take 12 the annual depreciation in the first year and 12 in the year after the last year in the tax life total years 1tax life MinE 306 Exploration and Valuation Basis Cost as basis the basis of property you buy is the first cost plus sales tax freight installation and testing and debt obligations I Other basis Other basis is determined by the way you received the property IRS 551 a If you exchange property a If paid for services with property a A gift or an inheritance Adjust the basis with other costs incurred before it is placed in service MinE 306 Exploration and Valuation Salvage Value Salvage value is an estimate of the value of property at the end of its useful life Salvage value is not used under MACRS as a deduction from the basis unless the property is intangible Treat salvage value as a cash inflow in the year sold or the project ends assuming assets are sold for the remaining depreciation This assumption is reasonable if the project life is more than the tax life of most of the initial investment usually 7 years MinE 306 Exploration and Valuation Depreciation UNDEP RECIATED INVESTMENT l I MACRS midyear convention 9 Cumulative DDB SL after yr 4 I Cumulative Straight Line 120 Note the faster 100 recovery of the g 80 investment with g 60 Double Declining E 40 Balance vs 20 Straight line 0 O 1 2 3 4 5 6 TIME YEARS MinE 306 Exploration and Valuation Asset Depreciation Recovery Period 39 year land improvements not associated with mining buildings parking for employees warehouse plant structure ie assets that can be used after mining is finished 15 year land improvements associated with mining river docks plant roads rail spurs Asset class 003 u 10 year vessels barges tugs Asset class 0028 7 year all mining equipment Asset class 100 large trucks furniture capitalized rebuilding cost rail loop 5 year cars light trucks information systems RampD equipment Asset class 001292941 MinE 306 Exploration and Valuation Asset Depreciation Recovery Period Exploration amp Development 30 is capitalized and depreciated using straight line for a 5 year period 70 is expensed in the year spent a Exploration includes costs to determine the existence location extent or quality of a mineral deposit a Development includes costs incurred after mineral deposits are shown to exist in sufficient quality and quantity to justify commercial exploitation and include infill drilling temporary power access roads and shafts slopes face ups site clearing permitting MinE 306 Exploration and Valuation Asset Depreciation Recovery Period Land surface land not mineral rights or property is part of working capital is not depreciated and the value is recovered at the end of the project life this assumes that land s intrinsic value can be regained when sold Recession of Face ROF costs are development costs incurred after a mine has reached full production and are treated as expenses in the current year MinE 306 Exploration and Valuation Asset Depreciation Recovery Period l Drilling Of and Gas WGIIS Asset class 131 a GDS recovery period is 5 years ADS 6 years a Assets used in onshore well drilling and services to complete wells Exploration for and Production of Petroleum and Natural Gas Deposits Asset class 132 a GDS recovery period is 7 years ADS 14 years a Assets used in gathering storage transportation compression treatment MinE 306 Exploration and Valuation Depreciation Rates MACRS 00 Tax Life 39 years 15 years 10 years 7 years 5 years Explor amp Devel Year Straight Line DDB Strt Line after year 6 DDB Strt Line after year 6 DDB Strt Line after year 5 DDB Strt Line after year 4 Strt Line over 5 years of 30 1 1 28 50 100 143 200 100 IN 256 95 180 245 320 200 Half year convention for first and last year 256 85 144 175 192 200 A 256 77 115 125 115 200 IU39I 256 69 92 89 115 200 g 256 62 74 89 58 100 1 256 59 66 89 loo 256 59 66 45 lo 256 59 66 256 59 66 MinE 306 Exploration and Valuation Depreciation Rates MACRS 0o E E Tax Life Year g Q E E E Q Q al 39 years Straight Line 256 256 256 256 256 256 256 128 100 DDB Strt Line 15 years after year 6 59 59 59 59 59 30 100 DDB Strt Line 10 years after year 6 33 100 DDB Strt Line 7 years after year 5 100 DDB Strt Line 5 years after year 4 100 Explor amp Strt Line over 5 Devel years of 30 100 Half year convention for first and last year MinE 306 Exploration and Valuation Tax Depletion Governments recognize the value of non renewable resources Mining a mineral deposit depletes the asset that can be replaced only by purchasing another deposit This assigned value is not taxed federal Allowable depletion is a nontaxable recovery of the value of the resource which is being extracted and may ignore the time value of money MinE 306 Exploration and Valuation Tax Depletion Allowable Depletion is not less than zero or the larger of 1 Percentage depletion 1 Cost depletion Depletion may be deducted after the cumulative amount of depletion exceeds the previously expensed exploration costs associated with the mineral deposit you can t deduct exploration costs twice MinE 306 Exploration and Valuation Percentage Depletion Percentage depletion the smaller of u A percentage of the gross revenue less royalty from the property at the mine Coal 10 less 20 Copper gold silver 15 Iron 15 less 20 Uranium lead zinc nickel 22 u 50 of the taxable net income from the property before depletion gross revenue cash costs 70 of exploration and development recession of face depreciation amortization reduced by 20 for coal and iron ore which 40 MinE 306 Exploration and Valuation Cost Depletion Cost depletion is calculated separately for each mine on the residual investment using the unit of production method Residual investment original leasehold cost less the value at the end of operations or basis less the cumulative depletion deducted in prior years may be called the adiusted basis Residual investment is divided by the total units left at the end of the year to produce over the remaining mine life to get the rate per unit times the production in that year cost depletion MinE 306 Exploration and Valuation Tax Depletion Summary Tax Depletion O or the greater of a cost depletion or b percentage depletion which is the lower of i 50 taxable net income or ii mineral specific of gross revenue less royalties iii Coal and iron are reduced 20 MinE 306 Exploration and Valuation Depletion Example Using the percentage method calculate a tax depletion for a coal project 1 Income tax payable for the year a Cash flow Assume no additional capital or development costs are incurred in that year Assume that the coal leasehold has no value at the end of the operating life there may be value in the pillars left the void created by mining or wheelage for transporting other products through the mined area MinE 306 Exploration and Valuation Depletion Example DATA Revenue 20t x 100000t 2000000 Cash cost 10tx100000t 1000000 Mining equipment Tax Basis 2041000 Tax year 2 MACRS half year convention Royalties 10 gross revenue 200000 MinE 306 Exploration and Valuation Depreciation l Cost basis for mining equipment 2041000 Property asset class 100 for Mining MACRS GDS recovery period 7 years I Year of service 2 MACRS GDS factor table A1 R8946 245 2041000 x 245 year 2 depreciation Depreciation 500000 MinE 306 Exploration and Valuation Depletion Example D1 50 of RevCCRoyTxDepr less 20 50 x 12 x 20001000200500 4 x 300k 120k D2 10 of Rev Roy less 20 10 x 12 x 1 800k 144k D1 lt D2 therefore allowable depletion is capped by the taxable income limit and equals 120k this year MinE 306 Exploration and Valuation Income Tax and Cash Flow Income tax rate assumed 34 fed 4 state Tax 38 x Rev CC RoyDepr DeplExplor 38 x 300k 120k 684k Cash Flow remember Depreciation and Depletion are only used for tax calculation CF Rev CC Roy Tax 2000k 1000k200k684k 731 6k MinE 306 Exploration and Valuation Problem Given a production rate of 120000 tons in year3 Assume the same realization and cost increase 10 I Using the percentage method calculate a tax depletion for a coal project a Income tax payable for the year a Cash flow Assume no additional capital or development costs are incurred in that year MinE 306 Exploration and Valuation Oil and Gas Depletion Cost Depletion calculated the same way as with minerals Percentage Depletion may be claimed if one of the following conditions is met a You are either an 39 independent producer or royalty owner a Gas is sold under a fixed contract signed before February 1 199 MinE 306 Exploration and Valuation Percentage Depletion Natural Gas Percentage depletion the smaller of n 15 of the gross revenue less royalty from the well n 100 of the taxable net income from the property before depletion gross revenue operating selling and administrative costs depreciation intangible drilling and development exploration and development a 65 of your taxable income from all sources MinE 306 Exploration and Valuation Oil and Gas Depletion Percentage 15 of the gross income from the property Average daily production included up to your depletable oil 1000 bbl or natural gas convert at 6000 cf per bbl quantity If daily production exceeds the depletable quantity reduce gross income by the fraction of depletable production divided by total daily production MinE 306 Exploration and Valuation Oil and Gas Depletion Gross Income Gross income from the property is the amount received from the sale in the immediate vicinity of the well u The Representative Market or Field Price RMFP or the oil or gas before conversion refining transportation is used to calculate gross income MinE 306 Exploration and Valuation
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