The Silver Institute has reviewed the Gold Institute’s Production Cost Standard to determine its use and adoption by the silver industry. Through the formation of a committee mostly comprised of Silver Institute member mining company Chief Financial Officers, the Standard, first introduced in 1996, and subsequently updated in 1999 and in 2002, has been modified to include two minor amendments. The amendments arise from US and Canadian GAAP changes affecting how mining companies account for Stripping and Mine Development and the Reclamation and Mine Closure Costs since the adoption of the Standard by the Gold Institute. In discussions, it has been noted that International Financial Reporting Standards (IFRS) follow the same principles as Canadian and US GAAP on these matters (UK, AUS follow IFRS, CANADA began following January 1, 2011, and the US is discussing adopting the IFRS standards).

The Silver Institute endorses the modified Standard and encourages its use within the silver mining community. The following is a more detailed description of the accounting changes and amendments to the Standard:

Footnote Three: Stripping and mine development adjustments:

Stripping and mine development adjustments, which were typically calculated by reference to a life-of-mine (LOM) stripping ratio, are no longer permitted under Canadian or US GAAP. In addition, an International Financial Reporting Interpretations Committee (IFRIC) Staff Paper would also inhibit companies from adopting the use of a LOM stripping ratio to calculate a deferred stripping adjustment under IFRS. Under US GAAP, all stripping costs incurred during the production phase of a mine are treated as inventory production costs in the period in which the costs were incurred. Under Canadian GAAP and the proposed IFRS standard, stripping costs incurred during the production phase of a mine are treated as capital expenditures if they result in a future economic benefit; i.e., they provide access to ore reserves to be mined in a future period. Otherwise, these costs would be treated as current period production costs (similar to US GAAP). Stripping costs that meet the criteria for capitalization are subsequently amortised on a units-of-production (UOP) basis over the ore reserves/resources that directly benefit from the stripping activity. Consequently, if the IFRS exposure draft is approved in its current form (or similar form), the stripping and mine development adjustment line in the Production Cost Standard is no longer relevant.

Footnote Nine: Reclamation and mine closure:

A new standard of accounting for reclamation and mine closure costs came into effect for US GAAP in 2001, i.e., after the original Gold Institute’s Production Cost Standard was first published. Since that time, both IFRS and Canadian GAAP have generally converged with US GAAP in terms of the treatment of these costs for accounting purposes. The current accounting standards require the recording of an asset retirement liability equal to the present value of the future costs required to close and rehabilitate the mine based on the current disturbance and a corresponding asset retirement asset. This asset is then amortized over the expected economic life of the mine. Therefore, the impact of reclamation and mine closure costs are captured in either the depreciation or depletion/amortization lines and, consequently, it is no longer relevant to keep the “reclamation and mine closure” line in the Standard.

By noting that footnote 3 and 9 were removed (and maintaining the same footnote references) will distinguish there have been amendments to the original Standard, while providing easy identification of what was amended.

Footnotes:

(1) Per ounce of metal produced or sold in accordance with each company’s own reporting practices.

(2) Direct mining expenses include all expenditures incurred at the site, including inventory changes, site specific corporate charges (e.g. insurance, computer services, data processing (timesharing, batch processing), software development and consulting services, (see service bureau, SaaS and ASP., etc.) and in-mine drilling expenditures that are production related (e.g. in-fill drilling, grade control, etc.). Exploration expenditures are not included in direct mining expenses.

In case of a joint venture or partnership, management or overhead fees charged by that operation’s operator, that are in addition to site-specific corporate charges, should be included in each company’s mine-site cash expenditures.

(3) – Removed

(4) Information with respect to by-product credits, on an operation-by-operation basis, should be disclosed in each company’s external reporting documents.

(5) Information with respect to royalties, on an operation-by-operation basis, should be disclosed in each company’s external reporting documents.

(6) Taxes that are considered to be income taxes, such as the Ontario and British Columbia provincial mining taxes, should not be included in production cost calculations.

(7) Treatment of capital lease payments should follow the normal accounting practice of being excluded from cash costs but included in noncash costs as part depreciation expense.

(8) Additional footnotes may be required to disclose what amounts have been included or excluded in the calculations.

(9) – Removed

Following its release in 1996, the Standard was widely adopted throughout the global gold industry, and regulatory bodies such as the Toronto Stock Exchange and the Ontario Stock Commission recommended its use by listed companies. The success of its wide acceptance was due to its disclosure-based philosophy. While the Gold Institute ceased operations at the end of 2002, the Standard remains in use today by many mineral producers.

The Silver Institute is a nonprofit international industry association headquartered in Washington, D.C. Established in 1971, the Institute serves as the industry’s voice in increasing public understanding of the value and many uses of silver.