The IGO Limited (ASX: IGO) share price has started the week in a disappointing fashion.
In morning trade, the battery materials producer's shares are down 7% to $15.
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Why is the IGO share price falling?
Investors have been hitting the sell button today after the company released an update on the assets acquired from Western Areas in June 2022 for $1.2 billion.
According to the release, IGO has been in the process of finalising the purchase price allocation relating to the acquisition of Western Areas for accounting purposes. This involves allocating the purchase price to the assets acquired at fair value in its balance sheet.
At the same time, the annual life of mine budget process has been progressing.
Unfortunately, based on preliminary findings, the company has essentially concluded that it has significantly overpaid for the Forrestania and Cosmos assets.
As a result, IGO has advised that it expects to record a non-cash, pre-tax impairment expense of between $880 million and $980 million in its financial results for FY 2023.
The release notes that impairment relates to the reassessment of the accounting value at Cosmos and Forrestania to reflect higher capital and operating costs, challenges to the mine production schedule, and delays in development at Cosmos. The latter also means that its previous guidance for Cosmos has now been withdrawn.
Earnings impact
While this appears to have been a significant waste of capital at this stage, it is not going to impact its earnings in FY 2023 as it is a non-cash impairment.
In addition, the impairment does not include changes in the mark to market value of IGO's shareholding in Panoramic Resources Ltd (ASX: PAN), which was acquired as part of the Western Areas acquisition.
'Disappointing'
IGO's board and management team have acknowledged that "the quantum of this impairment is significant." They have also engaged a group of leading independent consultants to assist with a comprehensive review of the Cosmos Project to better understand risks and opportunities to the current life of mine plan, capital cost estimates and schedule.
IGO's acting CEO, Matt Dusci, commented:
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.
