KATANGA MINING LIMITED CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

2 CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 TABLE OF CONTENTS PAGE Management s Responsibility for Financial Reporting 2 Independent Auditor s Report 3 Consolidated Statements of Financial Position 4 Consolidated Statements of Loss and Comprehensive Loss 5 Consolidated Statements of Changes in (Capital Deficiency) Equity 6 Consolidated Statements of Cash Flows 7 Notes to the Consolidated Financial Statements

3 Management s Responsibility for Financial Reporting The accompanying consolidated financial statements of Katanga Mining Limited and its subsidiaries ( 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 of 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. Following the end of the second quarter of fiscal 2017, in the course of an investigation by the Ontario Securities Commission ( OSC ), information drawing into question the appropriateness of certain of the Company's accounting practices came to the attention of the independent directors of the Company (the "Independent Directors"). This information led the Board of Directors (the "Board") of the Company to request the Independent Directors of the Board, being Robert G. Wardell, Terry Robinson and Hugh Stoyell, to conduct a review of these practices. Under the direction of the Independent Directors, an internal review (the Review ) was undertaken. The Independent Directors engaged Canadian legal counsel, and a multinational accounting firm, to assist the Independent Directors to conduct the Review. The Review identified accounting practices that, among other things, incorrectly recorded the total tonnage of finished copper cathode production so that finished product inventories were overstated, incorrectly valued copper concentrate included in work in progress inventories, incorrectly valued ore in stockpile inventories and incorrectly valued property, plant and equipment during 2016, 2015 and prior periods, which practices were not appropriate and required adjustments to the financial statements. Following completion of the Review, on November 20, 2017, the Company filed restated audited consolidated statements of financial position as at December 31, 2016, December 31, 2015 and January 1, 2015, consolidated statements of loss and comprehensive loss, consolidated statements of cash flows consolidated statements of changes in equity for the years ended December 31, 2016 and 2015, as well as unaudited consolidated interim financial statements as at, and for the three months ended March 31, 2017 (the Restated Financials ) and accompanying management s discussion and analysis ( MD&A ). The Board of Directors and management reassessed the effectiveness of the Company s internal controls over the financial reporting and concluded that material weaknesses in the Company s internal controls over the financial reporting existed as at December 31, The material weaknesses are described more fully in the Company s MD&A for the three months and years ended December 31, 2017 and While management and the Board of Directors have identified and are in the process of implementing and monitoring remediation measures to strengthen internal controls, the material weaknesses identified by the Board and management cannot be considered fully remediated until the applicable remedial controls operate for a sufficient period of time. Accordingly material weaknesses in the Company s internal controls over financial reporting continue to exist as at December 31, As the Company's processing of copper and cobalt was suspended until the resumption of the production of copper on December 11, 2017, the control environment that prevailed for the majority of fiscal 2017 was significantly less complicated than that which existed prior to the suspension of the Company s operations. A number of the material weaknesses previously identified by the Board and management do not impact financial reporting controls required in the absence of ordinary production and sales activities. In addition, based on the work performed during the Review by the Independent Directors, management, external auditors, outside legal counsel and outside accounting advisors, management and the Board of Directors concluded that the Company s previously filed restated consolidated financial statements are fairly stated in all material respects in accordance with IFRS. Against this backdrop, management and the Board of Directors have also concluded that the consolidated financial statements for the years ended December 31, 2017 and 2016 are fairly stated, in all material respects, in accordance with IFRS. 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 fulfils 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 2

4 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, who 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 Johnny Blizzard Grant Sboros Johnny Blizzard Grant Sboros Chief Executive Officer Chief Financial Officer March 31, 2018 March 31,

5 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 December 31, 2017 and 2016, and the consolidated statements of loss and comprehensive loss, consolidated statements of changes in (capital deficiency) equity and consolidated statements of cash flows for the years ended December 31, 2017 and 2016 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. 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 December 31, 2017 and, 2016, and its financial performance and its cash flows for the years ended December 31, 2017 and, 2016 in accordance with International Financial Reporting Standards. Leon Taljaard Deloitte & Touche Leon Taljaard Johannesburg, South Africa March 31,

6 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Expressed in thousands of U.S. dollars) December 31, December 31, Note ASSETS Current Cash and cash equivalents 6 38,144 1,518 Receivables 7 246, ,634 Inventories 8 453, ,066 Prepaid expenses and other current assets 9 135, , , ,325 Non-current Mineral interests and capitalized borrowing costs 10 1,978,360 1,869,706 Property, plant and equipment 11 2,378,282 2,270,444 Non-current inventories 8 47, ,018 Other non-current assets , ,241 Deferred income tax assets , ,305 5,025,995 5,208,714 Total assets 5,899,396 5,706,039 LIABILITIES Current Accounts payable and accrued liabilities , ,358 Provisions 14 10,316 7,220 Customer prepayments - related parties 19 2,241,573 1,592,761 2,572,570 1,849,339 Non-current Loan facilities - related parties 15 3,688,281 3,363,267 Provisions 14 1,343 - Decommissioning and environmental provisions 16 11,577 15,134 3,701,201 3,378,401 Total liabilities 6,273,771 5,227,740 (CAPITAL DEFICIENCY) EQUITY Share capital , ,750 Reserves 2,540,024 2,540,024 Accumulated deficit (2,197,190) (1,623,694) Equity attributable to the shareholders of the Company 533,584 1,107,080 Non-controlling interests 18 (907,959) (628,781) Net (capital deficiency) equity (374,375) 478,299 Total liabilities and equity 5,899,396 5,706,039 The notes on pages 8 to 52 are an integral part of these consolidated financial statements. Signed by: Signed by: Hugh Stoyell Hugh Stoyell (Chairman and Non-executive director) Robert Wardell Robert Wardell (Chairman of the Audit Committee and Non-executive director) 4

7 CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS (Expressed in thousands of U.S. dollars, except outstanding common shares and per share amounts) Year ended December 31, Note Sales 19 25,292 (30,127) Cost of sales 20 (31,839) - Gross loss (6,547) (30,127) Other (expense) income Operating expenses 20 (368,548) (236,399) General and administrative expenses (10,317) (2,283) Restructuring cost recovery Property, plant and equipment impairment 11 (25,148) - Inventory obsolescence provision 8 (54,528) - Facilities interest 15 (325,014) (305,504) Customer prepayments interest 19 (55,575) (43,526) Interest income 2,643 7,001 Other interest expense (9,069) (12,935) Foreign exchange gain 916 1,338 Loss before income taxes (851,187) (621,835) Income tax expense 26 (1,487) (9,017) Net loss and comprehensive loss 21 (852,674) (630,852) Attributable to Non-controlling interests 18 (279,178) (210,965) Shareholders of the Company (573,496) (419,887) Basic and diluted loss per common share (0.30) (0.22) Weighted average number of common shares outstanding 17 1,907,380,413 1,907,380,413 The notes on pages 8 to 49 are an integral part of these consolidated financial statements. 5

8 CONSOLIDATED STATEMENTS OF CHANGES IN (CAPITAL DEFICIENCY) EQUITY (Expressed in thousands of U.S. dollars) Reserves Number of common shares Share capital Contributed surplus Share reserve (Note 17) Accumulated deficit Equity attributable to shareholders of the Company Noncontrolling interests (Note 18) Total equity (capital deficiency) Balance at January 1, ,907,380, ,750 2,498,068 42,567 (1,203,807) 1,527,578 (417,816) 1,109,762 Options forfeited and expired (611) - (611) - (611) Comprehensive loss (419,887) (419,887) (210,965) (630,852) Balance at December 31, ,907,380, ,750 2,498,068 41,956 (1,623,694) 1,107,080 (628,781) 478,299 Comprehensive loss (573,496) (573,496) (279,178) (852,674) Balance at December 31, ,907,380, ,750 2,498,068 41,956 (2,197,190) 533,584 (907,959) (374,375) The notes on pages 8 to 49 are an integral part of these consolidated financial statements. 6

9 CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in thousands of U.S. dollars) Year Ended December 31, Operating activities Net loss and comprehensive loss for the year (852,674) (630,852) Adjusted for non-cash items: Depreciation and amortization 81,424 28,126 Property, plant and equipment impairment 25,148 - Inventory obsolescence provision 54,528 - Restructuring cost recovery - (600) Share-based compensation recoveries - (611) Income tax expense 1,487 9,017 Facilities and customer prepayment interest 380, ,030 Unrealized foreign exchange loss Decommissioning and environmental provision accretion 2,478 1,599 Expense on issue of capital spares to production 9,662 19,311 Loss (profit) on disposal of property, plant and equipment 3,042 (550) Income taxes paid - (3,950) Changes in working capital (excluding non-cash movements): Increase in receivables (9,669) (34,734) Decrease in prepaid expense and other current and non-current assets 43,822 34,934 Decrease in inventories 21, ,031 Increase (decrease) in accounts payable and accrued liabilities 59,781 (39,840) Increase (decrease) in provisions 3,096 (7,716) Increase in operating customer prepayments 2, Cash flows used in operating activities (172,487) (161,080) Investing activities Additions to mineral interests and property, plant and equipment (328,602) (222,513) Prepayments on capital equipment (45,005) - Proceeds on disposals of property, plant and equipment - 9,416 Cash flows used in investing activities (373,607) (213,097) Financing activities Proceeds from customer prepayments related parties 582, ,975 Cash flows from financing activities 582, ,975 Increase (decrease) in cash and cash equivalents 36,626 (36,202) Cash and cash equivalents, beginning of year 1,518 37,740 Effect of exchange rate changes on cash held in foreign currencies - (20) Cash and cash equivalents, end of year (refer to note 6) 38,144 1,518 The notes on pages 8 to 49 are an integral part of these consolidated financial statements. 7

10 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 86.3% of Katanga's shares through its wholly-owned subsidiary Glencore International AG. 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, KTE Underground Mine and Etang South Underground Mine ), the Kamoto Oliveira Virgule copper and cobalt mine ( KOV Open Pit or KOV ), 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. On September 11, 2015, the Company announced the decision to suspend the processing of copper and cobalt during the construction phase of the Whole Ore Leach Project ( WOL Project ). The suspension continued through most of 2017 with copper production resuming on December 11, The WOL Project includes the construction of optimized copper and cobalt circuits to sustainably produce 300,000 tpa of copper cathode and 30,000 tpa of cobalt contained in hydroxide over life-of-mine (as described in the Company s technical report dated March 31, 2018 and available on the System for Electronic Document Analysis ( SEDAR )). This is achieved by adding additional leach capacity at Luilu in order to leach run-of-mine oxide ore directly rather than concentrating the oxide ore at KTC. This is expected to result in improved oxide recoveries, thereby reducing the unit cost of production. 2. BASIS OF PREPARATION Statement of compliance These consolidated financial statements have been prepared in accordance with IFRS issued by the International Accounting Standards Board ( IASB ) effective as of December 31, The consolidated financial statements of the Company for the years ended December 31, 2017, and 2016 have been prepared by management, reviewed by the Audit Committee and approved and authorized for issue by the Board of Directors on March 31, The consolidated financial statements have been updated for the effects of events up to March 31, Shortly thereafter, the financial statements are made available to shareholders and others through filing on 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 at the end of each reporting period as explained in the accounting policies below. All financial information is presented in U.S. dollars rounded to the nearest thousand dollars, unless otherwise stated, consistent with the functional currency of the Company. The impact of seasonality or cyclicality on operations is not regarded as significant to the consolidated financial statements. 8

11 2. BASIS OF PREPARATION (continued) Summary of new accounting policies These consolidated financial statements are prepared using the same accounting policies and methods of computation as applied in the 2016 consolidated financial statements. The following new and revised standards were adopted effective for annual accounting periods beginning on or after January 1, 2017: Amendments to IAS 7 Statement of cash flow: Disclosure initiative; and Amendments to IAS 12 Recognition of deferred tax assets for unrealized losses. The adoption of these new and revised standards and interpretations did not have a significant impact on the Company s consolidated financial statements. New standards not yet effective At the date of authorization of these financial statements, the following new and revised standards, which are applicable to the Company, were issued but are not yet effective: Amendments to IFRS 2 Share-base Payments Classification and measurement of share-based payment transactions effective for year ends beginning on or after January 1, The amendment clarifies the classification and measurement of share-based payment transactions with respect to (i) accounting for cash-settled share-based payment transactions that include a performance obligation, (ii) the classification of share-based payment transactions with net settlement features and (iii) the accounting for modifications of share-based payment transactions from cash-settled to equitysettled. The amendments will not have a material impact on the Company s financial statements. IFRS 9 Financial Instruments effective for year ends beginning on or after January 1, 2018 IFRS 9 will supersede IAS 39 Financial Instruments: Recognition and Measurement and covers classification and measurement of financial assets and financial liabilities, impairment of financial assets and hedge accounting. The Company has undertaken a comprehensive analysis of the impact of the new standard based on the financial instruments it holds and the way in which they are used. As a result of the analysis, it is anticipated that there will be no material impact on the face of the statement of financial position or in the statement of income, however, there will be presentational changes in some of the note disclosures, as well as additional disclosures around classification and measurement of financial instruments which are summarized as follows: Expected credit loss model The new standard introduces an expected loss impairment model for financial assets held at amortized cost, which means that anticipated as opposed to impending credit losses will be recognized resulting in the likely earlier recognition of impairment. This change is not expected to have a material impact on the Company s results, given the low exposure to counterparty default risk as a result of the credit risk management processes that are in place. Hedge accounting The new standard introduces a less prescriptive basis to adopt hedge accounting. This change is not expected to materially impact the amounts recognized, as the Company does not employ hedge accounting. Classification and measurement IFRS 9 modifies the classification and measurement of certain classes of financial assets and liabilities and will require the Company to reassess classification of financial assets from four to three primary categories (amortized cost, fair value through profit and loss, fair value through other comprehensive income), reflecting the business model in which assets are managed and their cash flow characteristics. 9

12 These modifications will result in presentational changes to the additional detail provided primarily in the prepayments and loans (notes 9, 12, 15 and 19), accounts receivable (note 7) and accounts payable (note 13) note disclosures to reflect the business model and cash flow characteristics of these assets and liabilities and group them into their respective IFRS 9 category or other IFRS classification. A summary of the expected presentational changes on the December 31, 2017 balances is as follows: Financial assets Notes Current presentation IFRS 9 Presentation Change Held at fair value Held at through amortized profit and cost lost Total Cash and cash equivalents 6 38,144 38,144 38,144 Receivables 7 246, ,940 2, ,303 Prepaid expenses and other assets 9 135, , ,826 Other non-current assets , , ,431 Financial liabilities Accounts payable and accrued liabilities , , ,681 Customer prepayments, related parties 19 2,241,573 2,241,573 2,241,573 Loan facilities - related parties 15 3,688,281 3,688,281 3,688,281 IFRS 15 Revenue from Contracts with Customers effective for year ends beginning on or after January 1, IFRS 15 applies to revenue from contracts with customers and replaces all of the revenue standards and interpretations in IFRS. The standard outlines the principles an entity must apply to measure and recognize revenue and the related cash flows. The Company has undertaken a comprehensive analysis of the impact of the new standard based on a review of the contractual terms of its principal revenue streams with the primary focus being to understand whether the timing and amount of revenue recognized could differ under IFRS 15. As the majority of the Company s revenue is derived from arrangements in which the transfer of risks and rewards coincides with the fulfilment of performance obligations and transfer of control as defined by IFRS 15, no material changes in respect of timing and amount of revenue currently recognized by the Company are expected. In addition, IFRS 15 requires that distinct promised goods or services, such as insurance and freight services to deliver the contracted goods to the customers, if material, be deferred and recognized over time as the obligation is fulfilled. The impact of this change is also not material; however the revenue earned from these activities is required to be separately disclosed and thus there will be presentational changes in the revenue related note disclosures. IFRS 16 Leases effective for year ends beginning on or after January 1, IFRS 16 provides a comprehensive model for identification of lease arrangements and their treatment (on-balance sheet) in the financial statements of both lessees and lessors. It supersedes IAS 17 Leases and its associated interpretative guidance. Under the new standard, a lessee is required to recognize the present value of the unavoidable lease payments as a lease liability on the statement of financial position (including those currently classified as operating leases) with a corresponding right of use asset. The unwind of the financial charge on the lease liability and amortisation of the leased asset are recognized in the statement of income based on the implied interest rate and contract term respectively. Although the Company is still evaluating the potential impact of IFRS 16 on the financial statements and performance measures, including an assessment of whether any arrangements the Company enters into will be considered a lease under IFRS 16, the Company s recognized assets and liabilities will increase and affect the presentation and timing of related depreciation and interest charges in the consolidated statement of income. Upon adoption of IFRS 16, the most significant impact will be the 10

13 present value of the operating lease commitments (see note 25) being shown as a liability on the statement of financial position together with an asset representing the right of use, which are unwound and amortized to the statement of income over time. The Company has not early adopted these standards and is currently assessing what impact the application of the remaining standards or amendments will have on the financial statements. These standards and amendments 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. 11

14 3. KEY JUDGMENTS, ESTIMATES AND SUMMARY OF SIGNIFICANT 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 year. The estimates and associated assumptions are based on historical experience and other factors that are considered 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 year 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. The following are the critical judgments that management has made in the process of applying the Company s accounting policies and the key sources of estimation uncertainty that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Impairments Property, plant and equipment and mineral interests are reviewed for impairment if there is an indication that the carrying amount may not be recoverable. The Company conducts an internal review of the assets at least annually, which is used as a source of information to assess for indications of impairment or reversal of previously recognized impairment losses. If any such indication exists, then an impairment review is undertaken, with recoverable amount assessed by reference to the higher of value in use and fair value less costs of disposal ( FVLCD ). Refer to notes 10 and 11. The costs incorporated in the cash flow forecasts for FVLCD purposes are based on the anticipated updated life-of-mine plan or long-term production plans. This differs from value in use, which requires future cash flows to be estimated for the asset in its current condition and does not include future cash flows associated with improving or enhancing the asset s performance. Anticipated enhancements may be included in the FVLCD calculations and therefore generally result in a higher value. Where the recoverable amount of a cash-generating unit is dependent on the life of its associated orebody, expected future cash flows reflect the current life-of-mine or long-term production plans, which are based on detailed research, analysis and bespoke modelling to optimize the level of return from investment, output and sequence of extraction. The mine plan takes account of all relevant characteristics of the orebody, including waste-to-ore ratios, ore grades, haul distances, chemical and metallurgical properties of the ore affecting process recoveries and capacities of processing equipment that can be used. The life-of-mine plan and/or long-term production plans are therefore the basis for forecasting production output and production costs in each future year. The price forecasts used for ore reserve estimations are generally consistent with the assumptions that a market participant would be expected to use to assess the value of the mines operations. The discount rate applied to the future cash flow forecasts represents an estimate of the rate the market would apply having regard to the time value of money and the risks specific to the asset for which the future cash flow estimates have not been adjusted. The Company s risk adjusted discount rate is used as a starting point for determining the discount rates, with appropriate adjustments to the risk profile of the operation. 12

15 3. KEY JUDGMENTS, ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Key judgments and estimates (continued) Impairments (continued) The copper and cobalt pricing assumptions used in the fair value model are within market forecasts and anticipate long-term prices of 6,500/tonne and 55,000/tonne, respectively. The valuation assessment is most sensitive to movements in the long-term commodity price estimates for copper and cobalt and changes in future production volumes and operating costs. The valuation models use the most recent reserve and resource estimates, planned benefits from revisions to the life-of-mine plan, WOL related processing parameters, relevant cost assumptions and market based commodity pricing, discounted using an operation specific discount rate of 11.8%. The valuation remains sensitive to pricing and other key assumptions as detailed above. A deterioration of 10% in the commodity price assumptions or discount rate will not result in an impairment. Income taxes The Company operates in the DRC, Switzerland and Canada, 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 requires management to exercise judgment and make certain assumptions about the future performance of the Company. This can be affected by many factors, including: current and future economic conditions, net realizable sale prices, production rates and 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 and the estimates of future taxable income. Refer to note 26. 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 consolidated statement of loss, 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 reserves and resources and assumptions used in determining their economic feasibility. Such changes in reserves and 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 proven and probable ore reserves and measured and indicated mineral resources. Estimates of proven and probable ore reserves and mineral resources are prepared by experts in extraction, geology and ore reserve and mineral resource determination. 13

16 3. KEY JUDGMENTS, ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Key judgments and estimates (continued) Depreciation and amortization of mineral interests and property, plant and equipment (continued) 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, 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 11. Valuation of inventories Inventories are measured at the lower of production cost and net realizable value ( NRV ). If the carrying value exceeds the NRV, a write down is required. This write down may be reversed in a subsequent period if the circumstances which caused it no longer exist and the NRV impairment is recovered. The Company reviews the NRV periodically, as this involves significant estimates related to future production and sales volumes, metal prices, and future operating and capital costs. These estimates are subject to various risks and uncertainties and may have an effect on the NRV estimate and, in turn, the related carrying value of the current inventories. 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 that 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 unanticipated future 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 and a change in the timing for utilization of reserves. The decommissioning and environmental provisions, which are measured by discounting the expected cash flows using a risk adjusted discount rate of 11.8% (2016: 10.70%) being a rate specific to the liability and currency in which they are denominated to their net present value, are provided for and capitalized at the time such an obligation arises. The actual decommissioning and environmental provision will depend on a number of factors, including the time it will take to rehabilitate the property, the risk adjusted discount rate, and the location of the property. Refer to note

17 3. KEY JUDGMENTS, ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Significant accounting policies 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 14. Revenue recognition Revenues are recognized when the Company has transferred to the buyer all significant risk and rewards of ownership of the assets sold. 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. In most instances sales revenue is recognized when the goods have been delivered to a contractually agreed location, typically once the goods have cleared the DRC border. Generally, the sales price is determined on a provisional basis at the date of sale as the final selling price is subject to movements in market prices up to the date of final pricing, normally ranging from 30 to 60 days after initial booking. Revenue on provisionally priced sales is recognized based on the estimated fair value of the total consideration receivable. The revenue adjustment mechanism embedded within these provisionally priced sales arrangements has the character of a commodity derivative. Accordingly, the fair value of the sales price adjustment is re-estimated continuously and changes in fair value are recognized as an adjustment to revenue. In all cases, fair value is estimated by reference to forward market prices. Refer to note

18 3. KEY JUDGMENTS, ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Significant accounting policies (continued) Income taxes Income taxes consist of current and deferred income taxes. Current taxes represent income taxes expected to be payable based on enacted or substantively enacted tax rates at the period end on expected current taxable income, and any adjustment to tax payable in respect of previous years. Deferred taxes are recognized for temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable income, using enacted or substantively enacted income tax rates that are expected to be effective at the time of reversal of the underlying temporary difference. Deferred tax assets and unused tax losses are only recognized to the extent that their recoverability is probable. Deferred tax assets are reviewed at reporting period end and amended to the extent that it is no longer probable that the related benefit will be realized. To the extent that a deferred tax asset not previously recognized subsequently fulfils the criteria for recognition, an asset is then recognized. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same authority and the Company has both the right and the intention to settle its current tax assets and liabilities on a net or simultaneous basis. The tax effect of certain temporary differences is not recognized principally with respect to the initial recognition of an asset or liability (other than those arising in a business combination or in a manner that initially impacted accounting or taxable profit) and temporary differences relating to investments in subsidiaries and Associates to the extent that the Company can control the timing of the reversal of the temporary difference and it is probable the temporary difference will not reverse in the foreseeable future. Deferred tax is provided in respect of fair value adjustments on acquisitions. These adjustments may relate to assets such as extraction rights that, in general, are not eligible for income tax allowances. Current and deferred taxes are recognized as an expense or income in the consolidated statement of loss, except when they relate to items that are recognized outside the consolidated statement of loss (whether in other comprehensive income or directly in equity) or where they arise from the initial accounting for a business combination. The Company assesses its liabilities and contingencies for all tax years open to audit based upon the latest information available. Inherent uncertainties exist in estimates of tax contingencies due to complexities of interpretation and changes in tax laws. For those matters where it is probable that an adjustment will be made, the Company records its best estimate of these tax liabilities, including related interest charges. Earnings (loss) per common share Basic (loss) 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 (loss) 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 (loss) per common share are the same. 16

19 3. KEY JUDGEMENTS, ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Significant accounting policies (continued) Foreign currency translation Financial statements of subsidiaries are maintained in their functional currencies. The Company and all of its subsidiaries operate in an economic environment where the Company s functional currency is the US Dollar. 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 consolidated statement of loss. 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 loss. At December 31, 2017, 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 loss except for losses in value that are considered significant or prolonged. At December 31, 2017, 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. 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 consolidated statement of loss. At December 31, 2017, the Company has not classified any financial liabilities as FVTPL. 17

20 3. KEY JUDGMENTS, ESTIMATES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Significant accounting policies (continued) Impairment of financial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered impaired when there is objective evidence that, because of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. For financial assets carried at amortized cost, the amount of the impairment loss recognized is the difference between the asset s carrying amount and the present value of estimated future cash flows. The amount of the loss is recognized in the statement of income. Assets carried at amortized cost If there is objective evidence that an impairment loss on an asset 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 consolidated statement of loss. 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 consolidated statement of loss. In relation to receivables, a provision for impairment is made and an impairment loss is recognized in the consolidated statement of loss 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. Cash and cash equivalents Cash and cash equivalents include cash on hand, balances with banks and short-term deposits with original maturities of three months or less. 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 consolidated statement of cash flows. Borrowing costs Borrowing costs are expensed as incurred except where they relate to the financing of construction or development of qualifying assets in which case they are capitalized up to the date when the qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are ready for their intended use. 18