Delivering Results Annual Report

Transcription

1 Delivering Results 2012 Annual Report

2 Sierra Rutile produces rutile, ilmenite and zircon from one of the world s largest natural rutile deposits Contents Highlights 2 Our Operations 4 Chairman s Statement 6 Chief Executive s Statement 8 Financial Review 10 Business Review 16 Corporate Social Responsibility 18 Principal Risks 22 Board of Directors 24 Directors Report 27 Corporate Governance 30 Directors Remuneration Report 32 Statement of Directors Responsibilities 33 Independent Auditor s Report to the Members of Sierra Rutile Limited and its Subsidiaries 34 Consolidated Income Statement 35 Consolidated Statement of Comprehensive Income 36 Consolidated Statement of Financial Position 37 Consolidated Statement of Cash Flows 38 Consolidated Statement of Changes in Equity 39 Notes to the Consolidated Financial Statements 64 Officers and Professional Advisors

3 2012 Highlights Financial Highlights > > US$107.8 million EBITDA 1 (2011: US$0.1 million). > > 226% increase in revenue to US$179.1 million (2011: US$55.0 million). Total revenue US$m 179,094 > > 9% reduction in rutile cash production costs 2 at US$637/tonne (2011: US$701/tonne). > > Profit for the year of US$83.5 million compared to a loss of US$28.0 million in ,423 36,849 43,914 54,962 > > Government of Sierra Leone s ( GOSL ) minority interest in Sierra Rutile s operating subsidiary eliminated through US$13.0 million payment for PAYE liabilities. > > Strong balance sheet with current assets of US$92.2 million at 31 December 2012 (2011: US$54.2 million) Rutile production MT 78,908 63,864 68,198 67,916 94,493 Operational Highlights > > 39% increase in rutile production to 94,493 tonnes (2011: 67,916 tonnes). > > Lanti Dry Mining project completed on budget and on time > > Gangama Dry Mining pre-feasibility study and Sembehun Dredge scoping study completed. > > Agriculture project advanced, with the establishment of a management team and trial crop nurseries. 1 Earnings before interest, tax, depreciation and amortisation, excluding exceptional items and non-cash stock option expense. 2 Cost of sales, less depreciation, less ilmenite by-product credit divided by rutile volume sold during the period. Ilmenite by-product credit equals the volume of ilmenite produced in proportion to the rutile sold during the period, multiplied by the average ilmenite price achieved during the period. 1

4 Our Operations A unique world-class deposit Republic of Guinea Falaba Gberia Timbako Koinadugu Republic of Guinea Bumbuna Mambolo SRL Reconnaissance Licence Areas Rotifunk SRL Mineral Lease Boundary Lungi Freetown Pepel Masiaka Waterloo Rotifunk Republic of Sierra Leone Jagbwema Buedu Koindu Gbangbatok Serabu Matru Gbangbatok Serabu Matru Kenema Joru Daru JORC Compliant Resource of over 800 million tonnes with an average rutile grade of 1.01%. Atlantic Ocean Liberia Bucket ladder Dredge designed to dig at a rate of 1,000tph. Conventional earth moving equipment, mines 500 tonnes of ore per hour. Concentrator plant to process the dry mined ore into a heavy mineral concentrate. Wetplant to process the Dredge feed into a heavy mineral concentrate. Trucking operation to transport heavy mineral concentrate to the Mineral Separation Plant and finished product to the Port. Mineral Separation Plant separates the heavy mineral concentrate into its components rutile and by-products ilmenite and zircon. Silos and Domes capable of storing 32,000 tonnes of product. Port built to load over 200,000 tonnes of rutile per year. Shipping fleet comprising two push boats and 1,000 2,000 tonne barges used to transport product to deep water buoys for loading on to international vessels. 2

5 Significant infrastructure in place Mineral separation plant expandable to >200,000 tonnes of rutile per annum Established port and shipping fleet with capacity to ship >200,000 tonnes per annum of rutile A modern MFO power plant capable of producing 23MW of power (current utilisation under 9MW) Over 80km of established haulage roads Modern engineering and camp facilities in place Skilled and experienced workforce Experienced management team 30 years of experience operating Sierra Rutile 95% Sierra Leone nationals Highly educated employees Significant recruitment from premier universities of Sierra Leone, Fourah and Njala Official opening of the Lanti Dry Mining operations in January 2013 by Minister of Mines, Hon Minkilu Mansaray 3

6 Chairman s Statement Transformational operating improvements Last year I reported that 2011 had been a year of transition, marked by significant operational improvements in the Group and that we were beginning to see the benefit of higher production levels as a result of these actions. I am therefore delighted to be able to report that 2012 has been a year of delivery, a year in which our rutile production has seen a step change in volume, increasing by 39% to 94,493 tonnes. In addition, we also completed the Lanti Dry Mining project, which is now in the final stages of commissioning. Sierra Rutile is poised to produce 125,000 tonnes of rutile in 2013, an 84% increase in production from Jan Castro Non-Executive Chairman Most importantly, these improvements in operating performance have translated into an improved financial performance. Revenues increased by 226% to US$179.1 million, with EBITDA of US$107.8 million in the year demonstrating a marked turnaround from the prior year s EBITDA of US$0.1 million. Recognising the significant cash flow generating potential of the Group, the Board of Directors recently approved a new dividend policy with the aim of distributing at least 50% of free cash flows after capital expenditures, committed future expenditures and the repayment of any borrowings to shareholders. The first dividend payment will be considered once the timing of the Gangama Dry Mining project is determined. 4

7 Of course, 2012 was also a story of two halves in the titanium feedstock market, with demand significantly slowing in the latter part of the year. While there is evidence of the market improving, we firmly believe that our approach of focusing on long-term value creation, including targeted, low-capex growth projects and efficiency improvements is the best strategic approach for the Group and optimal in almost any market environment. We also remain very positive regarding the drivers of our markets in the medium and long-term. As ever, Sierra Rutile s achievements would not have been possible without the dedication and talents of our employees, many of whom have been with the Group for a long time. It is truly fortunate, as we continue to improve our operations and implement our capacity expansion that we can draw upon such a deep and experienced pool of talent. The health and safety of our workforce is paramount to the business. Our safety record for 2012 again showed marked year-on-year improvement, with a reduction in lost time injury frequency of 23% compared to Sierra Rutile remains committed to the health and safety of both our workforce as well as those that come into contact with our operations, whether through their work as subcontractors, as suppliers or as people from the local community. During the year we also took significant steps to develop agricultural opportunities within Sierra Rutile land. With over 55,000 hectares of land in our mining concessions, and given the region s ample rainfall, fertile soil, and location near the equator, we believe that there is a compelling business case for an agribusiness that also provides substantial employment opportunities for the surrounding population. We continue to believe that by combining our strong commitment to our workforce and local communities with our methodical approach to value creation, focused on sound planning and risk management, we are laying the foundation for the delivery of long-term value for all our stakeholders. Jan Castro Non-Executive Chairman Sierra Rutile recognises that our operations are intrinsically interlinked with the surrounding communities, and that it is essential that all stakeholders, not just shareholders, benefit from Sierra Rutile s success. We remain committed to pursuing initiatives and partnerships that improve the quality of the lives and employment opportunities of those residents in our local communities. Our medical facility treated over 22,000 people last year, and we offered free health education, mosquito nets for the prevention of malaria, and HIV testing. A local technical college, sponsored by Sierra Rutile, provides education to over 300 students. Additionally, the Sierra Rutile Foundation, funded by the Group, provides funding to projects such as school buildings, court house construction, the creation of a local radio station, grain storage construction, sanitation development, well drilling and the donation of generator sets to local health clinics. Sierra Rutile is committed to the preservation of the environment and to the continual rehabilitation of disturbed areas. In 2011, we completed a full survey of all disturbed lands from the past 45 years and developed a legacy mine disturbance remediation plan to be implemented over six years, enabling us to return these lands to the local community for full use. I am glad to report that we managed to rehabilitate 141 hectares of disturbed land last year, 20 hectares above our target. 5

8 Chief Executive s Statement A step change in production These are a strong set of financial results that serve to illustrate the significant improvements we have implemented at Sierra Rutile since With our continued strong production from existing assets and the introduction of our growth projects, scheduled to deliver significant production increases over the coming years, we are extremely well positioned for the future. John Bonoh Sisay Chief Executive Officer If 2011 was a year of transition for Sierra Rutile, then 2012 has been a year of delivery. Our first objective was to continue delivering on production, which, as was the case in 2011, we succeeded in doing. This was a greater achievement than in 2011 as the 2012 target included a step change in production, driven by our renewed asset investments of recent years. While we were always confident that our investments would yield sustainable production increases, it remained an important milestone to prove this, and to prove it on an aggressive timeline. Particularly pleasing was the setting of new production records, which we achieved on both a monthly and quarterly basis during the year. 6

9 Our second objective was to deliver on our first expansion project, Lanti Dry Mining. This was the first major expansion of Sierra Rutile s production capabilities since the operation s restart and we were pleased to be able to deliver the project both on budget and on schedule, a schedule that we had actually accelerated from our original estimates. Furthermore, we learned a significant amount about such projects, which I am confident will prove invaluable as we execute further expansions in the future. We also delivered on our objective to define the next stage of growth for Sierra Rutile, completing studies on a number of expansion possibilities. The Gangama Dry Mining project, on which a pre-feasibility study was conducted, combines low-capex, a short construction period and the optionality of phased implementation. This makes the project well suited to serving our increasing market. The feasibility study on the Gangama Dry Mining project is expected to be completed during the second quarter of Additionally, a scoping study was completed on dredge mining of the Sembehun deposit. This study yielded strong economics and provides a good basis for a long-term increase in production beyond the current level. Finally, we were able to advance our nascent agribusiness, African Lion Agriculture ( African Lion ), with a strong management team and the establishment of trial crop nurseries. Not only does African Lion provide us with the opportunity to further support social development and the creation of job opportunities, but it also represents a compelling business opportunity, given our land concessions, fertile soils and productive climate. Finally, I would like to thank our employees, the local communities in which we operate, as well as the Government and people of Sierra Leone for their continued support. This ongoing support positions us well to enjoy many more years of the success that we have experienced during John Bonoh Sisay Chief Executive Officer 7

10 Financial Review Generating substantial cashflow Cash and Liquidity As at 31 December 2012, the Group had a net cash balance of US$5.1 million (US$10.7 million as at 31 December 2011) and trade receivables of US$34.3 million liquidated within a month of year end (2011: US$8.1 million). At the year end, the Group was also carrying an inventory of 26,807 tonnes of rutile (14,064 tonnes as at 31 December 2011) and 4,291 tonnes of ilmenite, which has a balance sheet value of US$25.2 million (US$6.6 million as at 31 December 2011). During the year the Group invested US$57.5 million in property, plant and equipment with US$23.0 million being spent on existing operations and US$34.5 million on expansion projects. On 30 April 2012, the Group entered into an agreement with the GOSL to pay, in cash, PAYE taxes that had historically been satisfied through the issuance of shares in Sierra Rutile s operating subsidiary in Sierra Leone. As part of the agreement the shares held by the GOSL were transferred back to Sierra Rutile. The total cost of this agreement was US$13,123,000, which included payment in respect of PAYE liabilities that had not yet been settled by share issuances. Additionally, as part of the agreement, the GOSL also agreed to settle its payable to Sierra Rutile of US$727,000 previously recorded as a non-current receivable. The net cash outflow for Sierra Rutile was therefore US$12,396,000. The non-controlling interest balance previously recognised of US$19,063,000 was also eliminated with the balance being recorded within retained loss in accordance with IAS27 Consolidated Financial Statements. Concurrent with this agreement, the Group also prepaid US$5,200,000 of PAYE taxes to the GOSL. 8

11 Turnover The Group was able to benefit from its increased sales volume as well as a strong pricing environment in 2012 as the majority of sales were no longer made on long-term contracts. Rutile, ilmenite and zircon and other concentrates sales of US$179.1 million in 2012 were 226% above the US$55.0 million achieved in In 2012, the Group sold 80,894 tonnes of rutile generating revenue of US$165.1 million (2011: 60,499 tonnes for US$40.1 million), 19,643 tonnes of ilmenite generating revenue of US$6.6 million (2011: 19,090 tonnes for US$4.0 million) and 28,232 tonnes of zircon and other concentrates generating revenue of US$7.4 million (2011: 12,901 tonnes for US$10.9 million). The major contribution to the increase in sales in 2012 over 2011 was the significantly stronger pricing obtained with an average realised price for rutile in 2012 of US$2,041/tonne (2011: US$662/tonne), combined with the increased volume of product sold. Cost of Sales Rutile cash production costs decreased 9% to US$637 per tonne (2011: US$701 per tonne) as a result of increased production and the impacts of fixed asset and maintenance investment during 2011 and On an absolute basis, cost of sales were higher at US$78.3 million for the year from US$55.2 million in 2011 due to the greater volume of rutile sold, and impacted by: increased production and shipping costs of US$49.6 million (2011: US$34.3 million) required to support increased production; and increase in depreciation charge to US$15.9 million (2011: US$9.1 million) mainly due to additional depreciation on Land Plant Upgrade assets. The Group remains committed to controlling costs and continue to focus on many cost reduction programmes. Administrative and Marketing Expenses Administrative expenses increased by US$0.7 million from US$12.8 million in 2011 to US$13.5 million in 2012 principally due to non-cash expenses related to the Group s stock option plan and costs relating to senior management bonuses. Exceptional Items The Group recorded an exceptional gain of US$0.2 million (2011: loss of US$13.1 million). The 2012 amounts relate to a release of a US$0.5 million tax provision provided in the prior year offset by a US$0.3 million loss related to a barge damaged during the year. The 2011 amounts comprised three non-cash amounts. Following a strategic review and incorporating the findings of a number of consultants including Snowden Group, CPG Resources and Titan Salvages, management wrote down the US$10.1 million carrying value of the dredge which capsized in 2008, and the US$2.2 million carrying value of the partially constructed replacement dredge. In addition, a provision of US$0.7 million was raised for a potential tax exposure arising on the sale of Sierra Minerals Limited in Borrowings Net finance costs increased from US$1.8 million in 2011 to US$3.4 million in The increase was principally due to the appreciation of the Euro against the US Dollar and the impact this had on the Euro-denominated loan from the GOSL, which contributed to the net foreign exchange loss of US$0.6 million in 2012 (2011: gain of US$1.2 million). The underlying interest expense decreased from US$3.0 million in 2011 to US$2.6 million in 2012 principally due to the full year impact of the principal repayment of US$17.1 million in The next repayment of principal on the loan from the GOSL of US$2.8 million is due in December Prior to this date only interest on the loan is payable. The final instalment on the loan will be repaid in December

12 Business Review Operational expansion on schedule Group Overview Sierra Rutile produces rutile, a high-quality feedstock for the global titanium dioxide pigment industry, a raw material for the production of titanium metal, and a raw material for high-quality welding applications. Sierra Rutile also produces and sells an ilmenite ore, a lower grade titanium dioxide ore and on a selective basis, produces and sells quantities of zircon and other concentrates and other tailings concentrate that contains a variety of minerals. Sierra Rutile s mine, located in southwest Sierra Leone, is one of the largest natural rutile deposits in the world, with a JORC-compliant Mineral Resource for measured, indicated and inferred resources for the Sierra Rutile mine of over 800 million tonnes (as at 31 August 2012). Sierra Rutile currently operates a single bucket ladder dredge with a new dry mining project at Lanti currently in the final stages of commissioning, with forecast production of 30,000 to 35,000 tonnes per annum. 10

13 On 31 October 2012, the Group announced the next stage of its expansion strategy, Gangama Dry Mining, which is forecast on completion to have an average annual production rate of 83,400 tonnes of rutile, 46,000 tonnes of ilmenite and 9,500 tonnes of zircon and other concentrates over six years. The feasibility study into Gangama Dry Mining is scheduled for completion in the second quarter of Mission, Vision and Values Mission We aim to deliver long-term shareholder value through the sustainable and efficient operation of the world-class Sierra Rutile mine. Vision To create a national champion for Sierra Leone, recognised as a global leader in the mineral sands industry, by: developing the significant value contained in the Group s mineral deposits; improving operational performance through the application of best practices; working in partnership with local communities and the GOSL to ensure the Group maintains and builds upon its social licence to operate; and increasing the Group s portfolio through the addition of other minerals assets within Sierra Leone or other mineral sands operations worldwide. Sierra Rutile Mine The Sierra Rutile mine is located in the south west of Sierra Leone near the Imperri Hills, some 30 km from the Atlantic Ocean, on low lying coastal plains about 135 km south east of the capital Freetown. Sierra Rutile holds mining leases over a land area of 580 sq. km in which nineteen separate rutile deposits have been identified. The mine currently employs a bucket ladder dredge and conventional mineral processing methods to produce rutile and an ilmenite by-product. Further by-products are periodically produced, including a zircon concentrate and other mineral concentrates. During 2012, the Group completed the construction of a new production unit, Lanti Dry Mining, which will produce concentrate using conventional dry earthmoving techniques. This concentrate will then be processed in existing mineral processing facilities to produce rutile and ilmenite by-product. The Lanti Dry Mining project is currently in the commissioning stage. Values Health and Safety: the health and safety of our workforce is the first and foremost consideration. Our approach to health and safety is based on the principle of accident avoidance for our employees, and we aim to implement a policy that is consistent with the best global standards. Community: Sierra Rutile is committed to being a positive force not only in the communities around the minesite but Sierra Leone as a whole. The Group pursues a number of initiatives and partnerships, including the Sierra Rutile Foundation, which are designed to improve the lives and opportunities of the people of Sierra Leone. Environment: the Group aims to minimise the environmental impact of its mining operations and is committed to the rehabilitation of land affected by current and historical mining activity. Operations: the Group seeks to maximise production and operational efficiency at the Sierra Rutile mine. The expansion and optimisation of production will allow the Group to deliver long-term profitability and capitalise on the unique potential of the Sierra Rutile resource. 11

14 Business Review continued 12

15 Sierra Rutile Mine continued On 31 October 2012, the Group announced a significant additional expansion project, the dry mining of the Gangama deposit, on which a feasibility study is scheduled for completion in second quarter of Total revenue US$m 179,094 The mine is self-sufficient and generates its own power through its marine fuel oil ( MFO ) power plant, operates its own port, maintains local road infrastructure, has its own clinic and generally provides and maintains its own infrastructure and ancillary services. 39,423 36,849 43,914 54,962 During 2012, the Group continued with its resource expansion programme to extend the mine life of its operations. Drilling was completed across a number of areas of the deposit, including tailings to identify potential extensions to the existing mineral resource. Geological drilling was also completed at the Gangama deposit in order to assist with the future dry mining design requirements. Additionally during the year the Group obtained three exploration licences for areas which are adjacent to the current mining licence area, the Semabu, Jagbwema and Gbangbaia deposits. Sierra Rutile will commence with a phased exploration programme and mineral resource evaluation across all three exploration licence areas during Rutile production MT 78,908 63,864 68,198 67,916 94, Moving into 2013, the Group is accelerating the exploration programme which will concentrate exploration efforts on the existing mining licence area and the reconnaissance licence areas to optimise Sierra Rutile s dredge deployment strategy and longer-term dry mining plans, while at the same time improving existing mine planning and expanding the current ore reserve. Capital expenditure US$m 31,900 57,500 The mineral resource announced in 2011 identified the presence of potentially value-enhancing tailings in High Tension Tailings ( HTTs ) produced as a by-product of the Group s ongoing mining activities. In March 2011, a further study of the HTTs confirmed the presence of tailings at grades of 2.2% in the tailings stream. 15,300 8,700 4,

16 Business Review continued Mineral Resources Estimate The mining concession is one of the largest natural rutile deposits known in the world. In August 2012, the Group obtained an upgraded JORC-compliant Mineral Resource for the Sierra Rutile mine, which estimated that the total measured, indicated and inferred resources were over 800 million tonnes. Grade (%) Contained Tonnes (Kt) Category Tonnes Millions Rutile Ilmenite Zircon Rutile Ilmenite Zircon Measured Indicated , , Total , , Inferred ,610.0 Total ,461.3 Mineral Resources are reported in accordance with the JORC Code Key Project Pipeline Lanti Dredge, Floating Treatment Plant, Mineral Separation Plant and associated infrastructure Following a capital investment programme initiated in October 2010, operational improvements have driven significant production increases. Most recently, in June 2012, a major planned maintenance was completed, focused on upgrading key components of the dredge and equipment in the mineral separation plant, with the objective to increase both the throughput and efficiency of existing operations. These refurbishments included: upgrades to the Lanti Dredge bucket ladder, including addition of auto-samplers; replacement of product barges; expansion of critical spare parts inventory; and complete upgrade of the floating treatment plant, including, new rougher, mid and scavenger spirals, and de-sliming cyclones. The record monthly production in July 2012, of 10,551 tonnes of rutile, was a direct result of the June 2012 enhancements and the cumulative result of the last twenty months efforts. Substantial improvements in process recoveries have contributed to increased production, culminating in record annual production of 94,493 tonnes of rutile in Lanti Dry Mining In October 2011, the Group announced the commencement of the Lanti Dry Mining project, focusing on high-grade resources inaccessible to dredge mining. This project is forecast to add production of 30,000 to 35,000 tonnes per annum of rutile as well as ilmenite by-product. Construction of the Lanti Dry Mining plant was completed, on time and on budget, during the fourth quarter of 2012 and commissioning is well progressed. First ore was successfully processed through the concentrator and the concentrate was transferred for onward processing in the mineral separation plant. Production ramp-up is continuing. 14

17 Project update: ore processing plant is in final stages of commissioning, on budget and ahead of time; supervisors and operators are onsite and fully trained; and heavy mineral concentrate is currently being produced. Gangama Dry Mining On 31 October 2012, the Group announced a prefeasibility study into the dry mining of the Gangama deposit ( Gangama Dry Mining ). The pre-feasibility study reported an exceptional project with a pre-tax NPV 1 of US$507 million, an impressive 238% pre-tax IRR and a payback period of just eight months. The project replicates, on a larger scale, the Lanti Dry Mining project that successfully entered commissioning in the fourth quarter of Gangama Dry Mining represents a much lower-risk and lower capital intensity option for increasing Sierra Rutile s production to the 200,000 tonnes per annum level. The Group has commenced detailed engineering work and project implementation plans on the project and a feasibility study is scheduled for completion in the second quarter of The Gangama Dry Mining project will, upon completion, treat 1,000 tonnes per hour of ore. Both earth moving equipment and the concentrator are consistent with those used in Lanti Dry Mining operation. Production will target high-grade resources, resulting in forecast production of over 83,000 tonnes of rutile per annum. Dry mining the Gangama deposit will provide access to a high-grade resource and given the relatively short construction period, low capital intensity and option to develop in stages, allows a flexible commencement and ramp-up scheduled that can be matched to developing market conditions for rutile. Sembehun Dredge In October 2012 the Group also announced the Sembehun Dredge Mining project, following completion of a scoping study conducted by external consultants. The prefeasibility study reported a pre-tax NPV 1 of US$347 million and forecast average annual production profile of 113,000 tonnes of rutile and 66,000 tonnes of ilmenite over a life of twenty-two years. The Sembehun Dredge represents the next step change in production for Sierra Rutile. The Sembehun Dredge project would consist of a 1,875 tonnes per hour bucket ladder dredge and associated floating concentrator plant, a 50 tonne-per-hour mineral separation plant, an 18.6MW power plant, and all site infrastructure required to support an independent operation, accompanied by a new mineral separation plant and associated infrastructure to process concentrate from the Sembehun Dredge. Agricultural Opportunities Significant steps have been taken to explore the agricultural opportunities within Sierra Rutile land with the establishment of a wholly-owned subsidiary specifically for that purpose. During 2012 a leadership team was put in place and nursery plantations for prospective crops were developed. With over 55,000 hectares of land in its mining concessions, and the region s ample rainfall, fertile soil, and location near the equator, Sierra Rutile believes that there is a compelling business case for an agribusiness that also provides substantial employment opportunities for the surrounding population. 1 Based on price and market conditions prevailing at the time of study as produced by TZ MINERALS INTERNATIONAL ( TZMI ). Key Performance Indicators ( KPIs ) KPIs Rutile Production (MT) 78,908 63,864 68,198 67,916 94,493 Turnover (US$ million) Current Assets (US$ million) Gearing * 28.2% 29.9% 27.4% 19.6% 14.8% Assets Turnover ** 30.3% 20.9% 24.5% 33.5% 72.7% EBITDA *** (US$ million) (30.4) 9.7 (0.8) Net Cash & Cash Equivalents (US$ million) Capital Expenditure (US$ million) Lost Time Injuries Fatalities * Gearing, is calculated as the ratio of debt to debt plus equity. ** The asset turnover ratio, which measures the efficiency of a company s use of its assets in generating sales revenue and is calculated as the ratio of revenue to total assets. *** Earnings before interest, tax, depreciation and amortisation excluding exceptional items and non-cash stock option expenses. 15

18 Corporate Social Responsibility A partnership with Sierra Leone Environmental, Health and Safety ( EHS ) The year 2012 saw continued improvements in health and safety performance at Sierra Rutile, with the Group outperforming its target of a 20% reduction in lost time injury frequency by cutting lost time injury frequency by 23% compared to Key EHS Indicators Number of: Fatalities Lost Time Injuries We remain committed to continually improving our performance in this vital area. The Company is currently completing a comprehensive first aid training programme to cover all locations and shifts, conducting a formal baseline health and safety risk assessment and developing a formal system of health and safety standards, training, auditing and management accountability. Occupational Health The Sierra Rutile Clinic, which supports all ongoing initiatives, treated approximately 1,900 people a month in 2012, the majority of whom are our employees and their families. We also run additional weekly clinics in local communities to provide basic and emergency public healthcare. During the year the clinic treated 3,300 employees and members of the local communities for malaria and 1,933 for typhoid. The Group is currently assessing the impact of its malaria and typhoid eradication intervention programme in 2011 in which 5,000 mosquito nets and typhoid vaccines were distributed to employees and local communities. Sierra Rutile continued its successful partnership with NGOs, the Mine Workers Union and the National AIDS Secretariat of Sierra Leone ( NAS ) to address the prevention of HIV/AIDS. During the year the Group sponsored a study to assess the impact of its HIV/AIDS programme; the study was undertaken by NAS with support from International Labour Organization, ILO/AIDS (Geneva) and the Opec Fund for International Development ( OFID ). The main objective of the study was to obtain estimates of HIV prevalence and key behavioural indicators relating to HIV transmission and prevention methods. 16

19 Community Sierra Rutile is committed to being a positive force in the communities around the mine site as well as in Sierra Leone as a whole. The Group pursues a number of initiatives and partnerships, including the Sierra Rutile Foundation, which are designed to improve the lives and employment opportunities of the people of Sierra Leone. Training and recruiting the next generation of skilled employees is an important part of Sierra Rutile s longterm business strategy. Growing competition for skilled labour in Sierra Leone, the ageing nature of the Group s workforce and the desire to improve the lives of the local populace mean it is increasingly important to support education initiatives in the areas around the mine. During 2012, the Group continued to support the Sierra Rutile Technical Institute. The Institute teaches relevant technical and engineering skills to young people in the communities around the mine site. The Institute currently offers diploma level courses in civil, electrical, mechanical and automobile engineering and teaching certificate level courses in business studies and information technology. It is hoped that the Institute will significantly improve the long-term employment prospects for the people living around the Sierra Rutile mine and promote increased recruitment of local Sierra Leoneans and lower its reliance on expatriate workers. There are currently 12 staff and over 300 students enrolled in the Institute s various courses. Access to clean water is one of the most important factors in ensuring the health and well-being of the communities around the mine site, and the Group is rehabilitating old wells and constructing new ones in order to provide a long-term solution for local villagers water needs. Sierra Rutile Foundation The Group contributed US$150,000 to the Sierra Rutile Foundation in 2012 (2011: US$150,000), which was set up in 2006 to finance sustainable community development initiatives in the areas surrounding the Group s operations. The Foundation is managed by an independent board of trustees. In 2011, after consultation with representatives from chiefdoms in the area of the mine, the Foundation completed the construction of a number of development projects to support the local community, including: the construction of a resource centre and a radio station in the Imperri chiefdom; and the construction of a clean waterwell with hand pump and sanitation facilities for the Jong, Upper and Lower Banta chiefdoms. In 2012, the Foundation completed the following projects: Barrays, water wells with hand pumps and latrines in Imperi and Jong Chiefdoms; Jetty and waiting sheds in Upper Banta Chiefdom; Construction of a bridge in Bagruwa Chiefdom; Construction of a new primary school in Imperi Chiefdom; Rehabilitation of the court administrative building in Lower Banta Chiefdom; Operational support to the JADA Technical Institute; and Clearing and installation of radio station in Imperi Chiefdom. The Group itself also completed the following projects in 2012: Construction of seven houses; Construction of five latrines and kitchens in Nyandehun Village; Rehabilitation of police station in Imperi Chiefdom; Rehabilitation of seven water wells; Construction of six new water wells; and Undertaking an impact assessment study of the Sierra Rutile HIV/AIDS Programme. Environment The Group aims to minimise the environmental impact of its mining operations and is committed to the rehabilitation of land affected by current and historical mining activity. The mining processes used at Sierra Rutile have a relatively limited impact on the environment and no large-scale mining pits are created. However, the creation of dredge ponds and sandy tailings areas can impact the land and require the resettlement of communities. The various types of trees that were planted in previous years on former mine works, as part of both the Darwin Initiative and the Group s own projects, have all been successful, and the Group will continue to observe their growth rates to determine the best strategy going forward for land rehabilitation. In 2011, the Group commissioned a third party to conduct a full survey of historically disturbed land. Following this analysis a plan was developed and is being implemented to rehabilitate all legacy disturbed areas over the next six years. In 2012, Sierra Rutile rehabilitated hectares of disturbed land comprising filling of sand tailings and borrow pits, through the planting of various types of trees including cashew, guava, acacia, oil palm, mango, moringa and almond. It is intended that the trees will, in due course, provide the basis for local communities to develop agribusiness opportunities. The Group s aquaculture project for the rehabilitation of mined-out dredge ponds continued in 2012, with a total of 147,247 tilapia and cat fish stocked. In 2013 the Group plans to rehabilitate some old fish breeding ponds and introduce over 180,000 fish into the dredge ponds. 17

20 Principal Risks The table below sets out the major strategic and operational risks which the Group faces and their potential impact on our future performance, and our strategy for managing them. Principal Risk Exploration and estimates of mineral reserves and resources Mineral exploration and development involves a high degree of risk. Success in exploiting mineral resources and reserves is the result of a number of factors, including the level of geographical and technical expertise, the quality of land available for exploration and other factors. The economics of developing mineral properties are affected by many factors including the cost of operations, variations in grade, fluctuation in prices and fluctuation in exchange rates. Failure to meet project delivery timetables and budgets may impact potential performance, delay cash inflows and increase capital costs. Mineral reserves and resources estimates for projects are based on the interpretation of geological data obtained from drill holes and other sampling techniques and feasibility studies which derive estimates of costs based upon anticipated tonnage and grades to be mined and processed. There are numerous uncertainties inherent in estimating ore reserves and assumptions that are valid at the time of estimation may change significantly when new information becomes available. Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of reserves and may, ultimately, result in the reserves being restated. Operating risks The activities of the Group are subject to all of the hazards and risks normally associated with exploration, development and operation of natural resource projects. These risks and uncertainties include environmental hazards, industrial accidents, labour disputes, mechanical failures of the dredges or other key plant or machinery, grade problems, and periodic interruptions due to inclement or hazardous weather conditions and other acts of God. Should any of the risks affect the Group, it may significantly reduce production for prolonged periods and cause the cost of production to increase to a point where it would no longer be economic to continue operations. Mitigation The Group engages independent external consultants to review exploration work and produce resources and reserves estimates, supplemented by its own in house experts. The Group has employed highly skilled personnel in all its businesses. Current projects like Lanti and Gangama Dry Mining initiatives are set to de-risk the operations by reducing reliance on the dredge. Insurance Common to other mining companies, Sierra Rutile is subject to risk which could result in damage to or destruction of mineral properties and operating assets, personal injury or death, environmental damage, delays in extraction and possible legal liability. Accordingly, Sierra Rutile may suffer losses, liabilities or damages against which it cannot insure or against which it may elect not to insure because it is too expensive relative to the perceived risk. Should such liabilities or damages arise, they could reduce or eliminate any future profitability, result in increased costs and the loss of the Group s assets and a decline in the value of the Group s securities. The Group retains insurance cover with reputable organisations on all its operations and constantly monitors such for adequacy taking regard of its expansion projects. 18

21 Principal Risk Competition The mining industry is competitive in all of its phases. The Group faces strong competition from other mining companies in connection with the acquisition of mineral properties, as well as for the recruitment and retention of qualified employees. Larger companies, in particular, may have access to greater financial resources, operational experience and technical capabilities than the Group which may give them a competitive advantage. Mitigation The Group constantly reviews its human resources policy to ensure it can continue to attract and retain key and experienced staff. Volatility of mineral prices The future profitability of the Group will depend on the market price of rutile. Mineral prices fluctuate widely and are affected by numerous factors beyond the Group s control, including global supply and demand, political and economic conditions, advancements in mineral processing and currency exchange fluctuations. The effect of these factors on the price of rutile cannot accurately be predicted. Constant review of our production and cash costs per tonne and ensuring our operations are low cost and efficient. Current projects like Lanti and Gangama Dry Mining initiatives are likely to further reduce production costs per tonne. The Group regularly reviews quarterly updates from the global mining industry and engages independent external advisors to help with market analysis. Constantly engage with the customer base. Political risk The Group s properties are located in Sierra Leone and its operations may be affected to varying degrees by political and economic instability, crime, fluctuations in currency exchange rates and inflation. Whilst there can be no certainty about the future stability of the country, we note that there was a successful national election undertaken in November 2012 which was largely peaceful. Protection of assets and personnel Unless the Government can provide the necessary degree of peace, order and security, the cost to, and the ability of, the Group to maintain effective security over its assets in Sierra Leone will be adversely affected. The Group works closely with the GOSL and the local communities in which it operates. The Group through its EHS and government relations department maintains a transparent and regular communication with local communities, GOSL and all stakeholders. Active engagement and dialogue with the GOSL and Ministry of Mines. In 2009 the Group appointed a specialist security service to manage the Group s security needs. The primary focus of the team is on loss prevention, and the appointment of the specialist security service is showing a positive impact through a reduction in levels of theft. The primary focus of the team is on loss prevention, and the appointment of the specialist security service is showing a positive impact through a reduction in levels of theft. 19

22 Principal Risks continued Principal Risk Title to properties The Group is satisfied that it has taken reasonable measures to ensure that proper title to the mining leases of Sierra Rutile has been obtained and that all grants of mineral rights for the Group s properties have been registered in the appropriate deeds offices. No assurance can be given; however, that any lease, licence or permit held by the Group will not be challenged or impugned in the future. Mitigation Monitor licences issued by the GOSL to ensure there are no conflict of interest issues over the Group s licensed tenure. Government regulation The Group s mining operations are located in Sierra Leone and are subject to its laws and regulations governing expropriation of property, health and worker safety, employment standards, waste disposal, protection of the environment, mine development, land and water use, prospecting, mineral production, exports, taxes, the protection of endangered and protected species and other matters. While the Group believes that it is in compliance with all material laws and regulations currently affecting its activities, future changes in applicable laws, regulations, agreements or changes in their enforcement or regulatory interpretation could result in changes in legal requirements or in the terms of existing permits and agreements applicable to the Group or its properties, which could have a material adverse impact on the Group s current operations or future development projects. Where required, obtaining necessary permits and licences can be a complex, time-consuming process and the Group cannot be sure whether any necessary permits will be obtainable on acceptable terms, in a timely manner or at all. Active engagement and dialogue with the GOSL and Ministry of Mines. The Group actively engages regulators and keeps a sound compliance register for all major regulatory announcements and proposed legislation. Initiatives to support local communities in which the Group operates as reflected in the Corporate Social Responsibility statement. Environmental regulation Environmental and safety legislation (e.g. in relation to reclamation, disposal of waste products, protection of wildlife and otherwise relating to environmental protection) may change in a manner that may require stricter or additional standards than those now in effect, a heightened degree of responsibility for companies and their directors and employees and more stringent enforcement of existing laws and regulations. There may also be unforeseen environmental liabilities resulting from mining activities, which may be costly to remedy. If the Group is unable to fully remedy an environmental problem, it may be required to stop or suspend operations or enter into interim compliance measures pending completion of the required remedy. The potential exposure may be significant and could have a material adverse effect on the Group. Active engagement and dialogue with the GOSL and Ministry of Mines. The Group actively engages regulators and keeps a sound compliance register for all major regulatory announcements and proposed legislation. Initiatives to uplift local communities as reflected in the Corporate Social Responsibility statement. Task undertaken to rehabilitate all legacy areas disturbed with the consultations of GOSL. The Group, through its EHS Board Committee continuously reviews and implements sound environmental health and safety policies. 20

23 Principal Risk Mitigation Rehabilitation Costs associated with rehabilitating land disturbed during the mining process and addressing environmental, health and community issues are estimated and provided for based on the most current information available. Estimates may, however, be insufficient and/or further issues may be identified. The Group, through its EHS Board Committee continuously reviews and implements sound environmental health and safety policies. Annual review of rehabilitation cost estimates are conducted and taken into account during the business planning process. Energy cost and supply The Group s operations are energy intensive and, as a result, the Group s costs and earnings could be adversely affected by rising energy costs or by supply disruptions. Power consumption is tracked on a monthly basis. Continuous investment in the newly upgraded powerhouse plant, and use of cheaper MFO fuel to power our generators. Emergency generator capacity is in place. A one month reserve of MFO is kept. Currency risk While the Group s revenue and expenditures are principally in US dollars, a significant portion of the Group s expenses incurred in connection with the projects are in Sierra Leone s local currency, the Leone. In addition, the GOSL loan facility is in Euros. As a result, fluctuations in currency exchange rates could have a material adverse effect on the financial condition, results of operation or cash flow of the Group. The Group has not entered into any hedging arrangements with respect to foreign currencies. Daily monitoring of exchange rates is conducted. The Group maintains a low level of debt to capital ratio (currently 14%). Dependence on key personnel, contractors, experts and other advisors The success of the operations of the Group is dependent to a significant extent on the efforts and abilities of its management, outside contractors, experts and other advisors. The Group has a small management team and the loss of a key individual could affect the Group s business. While the Group has entered into service agreements with certain of its key executives, the retention of their services cannot be guaranteed. Accordingly, the loss of any key executive or manager of the Group may have an adverse effect on the future of the Group s business. Sierra Rutile maintains focus on talent management, career development and performance management as integral parts of its human resource development. The Group s policy is to pay a competitive salary that attracts and retains personnel of the highest quality having regard to their experience, nature, complexity and location of their work. The Group continues to create a management pipeline in all areas of the business. 21

24 Board of Directors Jan Castro Non-Executive Chairman Mr. Castro is the founder and Chief Executive Officer of Pala Investments Limited, an investment company dedicated to investing in, and creating value across, the mining sector. Pala seeks to assist companies in which it has long-term shareholdings by providing strategic advice and innovative financing solutions. Prior to founding Pala in July 2006, Mr. Castro was Senior Vice President of Investments and Corporate Affairs for Mechel OAO, a NYSE-listed company and one of Russia s largest mining and metals companies listed on the New York Stock Exchange. Mr. Castro currently serves on the Boards of Alacer Gold (TSX: ASR), Nevada Copper (TSX:NCU), and Asian Mineral Resources (TSX-V:ASN) where he is the Chairman of the Board. Michael Barton Non-Executive Director Mr. Barton is currently a Managing Director of Pala Investments Limited and has been involved in many of Pala s largest transactions, including Pala s investments in Anatolia Minerals Development Corporation, Avoca Resources Limited, Dumas Contracting Limited and Norcast Wear Solutions. Previously, Mr. Barton was Vice President at Hatch Corporate Finance, a company specialising in providing corporate finance advisory services to the metals and mining industry. He currently serves on the boards of Peninsula Energy Ltd (ASX: PEN), Elemental Minerals Ltd (ASX/TSX: ELM) and WDS Limited (ASX: WDS). Mr Barton is a qualified chartered accountant and a member of the Securities and Investment Institute. John Bonoh Sisay Chief Executive Officer Mr. Sisay has accumulated considerable experience within the African mining sector having worked in over ten African countries. Mr. Sisay started his career as a graduate trainee at the Central Selling Organisation ( CSO ) of De Beers Consolidated Mines, Ltd. After working at De Beers, Mr. Sisay joined America Minerals Fields, now part of First Quantum, working on new acquisitions for the company, particularly in the Democratic Republic of Congo. Additionally, he has served as President of the Sierra Leone Chamber of Mines and as a Non-Executive Director for Diamond Fields International and Vimetco S.L. Mr. Sisay joined Sierra Rutile in He periodically serves as an advisor to the Government of Sierra Leone on mining-related issues. Michael Brown Non-Executive Director Mr. Brown is currently a Senior Vice President of Pala Investments Limited. He formerly served as the Chief Operating Officer of De Beers Consolidated Mines Ltd ( DBCM ), and Director of De Beers Group Services and De Beers Marine Limited. Mr. Brown worked at De Beers from 1990, holding a number of senior positions, including Head of Strategic Business Development at DBCM, General Manager of the Finsch Mine and Mine Manager at NAMDEB. He is a registered Professional Engineer (Pr. Eng) with the South African Council of Professional Engineers and a member of the South African Institute of Mining and Metallurgy. Mr Brown currently serves on the Board of Asian Mineral Resources (TSX-V: ASN). 22

25 Dr. Charles Entrekin Ph.D. Non-Executive Director Dr. Entrekin has over 35 years of experience in the mining and metals sector, acting both as an executive officer and as a consultant. He is currently Chairman of Melior Resources, Inc., and acts as an international consultant for numerous metal producers and financial houses. Previous executive positions include President and Chief Operating Officer of Titanium Metals Corporation, a NYSE listed producer of primary titanium and its alloys, as well as President and Chief Executive Officer of Timminco Ltd., a TSX-listed magnesium, silicon and aluminum company. Through his career Dr. Entrekin has led and implemented many successful restructurings and turnarounds of mining and metals companies internationally. Richard Lister Non-Executive Director Mr. Lister has over 40 years of experience in the industrial minerals and mining sectors. Currently acting as a consultant to various mining companies, Mr. Lister previously was President and CEO, as well as Vice- Chairman, of Zemex Corporation, a significant North American industrial minerals company. He also served as Vice-Chairman of Dundee Bancorp, a major Canadian wealth management company, and Chairman, President and CEO of Campbell Resources, a Canadian resource company with base metal, industrial mineral, coal, and oil and gas assets in Canada, the US and Mexico. Mr. Lister currently serves as a director of Labrador Iron Mines Holdings (TSX: LIM). Alex B. Kamara Non-Executive Director Mr. Kamara has considerable experience in the mining industry and in mechanical and electrical engineering. He was Head of Engineering at Sierra Rutile from 1982 to 1995, and head of the management team at the Sierra Leonean National Power Authority from 2000 to Mr. Kamara is a Sierra Leonean national and has been awarded the Order of Commander of the Rokel by the Government of Sierra Leone, a high civilian award in recognition of his contribution to engineering in Sierra Leone. He is currently Chairman of Standard Chartered Bank (Sierra Leone) Limited and a Director of Cemmats Group, a Sierra Leonean company which has a number of contracts with Sierra Rutile. 23

26 Directors Report The Directors submit their report and the audited financial statements of the Group for the year ended 31 December Results and dividend The results of the Group are shown on page 34. The Directors have not declared a dividend during the year (2011: US$nil). On 4 April 2013, the Board approved a new dividend policy which will aim to distribute to shareholders at least 50% of cash flows after capital expenditure, committed future expenditures and the repayment of any borrowings. The declaration of any future dividends, and the frequency of them, will be subject to the Group s financial condition, future prospects and satisfactory solvency tests and other factors deemed by the Board to be relevant at the time. Principal activities The Group s principal activity is exploring for, producing and marketing industrial minerals, primarily rutile, in Sierra Leone. The Group owns the Sierra Rutile mine in Sierra Leone. Business review A detailed business review can be found on pages 10 to 15. Post-balance sheet events These are disclosed in Note 26. Charitable contributions During the year the Group made charitable donations of US$150,000 (2011: US$150,000), principally to local communities in which the Group operates. Health, Safety, Environment and Communities The Group has agreed to take on the same performance obligations as members of the International Council on Mining & Metals and seeks continual improvement in non-financial performance so as to enhance shareholder value. Employee Policies and Involvement Our operations aim to record zero accidents causing harm to any individual through the following standards: we provide adequate control of health and safety risks and regular monitoring to assess the appropriateness of these risks over time; we provide appropriate training, equipment and maintenance to prevent accidents; we consult with employees at all levels to ensure that their instruction, supervision and levels of competency are appropriate to their position; we review and report on health and safety at our operations as part of internal management practice and external communications; and the Sierra Rutile mine site has a fully staffed and equipped clinic which is funded by the Group and provides free healthcare for employees, their dependants and the local population. Directors and their interests The names of the Directors who held office during the year and after the year end are listed below. Mr. Jan Castro (appointed 30 September 2010 and became Non-Executive Chairman 21 February 2011) Mr. John Bonoh Sisay (appointed 10 March 2008 and became CEO on 3 February 2009) Mr. Alex Kamara (appointed 10 March 2008) Mr. François Colette (resigned 26 June 2012) Mr. Michael Barton (appointed 30 September 2010) Mr. Michael Brown (appointed 14 October 2010) Dr. Charles Entrekin (appointed 10 December 2010) Mr. Richard Lister (appointed 20 March 2012) 24

27 The Directors who held shares as at 31 December 2012 and 31 December 2011 are: Number of shares held 31 December 2012 Percentage holding 31 December 2012 Number of shares held 31 December 2011 Percentage holding 31 December 2011 Mr. Jan Castro 891, % 75, % Dr. Charles Entrekin 58, % 10, % Mr. Michael Barton 52, % Mr. Michael Brown 145, % Mr. Richard Lister 100, % Directors liability insurance and indemnity The Group maintains liability insurance for the benefit of its Directors and officers which were made during the year and remain in force at the date of this report. Supplier payment policy The Group s policy is to agree terms of payment with its suppliers for each transaction, and to abide by the terms of payment. Share Capital Details are set out in the notes to financial statements. Substantial Shareholders So far as the Directors are aware, the following shareholders had an interest in 3% or more of the voting capital of the Group as at 31 December 2012: Holder No. of common shares Percentage holding Pala Minerals Limited 278,792, % M&G Investment Management Limited 100,732, % JPMorgan Asset Management Limited 45,505, % Neon Liberty Capital Management LLC 33,073, % Investec Asset Management 26,130, % In September 2011, Pala Minerals Limited ( Pala ), a subsidiary of Pala Investments Limited, made a mandatory offer for the shares in Sierra Rutile Limited it did not already own. The offer closed in November 2011, following which Pala held a majority interest in Sierra Rutile. Going Concern The financial position of the Group, its cash flows, liquidity position and borrowing facilities are set out in the Financial Review on page 8. At 31 December 2012, the Group had cash and cash equivalents of US$5.8 million (excluding overdrafts) and total borrowings of US$32.2 million. Details on the Group s borrowings are set out in note 19 to the financial statements. The Board has considered the Group s cash flow forecasts for the period to the end of December The Board is satisfied that the Group s forecasts and projections, taking account of reasonably possible changes in trading performance show that the Group will be able to operate with the level of its current facilities for the foreseeable future. Accordingly, the Board continues to adopt the going concern basis in preparing the financial statements. Annual General Meeting The AGM of the Group will be held at 3pm (British Summer Time) on Tuesday 9 July 2013 at 90 High Holborn, London, WC1V 6XX. The notice convening the meeting is being sent to shareholders with this report. Resolutions relating to the meeting are set out in the Notice of Meeting. 25

28 Directors Report continued Proxy Voting Proxy cards will be distributed to shareholders with the Notice of the AGM. Auditor Each of the persons who is a Director at the date of the approval of this Annual Report confirms that: so far as the Director is aware, there is no relevant audit information of which the Group s auditor is unaware; and the Director has taken all the steps that he/she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Group s auditor is aware of that information. A resolution for the appointment of the auditor of the Group is to be proposed at the forthcoming AGM. Approval This report was approved by the Board of Directors of the Group and signed on its behalf by: John Bonoh Sisay Chief Executive Officer 24 April

29 Corporate Governance Sierra Rutile shares are listed on the AIM Market of the London Stock Exchange and the Group is subject to and takes all appropriate steps to comply with the AIM Rules. The Board recognises the importance and value for the Group and its shareholders of good corporate governance. In this regard, the Directors intend, where practicable for a Group of Sierra Rutile s size and nature, to comply with the UK Corporate Governance Code. The Group has departed from certain aspects of the guidelines set out in the UK Corporate Governance Code and the Corporate Governance Code for small and mid-size quoted companies published by the QCA in that the Non-Executive Directors have been granted options, and the options are not subject to performance criteria. In the opinion of the Directors, these options are not considered to be material enough to either the Group or each Non-Executive Director concerned to impair the independence of the Group s Non-Executive Directors. Board overview The Board is responsible for establishing the Group s strategy and has ultimate responsibility for the management, direction and performance of the Group and its businesses. Authority for the execution of the approved strategies and objectives, and daily running of the business, is delegated to the Executive Directors and Senior Management of the Group. The Board regularly monitors financial and operational progress and risks of the Group. Board composition At the date of this report, the Group had seven directors, comprising one Executive Director and six Non-Executive Directors of which three are considered independent. Board Member Mr. Jan Castro Mr. John Sisay Mr. Alex Kamara Dr. Charles Entrekin Mr. Michael Barton Mr. Michael Brown Mr. Richard Lister Role Chairman Chief Executive Officer Independent Non-Executive Independent Non-Executive Non-Executive Non-Executive Independent Non-Executive Re-election of Directors Directors offer themselves up for re-election at regular intervals. Relations with Shareholders This annual report contains information about the activities of the Group. The Group communicates with shareholders and other interested parties through its website, direct information distributed to shareholders, and releases to AIM. At the AGM, shareholders elect the Directors and have the opportunity to express their views, ask questions about Group business and vote on items of business for resolution by shareholders. Board balance The Board membership provides a balance of industry and financial expertise which is well suited for the Group. The Non-Executive Directors are drawn from diverse backgrounds and bring a wide range of experience, to the Board to ensure effective leadership of Sierra Rutile. Directors Remuneration Details of directors remuneration are set out in the remuneration report starting on page

30 Corporate Governance continued Committees of the Board The Board has established a number of standing committees, which are ultimately accountable to it. These committees assist the Board by focusing on specialist areas. The Board committees meet independently and provide feedback to the main Board through their chairmen. The roles and representation of these committees are listed in the board committees table below. Committee Role Members Remuneration Committee The remuneration committee determines the terms and conditions of service, including the remuneration and grant of options to Directors (both Executive and Non-Executive) and others under the Share Option Scheme and any other future share option schemes and arrangements adopted by the Group. The remuneration committee meets at least once a year. Chaired by Mr. Barton, and includes Mr. Kamara and Mr. Lister (all Non- Executive Directors). Audit Committee The audit committee has primary responsibility for monitoring the quality of internal controls, for ensuring that the financial performance of the Group is properly measured and reported on and for reviewing reports from the Group s auditor relating to the Group s accounting and internal controls. The audit committee meets at least three times a year. The Group has adopted a code for Directors dealings appropriate for a Group with shares admitted to trading on AIM and will take all reasonable steps to ensure compliance by the Directors and any relevant employees. Chaired by Dr. Entrekin, and includes Mr. Barton and Mr. Lister (all Non- Executive Directors). Governance Committee The governance committee has primary responsibility for keeping the Board informed of current best practices in corporate governance; reviewing corporate governance trends for their applicability to the Group; and updating the Group s corporate governance principles and governance practices. Chaired by Dr. Entrekin, and includes Mr. Jan Castro. 28

31 Committee Role Members Strategic Review Committee The strategic review committee has primary responsibility in overseeing the assessment and implantation of the findings of the Strategic Review. Chaired by Mr. Brown, and includes Mr. Kamara and Dr. Entrekin. Health and Safety Committee The Health and Safety committee has primary responsibility in overseeing the development and implementation of policies and procedures to ensure the health and safety of the Group s workforce and those that come into contact with the mine. Chaired by Mr. Brown, and includes Mr. Sisay, Mr. Kamara and Dr. Entrekin. By order of the Board John Nagulendran Company Secretary 24 April

32 Directors Remuneration Report Introduction This report has been approved by the Board. Role of the remuneration committee The remuneration committee determines the terms and conditions of service, including the remuneration and grant of options to Directors (both Executive and Non-Executive) and others under the Share Option Scheme and any other future share option schemes and arrangements adopted by the Group. The remuneration committee meets at least once a year. Components of remuneration There are three main elements of the remuneration package of the Executive Director and senior management. Basic salary; Performance-related bonuses; and Share-based awards. Directors contracts The Executive Director has an indefinite term contract. It is the Group s policy that the period of notice required for Executive Directors does not exceed 12 months. Non-Executive Directors fees The fees for Non-Executive Directors are designed to ensure that the Group attracts and retains high calibre individuals. They are reviewed on an annual basis and account is taken of the level of fees paid by other companies of a similar size and complexity. Non-Executive Directors do not participate in any annual bonus plan or pension arrangements. The Group repays reasonable expenses that Non-Executive Directors incur in carrying out their duties as Directors. Directors Remuneration Directors remuneration for the years ended 31 December 2012 and 31 December 2011 is as follows Directors 31 December 2012 Total Remuneration Cash and Non-cash (US$) 2 31 December 2011 Total Remuneration Cash and Non-cash (US$) 2 Executive Director John Bonoh Sisay 542, ,229 Non-Executive Directors Alex Kamara 33,250 61,000 Jan Castro 53,750 52,500 Michael Barton 33,000 34,000 Michael Brown 34,500 33,500 Dr. Charles Entrekin 41,000 56,000 Richard Lister 23,250 Former Directors François Colette 1 15,500 51,000 Wayne Malouf 3 33,900 Jean Lindberg Charles 3 216, , ,016 1 François Colette resigned on 26 June No pension contributions have been made in the year. 3 Wayne Malouf and Jean Lindberg Charles resigned on 21 February

33 Share Options Directors and those who have served as directors during the year, hold the following options to subscribe for common shares as at 31 December 2012: 31 December 2011 Granted Exercised Lapsed 31 December 2012 Exercise Price Expiry Date Executive Director John Bonoh Sisay 100, , p ,630,000 4,630, p ,400,000 2,400, p Non-Executive Directors Alex Kamara 1,000, , , p ,000,000 1,000, p Jan Castro 375, , p ,500,000 1,500, p Michael Barton 250, , p ,000,000 1,000, p Michael Brown 250, , p ,000,000 1,000, p Dr. Charles Entrekin 1,000,000 1,000, p ,000,000 1,000, p Richard Lister 750, , p Former Director Francois Collette 1,000, , , p Directors Share Ownership Policy The average share price for the year ended was 64.59p (2011: 22.56p). Subsequent to the year end, the Board adopted a share ownership policy for Directors, whereby Non-Executive Directors are expected to build up and hold at least two million shares in the Group (four million for the Chief Executive Officer and Chairman). Directors are expected to retain shares acquired pursuant to share incentive awards, but may sell sufficient shares as necessary to pay the exercise price, taxation and out of pocket expenses associated with the exercise of share incentive awards. There is no target date to achieve the share ownership and such number of shares. On behalf of the Board Michael Barton Chairman of Remuneration Committee 24 April

34 Statement of Directors Responsibilities The directors are responsible for preparing the Annual Report and the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union. In preparing these financial statements, International Accounting Standard 1 requires that directors: properly select and apply accounting policies; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity s financial position and financial performance; and make an assessment of the Group s ability to continue as a going concern. The directors are responsible for: keeping adequate accounting records that are sufficient to show and explain the Group s transactions and disclose with reasonable accuracy at any time the financial position of the Group; safeguarding the assets of the Group; such internal control as they determine necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error; and taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility statement We confirm that to the best of our knowledge: the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position, and profit or loss of the Group; and the management report, which is incorporated into the Directors Report, includes a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that it faces. By order of the Board John Bonoh Sisay Alex Kamara 24 April April

35 Independent Auditor s Report to the Members of Sierra Rutile Limited and its Subsidiaries We have audited the financial statements of Sierra Rutile Limited and its subsidiaries for the year ended 31 December 2012 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of cash flows, the consolidated statement of changes in equity and the related notes 1 to 30. The financial reporting framework that has been applied in their preparation is International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the Group s members, as a body, in accordance with AIM Rule 19. Our audit work has been undertaken so that we might state to the Group s members those matters we are required to state to them in an independent auditor s 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 Group and the Group s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As explained more fully in the Statement of Directors Responsibilities, 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 and express an opinion on the financial statements in accordance with International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the Group financial statements: give a true and fair view of the state of the Group s affairs as at 31 December 2012 and of its profit for the year then ended; and have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union. Deloitte LLP Chartered Accountants London, United Kingdom 24 April

36 Consolidated Income Statement Year ended 31 December 2012 Notes Year ended 31 December 2012 Year ended 31 December 2011 Revenue 4 179,094 54,962 Cost of sales 5 (78,274) (55,216) Gross profit/(loss) 100,820 (254) Administrative and marketing expenses 5 (13,525) (12,767) Exceptional items (13,079) Other income ,804 (25,856) Net finance costs 8 (3,407) (1,793) Profit/(loss) before taxation 84,397 (27,649) Income tax expense 9 (895) (336) Profit/(loss) for the year 83,502 (27,985) Total profit/(loss) attributable to: Owners of the parent 83,502 (26,986) Non-controlling interests (999) 83,502 (27,985) Earnings/(loss) per share (US$) basic (0.056) diluted (0.056) 34

37 Consolidated Statement of Comprehensive Income Year ended 31 December 2012 Notes Year ended 31 December 2012 Year ended 31 December 2011 Profit/(loss) for the year 83,502 (27,985) Actuarial loss on retirement benefit scheme 20 (543) Total comprehensive income/(loss) for the year 82,959 (27,985) Total comprehensive income/(loss) attributable to: Owners of the parent 82,959 (26,986) Non-controlling interests (999) 82,959 (27,985) 35

38 Consolidated Statement of Financial Position 31 December 2012 Notes 31 December December 2011 ASSETS Non-current assets Intangible assets 11 11,827 9,063 Property, plant and equipment ,212 99,972 Non-current receivables , ,762 Current assets Inventories 16 42,921 20,493 Trade and other receivables 17 43,508 23,091 Cash and cash equivalents 24 5,783 10,658 Total assets 246, ,004 LIABILITIES Current liabilities Trade and other payables 18 (24,664) (22,998) Current tax liabilities 9 (191) (112) Short term borrowings 19 (5,911) Provisions for liabilities and charges 21 (380) (31,146) (23,110) Non-current liabilities Medium and long-term borrowings 19 (26,300) (30,712) Retirement benefit obligations 20 (1,678) (996) Provisions for liabilities and charges 21 (2,063) (2,478) (30,041) (34,186) Total liabilities (61,187) (57,296) Net assets 185, ,708 Equity and liabilities Capital and reserves Share capital , ,609 Share option reserve 5,661 1,984 Retained loss (94,610) (148,822) Owners of the parent 185, ,771 Non-controlling interests 23 (19,063) Total equity 185, ,708 The financial statements of Sierra Rutile Limited and its subsidiaries were approved by the Board of Directors on 24 April Signed on behalf of the Board of Directors John Bonoh Sisay Alex Kamara 24 April April

39 Consolidated Statement of Cash Flows Year ended 31 December 2012 Notes Year ended 31 December 2012 Year ended 31 December 2011 Operating activities Cash inflow/(outflow) from operations 24 68,812 (3,040) Interest received 2 20 Interest paid (2,452) (1,695) Income taxes paid 9 (816) (499) Net cash inflow/(outflow) from operating activities 65,546 (5,214) Investing activities Purchase of property, plant and equipment (57,510) (15,256) Purchase of intangible assets (2,812) Net cash used in investing activities (60,322) (15,256) Financing activities Repayment of borrowings (17,033) Issue of ordinary shares 22 17,847 Net proceeds from the exercise of share options 22 1,404 2,799 Acquisition of non-controlling interests 23 (12,396) Net cash (used in)/from financing activities (10,992) 3,613 Net decrease in cash and cash equivalents (5,768) (16,857) Cash and cash equivalents at beginning of the year 10,658 28,268 Net decrease in cash and cash equivalents (5,768) (16,857) Effect of foreign exchange rate change 201 (753) Cash and cash equivalents at end of the year 24 5,091 10,658 37

40 Consolidated Statement of Changes in Equity Year ended 31 December 2012 Note Share capital Share option reserve Retained loss Total Noncontrolling interests Total equity Balance at 1 January ,963 (123,343) 128,620 (18,064) 110,556 Total comprehensive loss for the year (26,986) (26,986) (999) (27,985) Issue of ordinary shares 22 20,646 20,646 20,646 Recognition of share-based payments 1,984 1,507 3,491 3,491 Balance at 31 December ,609 1,984 (148,822) 125,771 (19,063) 106,708 Total comprehensive income for the year 82,959 82,959 82,959 Acquisition of non-controlling interests 23 (29,408) (29,408) 19,063 (10,345) Exercise of share options 22 1,404 (661) 661 1,404 1,404 Recognition of share-based payments 4,338 4,338 4,338 Balance at 31 December ,013 5,661 (94,610) 185, ,064 38

41 Notes to the Consolidated Financial Statements Year ended 31 December General information Sierra Rutile Limited ( Sierra Rutile ) is a public limited liability company incorporated and domiciled in the British Virgin Islands. The address of its registered office is at P.O. Box 4301, Trinity Chambers, Road Town, Tortola, British Virgin Islands. These financial statements will be submitted for consideration and approval at the forthcoming AGM of shareholders of the Group. 2. Significant accounting policies The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Basis of preparation The financial statements of Sierra Rutile have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ( IFRS ). The financial statements have been prepared on the historical cost basis. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The principal accounting policies adopted are set out below. (b) Going concern The Board has considered the Group s cash flow forecasts for the period to the end of December The Board is satisfied that the Group s forecasts and projections, taking account of reasonably possible changes in trading performance show that the Group will be able to operate with the level of its current facilities for the foreseeable future. Accordingly, the Board continues to adopt the going concern basis in preparing the financial statements (see page 25 of the Directors Report). (c) New and revised International Financial Reporting Standards A number of amendments to accounting standards and new interpretations issued by the International Accounting Standards Board (IASB), were applicable from 1 January They have not had a material impact on the accounting policies, methods of computation or presentation by the Group. New IFRS accounting standards and interpretations not yet adopted At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not been adopted by the European Union): IFRS 9 Financial Instruments-Classification and Measurement (effective for periods beginning on or after 1 January 2014) IFRS 10 Consolidated Financial Statements (effective for periods beginning on or after 1 January 2013) IFRS 11 Joint Arrangements (effective for periods beginning on or after 1 January 2013) IFRS 12 Disclosure of Interest in Other Entities (effective for periods beginning on or after 1 January 2013) IFRS 13 Fair Value Measurement (effective for periods beginning on or after 1 January 2013) IAS 27 (reissued) Separate Financial Statements (effective for periods beginning on or after 1 January 2013) IAS 28 (reissued) Investments in Associates and Joint Ventures (effective for periods beginning on or after 1 January 2013) IFRIC 20 Stripping costs in the Production Phase of a Surface Mine (effective for periods beginning on or after 1 January 2013) The Directors anticipate that the adoption of these standards and Interpretations in future periods will have no material impact on the financial statements of the Group. 39

42 Notes to the Consolidated Financial Statements continued Year ended 31 December Significant accounting policies continued (d) Basis of consolidation Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. (e) Business combinations and goodwill arising thereon The acquisition method of accounting is used to account for business combinations by the Group. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interests in the acquiree either at fair value or at the non-controlling interests proportionate share of the acquiree s net assets. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance. The excess of the consideration transferred, the amount of any non-controlling interests in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group s share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of comprehensive income. Inter-Group transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Transactions with non-controlling interests The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity. (f) Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment losses. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads and costs directly attributable to bringing the assets to a working condition for its intended use. Cost also includes the cost of restoring the site on which the assets are located. These costs are recognised as a liability. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets. Where an item of property, plant and equipment comprises major components with different useful lives, the components are accounted for as separate items of property, plant and equipment. Subsequent expenditure relating to an item of property, plant or equipment is capitalised when it is probable that the future economic benefits from the use of the asset will increase by more than the expenditure incurred. All other subsequent expenditure is recognised as an expense in the period in which it is incurred. 40

43 2. Significant accounting policies continued (f) Property, plant and equipment continued Deposit and dam development, exploration, evaluation, mine development expenditure and deferred project expenditure In respect of deposit and dam development, minerals, exploration, evaluation and deferred project, expenditure is charged to the statement of comprehensive income as incurred except where: it is expected that the expenditure will be recouped by future exploitation or sale; or substantial exploration and evaluation activities have identified a mineral resource but these activities have not reached a stage which permits a reasonable assessment of the existence of commercially recoverable reserves in which case the expenditure is capitalised. Expenditure relating to both deposit and dam development and mine development is accumulated separately for each identifiable area of interest. Such expenditure comprises related direct costs and an appropriate portion of related overhead expenditure. Expenditure is carried forward when incurred in areas where economic mineralisation is indicated, but activities have not yet reached a stage which permits reasonable assessment of the existence of economically recoverable reserves, and active and significant operations in relation to the area are continuing. Each such project is regularly reviewed. If the project is abandoned or it is considered unlikely that the project will proceed to development, accumulated costs to that point are written off immediately. Each area of interest is limited to a size related to a known or probable mineral resource capable of supporting a mining operation. Projects are advanced to development status when it is expected that accumulated and future expenditure can be recouped through project development or sale. Amortisation and depreciation Amortisation of deferred project expenditure is based on the estimated useful life of the asset to which the expenditure relates. Depreciation is provided on a straight-line basis at rates calculated to write off the cost of fixed assets to their residual value over their estimated useful lives as follows: Infrastructure Plant, machinery and equipment Vehicles Mineral rights Exploration, evaluation and mine development expenditure on mineral rights - twenty to forty years - three to twenty years - three to five years - based on the estimated life of reserves - based on the estimated life on proven and expenditure, and - probable reserves Changes in estimates are accounted for over the estimated remaining economic life of the remaining commercial reserves of each project as applicable. (g) Mining development cost Mine development cost includes costs relating to the acquisition and development of mineral properties and are capitalised until such time as commercial levels of production are reached or the mineral properties are abandoned. Mine development costs are depreciated from the time that Sierra Rutile enters commercial production. Proceeds received from the sale of rutile and ilmenite sand prior to the commercial production date is offset against the capitalised mine development costs. Commercial production is defined as the stage at which the mine assets are available for use. This entails that the Group maintains a consistent level of production from the mining operations. This is determined by reference to various factors including forecast production levels and the generation of positive cash flows on a monthly and reasonably sustainable basis. (h) Intangible assets Acquired computer software licences are capitalised on the basis of costs incurred to acquire and bring to use the specific software and are amortised over their estimated useful lives estimated to be five years. 41

44 Notes to the Consolidated Financial Statements continued Year ended 31 December Significant accounting policies continued (i) Impairment of tangible and intangible assets At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately in the consolidated statement of comprehensive income. Goodwill arising on business combinations is allocated to the Group of cash generating units ( CGUs ) that are expected to benefit from the synergies of the combination and represents the lowest level at which goodwill is monitored by the Group s Board of Directors for internal management purposes. The recoverable amount of the CGUs or group of CGUs to which goodwill has been allocated is tested for impairment annually on a consistent date during each financial year, or when events or changes in circumstances indicate that it may be impaired. Any impairment is recognised immediately in the statement of comprehensive income. Impairments of goodwill are not subsequently reversed. (j) Foreign currencies (i) Functional and presentation currency Items included in the financial statements of each of the Group s entities are measured using United States Dollars, the currency of the primary economic environment in which the entities operates ( functional currency ). The consolidated financial statements are presented in United States Dollars, which is the Group s presentational currency. All financial information presented in United States Dollars has been rounded up to the nearest thousand. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing on the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. At the balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date the fair value was determined. (k) Financial instruments (i) Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of provision is recognised in the statement of comprehensive income. 42

45 2. Significant accounting policies continued (k) Financial instruments continued (ii) Trade payables Trade payables are stated at fair value and subsequently measured at amortised cost using the effective interest method. (iii) Borrowings Borrowings are recognised initially at fair value being their issue proceeds net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of comprehensive income over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period. (iv) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the statement of financial position. (v) Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as deduction, net of tax, from proceeds. (l) Inventories Inventories comprise stock piles of rutile, ilmenite, zircon and other concentrates and consumables. Rutile and consumables are measured at the lower of cost and net realisable value. In line with IAS 2 Inventories ilmenite and zircon and other concentrate by-products are measured at net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses. The cost of consumable inventories is based on the weighted average method and comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. The cost of rutile is measured as all production costs and other attributable production overheads adjusted for the by-product sales of ilemnite and zircon and other concentrates based on normal operating capacity and other costs incurred in bringing the inventories to their present location and condition. Obsolete, redundant and slow moving consumable stocks are identified on a regular basis and are written down to their estimated net realisable values. Inventories are stated at the lower of cost or net realisable value except for ilmenite and zircon and other concentrates which are stated at net realisable value, where cost is defined as follows: Rutile Concentrates Stockpiles Materials Fuel and sundry expenses Goods-in-transit - Production cost and attributable overheads - Production cost - Production cost - Average cost - Purchase cost - Invoice cost excluding freight (m) Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the period. Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. 43

46 Notes to the Consolidated Financial Statements continued Year ended 31 December Significant accounting policies continued (m) Taxation continued Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of any deferred tax asset is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised based on tax laws and rates that have been enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. (n) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are capitalised until such time as the assets are substantially ready for their intended use or sale. Other borrowing costs are expensed in profit or loss in the period in which they are incurred. (o) Retirement benefit obligations Short-term employee benefits The cost of all short-term employee benefits is recognised in the statement of comprehensive income during the period in which the employees render the related service. Long-term employee benefits The Group does not operate any retirement benefit plan for its employees. For employees of the Sierra Leone based subsidiary, the Group makes a contribution of 10% of the employees basic salary to the National Social Security and Insurance Trust for payment of pension to staff on retirement. These employees also contribute 5% of their basic salary to the Trust. The Sierra Leone based subsidiary also provides for end-of-term benefits based on the provisions contained in the Collective Bargaining Agreements; these benefits are paid to employees falling under this category when they leave the Group. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation in relation to this agreement. (p) Share options scheme The Group issues equity-settled share-based payments to certain employees and Directors. Equity-settled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group s estimate of shares that will eventually vest and adjusted for the effect of non market-based vesting conditions The fair value is determined at grant date by use of a Black Scholes model and taking account of market based vesting conditions. 44

47 2. Significant accounting policies continued (q) Provisions continued Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources, that can be reliably estimated, will be required to settle the obligation. Provisions for restructuring costs are recognised when the Group has a detailed formal plan for restructuring which has been notified to affected parties and comprise lease termination penalties and employee termination payments. Provisions are not recognised for future operating losses. Provision for restoration and rehabilitation In accordance with the Group s environmental policy and applicable legal requirements, a provision for site restoration and rehabilitation in respect of disturbed and contaminated land, and the related expense, is recognised when the land is contaminated or disturbed. Changes in estimates of the site restoration and rehabilitation provision are recognised as an expense in the consolidated income statement. Costs of reclamation and rehabilitation are assessed on a regular basis and estimated costs are provided over the life of the mine. The expenditure and provisions include costs of labour, materials, and equipment required to rehabilitate disturbed areas, cost of reclamation, plant and infrastructure closure and subsequent environmental monitoring. The estimates are discounted and are based on current costs, legislature and community requirements and technology. Expenditure relating to ongoing rehabilitation and restoration programmes is charged against the provisions made. (r) Revenue recognition Revenue from the sale of rutile, zircon and other concentrates and ilmenite is measured at the fair value of the consideration received or receivable, which is usually the invoice value of rutile, zircon and other concentrates and ilmenite and excludes sales and value added taxes. A sale is recognised when the significant risks and rewards of ownership have passed, and when revenue can be measured reliably. This is generally when title and any insurance risk have passed to the customer, and the goods have been delivered to a contractually agreed location. (s) Exceptional items Exceptional items are events or transactions which, by virtue of their size or nature, have been disclosed in order to improve a reader s understanding of the financial statement. (t) Presentation currency The financial statements are presented in thousands of United States Dollars ( US$ ). 3. Critical Accounting estimates and judgements Estimates and judgements are continuously evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a) Estimated impairment of goodwill The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 2(e). These calculations require the use of estimates (note 11). Directors necessarily apply their judgement in estimating the probability, timing and value of underlying cash flows and in selecting appropriate discount rates and useful economic lives to be applied within the valuation calculation. Such estimates and forecasts include commodity prices, foreign exchange rates, capital expenditure, future commissioning dates, production targets, operating costs and timelines of the granting of licences and permits. 45

48 Notes to the Consolidated Financial Statements continued Year ended 31 December Critical Accounting estimates and judgements continued (b) Asset lives and residual values Plant and equipment are depreciated over their useful lives taking into account residual values, where appropriate. The actual lives of the assets and residual values are assessed annually and may vary depending on a number of factors. In reassessing asset lives, factors such as technological innovation, product life cycles and maintenance programmes are taken into account. Residual value assessments consider issues such as future market conditions, the remaining life of the asset and projected disposal values. Consideration is also given to the extent of current profits and losses on the disposal of similar assets. (c) Valuation of share-based payments In order to value options granted, the Group has made judgements as to the volatility of its ordinary shares, the probable life of the options granted and the time to exercise of those options. During the year-ended 31 December 2012, the Group has used the Black-Scholes methodology for valuing share-based payments. (d) Restoration, rehabilitation and environmental costs Costs for restoration of site damage, rehabilitation and environmental costs are estimated using the work of external consultants or internal experts. Management uses it judgement and experience to provide for these estimated costs over the life of the mine. (e) Contingent liabilities On an ongoing basis the Group is party to various legal disputes, the outcomes of which cannot be assessed with a high degree of certainty. A liability is recognised where, based on the Group s legal views and advice, it is considered probable that an outflow of resources will be required to settle a present obligation that can be measured reliably. Disclosure of contingent liabilities is made in note 29, unless the possibility of loss arising is considered remote. 4. Segment information IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Chief Operating Decision Maker of the Group to allocate resources to the segments to assess their performance. The strategy of the Group is to produce, refine and sell rutile. Information reported to the Board is on an integrated basis, which is how decisions over resource allocation are made. The Group itself has only one product being rutile, with ilmenite, zircon and other concentrates and other revenue streams being considered by-products of the integrated rutile production process. As such, the Group considers there to be one operating segment being the production, refining and sale of rutile. Segment revenue Revenue represents the invoiced amount in respect of sales of rutile, ilmenite and zircon and other concentrates extracted during the period excluding sales discount and consists of the following: Rutile 165,076 40,066 Ilmenite 6,649 3,979 Zircon and other concentrates 7,369 10, ,094 54,962 46

49 4. Segment information continued Segment revenue continued Geographical information Segment revenue is derived from sales to external customers domiciled in various geographical regions. Details of segment revenue by location of customers are as follows: Asia 118,282 22,767 Europe 37,291 20,738 North America 22,491 6,642 South America 897 4,456 MENA (Middle East and North Africa) Russia ,094 54,962 No customers are currently located in Sierra Leone. For the year ended December 2012 revenues of US$65,209,000, US$30,863,000 and US$23,144,000 were generated from three customers (2011: Revenues of US$12,344,000, US$11,800,000, US$7,026,000 and US$10,900,000, were derived from four customers) all of whom accounted for more than 10% of the Group s total annual sales. Segment assets All of the Group s assets are in Sierra Leone. 5. Expenses by nature Amortisation (note 11) Depreciation on property, plant and equipment (note 12) 15,873 9,125 Changes in inventories of finished goods and work in progress (18,601) (3,810) Production and shipping costs 49,584 34,328 Operating overheads 23,508 14,407 Royalties, mining leases and rent Value of inventory impaired (note 16) Value of inventory provisions 3,764 Other expenses 5,958 2,028 Merger and strategic review charges 895 Directors fees and remuneration Insurance cost 2,702 1,848 Share option expense 4,338 3,491 Auditor's remuneration-audit fee Auditor's remuneration-other services Meeting, travel and other expenses 1,983 2,847 Total cost of sales and administrative and marketing expenses (excluding exceptional items see note 7) 91,799 67,983 47

50 Notes to the Consolidated Financial Statements continued Year ended 31 December Employee benefit expense Wages and salaries 17,376 9,775 Share option expense 4,338 3,491 Other costs including social security 1,475 1,096 23,189 14,362 The average number of employees was: 1,518 1,076 In accordance with IAS 24 Related Party Disclosures (Amended), the compensation for key management is disclosed within note Exceptional items Impairment of property, plant and equipment (250) (12,361) Loss on disposal of property, plant and equipment 11 Tax claim liability (13,079) The Group recorded an exceptional gain of US$0.2 million (2011: loss of US$13.1 million). The 2012 amounts relate to a release of a US$0.5 million tax provision provided in the prior year offset by a US$0.3 million loss related to a barge damaged during the year. The 2011 amounts comprised three non-cash amounts. Following a strategic review and incorporating the findings of a number of consultants including Snowden Group, CPG Resources and Titan Salvages, management wrote down the US$10.1 million carrying value of the dredge which capsized in 2008, and the US$2.2 million carrying value of the partially constructed replacement dredge. Furthermore, a provision of US$0.7 million was raised for a potential tax exposure arising on the sale of Sierra Minerals Limited in Net finance costs Interest expense: Government of Sierra Leone loan (2,619) (3,013) Bank overdrafts (33) Unwinding of discount on provision (note 21) (53) Interest expense on retirement benefits (note 20) (102) Total borrowing costs (2,774) (3,046) Interest income 2 20 Net foreign exchange transaction (losses)/gains (635) 1,233 (3,407) (1,793) 9. Income taxes (a) Income tax expense Current tax Deferred tax (note 15) Minimum turnover tax Prior year adjustment 61 Income tax expense

51 9. Income taxes continued (a) Income tax expense continued Under the provisions of an agreement reached with GOSL in June 2003, the Group s operations in Sierra Leone are not subject to standard Sierra Leone corporate income tax until 1 January Instead, up to that time, the operations are subject to a minimum tax charged at 0.5% of the turnover of the business. From 1 January 2015, the taxation of the Group s operations in Sierra Leone will revert to the provisions of the Sierra Rutile Agreement (Ratification) Act 2002, under which tax will be charged at an amount not less than 3.5% of turnover and not more than the standard Sierra Leone corporate income tax rate (up to a maximum rate of 37.5%) on taxable profits. The standard corporate income tax rate in Sierra Leone enacted at the balance sheet date was 30% this rate has therefore been used as the basis for measuring deferred tax assets and liabilities that are expected to be realised or settled after 31 December Based on the above, the income tax expense can be reconciled to the Group s profit/(loss) before tax as follows: Profit/(loss) before tax 84,397 (27,649) Tax at Sierra Leone corporate income tax rate applicable to the Group 0% Minimum turnover tax Prior year adjustment 61 Income tax expense (b) Current tax liabilities At 1 January Charged to the income statement (see note 9(a) above) Paid during the year (816) (499) At 31 December Basic and diluted earnings/(loss) per share (a) Basic earnings/(loss) per share Profit/(loss) attributable to owners of the parent () 83,502 (26,986) Weighted average number of ordinary shares in issue 509,974, ,177,479 Basic earnings/(loss) per share (US$) (0.056) (b) Diluted earnings/(loss) per share Profit/(loss) attributable to owners of the parent () 83,502 (26,986) Weighted average number of ordinary shares in issue 509,974, ,177,479 Effect of dilutive ordinary shares-share options 15,458,737 Weighted average number of ordinary shares for diluted earnings/(loss) per share 525,433, ,177,479 Diluted earnings/(loss) per share (US$) (0.056) For year ended 31 December 2011, because there is a reduction in loss per share resulting from the assumption that the share options are exercised, the share options are considered anti-dilutive and are ignored in the computation of diluted EPS. As there are no other instruments that may have a potential dilutive effect, the basic and diluted loss per share is the same. 49

52 Notes to the Consolidated Financial Statements continued Year ended 31 December Intangible assets Goodwill 1 Feasibility Computer study costs 2 software costs Total (a) Cost At 1 January , ,591 Additions during the year 2, ,812 At 31 December ,021 2, ,403 Amortisation At 1 January 2012 (528) (528) Charge for the year (48) (48) At 31 December 2012 (576) (576) Net book value At 31 December ,021 2, ,827 Goodwill 1 Feasibility study costs 2 Computer software costs Total (b) Cost At 1 January , ,446 Movement 3 (3,855) (3,855) At 31 December , ,591 Amortisation At 1 January 2011 (266) (266) Charge for the year (262) (262) At 31 December 2011 (528) (528) Net book value At 31 December , ,063 1 For the purposes of goodwill impairment testing, the recoverable amount of the Group is determined based on a fair value less costs to sell basis. Expected cash flows are inherently uncertain and are determined on the basis of the latest commodity price, growth forecasts and exchange rates consistent with external sources of information, the latest mine plan, using the Group s most recent production and unit cost assumptions and an asset life of 20 years. The cash flows are then discounted appropriately at the Group s weighted average cost of capital of 11% on a post-tax basis. 2 In 2012, the Group commissioned and incurred costs on a feasibility study into the Gangama and Sembehun mining options. All the costs incurred related to the technical feasibility of mining rutile via dredging or dry mining, and these have been capitalised as an intangible asset in line with IFRS 6, Exploration for and Evaluation of Mineral Resources. 3 During 2011, in light of new analysis and after reviewing the work of third party legal counsel, the Group reversed a contingent consideration liability of US$3,855,000 previously recognised in relation to the original acquisition of the Sierra Rutile assets in The release of this liability was taken against the goodwill balance as the acquisition took place prior to the introduction of IFRS3 (2008) Business Combinations (see note 29). 50

53 12. Property, plant and equipment Infrastructure Plant, machinery and equipment Mineral sand prospect and mine development Construction work in progress Dredge D2 Exploration Total (a) Cost At 1 January , ,862 69,319 16,120 6, ,430 Additions ,799 1,171 32,731 1,827 58,363 Transfers 13,130 5,308 (12,647) (5,791) Impairment charge (250) (250) Disposals (1,113) (32,599) (33,712) At 31 December , ,942 75,798 36,204 2, ,831 Depreciation At 1 January 2012 (15,540) (125,233) (41,475) (210) (182,458) Charge for the year (552) (10,113) (5,208) (15,873) Transfers (210) 210 Disposals 1,113 32,599 33,712 At 31 December 2012 (14,979) (102,957) (46,683) (164,619) Net book value At 31 December ,488 59,985 29,115 36,204 2, ,212 Infrastructure Plant, machinery and equipment Mineral sand prospect and mine development Construction work in progress Dredge D2 Exploration Total (b) Cost At 1 January , ,443 67,520 17,208 10,126 2, ,816 Addition 16 4,973 1,799 1,147 3,594 11,529 Impairment charge (2,235) (10,126) (12,361) Disposals (554) (554) At 31 December , ,862 69,319 16,120 6, ,430 Depreciation At 1 January 2011 (15,053) (121,287) (37,326) (210) (173,876) Charge for the year (487) (4,489) (4,149) (9,125) Disposals At 31 December 2011 (15,540) (125,233) (41,475) (210) (182,458) Net book value At 31 December ,205 35,629 27,844 16,120 6,174 99,972 (c) Expenditure capitalised in the year in respect of the construction in progress amounted to US$32,731,000 (2011: US$1,147,000). Depreciation has not been charged where the assets are presently not in the condition necessary to operate in the manner intended by management. (d) As at 31 December 2012 an impairment provision of US$250,000 was made against a damaged barge. In 2011, following technical and economic evaluation, capital expenditure spent on Dredge D2 (US$10,126,000) and Dredge D3 (US$2,235,000) was fully impaired, creating an exceptional loss of US$12,361,000 at 31 December 2011 (see note 7). 51

54 Notes to the Consolidated Financial Statements continued Year ended 31 December Subsidiaries (a) The Group s significant subsidiaries are as follows: Name 2011 and 2012 Titanium Fields Resources Ltd SRL Acquisition No. 1 Limited SRL Acquisition No. 3 Limited The Natural Rutile Company Limited (b) Sierra Rutile Holdings Limited (b) Sierra Rutile Limited (b) Agricultural Resources Group Ltd Biofuel Resources Group Ltd Proportion of ownership interest: Proportion of voting power held: Class of shares Country of held Year end Direct Indirect 1 Direct Indirect 1 incorporation Ordinary A share Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 31 December 100% 100% 31 December 100% 100% 31 December 100% 100% 31 December 31 December 31 December 95.17%/ 100% 95.17%/ 100% 95.17%/ 100% 95.17%/ 100% 95.17%/ 100% 95.17%/ 100% 31 December 100% 100% 31 December 100% 100% British Virgin Islands British Virgin Islands British Virgin Islands British Virgin Islands Main business Intermediate holding company Intermediate holding company Intermediate holding company Marketing of Rutile British Virgin Islands Immediate holding company Sierra Leone British Virgin Islands British Virgin Islands Extraction, concentration, separation and sale of Rutile, Ilmenite and Zircon and other concentrates sands Agricultural projects Biofuel projects (b) With the exception of Sierra Rutile Limited, all the subsidiaries are incorporated in the British Virgin Islands (BVI) where there is no legal requirement for the preparation and filing of audited accounts. Sierra Rutile Limited, the parent company, is quoted on the AIM market of the London Stock Exchange which requires the publication of annual audited financial statements prepared in compliance with IFRS. (c) On 30 April 2012, the Group entered into an agreement with the GOSL to pay, in cash, PAYE taxes that have historically been satisfied through the issuance of shares in Sierra Rutile s operating subsidiary in Sierra Leone. As part of the agreement the shares held by the GOSL were transferred back to Sierra Rutile. 1 Percentage ownership for years ended 2011 and 2012 respectively. 52

55 14. Non-current receivables Loan to the Government of Sierra Leone 727 This represented an amount loaned to the GOSL to settle existing obligations with the International Finance Corporation in a previous year. On 30 April 2012, the Group entered into an agreement with the GOSL to pay, in cash, PAYE taxes that have historically been satisfied through the issuance of shares in Sierra Rutile s operating subsidiary in Sierra Leone. As part of the agreement, the GOSL also agreed to settle its payable to Sierra Rutile of US$727,000 previously recorded as a non-current receivable (see note 23). 15. Deferred income tax Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on tax rates that have been enacted or substantively enacted by the balance sheet date. For deferred tax assets and liabilities relating to the Group s operations in Sierra Leone that are expected to be realised or settled after 31 December 2014, the standard Sierra Leone corporate income tax rate of 30%, as enacted at 31 December 2012, has therefore been used. The following are the major deferred tax assets and liabilities recognised by the Group and movements thereon during the current and prior reporting period. Accelerated tax depreciation Tax losses Total At 1 January 2011 (3,100) 3,100 (Charged)/credited to the income statement (1,151) 1,151 At 1 January 2012 (4,251) 4,251 (Charged)/credited to the income statement (3,901) 3,901 At 31 December 2012 (8,152) 8,152 On the basis that there is a legally enforceable right in Sierra Leone to offset an entity s current tax assets and liabilities and that the deferred tax assets and liabilities relate to income taxes levied by the same tax authority on the same entity, the deferred tax assets and liabilities are offset as follows Deferred tax assets 8,152 4,251 Deferred tax liabilities (8,152) (4,251) At the end of the reporting period, the Group had unused tax losses of US$446,780,000 (2011: US$527,376,000) available for offset against future profits, of which US$27,173,000 (2011: US$14,170,000) were recognised as a deferred tax asset. No deferred tax asset has been recognised in respect of the remaining available losses of US$419,607,000 (2011: US$513,206,000) due to the unpredictability of future profit streams. These losses have no expiry date. In addition the Group has other unrecognised deferred tax assets of US$7,369,000 in respect of other temporary differences. Due to the Group s retained loss position, there are no temporary differences associated with investments in the Group s subsidiaries. 53

56 Notes to the Consolidated Financial Statements continued Year ended 31 December Inventories (a) Rutile 24,102 6,287 Ilmenite 1, Zircon and other concentrates Consumables 17,618 13,791 42,921 20,493 (b) The cost of inventories recognised as an expense and included in cost of sales amounted to US$66,356,000 (2011: US$32,712,000). (c) The value of consumables inventory impaired at 31 December 2012 was US$1,438,000 (2011: US$726,000). (d) As ilmenite and zircon and other concentrates are considered by-products in accordance with IAS 2 Inventories, they are valued at their net realisable value. 17. Trade and other receivables Trade receivables 34,285 8,076 Advances and prepayments 9,223 15,015 43,508 23,091 The carrying amount of trade and other receivables approximates to their fair value. As of 31 December 2012, trade receivables of US$351,000 (2011: US$67,000) have been fully provided for. As of 31 December 2012, no trade receivables were past due but not impaired (2011: US$nil). The carrying amount of the Group s trade and other receivables are denominated in the following currency: US Dollar 39,985 17,935 South African Rand 1,073 4,558 Other 2, ,508 23,091 The maximum exposure to credit risk at the end of the reporting period is the fair value of each class of receivable mentioned above. 54

57 18. Trade and other payables Trade payables 15,853 14,573 Other payables and accrued expenses 8,811 8,425 24,664 22,998 Included in other payables and accrued expenses is an amount of US$nil (2011: US$2,778,000) relating to the remaining shares which were to be transferred to the GOSL (see note 23). The carrying amounts of trade and other payables approximate to their fair value. 19. Borrowings Medium and long-term borrowings: Government of Sierra Leone loan 26,300 30,712 Short-term borrowings: Bank overdraft (note 24(b)) 692 Government of Sierra Leone loan 5,219 5,911 Total borrowings 32,211 30,712 The GOSL borrowing is subject to interest of 8% per annum and is repayable semi-annually commencing in December There are no covenants attached to the loan and the Group does not have any undertaking, nor is it contractually bound to create, any lien on or with respect to any of its rights or revenues. The carrying amounts of non-current borrowings are not materially different from their fair value. 20. Retirement benefit obligations Sierra Rutile has two post service benefit plans in place for staff who work for Sierra Rutile Limited (the subsidiary incorporated in Sierra Leone). Both plans are unfunded and under both plans a lump sum amount falls due to employees on cessation of service which is dependent on final salary and length of service. (a) Change in liability Balance at 1 January Current service costs Interest expense 102 End of service payments (136) Actuarial loss on retirement benefit scheme 543 Balance at 31 December 1, (b) Actuarial assumptions The principal actuarial assumptions at the reporting dates were: Discount rate at the year-end 15% 11% Future salary increases 15% 10% General inflation rate 12% 13% The Directors consider that no further disclosure is required given the limited significance of these post service benefit plans to the overall performance and financial position of the Group. 55

58 Notes to the Consolidated Financial Statements continued Year ended 31 December Provision for liabilities and charges At 1 January 2,478 3,261 Amounts utilised in year (122) Unwinding of discount 53 Unused amounts reversed to the income statement (253) (783) Charged to the income statement 287 At 31 December 2,443 2,478 Analysed as follows: Current 380 Non-current 2,063 2,478 Total 2,443 2,478 Cost of reclamation and rehabilitation are assessed on a regular basis and estimated costs are provided over the life of the mine. The expenditure and provisions include costs of labour, materials and equipment required to rehabilitate disturbed areas, cost of reclamation, plant and infrastructure closure and subsequent environmental monitoring. Expenditure relating to ongoing rehabilitation and restoration programmes is charged against the provisions made. No provision is made for the dismantling and decommissioning of the Group s plant and equipment, as management believes that it has neither a legal nor constructive obligation to undertake this work. 22. Share capital (a) Issued shares and options Share capital Number of shares At 1 January ,864, ,963 Proceeds from new issues (see note (ii) below) 113,660,925 17,847 Employee share option scheme: Options exercised (see note (b) below) 9,730,000 2,799 At 31 December ,255, ,609 Employee share option scheme: Options exercised (see note (b) below) 3,130,000 1,404 At 31 December ,385, ,013 (i) The total authorised number of ordinary shares is unlimited with no par value. All issued shares are fully paid and are admitted to trading on the AIM market of the London Stock Exchange. (ii) On 23 February 2011, Sierra Rutile made a new placement of 113,660,925 common shares. The placing with institutional investors at a price of 10p per share raised 11,366,093 (US$18,501,000) before transaction costs amounting to US$654,000. (b) Share options Share options are granted to Directors and to selected employees. The exercise price of the granted option is determined by the Board before such grant. According to section 2.3 of the Rules of SRX Unapproved Share Option Scheme, the price should not be less than the highest of the: nominal value of the shares which is US$ nil; average of the middle market quotations of the shares as derived from the Official list for the 30 dealing days immediately preceding the Grant date; and middle market quotation of the shares as derived from the Official list on the Grant date. 56

59 22. Share capital continued (b) Share options continued Exercise of the option is not subject to performance-related conditions but is conditional to the continued employment of option holders with Sierra Rutile. (i) Fair value of the share options granted in the year The following share options were granted in the year: Option series Number Grant date Expiry date Exercise price pence Fair value at date of grant pence (i) Granted on , (ii) Granted on , (iii) Granted on , All options will vest quarterly in four equal portions, subject to continued employment with Sierra Rutile and will expire on the third anniversary of grant. The fair value of options granted during the year determined using the Black-Scholes valuation model ranges between 27.20p and 29.00p. The significant inputs into the model were: Option series Grant date share price Exercise price Expected volatility 84% 83% 83% Option life 2 years 2 years 2 years Risk-free interest rate 1% 1% 1% (ii) Movements in share options during the year The following table reconciles the share options outstanding at the beginning and end of the year. Number of options Weighted average exercise price pence Number of options Weighted average exercise price pence Balance at beginning of the year 26,890, , Granted during the year 1,150, ,520, Exercised during the year (3,130,000) 28.0 (9,730,000) 17.9 Lapsed during the year (500,000) 30.9 Balance at end of the year 24,410, ,890, The share options outstanding at the end of the year had exercise prices ranging from 12.5p to 75.5p (2011: 12.5p to 75.5p) and a weighted average remaining contractual life of 587 days (2011: 791 days). (iii) Share options exercised during the year The following share options were exercised during the year and were satisfied through the issuance of new shares (see above): Number exercised Exercised date Exercise price pence (i) Granted on , (ii) Granted on , (iii) Granted on ,300, ,130,000 57

60 Notes to the Consolidated Financial Statements continued Year ended 31 December Non-controlling interest Under the First Amendment Agreement dated 4 February 2004, entered into between the GOSL and Sierra Rutile, in lieu of payment of PAYE taxes, Sierra Rutile used to transfer shares in Sierra Rutile Holdings Limited (the parent company of the operating subsidiary in Sierra Leone) to the GOSL. On 30 April 2012, the Group entered into an agreement with the GOSL to pay, in cash, PAYE taxes that had historically been satisfied through the issuance of shares in Sierra Rutile s operating subsidiary in Sierra Leone. As part of the agreement the shares held by the GOSL were transferred back to Sierra Rutile. The total cost of this agreement was US$13,123,000, which included payment in respect of PAYE liabilities that had not yet been settled by share issuances. Additionally, as part of the agreement, the GOSL also agreed to settle its payable to Sierra Rutile of US$727,000 previously recorded as a non-current receivable. The net cash outflow for Sierra Rutile was therefore US$12,396,000. The non-controlling interest balance previously recognised of US$19,063,000 was also eliminated with the balance being recorded within retained loss in accordance with IAS27 Consolidated Financial Statements. Concurrent with this agreement, the Group also prepaid US$5,200,000 of PAYE taxes to the GOSL. 24. Cash flows from operating activities (a) Cash inflow/(outflow) from operations Profit/(loss) before taxation 84,397 (27,649) Adjustments for: Depreciation on property, plant and equipment 15,873 9,125 Amortisation of intangible assets Interest income (2) (20) Interest expense 2,774 3,046 Share option expense 4,338 3,491 Foreign exchange 439 (1,233) Impairment of property, plant and equipment ,361 Property, plant and equipment written off 11 Tax claim liability (498) , Changes in working capital Increase in inventories (22,428) (6,902) Increase in trade and other receivables (21,270) (6,203) Movement in provisions (51) (516) Increase in trade and other payables 4,942 10,480 Cash inflow/(outflow) from operations 68,812 (3,040) (b) Cash and cash equivalents Cash in hand and at bank 5,005 6,193 Short-term bank deposits 86 4,465 Cash and cash equivalents 5,091 10,658 58

61 24. Cash flows from operating activities continued (b) Cash and cash equivalents continued Cash and cash equivalents and bank overdrafts include the following for the purpose of the statement of cash flows: Cash and cash equivalents (excluding bank overdrafts) 5,783 10,658 Bank overdrafts (included within short-term borrowings) (note 19) (692) 5,091 10, Capital commitments Property, plant and equipment acquisition contracted for at the end of the reporting period but not yet incurred: 2,291 14,968 At December 2012, the Group had capital commitments of US$2,291,000 (2011: US$14,968,000). The 2011 capital commitments consisted of a concentrator unit for the dry mining expansion project for US$11,699,000, with other capital expenditures amounting to US$3,269, Events after the reporting period Events after the reporting period are disclosed only to the extent that they relate directly to the set of financial statements and are material in effect. As at the date of issuing this set of financial statements, there were no material events after the reporting period to disclose, except the following: On 4 April 2013, the Board approved a new dividend policy which will aim to distribute to shareholders at least 50% of cash flows after capital expenditure, committed future expenditures and the repayment of any borrowings. The declaration of any future dividends, and the frequency of them, will be subject to the Group s financial condition, future prospects and satisfactory solvency tests and other factors deemed by the Board to be relevant at the time. Subsequent to the year end, the Board also adopted a share ownership policy for Directors, whereby Non-Executive Directors are expected to build up and hold at least two million shares in the Group (four million for the Chief Executive Officer and Chairman). Directors are expected to retain shares acquired pursuant to share incentive awards, but may sell sufficient shares as necessary to pay the exercise price, taxation and out of pocket expenses associated with the exercise of share incentive awards. There is no target date to achieve the share ownership and such number of shares. On 15 April 2013 the Group entered into a 70,000 tonne rutile supply agreement with a major pigment producer. The contract, valid until 31 December 2014, consists of seven 10,000 tonne shipments of rutile (one per calendar quarter) and successfully secures sales of a substantial portion of Sierra Rutile s production for the remainder of 2013 and into Related party transactions (a) Transactions and balances Amount payable Purchases/ project fees Amounts receivable Total 2012 Director: Enterprise in which Mr. Alex Kamara is also a director Cemmats Group ** (325) (325) 2011 Shareholder: Group related to significant shareholder* (171) (171) Director: Enterprise in which Mr. Alex Kamara is also a director Cemmats Group ** (6) (466) (471) * During the year 2011, the Group entered into an agreement to purchase mining equipment for US$170,770 from Swanmet (Singapore) Pte Ltd (Swanmet). Swanmet is an entity which, at the time of the purchase, was controlled by Pala Investments Holdings Limited which at that time held 38.2% of Sierra Rutile s issued share capital. ** Mr. Alex B. Kamara is a Director of the Group. Mr. Kamara is also a non-executive director of Cemmats Group, a Sierra Leonean company which has a number of contracts with Sierra Rutile to supply mining services and equipment. 59

62 Notes to the Consolidated Financial Statements continued Year ended 31 December Related party transactions continued (b) Consultancy agreements with previous Directors Mr. Malouf resigned as a Director of the Group on 21 February Subsequent to this, the Group entered into a six months consultancy agreement at a cost to the Group of US$4,000 per month. This agreement ended in August (c) Key management personnel compensation The remuneration of the Directors, who are the key management personnel of the group, is set out below in aggregate for each of the categories specified in IAS 24, Related Party Disclosures. Further information about the remuneration of individual Directors is provided in the Directors Remuneration Report on pages 30 to 31. In accordance with IAS 24, Related Party Disclosures, key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group. Key management comprises the Board and senior management. In 2012, nine (2011: nine) were considered key management personnel of the Group Directors fees Salaries and short-term employee benefits 1,627 1,200 Share option expense 3,377 2,889 5,238 4,583 In 2011 certain employees and Directors exercised 9,700,000 of share options. The 2011 exercises were then tendered into the Pala Investment Offer. The Group also granted share options of 1,150,000 (2011: 36,520,000) to Directors, Senior Officers and advisors of the Group with exercise prices varying between 60.60p and 65.00p (2011: 12.50p and 20.90p) 28. Financial risk management 28.1 Financial risk factors The Group s activities expose it to a variety of financial risks: (a) market risk (including currency risk, fair value interest risk and fuel price risk); (b) credit risk; (c) liquidity risk; (d) cash flow interest rate risk; and (e) country risk. The Group s overall financial risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group s financial performance. A description of the significant financial risk factors is given below together with the risk management policies applicable. (a) Market risk Currency Risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to Leone (SLL), Euro and GBP. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. The Group places any excess of liquidity in stable currencies to reduce its exposure to foreign currency risks. 60

63 28. Financial risk management continued 28.1 Financial risk factors continued (a) Market risk continued Currency Risk continued At 31 December 2012, if the US$ had weakened/strengthened by 5% against the Euro, GBP, AUD, CAD and Leone, with all other variables held constant, the impact on the non-us$ denominated financial assets and liabilities would have been as follows: 2012 Value Impact on profit/assets/ liabilities Receivables 3, Cash and cash equivalents Borrowings 31,519 1,576 Payables 3, ,646 1, Value Impact on loss/ assets/ liabilities Receivables 5, Cash and cash equivalents Borrowings 30,712 1,536 Payables 2, ,193 1,961 Fuel price risk The Group s operations are energy intensive and, as a result, the Group s costs and earnings could be adversely affected by rising energy costs. Whilst the Group never has, its policy allows it to, from time to time to enter into fuel price derivatives to hedge the future fuel price risk but only to the extent that the group has fixed sales. During 2012, the Group purchased US$11.1 million of marine fuel oil ( MFO ) (2011: US$10.3 million) and US$10.9 of diesel (2011: US$5.8 million). The average price of MFO increased from 760 US$/tonne to 838 US$/tonne and the average price of diesel increased from 946 US$/tonne to 1,168 US$/tonne. This led to an increase in fuel costs from US$16.1 million in 2011 to US$22.0 million in The Group estimates that all other factors being equal in 2012 a 35% increase/decrease in MFO price would have created a 4.2% increase/decrease in operating cash expense and a 55% increase/decrease in diesel price would have created a 6.6% increase/decrease in operating cash expense. (b) Credit risk The Group s credit risk is primarily attributable to its trade receivables. The amounts presented in the statement of financial position are net of allowances for doubtful receivables (where required), estimated by the Group s management based on prior experience and the current economic environment. The Group has no significant credit risk for the time being, as sales are based on off-take agreements with corporate customers. The Group has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. 61

64 Notes to the Consolidated Financial Statements continued Year ended 31 December Financial risk management continued 28.1 Financial risk factors continued (c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities. The Group aims at maintaining flexibility in funding by keeping committed credit lines available. The table below analyses the Group s non-derivative financial liabilities with agreed repayments periods. The tables below have been drawn up based on the undiscounted cash flows of the financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows. At 31 December 2012 Less than one year Between two and five years More than five years Total Government of Sierra Leone loan 5,219 26,300 31,519 Trade and other payables 25,774 25,774 30,993 26,300 57,293 At 31 December 2011 Less than one year Between two and five years More than five years Total Government of Sierra Leone loan 30,712 30,712 Trade and other payables 22,998 22,998 22,998 30,712 53,710 (d) Cash flow and fair value interest rate risk The Group s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. Group policy is to maintain all its borrowings in fixed rate instruments. At year end, all borrowings were at fixed rates and accordingly no sensitivity analysis is presented. (e) Country risk The Group has an operating subsidiary, namely Sierra Rutile Limited, based in Sierra Leone. The Group does not have insurance cover to mitigate exposure to the risks present there Fair value estimation The nominal value less estimated credit adjustments of trade receivables and payables is assumed to approximate to their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments Capital risk management The Group s objectives when managing capital are: to safeguard the Group s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; and to provide an adequate return to shareholders by pricing products commensurately with the level of risk. The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. 62

65 28. Financial risk management continued 28.3 Capital risk management continued Consistent with others in the industry, the Group monitors capital on the basis of the debt-to-adjusted capital ratio. This ratio is calculated as net debt to adjusted capital. Net debt is calculated as total debt (as shown in the statement of financial position) less cash and cash equivalents. Adjusted capital comprises all components of equity (i.e. share capital, share premium, non-controlling interests, retained earnings and revaluation surplus) other than amounts recognised in equity relating to cash flow hedges, and includes some forms of subordinated debt. During 2012, the Group s strategy, which was unchanged from 2011, was to maintain the debt-to-capital ratio at the lower end of the range 5% to 25%, in order to secure access to finance at a reasonable cost. The debt-to-capital ratios at 31 December 2012 and at 31 December 2011 were as follows: Total debt (note 19) 32,211 30,712 Less: cash in hand and bank balance (note 24 (b)) (5,783) (10,658) Net debt 26,428 20,054 Total equity 185, ,708 Debt-to-capital ratio 14% 19% The decrease in the debt-to-capital ratio during 2012 resulted primarily from the increased profit realised during the year under review and the options tendered during the year, which together increased shareholders equity by US$78,356, Contingent liabilities The Group is subject to various claims which arise in the normal course of business. Previously in 2011, in light of new analysis and after reviewing the work of third party legal counsel, the Group reversed a contingent consideration liability of US$3,855,000 previously recognised in relation to the original acquisition of the Sierra Rutile assets in The Group strongly believes that no amount is payable to the original vendor, noting that the maximum liability would be US$10,000,000 (see note 11). 30. Ultimate controlling party As at 31 December 2012, the Group s immediate parent was Pala Minerals Limited, a subsidiary of Pala Investments Limited (formerly known as Pala Investment Holdings Limited), which is incorporated in the British Virgin Islands. The ultimate controlling party of the Group is VFI Holdings AG, which is controlled by Mr Vladimir Iorich. VFI Holdings AG is incorporated is Switzerland, and does not produce Group accounts. 63

66 Officers and Professional Advisors Company Secretary John Nagulendran Contact Details Sierra Rutile Limited 2nd Floor, Access Bank Building 30 Siaka Stevens Street Freetown Sierra Leone Registered Agents and Office SHRM Trustees (BVI) Limited Trinity Chambers P.O. Box 4301 Road Town Tortola British Virgin Islands Nominated Adviser & Joint Corporate Broker RBC Capital Markets Thames Court One Queenhithe London EC4V 3DQ Joint Corporate Broker Mirabaud Securities 33 Grosvenor Place London SW1X 7HY Solicitors Olswang Solicitors 90 High Holborn London WC1V 6XX Auditor Deloitte LLP 2 New Street Square London EC4A 3BZ Registrars Computershare Investor Services (Channel Islands) Limited P.O. Box 83 Ordnance House 31 Pier Road St Helier Jersey JE4 8PW Channel Islands 64

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68 Sierra Rutile Limited 30 Siaka Stevens Street 2nd Floor Access Bank Building Freetown Sierra Leone