The principal accounting policies applied in the preparation of
these consolidated financial statements are set out below. These policies have been applied to all the years presented, unless otherwise stated.
Basis of preparation
The consolidated financial statements of Talvivaara are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and in compliance with the IAS and IFRS standards as well as the SIC and IFRIC interpretations in force as at 31 December 2008.
The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of derivative financial instruments, financial assets at fair value through profit or loss, available-for-sale assets, and biological assets. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 4.
Consolidation Subsidiaries
The consolidated financial statements comprise the financial statements of Talvivaara Mining Company Plc. and its subsidiaries as at 31 December each year.
The consolidated financial information in 2008 includes the parent company Talvivaara Mining Company Plc., its 100 % owned subsidiary Talvivaara Infrastructure Ltd., 80 % owned subsidiaries Talvivaara Project Ltd. and Hyena Holding AB, and a special purpose entity HSH Nordic Finance Talvivaara Ab in which the Company has no shareholding.
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date on which control ceases. Intra-group transactions, balances and unrealized gains on intra- group transactions are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Minority interests
The Group applies a policy of treating transactions with minority interests as transactions with equity owners of the Group. For purchases from minority interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is deducted from equity. Gains or losses on disposals to minority interests are also recorded in equity.
Fi
na
nc
ia
l
Sta
te
m
e
Foreign currency translation Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in euro (€), which is the Company’s functional and presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year- end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement. Group companies
All the Group’s entities have the same functional currency as the presentation currency of these consolidated financial statements. Property, plant and equipment
Property, plant and equipment, which at 31 December 2008 include among others buildings and infrastructure, machinery and equipment used in mining operations, laboratory equipment, vehicles, roads, and structures for environmental protection, are stated at historical cost less accumulated depreciation and any accumulated impairment losses.
Where parts of an item of property, plant or equipment have different useful lives, they are accounted for as separate items of property, plant or equipment.
In open pit mining operations, it is necessary to remove overburden to access ore from which minerals can economically be extracted. The process of mining overburden and waste materials is referred to as stripping. During the development of a mine, before production commences, stripping costs are capitalised as part of the investment in construction of the mine and subsequently amortised over the life of the operation. Construction in progress and land are not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
Roads 25 years
Buildings 20 - 25 years Machinery and equipment 5 - 20 years Furniture, fixtures and fittings 5 - 10 years Vehicles 3 - 8 years Structures for environmental protection 4 years
Useful lives of assets, depreciation methods and any residual values are re-assessed on an annual basis.
For the purpose of estimating the useful lives of equipment and other mine related assets, the expected economic life of mine is assumed as 25 years.
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within other operating income or expenses, respectively, in the income statement.
Intangible assets
Exploration and evaluation expenditure is capitalized as exploration and evaluation assets. Capitalization of exploration and evaluation expenditure commences on acquisition of exploitation rights to mineral deposits. Once the technical feasibility and commercial viability of extracting a mineral resource are demonstrable, expenditure related to such development is not capitalized as exploration and evaluation assets but as mine development costs.
Exploration and evaluation expenditure
Exploration and evaluation expenditure includes acquisition of rights to explore, topographical, geological, geochemical and geophysical studies, exploration drilling, trenching, sampling, and activities in relation to evaluation of the technical feasibility and commercial viability of extracting a mineral resource.
Exploration and evaluation expenditure is assessed for impairment when facts and circumstances suggest that the carrying amount of the assets may exceed their recoverable amount. The impairment test is undertaken at the cash generating unit level. The Group has only one cash generating unit, the Talvivaara mine.
Mine development costs
Mine development costs include costs relating to the
development of mineral properties and of technologies used to exploit them and are capitalized until such time as an economic resource is defined and mining commences or the mining property is abandoned. The costs capitalized include the cost of materials and services used or consumed in generating the asset. Absorption of relevant overheads is capitalized only when they are directly attributable to the generation and preparation of the asset. Other mine development costs are recognized in the income statement as an expense as incurred.
Intangible assets representing exploration and evaluation or mine development are amortized on a straight line basis over their expected useful lives starting from the commencement of mining activities. The useful lives of these assets are assumed as 25 years.
Research and development
Research expenditure is recognized as an expense as incurred. Costs incurred on development projects and related
technologies are recognized as intangible assets when the following criteria are fulfilled:
● it is technically feasible to complete the intangible asset
so that it will be available for use or sale;
● management intends to complete the intangible asset and
use or sell it;
● there is an ability to use or sell the intangible asset;
● it can be demonstrated how the intangible asset will generate
Fi
na
nc
ia
l
Sta
te
m
e
nts
2
● adequate technical, financial and other resources to complete
the development and to use or sell the intangible asset are available; and
● the expenditure attributable to the intangible asset during its
development can be reliably measured.
Other development expenditures that do not meet these criteria are recognized as an expense as incurred. Capitalised
development costs are recorded as intangible assets and amortized on a straight-line basis over their useful lives starting from the commencement of mining activities. The useful lives of capitalised development costs are assumed as 25 years. Other intangible assets
Other intangible assets that are acquired by the Group are measured at cost less accumulated amortization and accumulated impairment charges. Other intangible assets category comprises acquired software, which are amortized on a straight-line basis over 5 years.
Biological assets
Biological assets, i.e. living trees, are measured on initial recognition and at each balance sheet date at their fair value less estimated point-of-sale costs. The fair values of biological assets other than young seedlings are based on quoted prices in active markets for biological assets. Biological assets that are physically attached to land are recognized and measured at their fair value separately from the land.
The fair value of harvest, measured as its value at the point-of- sale, is deducted from the fair value of the biological assets. The estimated growth of trees is recognised as gains in the fair value of the biological assets.
The changes in the fair value of biological assets are included in the operating profit.
Impairment of non-financial assets
Assets that are subject to amortization, depreciation or depletion are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use.
The exploration and evaluation and mine development assets are tested for impairment annually and whenever there is an indication of impairment. The recoverable amount of intangible assets not yet available for use is determined based on value-in- use calculations. These calculations use pre-tax cash flow projections based on forecasts that incorporate best estimates of selling prices, ore grades, production levels, foreign exchange rates, maintenance capital expenditure and production costs over the expected life of the Talvivaara mine. In line with normal practice in the mining industry, the cash flow projections are based on long term mine plans covering the currently expected life of operation.
For purposes of assessing impairment, assets are grouped at
the lowest levels for which there are separately identifiable cash flows (cash generating units). Currently, the Group has only one cash generating unit, the Talvivaara mine.
Financial assets
The Group classifies its financial assets into the following categories: available-for-sale financial assets, financial assets at fair value through profit or loss, loans and receivables. The classification depends on the purpose for which the financial assets were originated. Management determines the classification of its financial assets at initial recognition.
Purchases and sales of financial assets are initially recognised at fair value on the trade date, which is the date that the Group commits to purchase or sell the asset. Financial assets are initially recognised at fair value plus the transaction costs for all assets not carried at fair value through profit or loss.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivative financial instruments are classified as held for trading unless they are designated as effective hedging instruments. Assets in this category are classified as current assets unless the remaining maturity of the asset is more than 12 months.
Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement.
Gains or losses arising from changes in the fair value of the “financial assets at fair value through profit or loss” category are presented in the income statement within other operating income or expenses, in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognized in the income statement when the Group’s right to receive payments is established.
As at 31 December 2007 and at 31 December 2008 the Group had no financial assets at fair value through profit or loss except for derivative financial instruments for which hedge accounting is not applied.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets that are either designated in this category or not classified in any of the other categories. They are included in current assets unless management intends to hold the investment for more than 12 months of the balance sheet date. Available-for- sale financial assets are carried at fair value. Unrealized gains and losses arising from changes in the fair value of monetary securities are recognized in equity.
Interest on available-for-sale securities calculated using the effective interest method is recognized in the income statement. Dividends on available-for-sale equity instruments are recognized in the income statement when the Group’s right to receive payments is established.
Fi
na
nc
ia
l
Sta
te
m
e
When the available-for-sale securities are sold or impaired, the accumulated fair value adjustments are included in the income statement as net realized gains/losses on financial assets. The gains/losses are presented in the income statement within other operating income or expenses, in the period in which they arise. The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. If any such evidence exists for available-for- sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss – is removed from equity and recognized in the income statement.
As at 31 December 2008 the Group had no available-for-sale financial assets.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those that the Group intends to sell in the short term or that it has designated as available-for-sale. Loans and receivables are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables comprise other receivables and cash and cash equivalents in the balance sheet. Loans and receivables are carried at amortized cost using effective interest method. Fair values
The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active, the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, and option pricing models, making maximum use of market inputs and relying as little as possible on entity- specific inputs. The fair values of unquoted investments are based on valuation techniques mentioned above.
Financial assets are de-recognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.
Derivative financial instruments and hedge accounting The Group uses derivative financial instruments such as currency option contracts, interest rate swaps and commodity forward swap contracts to hedge its risks associated with foreign currency and interest rate fluctuations and volatility in commodity prices. Such derivative financial instruments are initially
recognised at fair value on the date a derivative contract is entered into and subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, on the nature of the item being hedged. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.
The Group has applied hedge accounting to most of the nickel forward swap contracts it has entered into since February 2008. The Group does not apply hedge accounting to zinc forward swaps, interest rate swaps and currency option contracts and recognises the changes in the fair value of these derivative instruments in the income statement within “other operating income or other operating expenses”.
The fair value of currency option contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of commodity forward swap contracts is based on quoted market prices at the London Metal Exchange. The fair value of interest rate swaps is
calculated by reference to current interest rates. Cash flow hedges
For the purpose of hedge accounting, hedges are classified as cash flow hedges when hedging exposure to variability in cash flows that is attributable to a particular risk associated with a highly probable forecast transaction.
At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk
management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in offsetting exposure to changes in cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Hedges which meet the strict criteria for hedge accounting are accounted for as follows:
The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while any ineffective portion is recognised immediately in profit or loss.
Amounts taken to equity are transferred to profit or loss when the hedged transaction affects profit or loss, such as when a forecast sale occurs.
If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognised in equity are transferred to profit or loss. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction or firm commitment occurs.
Inventories
The Group classifies its inventories into four groups: raw materials and consumables, ore on leach pads, work in progress, and finished products. Inventories are stated at the lower of cost and net realisable value. Cost is determined using