THE REPUBLIC OF UGANDA REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF KILEMBE MINES LTD FOR THE FINANCIAL YEAR ENDED 30 TH JUNE 2015 OFFICE OF THE AUDITOR GENERAL UGANDA
TABLE OF CONTENTS LIST OF ACRONYMS... iii REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF KILEMBE MINES LTD FOR THE YEAR ENDED 30TH JUNE, 2015... iv DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF KILEMBE MINES LTD FOR THE YEAR ENDED 30 TH JUNE, 2015... 1 1.0 INTRODUCTION... 1 2.0 BACKGROUND INFORMATION... 1 3.0 ENTITY FINANCING... 2 4.0 OBJECTIVE OF KILEMBE MINES LIMITED... 2 5.0 AUDIT OBJECTIVES... 2 6.0 PROCEDURES PERFORMED... 2 7.0 FINDINGS... 3 8.0 DETAILED AUDIT FINDINGS... 4 ii
LIST OF ACRONYMS Acronym GoU IAS KML Tibet UGX USD Government of Uganda International Accounting Standard Kilembe Mines Ltd Tibet Hima Mining Company Limited Uganda Shillings United States Dollar iii
REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF KILEMBE MINES LTD FOR THE YEAR ENDED 30 TH JUNE, 2015 THE RT. HON. SPEAKER OF PARLIAMENT I have audited the financial statements of Kilembe Mines Ltd for the year ended 30 th June 2015. These financial statements comprise of the Statement of Financial Position, the Statement of Financial Performance, and Cash flow Statement together with other accompanying statements, notes and accounting policies. Management Responsibility Under Article 164 of the Constitution of the Republic of Uganda 1995 (as amended) and Section 45 of the Public Finance Management Act, 2015, the Accounting Officer is accountable to Parliament for the funds and resources of Kilembe Mines Ltd. The Accounting Officer is also responsible for the preparation of financial statements in accordance with the requirements of International Financial Reporting Standards and the Uganda Companies Act, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement whether due to fraud or error. Auditor s Responsibility My responsibility as required by Article 163 of the Constitution of the Republic of Uganda 19995 (as amended) and Sections 13 and 19 of the National Audit Act, 2008 is to audit and express an opinion on these statements based on my audit. I conducted the audit in accordance with International Standards on Auditing. Those standards require that I comply with the ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing audit procedures to obtain evidence about the amounts and disclosures in the financial statements as well as evidence supporting compliance with relevant laws and regulations. The procedures selected depend on the Auditor s judgment including the assessment of risks of material misstatement of financial statements whether due to fraud or error. In making those risk assessments, the Auditor considers internal control relevant to the entity s preparation and fair presentation of financial statements in order to design audit procedures that are appropriate in the circumstances but not for purposes of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management as well as evaluating the iv
overall presentation of the financial statements. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion. Part A of this report sets out my opinion on the financial statements. Part B which forms an integral part of this report presents in detail all the significant audit findings made during the audit which have been brought to the attention of management and form part of my Annual Report to Parliament. PART A Opinion In my opinion, the financial statements of Kilembe Mines Ltd for the year ended 30 th June 2015 are prepared, in all material respects in accordance with the International Financial Reporting Standards and the Uganda Companies Act, Cap 110 of the Laws of Uganda, 2000. Emphasis of Matter Without qualifying my opinion, I draw attention to the following matters disclosed in the financial statements. Uncleared loan balance Included in the Non-current liabilities, under Note 12, is an outstanding Loan from Ministry of Finance (Privatisation Unit) amounting to UGX.4,700,000,000 inspite of the fact that the Privatisation Unit received USD4.03m as upfront fee on the signing of the Concession which could have been applied to offset this loan. Impairment loss As explained in note 3, Kilembe Mines Limited impaired its investments in Kasese Cobalt Company Limited (KCCL) by UGX.11,085,885,120 after KCCL posted a negative total equity of USD 40.9 million and having ceased its business operations. KML is likely to incur more costs in settlement of outstanding liabilities from the venture. John F.S. Muwanga AUDITOR GENERAL 14 th December, 2015 v
PART "B" DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF KILEMBE MINES LTD FOR THE YEAR ENDED 30 TH JUNE, 2015 This Section outlines the detailed audit findings, management responses, and my recommendations in respect thereof. 1.0 INTRODUCTION Article 163 (3) of the Constitution of the Republic of Uganda, 1995 (as amended) requires me to audit and report on the public accounts of Uganda and all public offices including the courts, the central and local government administrations, universities, and public institutions of the like nature and any public corporation or other bodies or organizations established by an Act of Parliament. Accordingly, I carried out the audit of the KML to enable me report to Parliament. 2.0 BACKGROUND INFORMATION Kilembe Mines Limited (KML) was incorporated in 1950 under the Companies Ordinance as a private company. In 1975, the Government of Uganda (GoU) bought majority shares from the previous owners and it became wholly owned by GoU. Following decline in the world market of copper prices the business became unviable, the mining operations deteriorated substantially. KML stopped mining as a main activity in 1982 and has since then been placed under care and maintenance. The principal activity of the Company was the mining and the marketing of copper and allied minerals; however after the drastic fall in prices in the late 70s and early 80s, mining operations ceased and the company diversified into various activities such as generation and sale of hydroelectric power, sale of lime, foundry products, rental of its buildings and sub-lease of its land, sale of transmission and fencing poles. The Government of Uganda (Principal shareholder in KML) in 2013 leased its assets in form of a concession to Tibet Hima Automobile Industry Limited (Tibet) that won the bid for the conceded assets of KML and subsequently entered into a Concession Agreement with the GOU which among other things requires the revival of mining activities at Kilembe to the point of processing copper and manufacture of finished copper products. Under the agreement, the core assets of KML, which include the mine, the mine works, the hydro-power station and attendant land and buildings, were conceded to Tibet for a period of 25-years effective April 2014.
Therefore, KML s new role as an asset-holding company is to track the investment program of the concessionaire and (in so doing) to monitor the implementation of the concession on behalf of GOU (by reporting on the key outputs). 3.0 ENTITY FINANCING KML was financed by operating income of UGX 1,918,719,259 representing annual decline of 31.5%. 4.0 OBJECTIVE OF KILEMBE MINES LIMITED The objective of KML is to carry out monitoring and evaluation roles according to the Concession Agreement between Government of Uganda and Concessionaire. 5.0 AUDIT OBJECTIVES The audit was carried out in accordance with International Standards on Auditing and accordingly included a review of the accounting records and agreed procedures as was considered necessary. In conducting my reviews, special attention was paid to establish:- a. Whether the financial statements have been prepared in accordance with consistently applied accounting Policies and fairly present the revenues and expenditures for the period and of the financial position as at the end of the period. b. Whether all funds were utilized with due attention to economy and efficiency and only for the purposes for which the funds were provided. c. Whether goods and services financed have been procured in accordance with the Government of Uganda Procurement regulations. d. Whether management put in place sufficient internal control structure and the internal controls worked as intended throughout the year. e. Whether the management was in compliance with the Government of Uganda financial regulations. f. Whether all necessary supporting documents, records and accounts have been kept in respect of all activities, and are in agreement with the financial statements presented. 6.0 PROCEDURES PERFORMED The following audit procedures were undertaken:- 2
(a) (b) (c) (d) (e) (f) Revenue Obtained schedules of all revenues collected and reconciled the amounts to the cashbooks and bank statements. Expenditure The payment vouchers were examined for proper authorization, eligibility and budgetary provision, accountability and support documentation. Internal Control system Reviewed the internal control system and its operations to establish whether sound controls were applied throughout the period audited. Procurement Reviewed the procurement of goods and services by the entity during the period under review and reconciled with the approved procurement plan. Fixed Asset Management Reviewed the use and management of the entity assets during the period under audit Financial Statements Examined on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessed the accounting principles used and significant estimates made by management; as well as evaluating the overall financial statement presentation. 7.0 FINDINGS 7.1 Categorization of audit findings The following system of profiling of the audit findings has been adopted to better prioritise the implementation of audit recommendations. Category Description 1 High significance Has a significant / material impact, has a high likelihood of reoccurrence, and in the opinion of the Auditor General, it requires urgent remedial action. It is a matter of high risk or high stakeholder interest. 2 Moderate significance Has a moderate impact, has a likelihood of reoccurrence, and in the opinion of the Auditor General, it requires remedial action. It is a matter of medium risk or moderate stakeholder interest. 3 Low significance Has a low impact, has a remote likelihood of reoccurrence, and in the opinion of the Auditor General, may not require much attention, though its remediation may add value to the entity. It is a matter of low risk or low stakeholder 3
interest. 7.2 Summary of audit finding according to the above profiling No Title of findings Significance 1 Uncleared loan balance 4,700,000,000 High 2 Impairment loss of Investments High UGX.11,085,885,120 3 Vacant positions moderate 4 Lack of an investment Plan High 5 Non Payment of Concession Fee moderate 6 Absence of a Project Linkage Plan moderate 7 Monitoring of activities of Tibet Hima Mining Company moderate 8.0 DETAILED AUDIT FINDINGS 8.1 Uncleared loan balance Included in the Non-current liabilities, under Note 12, is a Loan from Ministry of Finance, Planning and Economic Development (Privatisation Unit) amounting to UGX4,700,000,000 which has remained outstanding for a long time inspite of the fact that the company s role has changed and is now there to monitor the performance of the concession only. With no clear income sources, it is highly unlikely that the loan will be settled. I advised management to liaise with MoFPED and have the loan settled through the concession proceeds that are paid directly to Privatization Unit. 8.2 Impairment loss As explained in note 3, Kilembe Mines Limited (KML) impaired its investments in Kasese Cobalt Company Limited (KCCL) by UGX.11,085,885,120. This was after KCCL posted a negative total equity of USD.40.9 million and had ceased its business operations of cobalt processing. The investment has never economically been viable and no dividends were ever paid by KCCL. As at 31 st December 2014, the major shareholder (75%) had an outstanding Shareholder loan of USD.48.96m therefore KML is likely to incur more costs in settlement of outstanding liabilities from the venture. 4
I advised management to reconsider investment in UCCL in view of the declining value of the Company. 8.3 Vacant positions KML under the concession agreement between the GOU and Tibet has new roles that include asset holding, tracking the investment program of the concessionaire and monitor the implementation of the concession on behalf of GOU. As a result of its new roles, restructuring was undertaken. In its new structure, the company is required to have fourteen (14) full time employees. However, it was noted that 3 positions of key technical staff including a geologist, environmentalist and a mining engineer had not been filled. As a result of these vacancies, management may not undertake the roles set out in the concession agreement adequately. Management acknowledged the need to fill the vacant posts but attributed it to lack of funds. 8.4 Lack of an investment Plan Section 3.2.7.2 of the concession agreement requires that the Concessionaire prior to the procurement or acquisition of any one or group of conceded assets financed by the concessionaire, submit to KML an investment plan consistent with the applicable feasibility report, in a form to be agreed by KML and the Concessionaire indicating: a) The proposed specifications of the assets to be procured or details of the investment to be made. b) The number of assets to be procured and amounts of other inputs required. c) The proposed procurement methods, for information only; and d) The estimated cost separated into the aggregated cost of items to be procured and other costs to be incurred, for information only at this stage. Contrary to the above, the Concessionaire had not provided KML with an investment plan by the time of the audit despite procuring items worth USD3,796,121. None of the procured items were agreed upon between the concessionaire and KML. This violates the terms and conditions of the concession agreement, and also casts doubt on whether the procured equipment would achieve the intended purpose. Management explained that the submission date of the feasibility report was 30 th September 2015 and that although the investment plan has not been submitted, any items so far procured by the Concessionaire before the investment plan is availed will not be part of the Assets accounts to be maintained by KML. 5
I advised management to ensure timelines are adhered to and that the concession agreement is complied with. 8.5 Monitoring of activities of Tibet Hima Mining Company I undertook an inspection around the mill at Kilembe and the following observations were made: a) Lack of Protective Gear There were a number of workers who did not have protective gear as shown in the photo below. b) Cigarette packs in the mill Good safety practices allow for the creation of smoking zones in locations far from fire hazards. During the inspection of the mill, close to 3 cigarette packets were observed in the mill. This presents a risk of fire. It was observed that there were no smoking zones in the entire operation Area and as a result workers smoked from all locations in the mill and left the cigarette packs on the floor 6
Management explained that the issues of safety had always been brought to the attention of the Concessionaire and although they had promised to comply, no actions were taken. I advised management to consider invoking section 24 of the agreement which provides process of dealing with such continuous default and or non-compliance. 9.0 STATUS OF PRIOR YEAR AUDIT RECOMMENDATIONS I reviewed the implementation of the previous year audit recommendations and the following table summarizes the status of implementation and actions taken by management; Issue Recommendation Status I advised management to conduct Not implemented a valuation exercise for the A note was made in the biological assets and adjust the financial statements financial statements accordingly. Biological Assets-These had not been disclosed pending valuation of the assets. Trade Payables- There was an increment in the trade payables figure of 137% I advised Management to settle the obligations to avoid litigation. Implemented 7
I advised the company management to implement the outstanding audit recommendation to ensure enhanced accountability and better stewardship of the company resources. 8
FINANCIAL STATEMENTS 9