NEW DAWN MINING CORP FORM F4 BUSINESS ACQUISITION REPORT

Transcription

1 NEW DAWN MINING CORP FORM F4 BUSINESS ACQUISITION REPORT Item 1 Identity of Company 1.1 Name and Address of Company New Dawn Mining Corp. ( New Dawn or the Company ) 116 Simcoe Street, Suite 301 Toronto, ON M5H 4E2 1.2 Executive Officer The following executive officer of the Company is knowledgeable about the significant acquisition and this Report: Mr. Graham R. Clow Chief Financial Officer & Corporate Secretary Telephone: (416) Item 2 Details of Acquisition 2.1 Nature of Business Acquired New Dawn made an investment resulting in the acquisition of debt and a controlling shareholding interest (collectively, the Acquisition ) in Central Africa Gold plc ( CAG ), a U.K. incorporated company admitted to the London Stock Exchange s Alternative Investment Market (AIM). New Dawn, through its indirect wholly-owned subsidiary NDM (UK) Ltd., acquired from ECP Africa Fund II PCC, HBD Zim Investments Limited and Investec Asset Management Limited (collectively, the Sellers ), an aggregate of 890,412,258 ordinary shares in the capital of CAG (the Acquired CAG Shares ), representing approximately 88.7% of the issued and outstanding ordinary shares of CAG. In addition, New Dawn acquired from the Sellers approximately US$7,080,000 of principal debt and interest owed to the Sellers by CAG (the Acquired CAG Debt ). CAG, directly and through its wholly-owned subsidiary, Falcon Mines Holdings SA (Luxembourg), owns a 100% interest in Olympus Gold Mines Limited, a private Zimbabwe company, and an approximate 84.7% interest in Falcon Gold Zimbabwe Limited, a company currently listed and trading on the Zimbabwe Stock Exchange. The properties owned by CAG s subsidiaries are currently in limited operations or are under care and maintenance. Further details on the nature of the business acquired are included in the Company s Material Change Report filed on SEDAR on June 16, This document is available for review online at Date of Acquisition June

2 2.3 Consideration The consideration for the Acquired CAG Shares and Acquired CAG Debt was satisfied entirely with common shares and New Dawn Acquisition Warrants. New Dawn issued an aggregate of 3,543,329 common shares of New Dawn as consideration for the Acquired CAG Shares. New Dawn issued an aggregate of 5,324,560 common shares and 2,216,972 common share purchase warrants of New Dawn (the New Dawn Acquisition Warrants ) as consideration for the Acquired CAG Debt. Each New Dawn Acquisition Warrant entitles the holder to purchase one additional common share of New Dawn at a price of Cdn$2.00 until June 16, The terms of the New Dawn Acquisition Warrants provide that if during a period of 10 consecutive trading days, the closing price of New Dawn s common shares is not less than Cdn$3.00 per share, New Dawn may at any time within 10 days following such period accelerate the expiration date of the New Dawn Acquisition Warrants to a date which is not less than 30 days from the date on which New Dawn provides the warrant holders notice of the acceleration. 2.4 Effect on Financial Position New Dawn is proceeding with a comprehensive review of all aspects of CAG s assets and operations, including mineral reserves and resources, operations, management, control structures and systems, listing status, capital structure and future capital requirements. In particular, the Company is evaluating CAG s short-term and long-term working capital requirements to fund the development and operations of CAG s gold mining assets, which the Company contemplates will be addressed through a combination of internally generated funds and new debt and/or equity. New Dawn is currently developing a revised and updated strategic business plan in light of its acquisition of a controlling interest in CAG, with a view towards reaching annualized gold production of 50,000 to 60,000 ounces within the next 18 to 24 months. Additionally, the Company is reviewing and assessing CAG s extensive portfolio of exploration properties in Zimbabwe for future investment and development. At this point, New Dawn has determined that CAG will require interim financing to fund its operations (and those of CAG s subsidiaries) in the near term. New Dawn has established a US$2 million loan facility in favour of CAG to fund CAG s cash requirements. As of the date of this report, CAG has drawn down US$750,000 of this loan facility. 2.5 Prior Valuations No valuation opinions were obtained by New Dawn or, to the knowledge of New Dawn, by CAG, within the 12 months preceding the date of the Acquisition. 2.6 Parties to Transaction The Acquisition did not involve any informed person, associate or affiliate of New Dawn Mining Corp. 2.7 Date of Report This Business Acquisition Report is dated August 30, Item 3 Financial Statements The following financial information required by Part 8 of National Instrument are attached hereto and form part of this Business Acquisition Report: Schedule A: Annual consolidated financial statements of CAG as at and for the year ended December 31, 2009, together with the report thereon of CAG s auditors, KPMG Audit plc Page 2

3 (London, UK), together with comparative financial statements for the year ended December The consent of CAG s auditors to include their report in this document was not obtained. Schedule B: Interim unaudited consolidated financial statements of CAG for the period from January 1, 2010 to June 15, 2010, together with comparative unaudited financial statements for the period from January 1, 2009 to June 30, Under AIM rules CAG is required to prepare interim financial statements on a semi-annual, rather than quarterly, basis. Accordingly, in its usual course of business CAG did not prepare, and does not have, financial statements for any interim period starting after December 31, 2009 and ending prior to the date of the Acquisition. The period from January 1, 2010 (being the day after the date of the audited financial statements attached as Schedule A) to June 15, 2010 (being the day immediately preceding the date of completion of the Acquisition) was selected as providing the most relevant and timely interim financial information. In accordance with section 8.9 of National Instrument , comparative financial statements for the period from January 1, 2009 to June 15, 2009 are not included, as it was impractical to obtain financial information for this prior period. In accordance with clause 8.9(b) of National Instrument , the interim unaudited consolidated financial statements of CAG for the six months ended June 30, 2009, being the prior period information that is available, have been included as Schedule C. Schedule C: Interim unaudited consolidated financial statements of CAG for the six months ended June 30, Schedule D: Pro forma unaudited consolidated balance sheet for New Dawn as at March 31, 2010, and pro forma unaudited consolidated statements of operations and comprehensive loss of New Dawn for the year ended September 30, 2009 and for the 6 months ended March 31, Reference is made to the Additional information Audit reporting under Canadian Generally Accepted Auditing Standards and International Standards on auditing Discussed under Schedule E Comparison of IFRS issued by the International Accounting Standards Board ( IASB ) and IFRS adopted by the European Union ( EU ) Discussed under Schedule F Reconciliation to IFRS Included in this Business Acquisition Report are the consolidated financial statements of CAG as at December 31, 2009 and 2008, and for the years then ended. These financial statements have been prepared in conformity with International Financial Reporting Standards as adopted by the EU and reported on by KPMG using International Standards on Auditing Management of CAG is of the view that there are no significant differences between International Financial Reporting Standards as adopted by the EU, as reflected in the above noted financial statements, and Canadian Generally Accepted Accounting Principles ( GAAP ) if such financial statements were to be prepared using Canadian GAAP. Cautionary Statement Regarding Forward-Looking Statements Page 3

4 This Business Acquisition Report (including the documents appended to and referenced in this Report) contains forward-looking information which may include, but is not limited to, statements with respect to the future financial or operating performances of New Dawn, its mineral properties, the future supply, demand, inventory, production and price of gold and other precious minerals, the estimation of mineral reserves and resources, the realization of mineral reserve estimates, the timing and amount of estimated future production, costs of production, capital, operating and exploration expenditures, development costs for the mineral properties, requirements for additional capital, government regulation of mining operations, environmental risks, reclamation and rehabilitation expenses, title disputes or claims, limitations of insurance coverage and the timing and possible outcome of litigation and regulatory matters. Often, but not always, forward-looking information statements can be identified by the use of words such as plans, expects, is expected, budget, scheduled, estimates, forecasts, intends, anticipates, or believes, or variations (including negative variations) of such words and phrases, or state that certain actions, events or results may, could, would, might, or will be taken, occur or be achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of New Dawn to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others, those factors discussed in the section entitled Risk Factors in the Annual Information Form for 2009 filed on SEDAR and available for viewing online at Although New Dawn has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. Forward-looking statements contained herein are made as of the date of this document based on the opinions and estimates of management, and New Dawn disclaims any obligation to update any forward-looking statements, whether as a result of new information, estimates or opinions, future events or results or otherwise, except as required by applicable securities legislation. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, shareholders should not place undue reliance on forward-looking statements. Page 4

5 Schedule A to the Business Acquisition Report of New Dawn Mining Corp. dated August 30, 2010 Annual audited consolidated financial statements of CAG for the year ended December 31, 2009, together with the report thereon of CAG s auditors, KPMG Audit plc, including comparatives for the year ended December 31, 2008

6 Independent auditor s report We have audited the financial statements of Central African Gold plc for the year ended 31 December 2009, which are set out on pages 31 to 73. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU and, as regards the Company financial statements, as applied in accordance with the provisions of the Companies Act This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the Directors' Responsibilities Statement set out on page 25, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB's web-site at Qualified opinion on financial statements arising from limitation in audit scope For the year ended 31 December 2008, in relation to the assets, liabilities, income and expenses of the Group solely in respect of one subsidiary, Central African Gold Ghana Limited ( CAG Ghana ), the information available to us was limited. As explained in the basis of preparation of the 2008 financial statements, Investec Bank exercised its charge and took control of CAG Ghana on 14 January 2009 and the accounting records in respect of the year ended 31 December 2008 were not made available to us. Accordingly, we were unable to obtain sufficient appropriate audit evidence in respect of: the assets and liabilities at 31 December 2008 amounting to total assets of 36.5 million and total liabilities of 36.8 million; and each item of income and expense resulting in a net loss for the year ended 31 December 2008 of 26.1 million. While our work was not limited in respect of the other assets, liabilities, income and expenses of the Group and we were able to obtain sufficient appropriate audit evidence over those amounts, because of the significance of the CAG Ghana balances to the Group as a whole, we were unable to form a view on the 2008 consolidated financial statements. 28 P a g e

7 Independent auditor s report (continued) During the year ended 31 December 2009, the assets and liabilities of CAG Ghana have been disposed of and its operations have been classified as discontinued. A loss from continued operations (after tax) of million is included in respect of CAG Ghana for the year ended 31 December 2009 (see note 6). Any adjustments to the assets and liabilities at 31 December 2008 would have a consequential effect on: - the Group s net assets as at 31 December 2008 and on its loss for the year then ended; and - the loss from discontinued operations for the year ended 31 December 2009 and, consequentially, the Group s loss for the same period. In our opinion: - the financial statements give a true and fair view of the state of the Company s affairs as at 31 December 2009; and - the Company financial statements have been properly prepared in accordance with IFRSs, as adopted by the EU and as applied in accordance with the provisions of the Companies Act Except for the financial effect of such adjustments, if any, to the comparative information for the year ended 31 December 2008 and the Group s consolidated income statement for the year ended 31 December 2009 as might have been determined to be necessary had we been able to satisfy ourselves as to the assets and liabilities of CAG Ghana as at 31 December 2008, in our opinion: the financial statements give a true and fair view of the state of the Group's affairs as at 31 December 2009 and its loss for the year then ended; the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; and the financial statements have been prepared in accordance with the requirements of the Companies Act We modified our audit report on the financial statements for the year ended 31 December 2008 with regard to the same limitation in scope. Emphasis of matter Going Concern In determining the form of our opinion on the financial statements, we have considered the adequacy of the disclosures made in note 1 to the financial statements concerning the Group s and the Company s ability to continue as a going concern. In particular, the ability to continue as a going concern is dependent upon the Group: - achieving significant cost savings in the short term; and - effecting suitable financial and other arrangements to enable the development of the Zimbabwean assets, on which the Group s and Company s viability is dependant. These conditions, along with other matters explained in note 1 to the financial statements, indicate the existence of a material uncertainty which may cast significant doubt on the Group s and the Company's ability to continue as 29 P a g e

8 Independent auditor s report (continued) a going concern. The financial statements do not include the adjustments that would result if the Group and Company were unable to continue as a going concern. Opinion on other matter prescribed by the Companies Act 2006 In our opinion, the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception In respect solely of the limitation on our work in relation to CAG Ghana for the year ended 31 December 2008 referred to above: we have not obtained all the information and explanations that we considered necessary for the purpose of our audit of the consolidated financial statements of the Group; and we were unable to determine whether adequate accounting records had been kept. Except for this, we have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or the Company financial statements are not in agreement with the accounting records and returns. Lynton Richmond (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants London 7 June P a g e

9 Consolidated statement of comprehensive income for the year ended 31 December in thousands of pounds sterling Note Total Total Revenue Cost of sales (1,304) (1,246) Gross loss (383) (635) Other operating income Administrative charges (3,597) (3,439) Other administrative expenses (3,597) (2,683) Share based payments 8 - (756) Operating loss before impairment (3,636) (4,074) Impairment 17 (2,450) (170) Operating loss (6,086) (4,244) Finance costs (458) 3,802 Financial income 3 4 3,994 Financial expenses 4 (462) (192) Loss before tax (6,544) (442) Taxation 5 53 (22) Loss from continuing operations (6,491) (464) Discontinued operations Loss from discontinued operation (net of tax) 6 (3,057) (26,070) Loss for the year (9,548) (26,534) Other comprehensive income Foreign currency translation differences for foreign operations (290) (10) Total comprehensive loss for the year (9,838) (26,544) Loss attributable to: Owners of the company (9,398) (26,534) Non-controlling interest (150) - Loss for the year (9,548) (26,534) Total comprehensive loss attributable to: Owners of the company (9.688) (26,684) Non-controlling interest (150) 150 (9,838) (26,534) Loss per share Basic and diluted loss per share 19 (1.27p) (15.91p) Loss per share - continuing operations Basic and diluted loss per share 19 (0.86p) (0.27p) comparatives have been presented to show the results of the Ghanian business segment as discontinued as a result of its divestment in January 2009 (see note 6). 31 P a g e

10 Consolidated statements of changes in equity for the year ended 31 December 2009 In thousands of pounds sterling Share capital Share premium Foreign currency translation reserves Retained earnings Total Minority interest Total equity Group Balance at 1 January ,352 (221) (14,756) 13,905-13,905 Total recognised expense (26,684) (26,684) 150 (26,534) Share-based payments Translation reserve - - (10) - (10) - (10) Shares issued , ,597-15,597 Balance at 31 December ,625 (231) (40,684) 3, ,714 Balance at 1 January ,625 (231) (40,684) 3, ,714 Total recognised expense (9,398) (9,398) (150) (9,548) Shares issued 4,166 3, ,617-7,617 Translation reserve - - (290) - (290) - (290) Balance at 31 December ,020 47,076 (521) (50,082) 1,493-1,493 Company Balance at 1 January ,352 - (5,775) 23,107-23,107 Total recognised expense (35,541) (35,541) - (35,541) Share-based payments Shares issued , ,597-15,597 Balance at 31 December ,625 - (40,560) 3,919-3,919 Balance at 1 January ,625 - (40,560) 3,919-3,919 Total recognised expense (7,666) (7,666) - (7,666) Shares issued 4,166 3, ,617-7,617 Balance at 31 December ,020 47,076 - (48,226) 3,870-3, P a g e

11 Consolidated statement of financial position as at 31 December 2009 in thousands of pounds sterling Note Total Total Assets Goodwill Property, plant and equipment 12 6,700 37,424 Exploration and other evaluation assets 13-4,405 Total non-current assets 7,240 42,520 Inventories ,003 Trade and other receivables ,452 Cash and cash equivalents ,905 Assets held for sale 17 2,560 - Total current assets 3,502 6,360 Total assets 10,742 48,880 Equity Share capital 18 5, Share premium 47,076 43,625 Foreign currency translation reserve (332) (231) Accumulated (loss) / profit (50,271) (40,684) Total equity attributable to equity holders of the parent 1,493 3,564 Minority interest Total equity 1,493 3,714 Liabilities Loans and other borrowings 20 3,576 - Other financial liabilities 21-1,694 Deferred taxation Provisions 23 2,394 5,260 Total non-current liabilities 6,471 7,517 Loans and borrowings current portion ,709 Other financial liabilities current portion 21-2,137 Trade and other payables 24 2,250 14,729 Bank overdraft 16-1,061 Taxation (14) 13 Liabilities held for sale Total current liabilities 2,778 37,649 Total liabilities 9,249 45,166 Total equity and liabilities 10,742 48,880 The financial statements were approved by the Board of Directors on 7 June 2010 and were signed on its behalf by: Roy Pitchford (Acting Chairman and Chief Executive) Craig Campbell (Chief Financial Officer) 33 P a g e

12 Company statement of financial position as at 31 December in thousands of pounds sterling Note Total Total Assets Investment in subsidiaries 28 3,434 3,434 Total non-current assets 3,434 3,434 Trade and other receivables Amount due from subsidiaries 27 4,437 5,775 Cash and cash equivalents Total current assets 4,804 5,971 Total assets 8,238 9,405 Equity Share capital 18 5, Share premium 47,076 43,625 Accumulated loss (48,226) (40,560) Total equity attributable to equity holders of the 3,870 3,919 parent Total equity 3,870 3,919 Liabilities Loans and other borrowings 20 3,576 - Provisions Total non-current liabilities 3, Loans and other borrowings current portion 20-4,995 Trade and other payables Taxation (13) - Total current liabilities 782 5,408 Total liabilities 4,368 5,486 Total equity and liabilities 8,238 9,405 The financial statements were approved by the Board of Directors on 7 June 2010 and were signed on its behalf by: Roy Pitchford (Acting Chairman and Chief Executive) Craig Campbell (Chief Financial Officer) 34 P a g e

13 Statement of cash flows for the year ended 31 December 2009 Group Company in thousands of pounds sterling Note Total Total Total Total Cash flows from operating activities Loss before tax (9,548) (26,983) (7,715) (35,541) Adjusted for: Financial income (4) (5,785) (149) (97) Financial expense (including gold sale 462 2, agreement) Share-based payments Depreciation 211 2, Loss on disposal of property, plant and equipment Impairment of assets held for sale 2,450 Impairment loss on subsidiary loans - 2,344 - Loss on divestment of Ghana assets 6 3,057 14,620-36,207 Decrease/(increase) in inventories (212) (529) - - Decrease/(increase) in trade and other 144 (1,991) (109) 1 receivables (Decrease)/increase in trade and other 507 3, (611) payables and provisions Net cash from operating activities (2,595) (11,587) (4,772) 889 Interest paid (19) (192) (373) (174) Taxation paid (13) - (13) - Operating cash flow (2,627) (11,779) (5,158) 714 Cash flows from investing activities Interest received Cash cost of divestment in Ghana (5,975) Non-refundable deposit from disposal of Mali 414 Acquisition of exploration assets (492) (1,360) - - Acquisition of property, plant and equipment - (4,901) - - Investment in subsidiaries - (957) (21,265) Net cash from investing activities (6,049) (6,149) (808) (21,168) Cash flows from financing activities Proceeds from the issue of share capital 5,212 15,597 5,212 15,597 Loan and borrowing received 1,157 3, ,995 Repayment) of loans - (1,946) - Net cash from financing activities 6,369 17,244 6,028 20,592 Net increase in cash and cash equivalents (2,307) (684) Cash and cash equivalents at 1 January 2,844 2, Effect of exchange rate fluctuations on cash held (90) Cash and cash equivalents at 31 December , Restricted cash included in cash and cash equivalents at 31 December - 2, P a g e

14 Notes to the financial statements 1. Significant accounting policies (a) Going concern basis For the reasons given below, the Directors consider it appropriate to prepare the financial statements on the going concern basis, notwithstanding the circumstances described below. The Group sustained a loss in the year to 31 December 2009 of 9.5 million (2008: 26.5 million) and the Group had net current assets of 0.6 million (2008: 20.1 million net current liabilities). The Group s operating assets now consist entirely of five gold mines and extensive claim holdings in Zimbabwe; two of these mines are operating at a low level, but remain loss making, with the rest being on care and maintenance. The mines require significant development and capital investment in order to become operational and cash generative. While the situation in Zimbabwe remains challenging, the Directors are now cautiously optimistic about the recovery prospects for the mining sector, as a result of the formation of a government of national unity, substitution of the US Dollar for the Zimbabwe Dollar, and the Monetary Policy Statement issued in February The Group has limited cash and debt facilities, which will only be sufficient to allow the Group to trade as a going concern, that is, for at least 12 months from the date of approval of these financial statements, if significant cost reductions are achieved. The Group s overall viability is dependent upon its ability to raise new funding in order to enhance the value of the Zimbabwean assets. In terms of strengthening its current liquidity position, the Directors have taken the following actions: Operating costs have been reduced, which management expects to reduce even further. Concluded the disposal of its Malian assets, receiving US$3.4 million ( 2.3 million) in March A final instalment of US$1.0 million ( 0.6 million) is contingent on reserves determination prior to March Deferring repayment of shareholder loans totalling US$4.6 million ( 2.9 million) at year end and convertible loan notes totalling US$1.25 million ( 0.7 million) at year end, until April Shareholder loans totalling 0.6 million (US$1.0 million) raised subsequent to year end have been deferred to April Consequently, the Group has no significant debt repayment obligations before April At 30 May 2010, the Group s holds 1.2 million cash, which at current spending would be consumed by the end of November If significant cost savings cannot be achieved, and the Company were to run out of cash, the Company would request further funding from its shareholders. Under such circumstances, if the support of the shareholders were not forthcoming, then the business would have a cash shortfall and would face being wound up. 36 P a g e

15 Notes to the financial statements The Directors are currently seeking financial and other arrangements to take forward the development of the Zimbabwean assets onto a commercial and profitable production basis. As reported in December 2009, the new arrangement may be through a joint arrangement, new equity invested in the Company, exchanging some or all of the Zimbabwean assets for an equity stake in any acquiring company or through outright acquisition of the Company itself. Accordingly, the Directors are of the view that there is a realistic alternative to an outright sale of the assets themselves, and a consequent cessation of trading by the Group. Although discussions with interested parties have advanced since December, there can be no certainty that a suitable arrangement will be effected. These factors indicate the existence of a material uncertainty which may cast significant doubt on the Group s and the Company s ability to continue as a going concern. The Group and Company may therefore be unable to continue realising its assets and discharging its liabilities in the normal course of business. The financial statements do not include any adjustments that might result were the basis of preparation inappropriate. (b) Basis of preparation Central African Gold Plc ( the Company ) is a company domiciled and incorporated in the United Kingdom. The consolidated financial statements of the Company for the year ended 31 December 2009 comprise the company and its subsidiaries (together referred to as the Group ). Both the Company financial statements and the Group financial statements have been prepared and approved by the Directors, in accordance with International Financial Reporting Standards, as adopted by the EU ( Adopted IFRSs ). On publishing the Company financial statements, here together with the Group financial statements, the Company is taking advantage of the exemption in Section 408 of the Companies Act 2006 not to present its individual income statement and related notes that form a part of these approved financial statements. The financial statements are presented in pounds sterling, rounded to the nearest thousand, which is the functional currency of the Company and the presentation currency for the Group. The functional currency for the subsidiaries is primarily the US Dollar. The preparation of financial statements in conformity with adopted IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The accounting policies have been applied consistently by Group entities. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised 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. 37 P a g e

16 Notes to the financial statements 1. Significant accounting policies (continued) (c) Statement of compliance The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements. Judgements made by the Directors, in the application of these accounting policies that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed below. Measurement convention The financial statements are prepared on the historical cost basis except that the following assets and liabilities are stated at their fair value. Non-current assets and disposal groups held for sale are stated at the lower of previous carrying amount and fair value less costs to sell. Other financial liabilities are initially recognised at fair value at the date the contract is entered into, with the corresponding fair value adjustment being recognised through the income statement. Subsequent remeasurement to fair value is performed at each balance sheet date with the any further adjustments being recognised through the income statement. (d) Significant accounting and estimates (i) Reserves and resources Reserves and resources are determined by competent persons. The principal reserves and resources held by the Group at the time of signing the Annual Report are contained on page 8 of the Annual Report and were last assessed as at 31 December The determination of reserves and resources requires a wide variety of assessments regarding the geology of the ore body, mining plans and economic viability, which are all subject to inherent uncertainties. (ii) Impairment of goodwill and property, plant and equipment The carrying value of the goodwill and property, plant and equipment balances, all of which relate to the gold mines in Zimbabwe, is highly dependent on the economic situation in that country. Impairment reviews have been carried out on a fair value less costs to sell basis and are based on independent valuation reports that have been adjusted by the Directors to reflect the economic risk of Zimbabwe. The extraction of value from these assets will require capital investment. 38 P a g e

17 Notes to the financial statements 1. Significant accounting policies (continued) (iii) Rehabilitation provisions The nature of the mining operations of the Group gives rise to environmental obligations which are reflected in the rehabilitation provision. The level of provision needs to reflect the present value of the future remediation costs. Estimating the future remediation costs involves significant judgements including for example the local geography and geology, whether contamination has occurred and, if so the nature of the contaminants involved and the remediation approach to be taken and the likely costs to be incurred. In addition, the outflows in respect of rehabilitation are generally far into the future. Judgment is therefore also involved in estimating the timing of the cash flow and in the discounting factors to determine the present value. (e) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (ii) (iii) Transactions eliminated on consolidation Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Acquisitions The results of business acquired in the year are consolidated from the effective date of acquisition. The net assets and contingent liabilities acquired are incorporated in the consolidated financial statements at their fair values at the date of acquisition. Any excess of fair value of net assets above consideration is recognised in the income statement. 39 P a g e

18 Notes to the financial statements 1. Significant accounting policies (continued) (f) (i) Foreign currency Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to pounds sterling at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to pounds sterling at foreign exchange rates ruling at the dates the fair value was determined. (ii) Financial statements of foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated to pounds sterling, the Group s reporting currency, at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to pounds sterling at rates approximating to the foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on retranslation are recognised directly in a separate component of equity. (iii) Net investment in foreign operations Exchange differences arising from the translation of the net investment in foreign operations, and of related hedges are taken to a translation reserve. They are released into the income statement on disposal. (g) Borrowing costs Borrowing costs 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 the cost of those assets, until such time as the assets are substantially ready for their intended use or sale provided that future economic benefit is considered probable. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. 40 P a g e

19 Notes to the financial statements 1. Significant accounting policies (continued) (h) Goodwill Goodwill arises on the acquisition of subsidiaries and associates and represents the excess of the cost of the acquisition over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognised immediately in profit or loss. Goodwill is measured at cost less accumulated impairment losses and is assessed by management for impairment on a yearly basis. In performing impairment reviews, management has assessed the carrying value of the tax goodwill created on acquisition of the Zimbabwean subsidiaries, as well as the valuation performed by an independent valuation expert of the mineral assets owned by the Company. As a result of this, management have assessed there to be one cash generating unit: the Zimbabwean mineral assets. (i) Property, plant and equipment (i) Development costs Development costs relating to major programmes at a mine are capitalised. Development costs consist primarily of expenditure to expand the capacity of the mine. Day-to-day mine development costs to maintain production are expensed as incurred. Initial development and pre-production costs relating to a new ore body, including amortisation, depreciation and interest on borrowed funds used to develop the ore body, are capitalised until commissioning of production facilities. The Group reviews the carrying amount of mining assets and development costs when circumstances suggest the carrying amount may not be recoverable. Recoverability is assessed using estimates of future cash flows on a discounted basis, including revenues, operating costs and future capital expenditures. Where necessary a reduction in carrying amount is recorded. (ii) Property, plant and equipment Property, plant and equipment are included at cost. Cost includes costs directly attributable to bringing an asset to working condition for its intended use. Gains and losses on disposal of property, plant and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit. The Group reviews the carrying amount of property, plant and equipment when circumstances suggest that the carrying amount may not be recoverable. Recoverability is assessed using estimates of future cash flows on a discounted basis, including revenues, operating costs and restoration costs. Where necessary a reduction is recorded. 41 P a g e

20 Notes to the financial statements 1. Significant accounting policies (continued) (iii) Depreciation Depreciation of property, plant and equipment is calculated on a straight line basis using rates which are designed to write off the assets over their estimated useful lives as follows: land and buildings 10 years plant and equipment 3-8 years fixtures and fittings 3 years mine development and mineral reserves life-of-mine The residual value, if not insignificant, is reassessed annually. (j) Investments Investments in subsidiaries are stated in the Company s accounts at cost less any provision for impairment. (k) Trade and other receivables Trade and other receivables are stated initially at fair value at acquisition or at their cost less impairment losses (see accounting policy m). (l) Inventories Stores and materials are valued at the lower of cost and net realisable value on a weighted average cost basis. Obsolete, redundant and slow moving stock is identified and written down to recoverable amounts / net realisable values. Gold inventories are valued at the lower of average cost of production or net realisable value. Stock-pile and in-process inventories are valued at the lower of moving average cost of production and estimated net realisable value. The average cost of production is taken as total cost incurred on mining, including amortisation costs, and is allocated to inventory on a unit of production basis. (m) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. 42 P a g e

21 Notes to the financial statements 1. Significant accounting policies (continued) (n) Impairment The carrying amounts of the Group s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset s recoverable amount is estimated. For goodwill, the recoverable amount is estimated at each balance sheet date. The key judgements in the assessment of impairment of goodwill and property, plant and equipment: - Reserves and resources of the mines - Gold price - Foreign exchange - The economy of Zimbabwe Assumptions used are based on market information. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. Impairment losses recognised in respect of cash-generating units (group of units) are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. (i) Calculation of recoverable amount The recoverable amount of the Group s receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e., the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted. The recoverable amount of other assets is the greater of their value in use or fair value less costs to sell. 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. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. In assessing fair value less costs to sell, the directors have sought valuations from independent specialists, except in their assessment of Ghana where they made a commercial assessment. 43 P a g e

22 Notes to the financial statements 1. Significant accounting policies (continued) (ii) Reversals of impairment An impairment loss in respect of a receivable carried at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. (o) Provisions A provision is a liability of uncertain amount and/or timing. A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (i) Environmental rehabilitation recognition Long-term environmental obligations are based on the Group s environmental management plans, in compliance with current environmental and regulatory requirements in the jurisdiction in which the Group operates. Full provision is made based on the estimated cost of restoring the environmental disturbance that has occurred up to the balance sheet date with a corresponding increase in the related property, plant and equipment. Increases due to additional environmental disturbances are capitalised and amortised over the life of the mine. Annual increases in the provision relating to the change in the provision and inflationary increases are shown separately in the income statement, except where the related mine is under development and has not yet reached commercial levels of production, in which case such adjustment is charged or credited to the balance sheet carrying value of mining assets. 44 P a g e

23 Notes to the financial statements 1. Significant accounting policies (continued) The estimated costs of rehabilitation is reviewed annually and adjusted as appropriate for changes in legislation o technology. Annual contributions are made to fund the estimated cost of rehabilitation during and at the end of the life of the mine. The funds contributed are included under cash and cash equivalents and shown as restricted cash. (p) Trade and other payables Trade and other payables are stated at cost. (q) Revenue Revenue from the sale of precious metal is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. (r) Income tax Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. (i) Deferred tax Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, nor differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of 45 P a g e

24 Notes to the financial statements 1. Significant accounting policies (continued) the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (s) Financial instruments Financial assets and liabilities are recognised on the Group s balance sheet when the Group becomes a party to the contractual provisions of the instrument. (i) Loans and borrowings Financial liabilities are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method. (ii) Measurement Financial assets are initially measured at fair value plus, in the case of financial assets and liabilities not at fair value through the income statement, transaction costs that are directly attributable to acquisition or issue of the financial asset or liability. Subsequent to initial recognition, these instruments are measured as set out in the relevant accounting policy previously described. (iii) Offset Where a legally enforceable right of offset exists for recognised financial assets and financial liabilities, and there is an intention to settle the liability and realise the asset simultaneously or to settle on a net basis, all related financial effects are offset. Where the Group retains substantially all the risks and benefits of ownership of the financial asset, the group continues to recognise the financial asset. (iv) Derivative financial instruments Derivative financial instruments are measure at fair value through the income statement. (t) Comparative results Comparative results have been regrouped and restated where necessary. 46 P a g e