Has anyone modeled out an Asset Retirement Obligation or a Royalty to Related Party liability in the context of a DCF? Any other considerations I should be aware of?
A) Essentially, my copper tailings processing company has an obligation to remove equipment, pipes, etc. from a site at the end of its contract with the ore provider.
The Future Value of the cost is calculated, then PV'd back to present, which is carried as a liability. Every year, it's accreted a certain amount (which is also expensed in the P&L) which will eventually bring the liability to its FV at the end of the contract.
When calculating equity value, do I just deduct the carrying value of the ARO (like I do with debt)?
B) The same company is obligated to pay a certain amount (few cents) per lb of mineral produced to certain shareholders of the parent corporation. It's expensed in the P&L (like normal) but it's also held as a liability on the BS as a 'derivative financial instrument'. There's also a positive Royalty Accretion Adjustment in the P&L, which it looks like corresponds with a reduction in the liability (there could be other stuff baked in there).
Have never seen this before and not sure what's going on. Can anyone weigh in?
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