Mini-series on material balance – Part 5: the material balance as the basis for the metallurgical accounting

Discover a CASPEO mini-series dedicated to the material balance in mineral processing: The material balance, a key step between measurement and process control. Follow us and learn everything you ever wanted to know about material balance. No promotion, it will describe the topic from a neutral point. In this 5th part, let’s focus on the material balance as a basis for the metallurgical accounting: concepts and techniques.

What is metallurgical accounting and why is it so important?

Metallurgical accounting is a prerequisite for the accounting balance of the production company and therefore has both financial and regulatory objectives. Indeed, accounting balance sheet requires knowing precisely (i.e. exactly), for the financial year, the production linked to the sales invoices, the consumption of raw materials linked to the purchase invoices (in case of smelters, for example) or to the estimate of resources (in case of mines), and the stocks and work in progress at the closing of accounts. All these elements in monetary value are obtained from the material balance, and should together result in a balanced financial statement.

Although the balance sheet is drawn up annually, it is a common practice to draw up this balance sheet monthly in order to better anticipate any deviation from planning. This is requested by the shareholders who wish to have this follow-up, subject of quarterly or half-yearly reports. But it may also be a regulatory requirement, such as the monitoring of radioactive materials or mining resources by certain countries, or a contractual requirement in the case of subcontracting. Associated with the calculation of production costs, metallurgical accounting is also an essential tool for analysing the costs and added value of each operation.

Why implementing metallurgical accounting procedures?

1. Automate and control

The repetitive tasks that can be automated are:

• On-line measurements and automatic samplers, qualified for material balance.
• Data storage, based on a robust time stamp, in structured and scalable databases.
• Collection of raw data for a period.
• Consolidation of the raw data for that period.
• Data reconciliation.
• Report generation.

Software solutions exist to facilitate the automation of the last three items in this list. However, human control is still needed to assess the quality of the data. This control regards measurement and data entry when this last remains manual. It is also carried out after consolidation to check the presence and relevance of the raw data used. A final control is performed before the generation of reports to assess that the material balance is realistic and sufficiently accurate.

2. Reconciling scientific uncertainty and accounting rigour

Since metallurgical accounting is based on material balance, it is the result of a technical calculation in which uncertainties, both related to measurements and to process variability , are taken into account as part of such a scientific approach. But accounting rigour has no interest in this approach and is even against any uncertainty.

Indeed, some data, although uncertain since as a result of measurement, are considered by the accounting rules to be unmodifiable. This is the case for production, consumption of raw materials and the inventory of stocks and work in progress. The general tendency is to consider these data as perfectly known (zero associated error) and to perform data reconciliation on this basis. This is called “data anchoring”. However, this approach has the disadvantage of biasing the overall material balance and the risk of showing a drift month after month.

3. Reducing financial risk

The notion of financial risk makes the link between scientific uncertainty and financial concerns.

The answer is given by the calculation of errors of the measurements and reconciled data, associated with the calculation of costs related to the material balance. Thus, any investment in improving the measurement can be justified by the reduced financial risk it generates.

The financial risk also concerns the estimation of the value of the company. Indeed, an overestimation of stocks, often due to an underestimation of losses, leads to an overestimation of the value of assets. When the supposed stock is revealed not to be existing, an adjustment is made which discredits the company credibility in the eyes of its shareholders and even the regulatory authorities. An underestimation of stocks leads to the same harmful effects.

It should be remembered that the main source of such a financial risk is the inaccuracy of the measurements in terms of bias. Therefore, it is necessary to eliminate any bias in the measurements used for the material balance, but also, any calculation technique that could introduce a bias, such as anchoring certain data, as accounting rigour may tend to require.

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