KATANGA MINING LIMITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2014 AND

2 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2014 AND TABLE OF CONTENTS PAGE Management s Responsibility Statement 3 Independent Auditor s Report 4 Consolidated Statements of Financial Position 5 Consolidated Statements of Income and Comprehensive Income 6 Consolidated Statements of Changes in Equity 7 Consolidated Statements of Cash Flows 8 Notes to the Consolidated Financial Statements

3 Management s Responsibility for Financial Reporting The accompanying consolidated financial statements of Katanga Mining Limited ( Katanga or the Company ) were prepared by management in accordance with International Financial Reporting Standards ( IFRS ). Management acknowledges responsibility for the preparation and presentation of the consolidated financial statements, including responsibility for significant accounting judgments and estimates and the choice of accounting principles and methods that are appropriate to the Company s circumstances. The significant accounting policies of the Company are summarized in note 3 to the consolidated financial statements. Management has established a system of internal control over the financial reporting process, which is designed to provide reasonable assurance that relevant and reliable information is produced. The Board of Directors is responsible for reviewing and approving the consolidated financial statements, the accompanying Management s Discussion and Analysis and for ensuring that management fulfills its financial reporting responsibilities. An Audit Committee which is comprised of a majority of independent non-executive directors assists the Board of Directors in fulfilling this responsibility. The Audit Committee meets with management as well as with the independent auditor to review the internal controls over the financial reporting process, the consolidated financial statements and the auditor s report. The Audit Committee reports its findings to the Board of Directors for its consideration in approving the consolidated financial statements for issuance to the shareholders. The Company also has an internal audit function that evaluates and formally reports to management and the Audit Committee on the adequacy and effectiveness of internal controls specified in the internal audit plan. The independent auditor, that is appointed by the shareholders, examines and reports on the consolidated financial statements in accordance with Canadian generally accepted auditing standards. Management recognizes its responsibility for conducting the Company s affairs in compliance with established financial standards, and applicable laws and regulations, and for maintaining proper standards of conduct for its activities. Signed by Jeff Best Jacques Lubbe Chief Executive Officer Chief Financial Officer February 11, 2015 February 11,

4 Independent Auditor s Report To the Shareholders of Katanga Mining Limited We have audited the accompanying consolidated financial statements of Katanga Mining Limited, which comprise the consolidated statements of financial position as at 2014, and, and the consolidated statements of income and comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years ended 2014, and, and a summary of significant accounting policies and other explanatory information. Management's responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor's responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control system. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Katanga Mining Limited as at 2014, and, and its financial performance and its cash flows for the years ended 2014, and in accordance with International Financial Reporting Standards. Signed by Deloitte AG Makhan Chahal Matthew Sheerin Zurich, February 11, 2015 Zurich, February 11,

5 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Expressed in thousands of U.S. dollars) 2014 Note ASSETS Current Cash and cash equivalents 6 9,862) 25,745) Receivables 7 188,025) 202,414) Inventories 8 485,668) 553,218) Prepayments and other current assets 9 129,270) 96,867) 812,825) 878,244) Non-current Mineral interests 10 1,738,385) 1,543,880) Property, plant and equipment 11 2,051,340) 1,591,324) Non-current inventories 8 57,673 87,875 Other non-current assets 91,222 64,715 Deferred income tax assets , ,381 4,232,813) 3,419,175) Total assets 5,045,638) 4,297,419) LIABILITIES Current Bank overdrafts 6 20,381) -) Accounts payable and accrued liabilities ,183) 158,526) Provisions 13 27,904) 24,242) Customer prepayments related parties 19 2,385) 1,585,964) Current portion of other non-current liabilities 15 16,163) 18,657) 424,016) 1,787,389) Non-current Amended Loan Facilities - related parties 14 2,770,863) 717,990) Other non-current liabilities 15 15,368) 30,536) Decommissioning and environmental provisions 16 24,518) 14,336) 2,810,749) 762,862) Total liabilities 3,234,765) 2,550,251) SHAREHOLDERS EQUITY Share capital ,750) 190,750) Reserves 2,541,816) 2,541,123) Accumulated deficit (726,933) (862,708) Equity attributable to shareholders of the Company 2,005,633) 1,869,165) Non-controlling interests 18 (194,760) (121,997) Total equity 1,810,873) 1,747,168) Total liabilities and equity 5,045,638) 4,297,419) Signed by: Hugh Stoyell (Non-executive Chairman) Signed by: Robert G. Wardell (Non-executive Director) The notes on pages 9 to 51 are an integral part of these consolidated financial statements. 5

6 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Expressed in thousands of U.S. dollars, except outstanding common shares and per share amounts) Years ended 2014 Note Sales 19 1,078,510) 805,620) Cost of sales 20 (1,128,229) (740,846) Gross (loss) profit (49,719) 64,774) Other (expense) income General and administrative expense (8,276) (8,964) Interest income 3,198) 434) Interest expense (17,545) (11,059) Foreign exchange loss (10,168) (6,275) (Loss) income before income taxes (82,510) 38,910) Income tax recovery (expense) ,522) (762) Net income and comprehensive income 21 63,012) 38,148) Attributable to Non-controlling interests (72,763) (63,013) Shareholders of the Company 135,775) 101,161) Basic and diluted income per common share ) Weighted average number of common shares outstanding 1,907,380,413 1,907,380,413 The notes on pages 9 to 51 are an integral part of these consolidated financial statements. 6

7 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Expressed in thousands of U.S. dollars) Reserves Number of common shares Share capital Contributed surplus Share option reserve Accumulated deficit Equity attributable to shareholders of the Company Noncontrolling interests Total Balance at January 1, 1,907,380, ,750 2,498,068 42,996 (963,869) 1,767,945) (58,984) 1,708,961 Options vested net of forfeited and expired ) 59) -) 59 Comprehensive income (loss) ,161) 101,161) (63,013) 38,148 Balance at 1,907,380, ,750 2,498,068 43,055 (862,708) 1,869,165) (121,997) 1,747,168 Options vested net of forfeited and expired ) 693) -) 693 Comprehensive income (loss) ,775) 135,775) (72,763) 63,012 Balance at ,907,380, ,750 2,498,068 43,748 (726,933) 2,005,633) (194,760) 1,810,873 The notes on pages 9 to 51 are an integral part of these consolidated financial statements. 7

8 CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in thousands of U.S. dollars) Years ended Operating activities Net income and comprehensive income for the year 63,012) 38,148) Adjusted for: Depreciation and amortization 206,142) 154,491) Share-based compensation expense 693) 59) Net finance cost 14,347) 10,625) Income tax (recovery) expense (145,522) 762) Unrealized foreign exchange loss 2,384) 1,142) Decommissioning and environmental provision accretion 2,314) 1,869) Expense on issue of capital spares to production 25,760) -) Loss (gain) on disposal of property, plant and equipment 237) (1,462) Interest received 3,198) 434) Interest paid (17,545) (11,059) Income tax paid (27,216) (18,650) Changes in working capital (excluding non-cash movements): Decrease (increase) in receivables 14,389) (68,673) Increase in current prepayments and other current and non-current assets (72,478) (17,635) Increase in inventories (32,999) (251,652) Increase in accounts payable and accrued liabilities 178,862) 1,635) Increase in provisions 3,662) 2,717) Increase in customer prepayments 1,451) 819,332) Cash flows from operating activities 220,691) 662,083) 2014 Investing activities Additions to mineral interests and property, plant and equipment (578,659) (698,993) Proceeds from disposals of property, plant and equipment 94) 7,102) Cash flows utilized in investing activities (578,565) (691,891) Financing activities Proceeds from Amended Loan Facilities 321,700) -) Cash flows from financing activities 321,700) -) Decrease in cash and cash equivalents (36,174) (29,808) Cash and cash equivalents, beginning of year 25,745) 56,955) Effect of exchange rate changes on cash held in foreign currencies (90) (1,402) Cash and cash equivalents, end of year (10,519) 25,745) The notes on pages 9 to 51 are an integral part of these consolidated financial statements. 8

9 1. DESCRIPTION OF BUSINESS Katanga Mining Limited ( Katanga or the Company ) is a limited company whose common shares are listed on the Toronto Stock Exchange under the symbol KAT. The Company s registered office address is Suite 300, 204 Black Street, Whitehorse, Yukon, Canada Y1A 2M9. Katanga's ultimate parent company is Glencore plc ( Glencore ) which owns 75.3% of Katanga's shares through its wholly-owned subsidiaries Glencore International AG and Glencore Finance (Bermuda) Limited. Katanga, through its 75% owned subsidiary Kamoto Copper Company SA ( KCC ), is engaged in copper and cobalt mining and related activities in the Democratic Republic of Congo ( DRC ). KCC is engaged in the exploration, mining, refurbishment, rehabilitation, development and operation of the Kamoto / Mashamba East mining complex (including KTO Underground Mine or KTO ), the Kamoto Oliveira Virgule ( KOV Open Pit or KOV ) copper and cobalt mine, the T17 Mine consisting of T17 Open Pit and T17 Underground Mine, various oxide open pit resources, the Kamoto Concentrator ( KTC ) and the Luilu Metallurgical Plant ( Luilu ), (collectively, the Project ), in the DRC. 2. BASIS OF PREPARATION Statement of compliance These consolidated financial statements are audited and have been prepared using accounting policies consistent with the International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) and Interpretations of the International Financial Reporting Interpretations Committee ( IFRIC ). The consolidated financial statements of the Company for the years ended 2014, and have been prepared by management, reviewed by the Audit Committee and approved and authorized for issue by the Board of Directors on February 11, Shortly thereafter, the consolidated financial statements are made available to shareholders and others through filing on the System for Electronic Document Analysis and Retrieval ( SEDAR ). Basis of presentation The consolidated financial statements are prepared on a going concern basis (refer to note 5 liquidity risk), under the historical cost convention except for certain financial instruments, which are measured at fair value in U.S. dollars, the Company s functional currency. All financial information is presented in U.S. dollars rounded to the nearest thousand dollar, except as otherwise stated. The impact of seasonality or cyclicality on operations is not regarded as significant to the consolidated financial statements. 9

10 2. BASIS OF PREPARATION (continued) Changes in accounting policies and comparability The following new and revised standards and interpretations were adopted as of January 1, 2014: Amendments to IAS 32 Offsetting Financial Assets and Liabilities: The amendments to IAS 32 clarify the requirements relating to the offset of financial assets and liabilities. Specifically, the amendments clarify the meaning of currently has a legally enforceable right to set-off and simultaneous realization and settlement. Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets: The amendments to IAS 36 clarify the circumstances in which the recoverable amount of assets or cash-generating units are required to be disclosed, clarify the disclosures required, and to introduce an explicit requirement to disclose the discount rate used in determining impairment (or reversals) where recoverable amount (based on fair value less costs of disposal) is determined using a present value technique. Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting: The amendments to IAS 39 clarify the criteria required to be met such that there would be no need to discontinue hedge accounting if a hedging derivative was novated. IFRIC 21 Levies: provides guidance on when to recognize a liability for a levy imposed by a government, both for levies that are accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets and those where the timing and amount of the levy is certain. The adoption of these new and revised standards and interpretations did not have a significant impact on Katanga s consolidated financial statements. 10

11 2. BASIS OF PREPARATION (continued) Adoption of new and revised standards and interpretations The IASB issued a number of new and revised International Accounting Standards, International Financial Reporting Standards, amendments and related interpretations which are effective for the Company s financial year beginning on or after January 1, For the purpose of preparing and presenting the consolidated financial statements for the relevant periods, the Company expects to consistently adopt all these new standards. At the date of authorization of these consolidated financial statements, the IASB and IFRIC have issued the following new and revised Standards and Interpretations, which are applicable to the Company and are not yet effective for the relevant reporting periods: IFRS 15 Revenue from Contracts with Customers: modifies the determination of when to recognize revenue and how much revenue to recognize. The core principle is that an entity recognizes revenue to depict the transfer of promised goods and services to the customer of an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 9 Financial Instruments: modifies the classification and measurement of financial assets. It includes a single, principles-based approach for the classification of financial assets, which is driven by cash flow characteristics and the business model in which an asset is held. It also introduces a new expected loss impairment model requiring expected losses to be recognized when financial instruments are first recognized. The new standard also modifies hedge accounting to align the accounting treatment with risk management practices of an entity. The Company has not early adopted these standards, amendments and interpretations, however, the Company is currently assessing what impact the application of these standards or amendments will have on the consolidated financial statements of the Company. These Standards and Interpretations will be first applied in the financial report of the Company that relates to the annual reporting period beginning on or after the effective date of each pronouncement. Basis of consolidation The consolidated financial statements consolidate the assets, liabilities and results of all entities in which the Company holds a controlling interest. Control is achieved when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. All intercompany balances, transactions and unrealized profits are eliminated in full. The consolidated financial statements include the financial statements of the Company and its subsidiaries. Non controlling interests in the net assets of consolidated subsidiaries are identified separately from the Company s equity therein. The interests of non-controlling shareholders may be initially measured at fair value or at the non-controlling interests proportionate share of the fair value of the acquiree s identifiable net assets. The choice of measurement basis is made on an acquisition-by-acquisition basis. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the noncontrolling interests having a deficit balance. 11

12 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Foreign currency translation Financial statements of subsidiaries are maintained in their functional currencies. For the purposes of consolidation, assets and liabilities of group companies whose functional currency is a currency other than the U.S. dollar are translated into U.S. dollars using year-end exchange rates, while their statements of income are translated using the average exchange rate for the year. Transactions in foreign currencies are translated at the exchange rates in effect at the date of transaction. Monetary assets and liabilities denominated in foreign currencies are re-translated at year-end exchange rates. The resulting exchange differences are recorded in the statement of income. Critical accounting policies, key judgments and estimates The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual outcomes could differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Critical judgments in applying accounting policies The following are the critical judgments, apart from those involving estimations (see note below), that management has made in the process of applying the Company s accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements. Impairments Mineral interests and property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. If an asset s recoverable amount is less than the asset s carrying amount, an impairment loss is recognized. Future cash flow estimates which are used to calculate the asset s fair value are based on expectations about future operations primarily comprising estimates about production and sales volumes, commodity prices, reserves, operating, rehabilitation and restoration costs and capital expenditures. Changes in such estimates could impact recoverable values of these assets. Estimates are reviewed regularly by management. Refer to notes 10 and

13 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Critical accounting policies, key judgments and estimates (continued) Income taxes The Company operates in the DRC, Switzerland and Canada and is subject to several tax jurisdictions, and consequently, income is subject to various rates and rules of taxation. As a result, the Company s effective tax rate may vary significantly from the Canadian statutory tax rate depending upon the profitability of operations in the different jurisdictions. The Company calculates deferred income taxes based upon temporary differences between the assets and liabilities that are reported in its consolidated financial statements and their tax bases as determined under applicable tax legislation. The future realization of deferred tax assets can be affected by many factors, including: current and future economic conditions, net realizable sale prices, production rates and production costs and can either be increased or decreased where, in the view of management, such change is warranted. In determining whether a deferred tax asset will probably be realized, management reviews the timing of expected reversals of taxable temporary differences, the estimates of future taxable income and prudent and feasible tax planning that could be implemented. Refer to note 26. Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting year, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Depreciation and amortization of mineral interests and property, plant and equipment Mineral interests and certain property, plant and equipment are amortized using the unit of production method ( UOP ). The calculation of the UOP rate of amortization, and therefore the annual amortization charge to the statement of income, can fluctuate from initial estimates. This could generally result when there are significant changes in any of the factors or assumptions used in estimating ore reserves and mineral resources, notably changes in the geology of the ore reserves and mineral resources and assumptions used in determining the economic feasibility therein. Such changes in ore reserves and mineral resources could similarly impact the useful lives of assets depreciated on a straight-line basis, where those lives are limited to the life of the Project, which in turn is limited to the life of the proved and probable ore reserves and measured and indicated mineral resources. Estimates of proved and probable ore reserves and mineral resources are prepared by experts in extraction, geology and ore reserve and mineral resource determination. In calculating ore reserves and mineral resources, estimates and assumptions are required about a range of geological, technical, and economic factors, including quantities, grades, production techniques, production decline rates, recovery rates, production costs, commodity demand, commodity prices and exchange rates. In addition, future changes in regulatory environments, including government levies or changes in the Company s rights to exploit the mineral resource imposed over the producing life of the ore reserves may also significantly impact estimates. Assessments of UOP rates against the estimated recoverable ore reserves and mineral resources and the operating and development plan are performed regularly by management. Refer to notes 10 and

14 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Critical accounting policies, key judgments and estimates (continued) Key sources of estimation uncertainty (continued) Provisional pricing derivative Changes between the price recorded upon initial recognition of revenue and the final price due to fluctuations in commodity prices result in the existence of an embedded derivative (refer to revenue recognition accounting policy note). This receivable embedded derivative is recorded at fair value, with changes in fair value recorded in revenue and receivables. The fair value is estimated with reference to London Metal Exchange ( LME ) forward prices offset by the contractual discount to the LME price. Refer to notes 5, 7 and 19. Decommissioning and environmental provisions The Company s operations are subject to environmental regulations in the DRC and environmental reporting requirements in Canada. Upon establishment of commercial viability of a site, the Company estimates the cost to restore the site following the completion of commercial activities and depletion of reserves. These future obligations are estimated by taking into consideration closure plans, known environmental impacts, and internal and external studies which estimate the activities and costs that will be carried out to meet the decommissioning and environmental obligations. Amounts recorded for decommissioning and environmental provisions are based on estimates of decommissioning and environmental costs which may not be incurred for several years or decades. The decommissioning and environmental cost estimates could change due to amendments in laws and regulations in the DRC. Additionally, actual estimated decommissioning and reclamation costs may differ from those projected as a result of an increase over time of actual remediation costs, a change in the timing for utilization of reserves and the potential for increasingly stringent environmental regulatory requirements. The decommissioning and environmental provisions are measured by discounting the expected cash flows at a risk-adjusted discount rate of 11.04% ( 14%). The actual rate will depend on a number of factors, including the time it will take to rehabilitate the property and the location of the property. Refer to note 16. Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Company will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision, including legal, contractual and other exposures or obligations, is the best estimate of the consideration required to settle the related liability, including any related interest charges, taking into account the risks and uncertainties surrounding the obligation. The Company assesses its liabilities and contingencies based upon the best information available, relevant tax laws and other appropriate requirements. Refer to note

15 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue recognition Revenues are recognized when title, risk and rewards pass to the customer, typically when goods have been delivered to a contractually agreed location. Revenue excludes any applicable sales taxes and is recognized at the fair value of the consideration received or receivable to the extent that it is probable that economic benefits will flow to the Company and the revenues and costs can be reliably measured. Sales agreements are generally recognized at a provisional price with final prices being determined at a specified future date based on market prices. Changes between the price recorded upon initial recognition of revenue and the final price due to fluctuations in commodity prices result in the existence of an embedded derivative. The embedded derivative is recorded at fair value, with changes in fair value recorded in revenue and receivables. Refer to note 19. Income taxes Income tax expense represents the sum of tax currently payable and changes to deferred tax assets and liabilities as a result of operations during the year. Current income taxes Current income tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the date of the statement of financial position. Deferred income taxes Deferred income tax is provided using the statement of position liability method on temporary differences at the date of the statement of financial position between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax assets and liabilities are recognized for all taxable temporary differences, except: Where the deferred income tax asset or liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable income or loss; and Deferred tax liabilities in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable income will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilized. The carrying amount of deferred income tax assets is reviewed at each date of the statement of financial position and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred income tax asset to be utilized. 15

16 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Income taxes (continued) Deferred income taxes (continued) Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the date of the statement of financial position. Deferred income tax relating to items recognized directly in equity is recognized in equity and not in the statement of income. Deferred income tax assets and deferred income tax liabilities are offset if, and only if, a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend to either settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered. Earnings per common share Basic earnings per common share is computed by dividing the earnings attributable to shareholders of the Company for the year by the weighted average number of common shares outstanding during the year, including contingently issuable shares which are included when the conditions necessary for issuance have been met. Diluted earnings per share is calculated in a similar manner, except that the weighted average number of common shares outstanding is increased to include potentially issuable common shares from the assumed exercise of common share purchase options and on the conversion of debt, if dilutive. The number of additional shares included in the calculation is based on the treasury stock method for options and the conversion of debt. Currently, the effect of potential issuances of shares under options and the conversion of debt would be anti-dilutive and accordingly basic and diluted earnings per common share are the same. Financial assets All financial assets are initially recorded at fair value and designated upon inception into one of the following four categories: held-to-maturity, available-for-sale, loans-and-receivables or at fair value through profit or loss ( FVTPL ). Financial assets classified as FVTPL are measured at fair value with unrealized gains and losses recognized through the statement of income. At 2014, the Company s provisional pricing derivative has been designated FVTPL. Financial assets classified as loans-and-receivables and held-tomaturity are measured at amortized cost using the effective interest method. The Company s other receivables are classified as loans-and-receivables. The Company has not designated any financial assets as held-to-maturity. Financial assets classified as available-for-sale are measured at fair value with unrealized gains and losses recognized in other comprehensive income except for losses in value that are considered significant or prolonged. At 2014, the Company has not classified any financial assets as available-for-sale. Transactions costs associated with FVTPL financial assets are expensed as incurred, while transaction costs associated with all other financial assets are included in the initial carrying amount of the asset. 16

17 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Financial liabilities All financial liabilities are initially recorded at fair value and designated upon inception as FVTPL or other financial liabilities. Financial liabilities classified as other financial liabilities are initially recognized at fair value less directly attributable transaction costs. After initial recognition, other financial liabilities are subsequently measured at amortized cost using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. The Company s bank overdrafts, accounts payable and accrued liabilities, loan facilities and other non-current liabilities are classified as other financial liabilities. Financial liabilities classified as FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as FVTPL. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Fair value changes on financial liabilities classified as FVTPL are recognized through the statement of income. At 2014, the Company has not classified any financial liabilities as FVTPL. Impairment of financial assets The Company assesses at each date of the statement of financial position whether a financial asset is impaired. Assets carried at amortized cost If there is objective evidence that an impairment loss on assets carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows discounted at the financial asset s original effective interest rate. The carrying amount of the asset is then reduced by the amount of the impairment. The amount of the loss is recognized in the statement of income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed to the extent that the carrying value of the asset does not exceed what the amortized cost would have been had the impairment not been recognized. Any subsequent reversal of an impairment loss is recognized in the statement of income. In relation to receivables, a provision for impairment is made and an impairment loss is recognized in the statement of income when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Company will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through use of an allowance account. Impaired debts are written off against the allowance account when they are assessed as uncollectible. 17

18 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Impairment of financial assets (continued) Available-for-sale If an available for sale asset is impaired, an amount comprising the difference between its cost and its current fair value, less any impairment loss previously recognized in the statement of income, is transferred from the statement of changes in equity to the statement of income. Reversals in respect of equity instruments classified as available for sale are not recognized in the statement of income. Cash and cash equivalents Cash and cash equivalents include cash on hand, balances with banks, short-term deposits with original maturities of three months or less and restricted cash related to guarantees. Bank overdrafts that are repayable on demand and form an integral part of the Company s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Borrowings and borrowing costs Borrowings are initially recognized at fair value less attributable issue costs. Subsequent to initial recognition, borrowings are stated at amortized cost. Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Other borrowing costs not directly attributable to a qualifying asset are expensed in the period incurred. Inventories Inventories include inventory of supplies, which consists of raw materials, consumables and product inventories. Inventory of supplies is valued at the lower of cost and net realizable value on a first-in first-out ( FIFO ) basis. Cost includes all costs incurred in the normal course of business in bringing each supply to its present location and condition. Replacement cost is used as the best available measure of net realizable value. Obsolete, redundant, and slow moving consumables are identified and written down to net realizable values. Product inventories include ore in stockpiles, work in progress and finished product. Product inventories are measured at the lower of cost and net realizable value. Cost is calculated as a weighted average cost, including materials, direct labour, other direct costs, production overheads and amortization of property, plant and equipment directly involved in the mining and production processes. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. 18

19 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Property, plant and equipment Property, plant and equipment are recorded at cost less accumulated depreciation and amortization and any accumulated impairment write-downs. Depreciation and amortization are charged to the statement of income so as to write off the cost of assets less their residual values using the straight-line method over their expected useful lives as follows: Land Plant and equipment Buildings Leasehold improvements Finance lease assets Not applicable 1 to 20 years or UOP 20 years Term of underlying lease Shorter of the lease term and the estimated useful lives of the assets When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Items of inventory with a useful life of more than one year are included in the carrying amount of property, plant and equipment. The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the effect of any changes in estimate accounted for on a prospective basis. Overburden removal costs The costs of removing overburden material to access mineral reserve deposits, referred to as "stripping costs", are accounted for as variable production costs to be included in the cost of inventory produced, unless the overburden removal activity can be shown to be a betterment of the mineral property, in which case these costs are capitalized. Betterment occurs when the overburden removal activity provides access to additional mineral deposit reserves that will be produced in future periods which would not have otherwise been accessible in the absence of the stripping activity. These deferred costs are included in mineral interests and are amortized using the UOP basis to cost of sales over the life of the mineral deposit reserves accessed due to the overburden removal activity. Mineral interests All direct costs relating to the mineral interests that meet the generally accepted criteria for deferral are capitalized as incurred. These criteria include having a clearly defined process with identifiable associated costs, establishment of technical feasibility, an intention to process and sell the recovered minerals to a clearly defined market, and adequate resources exist or are expected to be available to complete the project to commercial production. Exploration costs, net of incidental revenues, are charged to the statement of income in the period incurred until such time as it has been determined that a property has economically recoverable reserves, in which case subsequent exploration costs and the costs incurred to develop a property are capitalized. Carrying values of mineral interests as reported on the statement of financial position do not necessarily reflect the actual present or future value. Recovery of carrying values is dependent upon the future commercial success of operations. 19

20 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Mineral interests (continued) Upon establishment of commercial production, carrying values of mineral interests are amortized over the estimated life of the mines, using the UOP method, based upon the current estimated recoverable mineral reserves and mineral resources. In applying the UOP method, amortization is calculated using the quantity of material extracted in the period as a percentage of the total quantity of material to be extracted in current and future periods based on mineral reserves and mineral resources. These mineral resources are included in depreciation calculations where there is a high degree of confidence in their economic extraction. Impairment of non-financial assets At each date of the statement of financial position, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cashgenerating unit to which the assets belong. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in the statement of income, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Lease contracts and other significant contracts are assessed to determine whether, in substance, they are or contain a lease. This includes an assessment of whether the arrangement is dependent on the use of a specific asset and the right to use the asset is conveyed through the contract. Assets held under finance leases are initially recognized as assets of the Company at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated statement of financial position as a finance lease obligation. 20

21 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Leases (continued) Lease payments are apportioned between finance expenses and a reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognized immediately in the statement of income, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Company s policy on borrowing costs (refer above). Contingent rentals are recognized as expenses in the periods in which they are incurred. Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which the economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred. In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which the economic benefits from the leased asset are consumed. Decommissioning and environmental provisions The Company recognizes liabilities for statutory, contractual, constructive or legal obligations, including those associated with the reclamation of mineral properties and property, plant and equipment, when those obligations result from the acquisition, construction, development or normal operation of the assets. Initially, a liability for a decommissioning and environmental provision is recognized at its fair value in the period in which it is incurred. Upon initial recognition of the liability, the corresponding decommissioning and environmental provision is added to the carrying amount of the related asset and the cost is amortized as an expense over the economic life of the asset using either the UOP method or the straightline method, as appropriate. Following the initial recognition of the decommissioning and environmental provision, the carrying amount of the liability is increased for the passage of time and adjusted for changes to the current market based discount rate, amount or timing of the underlying cash flows needed to settle the obligation and accreted over time to its present value, (accretion charge is included in the statement of income within cost of sales). Provisions Provisions are recognized when the Company has a present obligation (legal or constructive) that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre tax rate that reflects current market assessments of the time value of money and the risk specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. 21