Mining BI Insurance: Depreciation, Depletion and Amortization

  • Date05 May, 2022
  • Author Brad Ebel

The use of depreciation, depletion and amortization (DD&A) is an accounting method that allows the cost of an asset to be recorded as an expense over a period of time in order to reflect the use and consumption of the asset. This also keeps the accountants happy by matching the appropriate and related costs with revenues.

DD&A in mining is typically broken down as follows:


Depreciation typically relates to tangible assets such as scooptrams, shovels, shaft and hoist equipment, crushers, ball mills, buildings, mill equipment, etc.

An example is the depreciation of the component parts of a mill including the crusher, ball mills, SAG mill, roasters, building and all the ancillary equipment and conveyors. Often, a miner will record depreciation on these assets based on the expected useful life based on volume, which is typically referred to as “units of production” (UoP).

While this cost will behave like a variable cost in an insured’s accounting records, is this depreciation truly variable? Does building depreciation have a variable component? Does a crusher have a variable component?


Depletion typically relates to capitalized mine preparation costs such as pit stripping, waste rock removal, accessway and stope development, etc.

An example of depletion is a miner that capitalizes the higher stripping costs early in the life of an open pit mine in order to amortize them against the higher metal production later in the mine life. While this is a well-accepted accounting approach, is it appropriate to consider reduced amortization during a production outage?

Another example of depletion is the capitalized costs of tunnels, ramps and stope development that benefits a mining entity over a longer period. This capitalized cost is typically depleted over the period in which the costs result in the production of ore. While this depletion cost appears to be variable with production, is it appropriate to consider it fully or 100% variable?


Amortization typically relates to intangible assets such as goodwill, licenses, mineral rights, etc.

An example of the costs involved is purchased mineral rights including exploration and site evaluation costs.

This capital cost is often amortized over the period of time the rights relate to in which case the annual amortization would be the same each year until the rights expire. The rights can also be amortized over the volume produced where the mineral reserve size is known and the annual amortization would vary directly with the volume produced.

Based on the foregoing, DD&A would appear to be fixed or variable or a mixture based on the capitalized cost being expensed and its nature.

So how do we approach this group of costs when measuring a mining business interruption loss? It has been my experience that we consider two factors:

  1. Is the activity involved variable in nature? For example, the depletion of stope development is generally a variable activity as the upfront costs of
    accessing and developing a stope are capitalized and then depleted on a UoP basis as the ore is mined.
  2. Are the costs fully or partially variable in nature? In the example, the costs to access and develop a stope include normal mining costs such as drilling, blasting, mucking and reinforcing. While these costs have a significant variable component, there is also a fixed component largely related to the fixed cost of the owned or leased equipment.

So, to summarize, mining DD&A costs almost always include a variable cost component that should be considered in any loss measurement, and the analysis of DD&A costs requires consideration of the nature of both the activity and the costs involved. This analysis will be very site and situation specific and will require discussion with site personnel to resolve this somewhat subjective allocation.

Like many business interruption issues, there is no one answer and it depends.

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