25 May 2011
ZANAGA IRON ORE COMPANY LIMITED
("ZIOC" or the "Company")
AUDITED RESULTS FOR THE YEAR TO 31 DECEMBER 2010
Zanaga Iron Ore Company Limited (AIM:ZIOC) is pleased to announce its audited results for the year ended 31 December 2010. A full version of the Annual Report and Accounts for the year ended 31 December 2010 will be available on the Company's website www.zanagairon.com today.
2010 Highlights
· The Company listed on the London Stock Exchange's AIM Market ("AIM") on 18 November 2010, raising US$50m for ZIOC
· Phase I of the Pre-Feasibility Study completed in June 2010. Phase II of the Pre-Feasibility Study to be published in Q3 2011 simultaneously with the results of the Value Engineering Exercise. In September 2010 Xstrata extended its first call option over 50% plus one share interest in Jumelles Limited, the joint venture vehicle which owns the Zanaga Project, for an agreed amount of up to US$56.49m which was used to fund Phase II of the Pre-Feasibility Study
· In February 2011 - Xstrata exercised its first call option and now owns 50% plus one share interest in Jumelles Limited. The Zanaga Project is now managed by Xstrata, and Xstrata has agreed to fund the completion of a feasibility study in accordance with international best practice standards and Xstrata internal guidelines
· Mineral resource upgrade based on work completed as at 2010 year end:
o Resource increase to 4.0 Bt from 3.3 Bt
o Grade improvement to 33.9% Fe from 32.8% Fe
· Cash balance of US$49m as at 2010 year end
Cliford Elphick, Non-Executive Chairman of Zanaga Iron Ore Company Limited, commented:
"In addition to the strategic partnership with Xstrata, the combination of a number of key strengths supports the Board's view that the Zanaga Project represents a significant opportunity. Large scale resources have been identified from targeted areas of the Zanaga ore body that have the potential to sustain a high production mine over the long-term. Exploration work to date has indicated that the quality of the ore is characterised by a shallow, soft and rippable haematitic itabirite cap which overlies a magnetite banded iron formation or BIF protore which jointly demonstrate production potential of iron ore product with low deleterious elements. To date only 25 km of the known 47km strike length of magnetic mineralisation has been drilled to define the current mineral resource, leaving potential upside to expand production and enhance value."
The Company will today send to shareholders the Annual Report and Accounts for the year ended 31 December 2010 ("2010 Annual Report and Accounts"), together with the Notice of Annual General Meeting ("AGM") to be held at the Westbury Hotel, Bond Street, Mayfair, London, W1S 2YF, England on 17 June 2011 at 09:30am (BST), the form of proxy, and form of instruction for holders of Depositary Interests for use at the AGM.
Copies of the 2010 Annual Report and Accounts and the Notice of AGM will be available on the Company's website at www.zanagairon.com today.
For further information please contact:
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ZIOC |
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Corporate Development and |
Andrew Trahar |
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Investor Relations Manager |
+44 20 7399 1105 |
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Liberum Capital Limited |
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Nominated Adviser, Financial |
Chris Bowman, Christopher Britton |
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Adviser and Sole Broker |
and Christopher Kololian |
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+44 20 3100 2000 |
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Pelham Bell Pottinger |
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Financial PR |
Charles Vivian, James MacFarlane |
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and Philippe Polman |
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+44 20 7861 3232 |
Chairman's statement
It has been an eventful year for ZIOC. Against a backdrop of a strong recovery in global demand for commodities, we made a successful debut in November 2010 on the AIM Market of the London Stock Exchange raising US$50m of new money. We completed Phase 1 of the Pre-Feasibility Study ("PFS") on the Zanaga Iron Ore Project ("Zanaga Project") which, in turn, contributed to the crystallisation in early 2011 of our strategic joint venture partnership with Xstrata ("JV"), securing the future funding requirements of the completion of the Feasibility Study ("FS") for the Zanaga Project.
Significant achievements in the year
Throughout 2010, ZIOC and Xstrata have focused in greater detail on the first steps towards the development and construction of a world-class iron ore project capable of mining, processing, transporting and exporting iron ore concentrate from the Republic of Congo. In doing so, the following key milestones were achieved during 2010:
- The work streams for Phases I and II of the PFS have been completed at a joint cost of approximately US$105m.
- The conclusion in September 2010 of an Addendum to the 2007 Mining Convention with the Republic of the Congo. The 2010 Addendum sets out in greater detail the legal framework for the further development of the Zanaga Project in key areas such as tax & customs, allocation of project infrastructure, permitting & licensing and the environmental & social matters.
- A significant amount of drilling was completed which has resulted in an increase in the JORC compliant mineral resource to 4.0 Bt from 3.3 Bt and an increase in grade to 33.9% Fe from 32.8% Fe. The drilling was conducted over only 25km of the known 47km strike length of magnetic mineralisation, leaving potential for future expansion of the resource size and potential flexibility to increase estimated annual production levels.
- On 18 November 2010 ZIOC listed on the AIM Market of the London Stock Exchange raising US$50m of new money with a further US$50m placed on behalf of selling shareholders.
A focused strategy
Our objective is to maximise the value of ZIOC's 50% less one share minority stake in the Zanaga Project pending the possible exercise by Xstrata of its Second Call Option in respect thereof. Following Xstrata's exercise of its first call option it now has management control of the Zanaga Project and is obliged under the terms of the joint venture agreement ("JVA") to fund and deliver a FS in accordance with international best practice standards and Xstrata's internal guidelines.
As a result the Zanaga Project has been significantly derisked. When the FS is complete, if Xstrata does not exercise the Second Call Option, ZIOC will have a number of future funding options including (i) dilution at NPV during construction; or (ii) a right to fund ZIOC's pro rata equity share of construction capital expenditure.
With a cash balance of US$49.3m as at 31 December 2010 ZIOC believes it has adequate funds at its disposal to meet its working capital requirements for the duration of the FS phase and does not currently foresee further funding requirements until completion of the FS.
A potential world class opportunity
In addition to the strategic partnership with Xstrata, the combination of a number of key strengths supports the Board's view that the Zanaga Project represents a significant opportunity. Large scale resources have been identified from targeted areas of the Zanaga ore body that have the potential to sustain a high production mine over the long-term. Exploration work to date has indicated that the quality of the ore is characterised by a shallow, soft and rippable haematitic itabirite cap which overlies a magnetite banded iron formation or BIF protore which jointly demonstrate production potential of iron ore product with low deleterious elements. To date only 25 km of the known 47km strike length of magnetic mineralisation has been drilled to define the current mineral resource, leaving potential upside to expand production and enhance value.
Access to low cost energy
The PFS work to date indicates that the Zanaga Project has the potential to be a low cost producer of iron ore. Of particular interest is the potential for low cost energy resulting from the availability of large volumes of gas from defined on-shore gas fields and producing off-shore oil platforms. Following the suggestion from the Republic of the Congo for oil producers to halt the flaring of natural gas, established oil and gas producer Eni S.p.A., constructed a 150MW power plant in Pointe-Noire to harness the local natural gas reserves. The 150MW plant has been commissioned and ZIOC understands that there are phased 150MW expansion plans up to a total capacity of up to 750MW at the same facility.
Transport infrastructure
Transportation infrastructure is one of the critical factors in developing any major iron ore project. In the course of 2010 Jumelles ("Jumelles" or "JVCo") and its consultants have refined its transport options and determined a preliminary corridor for a standalone railway network and continue optimising this process based on, amongst others, the ongoing receipt of more accurate geotechnical and LIDAR topographical data. PFS results to date further indicate that the Zanaga Project could derive benefit from the access to an excellent targeted bulk commodity port site which is located only 9km to the north of the existing public port of Pointe-Noire which also currently services the local oil industry. Twenty (20) metre deep tidal water is located approximately 2km off-shore with a natural channel offering the possibility, with limited dredging, of a 1.2 to 1.5km long loading trestle with no required breakwater which ZIOC is advised could present a significant advantage compared to other global iron ore projects.
Project team and consultants
In the course of 2010 a number of additional, talented key employees with a proven track record in the evaluation of iron ore projects in francophone Africa were recruited for the Zanaga Project team, supported by leading consultants with specific expertise in working on exploration stage development projects and evaluation of iron ore projects.
Following the exercise by Xstrata of its First Call Option (as set out below), ZIOC has engaged Wardrop Engineering Inc and Mr Carl Wilson of Wilson Campbell & Associates as its dedicated team of consulting engineers to advise ZIOC on all material technical aspects of the Zanaga Project. These engagements provide ZIOC with the much required technical skills and expertise in the key areas of rail, port and mine site development appropriate for a large scale mining and infrastructure project such as Zanaga.
A key strategic partnership with a mining major
We are very pleased to have built a strong relationship with Xstrata, a global diversified mining group with a stated strategy to enter the iron ore market. Xstrata has been closely aligned to the Zanaga Project since October 2009 when it entered into a call option agreement ("First Call Option") for the acquisition of its 50% plus one share majority stake in Jumelles the joint venture holding vehicle, for the Zanaga Project, in consideration for payment of an option premium of US$50m. This option premium was used by the JVCo to fund Phase I of the PFS which was completed in June 2010.
In the course of the second half of 2010 Xstrata extended its First Call Option in consideration for funding Phase II of the PFS for up to an additional US$56.49m, subject to the terms and conditions of the First Call Option.
In February 2011 Xstrata exercised the First Call Option and now owns a 50% plus one share majority stake in the JVCo. In consideration for the majority stake Xstrata must fund and deliver the FS in accordance with international best practice standards and Xstrata's internal guidelines.
Xstrata is now ZIOC's joint venture partner and has effective control of the Zanaga Project at both a shareholder and director level. In this regard, it is important to mention that many of the key historic management team members recruited by Jumelles still continue to work with Xstrata management and build on the valuable work results achieved to date.
Xstrata's Second Call Option
The exercise of the First Call Option by Xstrata has triggered the implementation of the JVA between ZIOC and Xstrata governing the working relationship between our two companies. It is important to note that the JVA stipulates that within 90 days of completion of the FS, Xstrata has the right to exercise a further call option ("Second Call Option") to acquire all (but not part of) ZIOC's remaining 50% less one share minority stake in the JVCo in consideration for an agreed price, failing which a net present value based price determined by an independent expert in accordance with the JVA's agreed valuation terms of reference. The exercise of this Second Call Option is not subject to shareholder approval and together with the JVA provides ZIOC and Xstrata with a clear legal and commercial framework, goal and timetable within which to further determine and improve on the Zanaga Project's value and feasibility.
PFS and the current value engineering analysis
The results from Phase II of the PFS will be published in Q3 2011 simultaneously with the results of the Value Engineering Exercise ("VEE") currently undertaken and commissioned as an initial stage to the FS. The VEE aims to review and refine those options and opportunities that could positively impact on the net present value ("NPV") of the Zanaga Project, either through added value or the reduction of risk. Further details on the VEE work stream are set out in the Business Review below.
Recovering commodity markets
2010 saw a clear reversal of 2009's cautious outlook for global growth and specifically commodities. The recovery of world growth in 2010 caused a return in demand for commodities on a significant scale. Iron ore prices were driven by renewed global demand for steel as well as closed domestic Chinese capacity not being able to re-open to meet returning demand, this being marginally tempered by issues such as sovereign debt concerns, differing monetary policies and most importantly, indications of Chinese credit tightening.
A recovery in market conditions is now well under way as investor confidence grows and consumption demand for commodities continues. 2011 has seen iron ore prices rising further, reaching record highs as a result of continued demand from the emerging markets especially China as well as a surprising recovery in demand from established Western economies. Growing confidence combined with tighter supply at the start of the year has driven iron ore prices to new highs. This momentum abated following conflicts in the Middle East and North Africa as well as the tsunami disaster in Japan. However continued constraints on expanding iron ore supply indicate that prices will remain robust to 2014, normalising at a level that will result in the removal of high cost production. Evidence of constraints have appeared in delays to the timing of planned production expansions as well as increasing levels of expected capital expenditure, thus providing substantial support to the iron ore price in the near term.
Corporate responsibility
From the outset of our work on the Zanaga Project our strategy has been to engage and form partnerships with government and local communities and as such the Zanaga Project has engaged experts in the fields of health, safety, community liaison and the environment to ensure that the Zanaga Project is developed in a responsible manner in accordance with internationally accepted industry standards and practice. This supports our objective of maximising the Zanaga Project's value for our shareholders whilst putting in place and adhering to policies and systems that will ensure that local communities and the Republic of Congo at large receive benefits from the ongoing development of the project.
Although the Zanaga Project is in its early stages, it is already a large direct and indirect local employer. Over the past year we have increased our investment in the ongoing education and training of our local workforce and communities thereby stimulating the local economy (before any revenues flow from the mine) through the PFS work programme and related expenditure. Studies of the mine site and related areas have been conducted by internationally recognised experts and their findings have been integrated into our project planning. We are confident that under Xstrata's management and in collaboration with ZIOC's technical consultants the Zanaga Project will be run to the highest standards and will, subject to its feasibility, provide a hugely beneficial source of employment and revenue for the country as a whole.
An experienced Board
We have assembled a well-balanced Board with in-depth experience in the financing, evaluation and development of mining projects and the management of public companies. I am confident that the extensive experience of the Board of Directors in these critical areas will ensure ZIOC is able to actively monitor the completion of the FS and to achieve our strategic objective - to maximise the value of the Zanaga Project.
I would like to thank the Board for their contribution and guidance during the flotation process and our staff for their commitment and hard work over the last year.
Looking forward
Following the VEE as set out above and below, it is planned to complete the FS work. It is anticipated that the VEE as a first phase of the FS will complete in Q3 2011 when the next stage of review will occur. Xstrata must use its reasonable endeavours to deliver the FS no later than three months prior to the expiration of the licenses in May 2014, assuming a second extension of the Zanaga Project exploration licences in May 2012. As a result, we do not currently foresee any substantial near-term spending obligations for ZIOC until completion of the FS. The cost of the ZIOC personnel, financial advisors and the technical experts appointed to oversee the project for ZIOC are currently our only budgeted expenditures during the VEE and FS work programmes.
Our focus going forward is now on monitoring the Zanaga Project's further development and the delivery of the FS. Key milestones for 2011 will therefore include the advancement of the Zanaga Project's Environmental and Social Impact Assessment work stream, ongoing collaboration with the Government of the Republic of Congo on the Zanaga Project's development and paving the way for the conclusion of a definitive Mining Convention in respect of the Zanaga Project's eventual mining phase and, of course, the processing and finalisation and publication of the PFS and VEE results.
The Board believes that the continued demand for iron ore and the quality of the Zanaga Project's assets will underpin the business case for the substantial investment programme now being undertaken by Xstrata, our joint venture partner, and that the next phase in the development of the Zanaga Project will continue to build shareholder value.
In the circumstances, ZIOC looks forward to the finalisation of the definitive results of the PFS and VEE currently in progress, in order to gain further insight with Xstrata into the exciting potential of this project whilst embarking on its FS phase.
Clifford Elphick
Non-Executive Chairman
Zanaga Iron Ore Company Limited
Business review - Operations
Pre-Feasibility Study ("PFS") and Value Engineering Exercise Phases
The PFS commenced in September 2009 and was conducted in line with what the Directors believe are internationally accepted best practice standards. Total PFS related expenditure to 31 March 2011 totalled US$105.45m. During this period the PFS project work programmes covered a number of work streams including, (i) mineral resource definition; (ii) an assessment of the economic and technical viability of the various options for the development of the iron ore body including mining methods, processing, product range, waste disposal and management, tailings storage and containment, mine site infrastructure location and design, rail or pipeline options, port sites, product marketing, environmental and social aspects, commercial aspects, legal framework and government relations.
The PFS was subdivided into two key phases. The works streams for Phase I were completed in June 2010 and Phase II in the course of Q1 2011, save for the processing of its results into a finalised PFS report.
Following the exercise of Xstrata's First Call Option in February 2011 and its assumption of majority control of the Zanaga Project, Xstrata and ZIOC jointly announced the commencement of a Value Engineering Exercise ("VEE") including a scope and options review to take place during Q2 and Q3 2011 as an initial phase to the Feasibility Study work programme.
The VEE further builds and expands on the opportunities to re-assess capex and opex options recognised as part of the PFS work undertaken to Q1 2011 by Jumelles. A team of internal and external experts has been assembled by Jumelles to conduct the VEE and investigate a broader range of long-term development opportunities for the Zanaga Project before the final options and scope for the full FS are finalised.
The VEE commenced on 16 March 2011 with initial workshops generating and prioritising specific ideas and opportunities for the Zanaga Project that have the potential to impact positively on NPV, either through added value or reduced risk. A selection of specific opportunities have been outlined, forming the basis of the VEE, and will be studied in more detail over the coming months.
In view of these plans, ZIOC and Xstrata expect to be able to publish the completed results of the PFS simultaneously with the results of the VEE at the end of Q3 2011.
Mineral resource and drilling programme
Mineral resource
In ZIOC's AIM admission document of November 2010 an estimated 3.3 Bt JORC compliant mineral resource was set out in the competent person's report ("CPR") based on drilling results up to end of June 2010. An updated mineral resource was announced in April 2011 and includes the results of the additional drilling completed to 24 November 2010. The table below summaries the total drilling completed to date on the Zanaga Project.
Drilling programme
Since commencement of exploration drilling operations in early 2008 until completion of Phase I of the PFS a total of 42,706m were drilled, 11,224m of which came from 80 DD holes and 31,482m came from 388 RC holes. The agreed objective of the drilling programme until then was to define a JORC compliant mineral resource of 1 Bt of iron ore.
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Drilling completed |
Metres |
Holes |
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At 30 Jun 2010 (IPO JORC resource of 3.3 Bt) |
42,706 |
468 |
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30 Jun 2010 to 24 Nov 2010 (New JORC resource of 4.0 Bt) |
24,726 |
191 |
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24 Nov 2010 to 28 April 2011 (Not yet included in JORC resource) |
31,463 |
155 |
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Total to date |
98,895 |
814 |
During Phase II of the PFS a further 24,726m was drilled, which, based on drilling completed up to and including 24 November 2010, resulted in a stated JORC compliant mineral resource of 4.0 Bt. At the commencement of Phase II of the PFS the initial target was 1.5 Bt of haematite dominated mineralisation (50% Indicated and 50% Inferred) but due to the drill programme being focused on the central 25km mineralised zone the resource target was revised to 2.7 Bt of combined haematite/magnetite.
A comprehensive resource drilling programme was conducted during 2010 utilising on average a total of 5 drill rigs (3 Reverse Circulation and 2 Diamond Drilling) operating 24 hours per day. A further 2 Diamond Drilling rigs were en route to site in Q4 2010 and are now operational bringing the total number of operational rigs to 7.
Geology
At the end of the November 2010 Phase II resource cut-off date the total number of samples assayed amounted to 21,045. In order to obtain an initial Fe analysis on the samples and reduce freight and turnaround time, a sample preparation laboratory and a Niton XRF analyser machine were established and utilised on site at the Zanaga exploration camp. To date 38,855 Niton samples have been analysed using the Niton analyser and results show a very good correlation with the external laboratory assays received to date.
Using drill information combined with resistivity/magnetic data as well as structural observations a detailed geological and structural understanding of the deposit(s) is being established which allows for accurate drill collar location and accurate assumptions as to the geometry of the ore bodies.
Feasibility Study ("FS") Work Programme
As stated above a multidisciplinary FS to bankable standards has commenced. The major components of the FS phase include:
- Value Engineering Exercise including Scope and Options Review;
- Engineering studies to investigate the potential mine site, transport corridor and power related infrastructure costs of the Zanaga Project;
- Finalisation of an Environmental and Social Impact Assessment (ESIA) study, in accordance with international standards and best practice;
- Completion of the drilling programme focused on refining and increasing the levels of confidence in the 4.0 Bt resource identified to date; and
- Conclusion with the Government of the Republic of Congo of a comprehensive and definitive Mining Convention to cover the exploitation phase of the Zanaga Project
Business review - Financials
Results from operations
The financial statements contain the results for ZIOC's first full year of operations following its incorporation on 19 November 2009. ZIOC made a loss in the year of US$13.2m compared to a loss of US$1.6m in the short period from ZIOC's date of incorporation to 31 December 2009. The loss for the year comprised:
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1 January to |
19 November to |
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General expenses |
(2,755) |
(96) |
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Net foreign exchange loss |
(1,343) |
- |
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Share-based payments |
(964) |
- |
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Share of loss of associate |
(8,805) |
(1,476) |
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Interest income |
17 |
- |
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Loss before tax |
(13,850) |
(1,572) |
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Share of other comprehensive income of associate - foreign exchange |
621 |
(85) |
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Total comprehensive income |
(13,229) |
(1,657) |
General expenses of US$2.7m consist of cash bonuses of US$1.0m paid to certain key employees on admission to trading on AIM in November 2010, US$0.9m of professional fees and US$0.8m of other general operating expenses.
The foreign exchange loss of US$1.3m can be attributed to the impact of the weakening of the US Dollar against UK Sterling during the year on the cash balances that arose following the listing that are held in UK Sterling.
The share-based payment charge reflects the expense associated with the grant of options to ZIOC's directors under ZIOC's long-term incentive plan ("LTIP") and to the expense associated with the grant of share options to one of ZIOC's consultants. Further details of the LTIP and options granted can be found in the Notes below.
The share of loss of associate reflected above relates to ZIOC's investment in Jumelles which generated a loss of US$6.2m in the year to 31 December 2010, together with a charge of US$2.5m made for equity accounting purposes for share options provided to employees of Jumelles. The loss comprised of US$6.0m administrative expenses and a tax charge of US$0.3m.
During the year, Jumelles spent US$56.1m on exploration, increasing its capitalised exploration assets to US$79.0m.
Financial Position
ZIOC's net asset value ("NAV") of US$241.2m comprises of US$192.8m investment in Jumelles, US$49.3m of cash balances and US$0.9m of net current liabilities.
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2010 |
2009 |
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Investment in associate |
192.8 |
198.4 |
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Cash |
49.3 |
8.1 |
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Other net current liabilities |
(0.9) |
(0.2) |
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Net assets |
241.2 |
206.3 |
Cost of investment
The investment in associate relates to the value of the investment in Jumelles which as at 31 December 2010 owned 100% of the Zanaga Project. The value of this investment has decreased by US$5.7m due to the US$8.2m loss made by Jumelles during the year net of US$2.5m of additions. The additions relate to the share-based payments made to the employees of Jumelles which have augmented the value of the investment.
As at 31 December 2010, Jumelles had aggregated assets of $101.8m (2009: US$62.4m) and aggregated liabilities of US$30.8m (2009: US$24.8m). Assets consisted of US$79.0m of capitalised exploration assets and US$13.6m of other fixed assets including property, plant and equipment (2009: US$22.9m and US$6.7m respectively). A total of US$56.1m of exploration costs were capitalised during the year. Cash balances totalled US$5.0m (2009: US$3.8m) and other current assets had decreased from US$29.0m to US$4.2m as the call option premium was utilised during the year.
Cash flow
Cash balances have increased by US$41.2m since 31 December 2009. The placing of shares on AIM in November 2010 raised a net US$44.6m: operating activities utilised US$2.3m and foreign exchange differences generated a cash loss of US$1.1m as the value of the US Dollar weakened against the UK Sterling thereby reducing the value of the Sterling denominated cash balances.
Fundraising activities
ZIOC listed on AIM on 18 November 2010, placing 39.8 million ordinary shares at 156 pence each. The placing comprised of 19.9 million new shares issued by ZIOC and the sale of 19.9 million sale shares by certain then existing shareholders. These new shares were issued for cash of US$49.5m, before expenses of US$5.4m. A total of 5.6 million ordinary shares were issued to the Employee Benefit Trust on ZIOC's Admission to AIM in order to meet obligations under ZIOC's LTIP.
Risk management
The Board considers risk assessment to be important in achieving its strategic objectives. There is a process of evaluation of performance targets through regular reviews by senior management to forecasts. Project milestones and timelines are regularly reviewed.
Risks and uncertainties
The principal risks facing ZIOC are set out below. A more comprehensive summary of risks associated with ZIOC is set out in Part V of ZIOC's AIM Admission Documents of 18 November 2010. Risk assessment and evaluation is an essential part of the Group's planning and an important aspect of the Group's internal control system.
The successful development of the Zanaga Project depends on adequate infrastructure: a transportation system through which it can deliver future iron ore product to a port for onward export by sea.
Risks relating to the agreement with Xstrata
Whilst Xstrata has agreed to fund a full FS to be delivered to an international best practice standard and in accordance with Xstrata's internal guidelines at a cost of at least US$100m or complete the FS itself. In the event that there is a material adverse change, Xstrata's funding obligations under the JVA will be suspended until the material adverse change has ceased.
The change of control provisions contained in the JVA could act as an impediment to a takeover of ZIOC as in such circumstances Xstrata would have the right to acquire all of the shares which it does not hold in Jumelles. Similarly, all of the rights attaching to the preferred right contained in the JVA shall lapse if there is a change of control in respect of ZIOC and this could also act as an impediment to a takeover.
The principal business of ZIOC currently comprises managing ZIOC's interest in the Zanaga Project, which is controlled by Xstrata at both a shareholder and director level, and monitoring the preparation of the FS.
When the FS is completed, Xstrata may exercise its right to make an offer to ZIOC for all of the ordinary shares ZIOC holds in Jumelles. The exercise of this right is not subject to shareholder approval. If Xstrata exercises this right under the JVA, ZIOC will no longer hold any ordinary shares in Jumelles Limited and will receive the consideration proceeds from Xstrata for the ordinary shares in Jumelles Limited. There is no guarantee that the consideration paid by Xstrata will be in excess of the underlying value of ZIOC's ordinary shares.
Exploration and mining risks
The business of exploration for and identification of iron ore deposits is speculative and involves a high degree of risk. Future results, including resource recoveries and work programme plans and schedules, will be affected by changes in market conditions, commodity price levels, political or regulatory developments, timely completion of exploration programme commitments or projects, the outcome of commercial negotiations and technical or operating factors. Even if there are economically recoverable deposits, delays in the construction and commissioning of mining projects or other technical difficulties, including relating to infrastructure and permitting may make the deposits difficult to exploit.
Transportation infrastructure
The successful development of the Zanaga Project depends on adequate infrastructure. The region in which the Zanaga Project is located is sparsely populated and difficult to access. Central to the Zanaga Project becoming a commercial mining operation is access to a transportation system through which it can transport future iron ore product to a port for onward export by sea. In order to achieve this it will be necessary to build a port facility at Pointe-Noire and build a rail network or other transportation for which permits, authorisations and land rights will be required and substantial finance required.
In relation to the proposed port and rail network, the necessary permits, authorisations or land access rights have not yet been obtained. In relation to the proposed port facility, the permitting and authorisation process is at a very early stage. Failure to complete the proposed rail network and/or to establish the port or to do either in an economically viable manner, could have a material adverse effect on the Zanaga Project.
Iron ore prices and undefined market and product
The principal business of the Zanaga Project is the exploration for iron ore. The ability to raise finance and the Zanaga Project's future financial performance is largely dependent on movements in the price of iron ore. A detailed market study to identify the potential demand for product has not yet been undertaken and there are no assurances that the demand for the Zanaga Project's product will be sufficient in quantity or in price to ensure the economic viability of the project.
Host country related risks
The operations of the Zanaga Project are located entirely in the Republic of Congo. These operations will be exposed to various levels of political, regulatory, economic, taxation and other risks and uncertainties. As in many other countries, these (varying) risks and uncertainties include, but are not limited to: political, military or civil unrest; fluctuations in global economic and market conditions impacting on the Congolese economy; terrorism; hostage taking; extreme fluctuations in currency exchange rates; high rates of inflation; labour unrest; nationalisation; illegal mining; restrictions on foreign exchange and repatriation. In addition, the Republic of Congo is an emerging market and, as a result, is generally subject to greater risks than in the case of more developed markets.
Risks relating to the Zanaga Project's exploration licences
Subject to fulfilment of all related obligations and undertakings, the Zanaga Project's exploration licences are renewable for a further term of two years but this is outside of the project's control and there can be no guarantee that this will indeed happen. If renewed, there will be a reduction of the surface area covered by the Zanaga Project's exploration licences of up to 50% and there can be no guarantee that the Congolese Government will accept any proposal as to which land is to be relinquished.
Free carried interest
The holder of an exploitation licence is required to incorporate a Congolese company to be the operating entity and the Congolese government is entitled to a free carried interest in projects which are at the production phase. This participation cannot be less than ten per cent. There is, therefore, a risk that the government will seek to obtain a higher participation in the Zanaga Project.
Statement of comprehensive income
for year ended 31 December 2010
|
|
Note |
1 January 31 December 2010 |
19 November |
|
Administrative expenses |
4 |
(5,062) |
(96) |
|
Share of loss of associate |
|
(8,805) |
(1,476) |
|
Operating loss |
|
(13,867) |
(1,572) |
|
Interest income |
|
17 |
- |
|
Loss before tax |
|
(13,850) |
(1,572) |
|
Taxation |
5 |
- |
- |
|
Loss for the period |
|
(13,850) |
(1,572) |
|
Share of other comprehensive income of associate - foreign exchange translation |
|
621 |
(85) |
|
Total comprehensive income loss |
|
(13,229) |
(1,657) |
|
Loss per share (basic and diluted) (cent) |
12 |
(0.05) |
(0.01) |
The loss for the period is attributable to the equity holders of the parent company.
Statement of changes in equity
for year ended 31 December 2010
|
|
|
|
Foreign |
|
|
|
|
|
currency |
|
|
|
Share |
Retained |
translation |
Total |
|
|
capital |
earnings |
reserve |
equity |
|
|
$000 |
$000 |
$000 |
$000 |
|
Balance at 19 November 2009 |
|
|
|
|
|
Issue of shares |
223,967 |
- |
- |
223,967 |
|
Repurchase of shares |
(16,000) |
- |
- |
(16,000) |
|
Loss for the period |
- |
(1,572) |
- |
(1,572) |
|
Other comprehensive income |
- |
- |
(85) |
(85) |
|
Total comprehensive loss |
- |
(1,572) |
(85) |
(1,657) |
|
Balance at 31 December 2009 |
207,967 |
(1,572) |
(85) |
206,310 |
|
Balance at 1 January 2010 |
207,967 |
(1,572) |
(85) |
206,310 |
|
Issue of shares - listing |
44,114 |
- |
- |
44,114 |
|
Consideration for share-based payments - share issue costs |
481 |
- |
- |
481 |
|
Consideration for share-based payments - other services |
3,508 |
- |
- |
3,508 |
|
Loss for the period |
- |
(13,850) |
- |
(13,850) |
|
Other comprehensive income |
- |
- |
621 |
621 |
|
Total comprehensive loss |
- |
(13,850) |
621 |
(13,229) |
|
Balance at 31 December 2010 |
256,070 |
(15,422) |
536 |
241,184 |
Balance sheet
For year ended 31 December 2010
|
|
|
2010 |
2009 |
|
|
Note |
$000 |
$000 |
|
Non-current asset |
|
|
|
|
Investment in associate |
6 |
192,799 |
198,439 |
|
Current assets |
|
|
|
|
Other receivables |
7 |
80 |
11 |
|
Cash and cash equivalents |
8 |
49,318 |
8,106 |
|
|
|
49,398 |
8,117 |
|
Total Assets |
|
242,197 |
206,556 |
|
Current liabilities |
|
|
|
|
Trade and other payables |
9 |
(1,013) |
(246) |
|
Net assets |
|
241,184 |
206,310 |
|
Equity attributable to equity holders of the parent |
|
|
|
|
Share capital |
10 |
256,070 |
207,967 |
|
Retained earnings |
|
(15,422) |
(1,572) |
|
Foreign currency translation reserve |
|
536 |
(85) |
|
Total equity |
|
241,184 |
206,310 |
These financial statements were approved by the Board of Directors on 24 May 2011 and were signed on its behalf by:
Mr M Haworth Mr C Elphick
Director Director
Cash flow statement
for year ended 31 December 2010
|
|
|
1 January |
19 November |
|
|
|
to |
to |
|
|
|
31 December |
31 December |
|
|
|
2010 |
2009 |
|
|
Note |
$000 |
$000 |
|
Cash flows from operating activities |
|
|
|
|
Total comprehensive loss for the period |
|
(13,229) |
(1,657) |
|
Adjustments for: |
|
|
|
|
Increase in other receivables |
|
(69) |
(11) |
|
Increase in trade and other payables |
|
532 |
246 |
|
Net exchange loss |
|
1,343 |
- |
|
Share of loss of associate |
|
8,184 |
1,561 |
|
Share-based payments |
|
964 |
|
|
Net cash from operating activities |
|
(2,275) |
139 |
|
Cash flows from financing activities |
|
|
|
|
Proceeds from the issue of share capital |
|
49,507 |
25,000 |
|
Share issue costs |
|
(4,912) |
(1,033) |
|
Repurchase of own shares |
|
- |
(16,000) |
|
Net cash from financing activities |
|
44,595 |
7,967 |
|
Net increase in cash and cash equivalents |
|
42,320 |
8,106 |
|
Effect of exchange rate difference |
|
(1,108) |
- |
|
Cash and cash equivalents at beginning of period |
|
8,106 |
- |
|
Cash and cash equivalents at end of period |
8 |
49,318 |
8,106 |
The accompanying notes form an integral part of the financial statements.
Notes to the financial statements
1 Business information and going concern basis of preparation
Background
Zanaga Iron Ore Company Limited (the "Company"), was incorporated on 19 November 2009 under the name of Jumelles Holdings Limited. The Company changed its name on 1 October 2010. The Company is incorporated in the British Virgin Islands ("BVI") and the address of its registered office, is situated at Coastal Building, 2nd Floor, Wickham's Cay II, Road Town, Tortola, BVI. The Company's principal place of business as an investment holding vehicle is situated in Guernsey, Channel Islands.
As at 31 December 2010 the Company held 100% of the share capital of Jumelles Limited ("Jumelles") subject to the Xstrata's First Call Option (as defined below).
In 2007, Jumelles became the special purpose holding company for the interests of its then ultimate 50/50 founding shareholders, Garbet Limited ("Garbet") and Guava Minerals Limited ("Guava"), in Mining Project Development Congo SAU ("MPD Congo") which owns and operates 100% of the Zanaga Project in the Republic of Congo (subject to a minimum 10% free carried interest in MPD Congo in favour of the Government of the Republic of Congo).
In December 2009 Garbet and Guava contributed their then respective 50/50 joint shareholding in Jumelles to the Company.
Garbet is majority owned by Strata Limited ("Strata"), a private investment holding company based in Guernsey, which specialises in the investment and development of early stage natural resource projects in emerging markets, predominately Africa. Garbet owns approximately 41.25% of the share capital of the Company.
Guava is majority owned by African Resource Holdings Limited ("ARH"), a BVI company that specialises in the investment and development of early stage natural resource projects in emerging markets. Guava owns approximately 31.64% of the share capital of the Company.
The balance of shareholding in the Company is predominantly held by a number of reputable institutional investors in the mining sector.
Jumelles has three subsidiary companies, namely Jumelles M Limited, Jumelles Technical Services (UK) Limited and MPD Congo.
Xstrata Transaction
On 16 October 2009, Garbet, Guava and Jumelles entered into a transaction with Xstrata (Schweiz) AG (on 3 December 2009, Xstrata (Schweiz) AG was substituted by Xstrata Projects (pty) Limited ("Xstrata Projects"), comprising of two principal transaction agreements (together the "Xstrata Transaction"):
· a call option deed which gave Xstrata Projects an option to subscribe for 50% plus 1 share of the fully diluted and outstanding shares of Jumelles in return for providing funding towards on-going exploration of the Zanaga exploration licence area and a pre-feasibility study (the "PFS") subject to a minimum amount of $50 million (the "Xstrata Call Option"). Under the terms of the Xstrata Call Option, the consideration payable by Xstrata Projects for the option shares that would be issued by Jumelles Limited would comprise (i) a commitment to fund all costs to be incurred by Jumelles Limited in completing a feasibility study on the Zanaga Project (the "FS") (provided such amount shall be greater than $100 million) or to carry out such a feasibility study at its own cost and (ii) payment of an amount (up to a maximum of $25 million) equal to the amount that Jumelles Limited owes to Garbet and Guava as loans which would be used to repay the latter; and
· a joint venture agreement which regulates the respective rights of the Company, Jumelles and Xstrata Projects in relation to Jumelles following exercise of the Xstrata Call Option and gives Xstrata Projects the right to purchase the Company's remaining 50% minus 1 share interest in Jumelles ("Minority Stake") following completion of the FS and deals with the terms on which Jumelles will be funded following completion of the FS (the "JVA").
During 2010, the PFS progressed and following completion of Phase I of that study Xstrata Projects countersigned a further funding letter confirming in writing its agreement (subject to the provisions of the Xstrata Call Option) to contribute further funding and confirming its approval of the phase II work program, budget and funding amount (up to $56.49 million) as set out in that letter.
On 11 February 2011 Xstrata Projects exercised the Xstrata Call Option and the exercise paid (the "Call Option Price") is the sum of:
· the aggregate costs of completing the FS, provided that such amount is greater than US$100,000,000 (excluding the Call Option Premium); plus
· sums to repay all outstanding founding shareholder loans then amounting to US$21,277,334.
The Call Option Price must not exceed an amount that would result in it being a Class 2 Transaction for Xstrata.
Relationship between Jumelles and Xstrata pending exercise of the First Xstrata Call Option
The terms of the Xstrata Call Option include a number of decisions and actions, including setting the scope of the PFS and appointing contractors, that may not be taken by Jumelles without receiving Xstrata Projects' prior consent. There are also a number of actions that Jumelles and its subsidiaries are required to take including keeping Xstrata informed of all material matters. These restrictions and obligations are customary in the context of a joint venture and are intended to ensure that Xstrata Projects is not prejudiced, legally or economically, by the actions of Garbet, Guava, Jumelles or the Company.
Relationship between Jumelles and its shareholders after exercise of the First Xstrata Call Option
The Company, Jumelles and Xstrata Projects agreed to regulate their respective rights in relation to the Zanaga Project following exercise of the Call Option under the terms of the JVA. Under the terms of the JVA, all significant decisions regarding the conduct of Jumelles' business (other than certain protective rights which require the agreement of shareholders holding at least 95% of the voting rights in Jumelles) are made by the Board of Directors.
Each shareholder holding 15% or more of the votes in Jumelles has the right to appoint a director to the Board of that company. At any Board meeting, each such director will have such number of votes as represents the appointing shareholder's voting rights in the general meetings of Jumelles.
As a consequence, following exercise of the Xstrata Call Option (which completed on 11 February 2011), Xstrata Projects controls Jumelles at both a shareholder and director level and therefore controls what was the Company's sole mineral asset, the Zanaga Project, and going forward the Company has a strategic partnership in respect of the Zanaga Project with Xstrata.
Following exercise of the Xstrata Call Option, the principal business of the Company has comprised managing its 50% less one share interest in the Zanaga Project and monitoring both the finalisation of the pre-feasibility study and the preparation of the feasibility study.
In addition, under the terms of the JVA, following exercise of the Xstrata Call Option Xstrata Projects has the right to require all the other shareholders in the Company to sell their shares to Xstrata for a period of 90 days following completion of the FS. Therefore Xstrata projects could elect to acquire 100% of the Zanaga Project following completion of the FS. The JVA has provisions governing how any dispute as to the price to be paid would be resolved. The exercise of this right is not subject to the approval of Zanaga's shareholders.
Future funding requirements and going concern basis of preparation
In common with many exploration and development companies in the mining sector, the Company raises funding in phases as its projects develop.
Following exercise of the Xstrata Call Option, Xstrata is required to fund and implement the FS in accordance with the Xstrata Transactions. Xstrata has undertaken to use its reasonable endeavours to complete the FS at least three months prior to the expiration of the Zanaga Exploration Licence in May 2014, assuming renewal of the Zanaga Exploration Licences in May 2012 and subject to there being no adverse change. The cost of the Company's personnel and the technical experts appointed to oversee the project are the only expenditures currently envisaged during the period of the FS work programme and the Company has significant cash resources available. In the circumstances, the Directors have a reasonable expectation that the Company has adequate financial resources to continue in operational existence for the foreseeable future. For these reasons, the financial statements of the Company have been prepared on a going concern basis.
In the event that a decision is taken to develop a mine at Zanaga (and assuming that Xstrata Projects has not acquired the Company's interest in Jumelles), the Company will need to raise further funds.
2 Accounting policies
The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated.
Basis of preparation
These financial statements have been prepared in accordance with the International Financial Reporting Standards as adopted by the European Union ("Adopted IFRS"). Adopted IFRS comprises standards and interpretations approved by the International Accounting Standards Board ("IASB") and the International Financial Reporting Interpretations Committee ("IFRIC") as adopted by the European Union.
The Company holds an investment in an associate which is accounted for using the equity method. These financial statements represent individual financial statements.
New standards, amendments and interpretations
The following Standards and Interpretations were issued during the year, but were not effective at the balance sheet date:
· IAS 32 - (Amended) - Financial instruments: Presentation - classification on rights issues
· IFRS 1 - (Amended) - First-time adoption - on exemption of new fair value disclosures
· IFRIC 19 - Extinguishing financial liabilities with equity instruments.
These standards have not been applied in preparing the financial statements for the year ended 31 December 2010.
It is not anticipated that the adoption of these standards will have any significant impact on the financial statements.
Measurement convention
These financial statements have been prepared on the historical cost basis of accounting.
The preparation of financial statements in conformity with Adopted IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the Company's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 3.
Associates
Investments in associates are recorded using the equity method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition changes in the Company's share of the net assets of the associate. The Company's profit or loss and other comprehensive income includes the Company's share of the associate's profit or loss and other comprehensive income. The investment is considered for impairment annually.
Foreign currency
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to the functional currency at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement.
Share-based payments
The Company makes equity-settled share-based payments to certain employees and similar persons as part of a long-term incentive plan ("LTIP"). The fair value of the equity-settled share-based payments is determined at the date of the grant and expensed, with a corresponding increase in equity, on a straight line basis over the vesting period, based on the Company's estimate of the awards that will eventually vest, save for any changes resulting from any market-performance conditions.
Where awards are granted to employees of the Company's associate and similar persons, the equity-settled share-based payment is recognised by the Company as an increase in the cost of the investment with a corresponding increase in equity over the vesting period of the award.
The shares to be issued under the LTIP are acquired by an Employee Benefit Trust which has to date subscribed for the shares at zero value. These shares are held by the Employee Benefit Trust until the vesting conditions have been met. Information on the share awards are provided in note 11 to these financial statements.
Share-based payments to non-employees
Where the Group received goods or services from a third party in exchange for its own equity instruments and the amount of equity instruments is fixed, the equity instruments and related goods or services are measured at the fair value of the goods or services received and are recognised as the goods are obtained or the services rendered. Equity instruments issued under such arrangements for the receipt of services are only considered to be vested once provision of services is complete.
Non-derivative financial instruments
Non-derivative financial instruments in the balance sheet comprise other receivables, cash and cash equivalents, and trade and other payables.
Other receivables
Other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method, less any impairment losses.
Trade and other payables
Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits.
Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity.
Ordinary shares issued to the Employee Benefit Trust under the LTIP or to non-employees for services provided to the Company, are included within Share Capital.
When share capital recognised as equity is repurchased, the amount of consideration paid, including directly attributable costs, is recognised as a change in equity. Repurchased shares are classified as treasury shares and presented as a deduction from total equity.
Impairment
The carrying amounts of the Company's assets are reviewed at each balance sheet date to determine whether there is any indication of impairment; a financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. If any such indication exists, the asset's recoverable amount is estimated.
An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement.
Calculation of recoverable amount
The recoverable amount of the Company's investments and receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e., the effective interest rate computed at initial recognition of these financial assets). Receivables with a short duration are not discounted.
The recoverable amount of other assets is the greater of their fair values 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.
Reversals of impairment
An impairment loss in respect of a receivable carried at amortised cost is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised.
In respect of other assets, an impairment loss is reversed when there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount.
An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
Expenses
Financing income and expenses
Interest income and interest payable is recognised in profit or loss as it accrues, using the effective interest method.
Taxation
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill: the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised.
Segmental Reporting
The Company has one operating segment, being its investment in the Zanaga Project, held through Jumelles Limited. Financial information regarding this segment is provided in note 6.
Subsequent events
Post year-end events that provide additional information about the Company's position at the balance sheet date (adjusting events) are reflected in the financial statements. Post year-end events that are not adjusting events are disclosed in the notes to financial statements when material.
3 Critical accounting estimates, assumptions and judgements
The Company makes estimates and assumptions concerning the future that are continually 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 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 amount of assets and liabilities within the next financial year are discussed below.
Impairment of investment in associate
The value of the Company's investment in Jumelles depends very largely on the value of Jumelles' interest in the Zanaga Project. Jumelles assesses at least annually whether or not its exploration projects may be impaired. This assessment can involve significant judgement as to the likelihood that a project will continue to show sufficient commercial promise to warrant the continuation of exploration and evaluation activities.
Accounting for the Company's interest in Jumelles Limited
Significant judgement has been applied in arriving at the accounting treatment of the Company's interest in Jumelles as explained in note 6.
4 Note to the comprehensive income statement
Operating loss before tax is stated after charging:
|
|
1 January |
19 November |
|
|
to |
to |
|
|
31 December |
31 December |
|
|
2010 |
2009 |
|
|
$000 |
$000 |
|
Share-based payments (see note 11) |
964 |
- |
|
Net foreign exchange loss |
1,343 |
- |
|
Directors' fees |
309 |
- |
|
Auditors' remuneration |
39 |
5 |
|
General expenses |
2,407 |
91 |
|
|
5,062 |
96 |
The Company did not directly employ any staff during 2010 or 2009 other than the Company Directors. The Directors received $309,000 remuneration for their services as Directors of the Company (2009: $nil). The amounts paid as Directors' fees are shown in the Directors' remuneration report on pages 30 to 33 of the 2010 Annual Report and Accounts. The Directors' interests in the share capital of the Company are shown in the Directors' remuneration report on pages 30 to 33 of the 2010 Annual Report and Accounts.
5 Taxation
The Company is exempt from most forms of taxation in the British Virgin Islands ("BVI"), provided the Company does not trade in the BVI and does not have any employees working in the BVI. All dividends, interest, rents, royalties and other expense amounts paid by the Company, and capital gains are realised with respect to any shares, debt obligations or other securities of the Company, are exempt from taxation in the BVI.
The effective tax rate for the Company is therefore $nil (2009: $nil).
6 Investment in associate
|
|
$000 |
|
Balance at 19 November 2009 |
|
|
Acquisition |
200,000 |
|
Share of post acquisition comprehensive income |
(1,561) |
|
Balance at 31 December 2009 |
198,439 |
|
Balance at 1 January 2010 |
198,439 |
|
Additions |
2,544 |
|
Share of post acquisition comprehensive income |
(8,184) |
|
Balance at 31 December 2010 |
192,799 |
The investment represents a 100% holding in Jumelles for the entire share capital of 2,000,000 shares. The shares were acquired in exchange for shares in the Company and have been recorded at fair value of the interest acquired.
The increase in the investment during the year ended 31 December 2010 is due to the Company granting awards under the LTIP to employees of Jumelles (as set out in note 11).
Since its acquisition and up to 31 December 2010, the investment in Jumelles does not represent an investment in a subsidiary due to the call option held by Xstrata described in note 1 above which throughout that period gave Xstrata potential voting rights which would have been sufficient for Xstrata to control Jumelles. Nevertheless following exercise of the option, the residual rights that would be retained by the Company are sufficient in the view of the Directors to provide the Company with the power to participate significantly in the financial and operating decisions affecting Jumelles. As a consequence the Company's interest is accounted for as an associate using the equity method of accounting. As the Company actually had 100% participation in the profits and assets of Jumelles throughout this period, the Company has accounted for a 100% interest in Jumelles.
Jumelles has itself accounted for the Xstrata transaction as an in-substance equity-settled share-based payment for the provision of services by Xstrata to Jumelles in relation to the PFS and the FS. These services largely are provided through third party contractors and are measured at the cost of the services provided.
As explained in note 1, subsequent to the year end on 11 February 2011, Xstrata exercised the call option and from that date owns 50% plus one share of Jumelles and Jumelles is controlled at both a shareholder and director level by Xstrata. However, as the shares issued on exercise of the option are not considered to vest until provision of the services relating to the PFS and the FS has been completed, the Company will continue to account for a 100% interest in Jumelles Limited until the FS has been completed. Only at that time will the Company account for a reduction in its interest in Jumelles.
As at 31 December 2010, Jumelles had aggregated assets of $101,783,000 (2009: $62,422,000) and aggregated liabilities of $30,846,000 (2009: $24,763,000). For the year ended 31 December 2010, it incurred administrative expenses of $5,992,000 (year ended 31 December 2009: $8,332,000) and incurred a tax charge of $269,000 (year ended 31 December 2009: $426,000). A summarised consolidated balance sheet of Jumelles Limited for the year ended 31 December 2010, including adjustments made for equity accounting, is included below:
|
|
2010 |
2009 |
|
Non-current assets |
|
|
|
Property, plant and equipment |
13,623 |
6,654 |
|
Exploration and other evaluation assets |
78,954 |
22,904 |
|
|
92,577 |
29,558 |
|
Current assets |
9,206 |
32,864 |
|
Current liabilities |
(30,846) |
(24,763) |
|
Net current (liabilities)/assets |
(21,640) |
8,101 |
|
Net assets |
70,937 |
37,659 |
|
Share capital |
3,063 |
519 |
|
Share option reserve |
88,918 |
50,000 |
|
Translation reserve |
(52) |
(673) |
|
Retained earnings |
(20,992) |
(12,187) |
|
|
70,937 |
37,659 |
|
|
|
|
|
7 Other receivables |
|
|
|
|
|
|
|
|
2010 |
2009 |
|
Prepayments |
80 |
11 |
|
|
|
|
|
8 Cash |
|
|
|
|
|
|
|
|
2010 |
2009 |
|
Cash and cash equivalents |
49,318 |
8,106 |
|
|
|
|
|
9 Trade and other payables |
|
|
|
|
|
|
|
|
2010 |
2009 |
|
Accounts payable |
677 |
246 |
|
Amounts payable to the Jumelles Limited group |
336 |
- |
|
|
1,013 |
246 |
Amounts payable to the Jumelles Limited group comprise of $298,000 payable to Jumelles (2009: $nil) and $38,000 payable to Jumelles Technical Services (UK) Limited (2009: $nil). No amounts payable are due in more than 12 months (2009: $nil).
10 Share capital
|
|
Ordinary shares |
|
In thousands of shares |
|
|
At incorporation - 19 November 2009 |
- |
|
Issued in exchange for shares in Jumelles Limited |
100,000 |
|
Issue of additional shares |
12,500 |
|
Repurchase of shares |
(10,526) |
|
On issue at 31 December 2009 - fully paid |
101,974 |
|
Sub-division of shares |
152,960 |
|
New shares issued pursuant to placing |
19,908 |
|
Shares issued to the Employee Trust under the LTIP |
5,574 |
|
On issue at 31 December 2010 - fully paid |
280,416 |
The Company is able to issue an unlimited number of no par value shares. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. No dividends have been paid or declared in the current year (2009: $nil).
Share capital changes in 2009
On incorporation on 19 November 2009 the Company issued 1 ordinary share to Garbet Limited. Subsequently in 2009, the Company issued 99,999,999 shares (50,000,000 to its founding shareholders Guava and 49,999,999 to Garbet) in return for the entire share capital of Jumelles. This exchange was part of a reorganisation plan so that Guava and Garbet would be sole owners of the Company, which would in turn be the 100% owner of Jumelles.
Subsequently Guava reduced its holdings by 10,526,315 to 39,473,685 through a share repurchase in December 2009. 12,250,000 shares were issued to institutional investors and a further 250,000 to Garbet. These shares were issued for cash of $25,000,000 and are disclosed net of issue costs of $1,033,000.
Share capital changes in 2010
On 15 November 2010, pursuant to a written resolution of the Directors dated the same day, each ordinary share of the Company was divided into 2.5 ordinary shares creating 152,960,527 new shares.
The Company was admitted to trading on AIM on 18 November 2010 at which point the total number of shares in issue was 254,934,212.
On Admission to AIM the Company issued 19,907,629 new ordinary shares at 156 pence each. These shares were issued for cash of $49,507,000 and are disclosed net of issue costs of $5,393,000.
Under a deed of warrant dated 17 November 2010 the Company granted to Liberum, the Company's Nominated Advisor and Broker, conditional on admission a warrant to subscribe for, at the placing price of £1.56, new ordinary shares equal in value to 5% of the aggregate number of new shares issued on admission (998,382 shares), exercisable within 12 months of Admission which have not been exercised to date. $481,000 of the issue costs on Admission to AIM relate to the fair value of services received under this deed of warrant.
A total of 5,574,135 ordinary shares were issued for nil consideration to a discretionary trust established for the benefit of current and former employees and officeholders of the Company and the Jumelles group in connection with the Company's LTIP. Further details of this scheme can be found in note 11.
11 Share-based payments
Employees
As stated under Note 2 above the Company has implemented a LTIP in order to recruit and retain key officers and employees of the Company and the Company's associate. For all key management personnel, the LTIP is structured as a split interest scheme. On the date of the award, the employee and the Employee Trust enter into an agreement to acquire shares as joint owners with the employee's proportion of ownership of each share being; 0.001% of the total value up to a given hurdle and 99.999% of the total value above the hurdle. The hurdle is determined on advice of the Remuneration Committee. The employee will pay the market value for his joint ownership of the shares. If the vesting conditions are not met, the employee forfeits joint ownership of the shares. If the award meets the vesting conditions, the employee has the right to exercise the option and become the sole owner of the shares. The Company has also granted a number of awards of share options to middle management. Under these awards the Trust grants the employee the right to acquire shares if certain vesting conditions are achieved. The employee is not required to pay an exercise price for these shares.
A number of separate awards were made on 18 November 2010. Different awards were made subject to several different vesting conditions.
Award 1
These awards vest on the later of the following:
· The exercise or non-exercise by Xstrata or expiry or termination of the First Call Option to acquire its Majority Stake in Jumelles; and
· The completion of the PFS to the satisfaction of the Board.
There are specific provisions that apply to the awards in respect of takeover and corporate transaction provisions and provisions relating to cessation of employment or ceasing to provide services.
Award 2
These awards vest as follows:
· In respect of ⅓ of the shares subject to the awards, immediately on Admission;
· In respect of ⅓ of the shares subject to the awards, on the expiry of one year following Admission;
· In respect of ⅓ of the shares subject to the awards, the expiry of two years following Admission.
There are specific provisions that apply to the awards in respect of takeover and corporate transaction provisions and provisions relating to cessation of employment or ceasing to provide services.
Award 3
These awards vest on the expiry of the following periods:
· In respect of ½ of the shares subject to the awards, the expiry of one year following Admission;
· In respect of ½ of the shares subject to the awards, the expiry of two years following Admission.
The application of the vesting criteria in the three awards above is subject to the discretion of the Board of Directors who can also vary the criteria if they see fit. There are specific provisions that apply to the early vesting of awards in the event of takeover and corporate transaction provisions and provisions relating to cessation of employment or ceasing to provide employment.
The following information is relevant to the awards made during the year:
|
|
Award 1 |
|
Award 2 |
|
Award 3 |
|
Total |
||||
|
|
Weighted |
|
|
Weighted |
|
|
Weighted |
|
|
Weighted |
|
|
|
Average |
|
|
Average |
|
|
Average |
|
|
Average |
|
|
|
Exercise Price |
|
|
Exercise Price |
|
|
Exercise Price |
|
|
Exercise Price |
|
|
|
(£) |
Number |
|
(£) |
Number |
|
(£) |
Number |
|
(£) |
Number |
|
At start of year |
N/A |
Nil |
|
N/A |
Nil |
|
N/A |
Nil |
|
N/A |
Nil |
|
Granted |
£0.02 |
4,260,235 |
|
£0.02 |
995,382 |
|
£1.58 |
199,076 |
|
£0.08 |
5,454,693 |
|
Forfeited |
N/A |
Nil |
|
N/A |
Nil |
|
N/A |
Nil |
|
N/A |
Nil |
|
Exercised |
N/A |
Nil |
|
N/A |
Nil |
|
N/A |
Nil |
|
N/A |
Nil |
|
Lapsed |
N/A |
Nil |
|
N/A |
Nil |
|
N/A |
Nil |
|
N/A |
Nil |
|
At end of year |
£0.02 |
4,260,235 |
|
£0.02 |
995,382 |
|
£1.58 |
199,076 |
|
£0.08 |
5,454,693 |
|
|
($0.03) |
|
|
($0.04) |
|
|
($2.45) |
|
|
($0.12) |
|
|
|
Award 1 |
|
Award 2 |
|
Award 3 |
|
Total |
|
Range of exercise prices (£ and $*) |
£0.00-£0.02 |
|
£0.02 |
|
£1.58 |
|
£0.00-£1.58 |
|
Weighted average share price at date of exercise (£) |
N/A |
|
N/A |
|
N/A |
|
N/A |
|
Total share awards vested (No.) |
Nil |
|
331,794 |
|
Nil |
|
331,794 |
|
Weighted average fair value of share awards granted in the period (£ and $*)
|
£1.54 |
|
£1.54 |
|
£0.39 |
|
£1.40 |
|
Weighted average remaining contractual life (days) |
219 days |
|
502 days |
|
502 days |
|
281 days |
* Sterling amounts have been converted into US Dollars at the year end closing exchange rate of $1.547:£1.
It is currently expected that awards will vest in full.
The following information is relevant in the determination of the fair value of options granted:
|
|
Award 1 |
|
Award 2 |
|
Award 3 |
|
Total |
|
Option pricing model used |
Black-Scholes |
|
Black-Scholes |
|
Black-Scholes |
|
Black-Scholes |
|
Weighted average share price at date of grant (£ and $*)
|
£1.56 |
|
£1.56 |
|
£1.56 |
|
£1.56 |
|
Weighted average contractual life (days) |
264 days |
|
365 days |
|
548 days |
|
293 days |
|
Expected volatility (%) |
50% |
|
50% for less than 1 year expected life, 55% for more than 1 year expected life |
|
50% for less than 1 year expected life, 55% for more than 1 year expected life |
|
50% for less than 1 year expected life, 55% for more than 1 year expected life |
|
Dividend growth rate (%) |
Zero |
|
Zero |
|
Zero |
|
Zero |
|
Risk-free interest rate (%) |
0.51% for 6 month expected life 0.69% for 12 month expected life |
|
0.69% for 12 month expected life 1.12% for 24 month expected life 1.55% for 36 month expected life |
|
0.69% for 12 month expected life 1.12% for 24 month expected life |
|
0.51% for 6 month expected life 0.69% for 12 month expected life 1.12% for 24 month expected life 1.55% for 36 month expected life |
* Sterling amounts have been converted into US Dollars at the year end closing exchange rate of $1.547: £1.
The volatility assumption is measured by reference to the historic volatility of comparable companies based on the expected life of the option.
Non-employees
The Company has also granted an award of share options in respect of consultancy services provided by Francois Du Plessis as a member of Strata Capital UK LLP on 17 November 2010. The options have a weighted average price of £1.56 ($2.43), a weighted average fair value of £0.39 ($0.62) and a weighted average contractual life of 502 days. The awards have the same terms as the Award 3 issued under the LTIP and have therefore been fair valued using the same model and valuation assumptions.
The total equity-settled share-based payment expense recognised as an operating expense during the period was $964,000, of which $941,000 related to the Directors and $23,000 related to consultancy services provided by Strata. Further details of share-based payments awarded to Directors of the Company can be found in the remuneration report on pages 30 to 33 of the 2010 Annual Report and Accounts.
The total equity-settled share-based payments awarded to employees of companies in which the Company has a significant interest totals $2,544,000 and has been added to the cost of investment in those companies.
12 Loss per share
|
|
2010 |
2009 |
|
Loss (Basic and diluted) |
(13,850) |
(1,572) |
|
Weighted average number of shares (thousands) |
|
|
|
Basic and diluted |
|
|
|
Issued shares at beginning of period |
101,974 |
- |
|
Effect of shares issued |
33,788 |
55,952 |
|
Effect of share repurchase |
- |
(3,318) |
|
Effect of own shares |
(657) |
- |
|
Effect of share split |
122,229 |
78,952 |
|
Weighted average number of shares at 31 December - basic |
257,334 |
131,586 |
|
Loss per share (cent) |
|
|
|
Basic and diluted |
(0.05) |
(0.01) |
The calculation of loss per share for the period ended 31 December 2009 has been restated for the share split that took place on 15 November 2010 in accordance with the retrospective adjustment requirements of IAS 33 earnings per share.
There are potential ordinary shares outstanding, refer to note 10 and 11 for details of these potential ordinary shares.
13 Financial instruments
Fair values of financial instruments
Other receivables
The fair value of other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance sheet date if the effect is material. The fair values approximate book values.
Trade and other payables
The fair value of trade and other payables is estimated as the present value of future cash flows, discounted at the market rate of interest at the balance sheet date if the effect is material. The fair values approximate book values.
Cash and cash equivalents
The fair value of cash and cash equivalents is estimated as its carrying amount where the cash is repayable on demand. Where it is not repayable on demand then the fair value is estimated at the present value of future cash flows, discounted at the market rate of interest at the balance sheet date.
Financial risk management
The Company's activities expose it to a variety of financial risks: credit risk, liquidity risk and market risk (comprising currency risk and interest rate risk). The Company seeks to minimise potential adverse effects of these risks on the Company's financial performance. The Board has overall responsibility for managing the risks and the framework for monitoring and coordinating these risks. The Company's financial risk management policies are set out below:
(a) Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's receivables related parties. The Company has a credit policy in place and exposure to credit risk is monitored on an ongoing basis. At 31 December, the financial assets exposed to credit risk were as follows:
|
|
2010 |
2009 |
|
Cash and cash equivalents |
49,318 |
8,106 |
(b) Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its obligations as they fall due. The Company evaluates and follows continuously the amount of liquid funds needed for business operations, in order to secure the funding needed for business activities and loan repayments. The availability and flexibility of the financing is needed to assure the Company's financial position. The Company's funding requirements are detailed in note 1.
Details of the maturity of financial liabilities are provided in note 9.
(c) Market risk
(i) Foreign currency risk
The foreign currency denominated financial assets and liabilities are not hedged, thus the changes in fair value are charged or credited to profit and loss.
As at 31 December 2010 the foreign currency denominated assets include cash balances held in sterling of $42,861,000, other receivables denominated in Sterling of $77,000, and accounts payable of $599,000 denominated in sterling, $25,000 in South African Rands and $38,000 in Euros.
The following significant exchange rates applied during the year:
|
|
|
Reporting date |
|
Reporting date |
|
|
Average rate |
spot rate |
Average rate |
spot rate |
|
|
2010 |
2010 |
2009 |
2009 |
|
Against US Dollars |
$ |
$ |
$ |
$ |
|
Pounds Sterling |
1.546 |
1.547 |
1.634 |
1.592 |
Sensitivity analysis
A 10% weakening of the following currencies against the US Dollar at 31 December would have increased (decreased) equity and profit or loss by the amounts shown below. This calculation assumes that the change occurred at the balance sheet date and had been applied to risk exposures existing at that date.
This analysis assumes that all other variables, in particular other exchange rates and interest rates, remain constant.
|
|
Equity |
Profit or loss |
Equity |
Profit or loss |
|
|
2010 |
2010 |
2009 |
2009 |
|
|
$'000 |
$'000 |
$'000 |
$'000 |
|
Pounds Sterling |
(4,346) |
(4,346) |
(22) |
(22) |
A 10% strengthening of the above currencies against the US Dollar at 31 December would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant.
(ii) Interest rate risk
The Company is exposed to interest rate fluctuations on its cash deposits. The Company uses overnight cash deposits to maximise interest received. A 0.5 percentage point increase in interest rates will increase interest income by approximately $0.25 million on an annual basis based on the amount of cash on hand at 31 December 2010.
Capital management
The Board's policy is to maintain a strong capital base so as to maintain investor and market confidence. Capital consists of share capital and retained earnings.
The Directors do not intend to declare or pay a dividend in the foreseeable future but, subject to the availability of sufficient distributable profits, intend to commence the payment of dividends when it becomes commercially prudent to do so.
The Company has a LTIP which is administered by the Remuneration Committee. The LTIP is discretionary and the Remuneration Committee will decide whether to make share awards under the LTIP at any time. The Company's Employee Benefit Trust buys the shares in the Company to be issued under the LTIP.
14 Commitments
The Company had no capital commitments or off-balance sheet arrangements at 31 December 2010 (31 December 2009: nil).
15 Related parties
The Company's relationships with Jumelles, Garbet, Guava and Xstrata are described in note 1 above.
The following transactions occurred with related parties during the period:
|
|
Transactions for the period |
|
Closing balance |
||
|
|
2010 |
2009 |
|
2010 |
2009 |
|
|
$'000 |
$'000 |
|
$'000 |
$'000 |
|
Intercompany payable Jumelles Limited |
298 |
- |
|
298 |
- |
|
Intercompany payable Jumelles Technical Services UK Limited |
38 |
- |
|
38 |
- |
|
Strata Capital UK LLP |
57 |
- |
|
57 |
- |
In addition to the transactions above, the Company has also issued share options to Strata Capital UK LLP. Details of these options can be found in note 11.
Transactions with key management personnel
|
|
2010 |
2009 |
|
|
$'000 |
$'000 |
|
Share-based payments |
964 |
- |
|
Directors' fees* |
309 |
- |
|
Total |
1,269 |
- |
* Colin Harris was also paid $671,000 by Jumelles Technical Services (UK) Limited for his services provided to them as an employee in the capacity of TSA Project Leader.
The Directors have no material interest in any contract of significance subsisting during the financial year, to which the Company is a party.
16 Events occurring after the balance sheet date
See note 1 above for the details regarding (i) the exercise by Xstrata of its First Call option, (ii) Triggering of the JVA and (iii) the VEE currently undertaken in respect of the Zanaga Project.