Anglo American Annual Report 2012

14. INTANGIBLE ASSETS continuedValue in use is based on the present value of future cash flows expected to be derived from the CGU or reportable segment in its current state. Fair value lesscosts to sell is normally supported by observable market data (in the case of listed subsidiaries, market share price at 31 December of the respective entity)or discounted cash flow models taking account of assumptions that would be made by market participants.Expected future cash flows are inherently uncertain and could materially change over time. They are significantly affected by a number of factors including orereserves and resources, together with economic factors such as commodity prices, discount rates, exchange rates, estimates of costs to produce reserves andfuture capital expenditure. Management believes that any reasonably possible change in a key assumption on which the recoverable amounts are based wouldnot cause the carrying amounts to exceed their recoverable amounts.Cash flow projections are based on financial budgets and mine life plans or non-mine production plans, incorporating key assumptions as detailed below:Reserves and resourcesOre reserves and, where considered appropriate, mineral resources are incorporated in projected cash flows, based on ore reserves and mineral resourcestatements and exploration and evaluation work undertaken by appropriately qualified persons. Mineral resources are included where management has a highdegree of confidence in their economic extraction, despite additional evaluation still being required prior to meeting the requirements of reserve classification.For further information refer to the Ore Reserves and Mineral Resources section of the Annual Report.Commodity pricesCommodity prices are based on latest internal forecasts for commodity prices, benchmarked with external sources of information, to ensure they are withinthe range of available analyst forecasts. Where existing sales contracts are in place, the effects of such contracts are taken into account in determining futurecash flows.Operating costs and capital expenditureOperating costs and capital expenditure are based on financial budgets covering a three year period. Cash flow projections beyond three years are based onmine life plans or non-mine production plans as applicable, and internal management forecasts. Cost assumptions incorporate management experience andexpectations, as well as the nature and location of the operation and the risks associated therewith. Underlying input cost assumptions are consistent withrelated output price assumptions.Non-commodity based businessesFor non-commodity based businesses, margin and revenue are based on financial budgets covering a three year period. Beyond the financial budget, revenueis forecast using a steady growth rate consistent with the markets in which those businesses operate, and for those periods five years or more from the balancesheet date, at a rate not exceeding the long term growth rate for the country of operation. Where existing sales contracts are in place, the effects of suchcontracts are taken into account in determining future cash flows.Discount ratesCash flow projections used in fair value less costs to sell impairment models are discounted based on a real post-tax discount rate of 6.5% (2011: 6.0%). Thediscount rate for Minas-Rio is a real pre-tax rate of 8.5% (2011: 8.0%). Adjustments to the rate are made for any risks that are not reflected in the underlyingcash flows.Foreign exchange ratesForeign exchange rates are based on latest internal forecasts for foreign exchange, benchmarked with external sources of information for relevant countriesof operation. Foreign exchange rates are kept constant from 2017 onwards.Minas-RioThe Minas-Rio iron ore project (Minas-Rio) in Brazil was acquired in two separate transactions in 2007 and 2008. Minas-Rio is expected to produce 26.5 Mtpaof high quality pellet feed in its first phase of development, with the potential to increase to 29.8 Mtpa following asset optimisation. Pre-feasibility studies forthe subsequent expansion phases of Minas-Rio commenced during 2011, supported by an estimated resource base at that time of 5.77 billion tonnes,as detailed in the 2011 Ore Reserves and Mineral Resources statement. We have subsequently converted 1.45 billion tonnes to Ore Reserves.While progress is being made, construction activities at the beneficiation plant and land access along the 525 km pipeline route have been impeded by a seriesof challenges, including three legal injunctions. All three injunctions were resolved during the second half of 2012 and construction activity in the affectedareas has resumed.Additional capital expenditure has been incurred as a result of, inter alia, the delays arising from the injunctions, scope changes and higher than expectedinflation of operational costs. Management has completed a detailed review to assess the impact of these additional costs and the forecast capital expenditurefor the first phase of Minas-Rio has increased from $5.8 billion to $8.8 billion, including a $0.6 billion contingency, on an attributable basis.The delivery of the project on the revised schedule is dependent upon a number of development milestones: suppression of caves at the mine site; completionof the tailings dam before the rainy season; land release for the transmission line to the beneficiation plant and pipeline; and fulfilment of installation licences’conditions such that operating licences can be issued in due course. Subject to no further unexpected interventions and the successful completion of thesekey milestones in the next 12 months, first ore on ship is anticipated at the end of 2014.The valuation of Minas-Rio at 31 December 2012 has been assessed by reference to its value in use, determined on a discounted cash flow basis (real pre-taxdiscount rate of 8.5%). The valuation considers the risk of further escalation in capital expenditure and of further delay to first ore on ship. It also considers theimpact of further unanticipated impediments to progress. These risks reflect the history of unforeseen challenges that have affected the project to date. Thevaluation model employs long term iron ore prices based on detailed analysis of market fundamentals and adjusted for iron ore quality. The long term iron oreprice which is used in the valuation from 2022 onwards is within the range of published analyst forecasts and is slightly above the median of $80 per tonne.Based on this valuation, the Group has recorded an impairment charge of $4,960 million (before tax) against the carrying value of the asset. Of this charge,$1,105 million has been recorded against goodwill and $3,855 million has been recorded against mining properties, with an associated deferred tax credit of$960 million. The post-tax impairment charge is $4,000 million.Financial statementsAnglo American plc Annual Report 2012 161