Afarak Group
Annual Report 2015

Plain-text annual report

A F A R A K G R O U P ANNUAL REPORT A F A R A K G R O U P 2015 A vertically-integrated producer of speciality alloys, Afarak is a global organisation with operations in South Africa, Turkey and Germany. Afarak is listed on the NSDAQ OMX Helsinki Stock Exchange and the London Stock Exchange. A F A R A K G R O U P K A R A F P U O R G A CONTENTS STRATEGIC REVIEW GROUP HIGHLIGHTS CEO REVIEW BUSINESS MODEL OUR PRODUCTS OUR CLIENTS OUR STRATEGY 2015 FOCUS YEAR IN REVIEW THE ECONOMIC ENVIRONMENT OPERATIONAL REVIEW FINANCIAL REVIEW BUSINESS SEGMENTS RISK STATEMENT COMMUNITY DEVELOPMENT RESOURCE STATEMENTS GOVERNANCE REVIEW CHAIRMAN’S INTRODUCTION THE BOARD OF DIRECTORS OUR PEOPLE THE BOARD EXECUTIVE MANAGEMENT TEAM CORPORATE MANAGEMENT GOVERNANCE STRUCTURE THE BOARD OF 2015 BOARD COMMITTEES CORPORATE GOVERNANCE STATEMENT INTERNAL CONTROL INSIDER ADMINISTRATION RESOLUTIONS OF AGM REMUNERATION REPORT 5 6 8 10 12 13 14 17 18 20 24 26 28 34 38 41 53 54 56 61 62 65 66 67 72 73 74 75 77 78 80 FINANCIAL STATEMENTS KEY FIGURES CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CASH FLOWS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 1. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1.1 COMPANY INFORMATION 1.2 ACCOUNTING PRINCIPLES 1.3 BUSINESS COMBINATIONS AND ACQUISTION OF NON-CONTROLLING INTEREST 1.4 IMPAIRMENT TESTING 1.5 OPERATING SEGMENTS 1.6 NOTES TO THE INCOME STATEMENT 1.7 NOTES TO THE STATEMENT OF FINANCIAL POSITION 1.8 RELATED PARTY DISCLOSURES 1.9 COMMITMENTS AND CONTINGENT LIABILITIES 1.10 EVENTS AFTER THE REPORTING PERIOD PARENT COMPANY’S FINANCIAL STATEMENTS (FAS) INCOME STATEMENT (FAS) BALANCE SHEET (FAS) STATEMENT OF CASH FLOWS (FAS) 2. NOTES TO THE FINANCIAL STATEMENTS OF THE PARENT COMPANY (FAS) 2.1 ACCOUNTING POLICIES 2.2 NOTES TO THE INCOME STATEMENT 2.3 NOTES TO ASSETS 2.4 NOTES TO EQUITY AND LIABILITIES 2.5 PLEDGES AND CONTINGENT LIABILITIES 2.6 OTHER NOTES SIGNATURES TO THE BOARD OF DIRECTORS REPORT AND THE FINANCIAL STATEMENTS AUDITOR’S REPORT 85 86 89 89 91 93 95 96 96 108 108 112 115 119 152 156 157 158 158 159 161 162 163 164 167 169 170 172 173 STRATEGIC REVIEW A F A R A G R O U P K A F A R A K G R O U P 1 2015 GROUP HIGHLIGHTS Strong turnaround in performance & profitability 6 7 CEO REVIEW 8 A F A R A K G R O U P Dr Alistair Ruiters CEO We Delivered. 2015 was a transformational year for Afarak. Against a difficult external environment, Afarak delivered a turnaround with significant operational and financial improvements. As a matter of fact, 2015 has been Afarak’s strongest year. Our efforts to focus on specialized products and our ability to offer unique speciality alloys to each and every customer has provided us with added resilience in the face of adverse market conditions. Our reputation in this niche sector has allowed us to conclude additional long-term sale agreements and to build deeper relationships with our clients. In essence, it helped us protect our margins. It confirms Afarak’s vision of investing in research & development. In a market characterised by susceptibility to external factors, it is the speciality products that make us resilient to adverse market conditions. Afarak has assembled an able team of professionals who were capable of transforming the business. Today, we are also pioneering logistics and delivery services to our clients apart from our bespoke speciality alloys. Delivering on commitments -------------------------------- This vision has allowed us to register a strong financial performance too. We delivered on our commitment to create shareholder value by delivering high profitability and long-term, sustainable growth remains at the heart of the Group’s operations. The Group’s continued focus on its core business and the production of special grade material resulted in an improvement of social responsibility. Looking ahead, we want to its operative cash flow and profitability. In fact, continue engaging with all stakeholders including Afarak’s EBITDA doubled when compared to 2014 our valued shareholders. Our commitment as EBITDA improved both in the Speciality Alloys to continue creating value throughout all our segment and the Ferro Alloys segment. operations remains central to our business strategy and vision. We plan to do so through mix Resumption of mining activities at the Turkish of investments, corporate social responsibility mines of Tavas and Kavak and at the South programs and other projects. African mine of Mecklenburg during 2015 enabled the Group to increase production in both segments. Furthermore, the introduction of Looking ahead ----------------------------------- The economic conditions remain subdued. A weaker bulk sample mining at Vlakpoort in the second than expected economic recovery together with quarter contributed positively to the increase in China’s slowing economy will continue to present production volumes. a very challenging scenario. However, we are ever more determined to continue delivering on our As part of its growth strategy, the Group proudly commitments. Our results for 2015 encourage us announced the completion of the shaking to continue moving forward with our strategy. We 9 table plant at the FerroAlloys mine of Stellite in will continue to build on our already significant February 2016. The shaking table technology operational investments whilst we will continue will increase the mine’s total plant mass yield pursuing our drive towards an efficient and effective significantly, leading to a decrease in the organization that creates value to all its stakeholders. operating cost per ton. In 2015, the Speciality Alloys Turkish operation TMS invested in the new plant at Tavas and a fines tailing processing plant Thank you ----------------------------------- On behalf of my executive management team, I at Kavak, increasing annual mining volume by would like to thank all our people and stakeholders 15,600 tonnes following the commissioning of for the past year. Your support has been essential these plants. New dust exhaustion was installed at in this transformational process. Our employees EWW, the smelting operation located in Germany have continued to prove themselves as the and a key component of Afarak’s integrated backbone of this agile and robust organization. Our Speciality Alloys business. The commissioning clients have been partners in this internal process by the Mogale Alloys plant in South Africa of the and continue to believe in Afarak’s unwavering refining and granulation plant in December 2014 commitment to quality. Also, I would like to thank enabled the Group to increase annual processing the communities that host us. levels in the FerroAlloys segment allowing the Group to enter into a new niche market and Lastly, I thank all the members of the Board, led by produce carbon ferrochrome in 2015. our chairman Alfredo Parodi, for putting their trust in me and for sharing their extensive collective Health, safety and the environment continue to expertise and insight, and for providing the support be an integral part of our business. In 2015, the Group set up a Health Safety and Environment and guidance needed to deliver a performance that reflects Afarak’s full potential. Dr Alistair Ruiters CEO Committee (HSEC) with the aim of building a stronger linkage between our operations and the social, environmental, health and safety position of all stakeholders. I am pleased to report that throughout 2015, the Group only suffered 15 accidents that caused loss of time and zero fatalities. Engaging with stakeholders --------------------------------- Afarak remains at core a people-centered business. We have continued to work and engage with local communities where we have our assets. We are working closely with civil society groups as we seek to make a difference in people’s lives through our commitment to corporate OUR BUSINESS MODEL 10 Afarak is a vertically-integrated specialist alloys company. We extract, process, market and trade our specialised metals. We are trusted by a highly diversified customer base that includes industry leaders from the aviation, nuclear, oil & gas and automotive sectors. Through our investments we are today able to produce a unique alloy mix for every customer making us a boutique speciality alloys producer. In all we do, we take pride in delivering on our promise to create value for all our stakeholders. K P A U R O R A G F A 11 As we aim to create value across the product- chain, Afarak remains committed to sustainable development, investment and to delivering a healthy financial performance for its shareholders. As a global company, we seek to achieve a balance between our environmental, social and economic interests in all of our operations. EXTRACT We operate our own mines in South Africa & Turkey guaranteeing a high-quality input to our processing activities. R&D Our modern and state-of-the-art laboratories at our plant in Germany allow us to develop and test unique speciality alloys for every customer. PROCESS Our expertise and technology allow us to process our metals into speciality alloys. SALES & MARKETING Our industry insight and knowledge allows us to sell our products all over the world whilst building long-standing relationships with our clients. LOGISTICS & DELIVERY of speciality alloys to our clients whilst supporting them in their Through our logistics platform we are able to deliver any quantity inventory management. GLOBAL DISTRIBUTION Our products are trusted and requested by clients all over the world. Today, we are honored to have a geographically diversified client base. OUR PRODUCTS We pride ourselves in being the speciality alloy producer of choice for many leading companies around the world. Our knowledge and leadership allows us to produce unique alloys for each and every customer, tailored to their specific needs. Today, our products are found in a variety of sectors including aerospace, nuclear energy, construction, automobile and oil & gas. If it’s speciality, it’s Afarak. Products Customers End User 12 Ferrochrome smelters Stainless steel smelters Stainless steel smelters Carbon steel mills Cutlery Automotive Appliances Construction Architectural Rail Chemical applications Automotive Construction Infrastructure Housing Appliance Shipping Industrial machinery Tool and high speed steels Engineering steel High stenght low alloy steel Carbon steel mills Aerospace Automotive Engineering Plastics Machinery Yellow goods (mining equipment) Structural applications Nuclear power plant tubing/pipes CHROME ORE PLASMA CHARGE CHROME STAINLESS STEEL ALLOY SILICONE MANGANESE FERROCHROME MEDIUM CARBON - LOW CARBON - ULTRA LOW CARBON - SPECIALITY LOW CARBON OUR CLIENTS We are trusted by a growing number of clients all over the world. Our diversified client base also strengthens our resilience to external pressures and protects our margin as our sales to Europe are speciality products. Afarak is seen as a partner and not just a supplier. Our ability to supply clients with the products and materials they specify is at the foundation of our relationship with them. We are also pioneering the logistics and delivery approach in the alloy business. Afarak is able to supply its clients with small to large quantities thus supporting its clients in their inventory management. USA EUR 22% EUROPE EUR 43% 13 AFRICA EUR 13% OUR STRATEGY Afarak is focused on leveraging long-term growth opportunities. This goal guides our short to medium term strategy and action plans. Over the past few years, Afarak has invested heavily in its internal capacity to deliver. We have invested in our people, in technology, processes and systems. 14 MARGIN PROTECTION LOCAL COMMUNITY DEVELOPMENT OPERATIONAL EFFICIENCY SUSTAINED GROWTH STRATEGIC INVESTMENTS ZERO HARM A F A R A K G R O U P MARGIN PROTECTION Afarak has managed to protect its margin by becoming a leading speciality alloy producer. Our focus on offering speciality products allows us to maximise our margins. 15 OPERATIONAL EFFICIENCY We aim to streamline our processes and systems in order to reap economies of scale thus reducing our operational expenditure. STRATEGIC INVESTMENTS Through a strategic investment programme, we continue to develop and implement new technologies to support our long-term strategy and goals. ZERO HARM Afarak strives to achieve ‘Zero Harm’ at all of its operations and to provide its employees and contractors with a safe and healthy environment in which to work, develop and grow. SUSTAINED GROWTH Our industry insight and knowledge ensures that we have a pipeline of opportunities and projects to pursue and to sustain our growth. LOCAL COMMUNITY DEVELOPMENT Afarak seeks to make positive contributions to the local communities in which it operates and to build long-term relationships to underpin the sustainability of its business. A F A R A K G R O U P 2015 IN FOCUS A F A R A K G R O U P THE YEAR IN REVIEW 18 JANUARY Commissioning of the Tire Washing System at EWW, Germany JUNE Commenced bulk sampling at its Vlakpoort open pit mine in South Africa. MARCH Resumption of mining activities at Kavak, Turkey NOVEMBER Re-ceritification of the Energy Management System as per DIN EN ISO 50001 at EWW, Germany AUGUST • Setting-up of Health Safety and Environment Committee • Installation of solar powered borehole pumps as a part of a community project, Mecklenburg, South Africa JANUARY • Signing of further sale agreements regarding saw mill equipment • TMS has been granted the exploitation mining license for ‘Eagle Field” in Turkey • Start-up of the de-dusting system at EWW, Germany 01 02 03 04 05 06 07 08 09 10 11 12 01 02 2015 2016 MAY • New Board elected during AGM • Dr Alistair Ruiters appointed as CEO SEPTEMBER Investment in new plant at Tavas, Turkey FEBRUARY ISO 14001:2004 & ISO 9001:2008 recertification, Mogale Alloys, South Africa JULY • Investment in dryer at Mogale Alloys plant, South Africa • Commencement of storm water project, Mogale Alloys, South Africa FEBRUARY • Afarak Trading entered into a long-term agreement of low carbon ferrochrome with US company Carpenter Technology Corporation • Completion of shaking table plant at Stellite Mine • Second campaign of high grad SiCr production at ASK, EWW Germany DECEMBER • Commissioning of new dust exhaustion at EWW, Germany • Bulk sampling project at Vlakpoort, South Africa JANUARY Commissioning of the Tire Washing System at EWW, Germany Commenced bulk sampling at its Vlakpoort open pit mine in South Africa. JUNE Resumption of mining activities at MARCH Kavak, Turkey NOVEMBER Re-ceritification of the Energy Management System as per DIN EN ISO 50001 at EWW, Germany AUGUST • Setting-up of Health Safety and Environment Committee • Installation of solar powered borehole pumps as a part of a community project, Mecklenburg, South Africa JANUARY • Signing of further sale agreements regarding saw mill equipment • TMS has been granted the exploitation mining license for ‘Eagle Field” in Turkey • Start-up of the de-dusting system at EWW, Germany 19 01 02 03 04 05 06 07 08 09 10 11 12 01 02 2015 2016 MAY • New Board elected during AGM • Dr Alistair Ruiters appointed as CEO SEPTEMBER Investment in new plant at Tavas, Turkey FEBRUARY ISO 14001:2004 & ISO 9001:2008 recertification, Mogale Alloys, South Africa JULY • Investment in dryer at Mogale Alloys plant, South Africa • Commencement of storm water project, Mogale Alloys, South Africa FEBRUARY • Afarak Trading entered into a long-term agreement of low carbon ferrochrome with US company Carpenter Technology Corporation • Completion of shaking table plant at Stellite Mine • Second campaign of high grad SiCr production at ASK, EWW Germany DECEMBER • Commissioning of new dust exhaustion at EWW, Germany • Bulk sampling project at Vlakpoort, South Africa THE ECONOMIC ENVIRONMENT 20 The external environment continues to pose challenges to the mining industry particularly through subdued economic growth, low commodity prices and unfavourable exchange rates. The global recovery continued to recover in 2015 and grew at a modest rate. As some developed economies continued to strengthen, emerging economies were sluggish and dampened global growth to below three percent. GDP growth (%) 15 12 9 6 3 0 -3 -6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: World Bank. The US economy continued its solid growth. subdued confidence have impacted the world Improvements in the labour market supported economy through the effects of weaker commodity consumer demand whilst higher equity markets prices and increased volatility in financial markets. and the ongoing recovery in corporate investment supported growth. Europe’s recovery continued to gather momentum mainly driven by the successful Commodity prices -------------------------------- Commodity prices fell further in the second half of quantitative easing pursued by the European 2015. By November, the three industrial commodity Central Bank. price indexes—energy, metals, and agricultural raw materials—were down, on average, 45 percent However, growth in China continued to slow down from their 2011 peaks. Abundant supplies, due in mainly driven by a dampened property market part to investment during the decade-long price and fixed asset investment programmed. This two boom, and softening demand are the main factors factors had in turn a strong impact on the demand behind the continued weakness. The appreciation for metals and minerals. Policy measures directed of the U.S. dollar, the currency in which most towards the property market have supported commodities are traded, has also contributed to growth. However, this s slow down coupled by the price weakness. 21 Commodity Metals Price Index 300 250 200 150 100 50 02/11 05/11 08/11 11/11 02/12 05/12 08/12 11/12 02/13 05/13 08/13 11/13 02/14 05/14 08/14 11/14 02/15 05/15 08/15 11/15 02/16 Source: IMF. The slump in metal prices, which reached their lowest Despite the expectations at the end of the third levels in more than 6 years in November, reflects quarter that consumption would improve in the well-supplied markets as well as weaker growth fourth quarter, demand failed to grow materially in major emerging markets. New mining capacity and selling prices decreased further than expected. came into operation in several countries, especially Australia, adding to already abundant supplies. During the past year, the price of nickel, which is one Stainless Steel -------------------------------- The fourth quarter of 2015 has been another steel together with ferrochrome, in common with most other traded commodities, has had a notable difficult period for stainless steel industry globally. downward trend. The LME nickel prices have There was continued weakness in the European dropped from over US$ 15,000 per tonne in 2014, to markets with the margins for all mills remaining to US$ 8,650 per tonne, by the end of 2015, a decrease of the main raw materials used to produce stainless be unsatisfactory. of more than 44%. In addition, prices were at levels lower than these during parts of the fourth quarter. The nickel price has been undermined, in part, by Spot ferroalloy prices continued to decrease during the unprecedented high level of LME inventory. The the fourth quarter, even though not at the same official daily figure rose from over 400,000 tonnes rate as Nickel or Ferro-Molybdenum. Destocking at the end of 2014, to reach a peak of over 470,000 during the fourth quarter was expected to lead tonnes in June 2015. Stocks steadily reduced to a pickup in spot demand but the stainless steel thereafter reaching a low of around 393,000 production showed very limited sign of any upturn. tonnes, until a recent influx of material took the total over 438,000 tonnes at the end of 2015. Manganese Alloy -------------------------------- The anti-dumping disputes continued in the The costs of the other major raw materials have steel market, within the alloy markets, including also fallen. The price paid by United States mills for silico manganese, which was also the subject of chromium has decreased by around 10% in the past trade cases. Bulk alloy prices have decreased twelve months, while the cost of scrap, used in the significantly during 2015 and in some cases have American producers’ alloy surcharge calculations, fallen back to the levels last seen prior to China’s has dropped by 56%, resulting in losses for scrap upsurge in stainless production which began 22 suppliers. As a result, the December 2015 alloy in 2008 when the West was hit by the financial surcharge in the United States is 46% lower than crisis. Bulk alloys production in China and in the the figure reported in the same period of 2014. West was cut during the fourth quarter of 2015 in This contributes to a transaction value for 304 cold response to low prices. rolled coil that was around 34% less than the prices in December 2014. It was also noted that Eurasian Economic Union (EEU) Commission is considering introducing anti- The Western mill selling figures for the same dumping measures of Ukrainian Silico-Manganese products have fallen by almost 34% in China and by to Russia, which could increase exports to Europe. nearly 25% in Europe when compared to the prices at the end of 2014. Currency -------------------------------- The South African Rand suffered a significant The persistent negative trend in stainless steel depreciation in value in 2015. Although the selling values has created very difficult business depreciation of the Rand increased the export conditions for all participants in the supply chain earnings of domestic producers, they were offset by except for the speciality stainless steel producers a further drop in international commodity prices. who saw an improvement in sentiment. Ferrochrome -------------------------------- In the fourth quarter South African benchmark price dropped from the third quarter by US$ 0.04/ lb Cr. The benchmark prices for the European steel mills and Japanese steel mills were of US$ 1.04/ On the other hand; the Euro, Sterling and Turkish Lira continued to weaken against the dollar throughout 2015. Economic Outlook -------------------------------- The global economy is expected to modestly lb Cr and US$ 1.12/lb Cr respectively not including discounts which reached 25% at times. This price is improve its grow similarly the pace in 2014, and to 5.3 percent in 2017 and 2018. the lowest since the third quarter of 2009. This modest improvement is predicated The Chinese spot market prices of high carbon on continued momentum in high-income ferrochrome and charge chrome also came under countries, a stabilization of commodity prices, downward pressure during the fourth quarter of still accommodative monetary policy in major 2015 where prices went down below US$ 0.70/ economies with no bouts of financial market lb Cr, which is still low when compared to the turbulence, and a continued gradual slowdown in European benchmark prices. China’s ferrochrome China. With stabilizing commodity prices, growth market was quiet, with most producers waiting in commodity exporters is expected to resume. for new tender prices from steelmakers, most of Among low-income countries, growth is mostly which was heavily delayed and therefore tonnages steady or rising. However, forecasts for 2016 imported dropped to 539,938 tonnes in the fourth have been downgraded for some countries from quarter, from the 755,883 tonnes reported in the previous projections, reflecting lower commodity third quarter of 2015. prices and rising security and political tensions in some countries. The persistent growth slowdown in emerging forecasts in recent years. Many of the factors and developing economies has led to repeated underpinning the slowdowns – low commodity forecast downgrades. The largest emerging prices, weak global trade, and slow productivity markets are among the countries subject to growth – are expected to persist significant downward revisions to their long-term ZAR/USD 23 18 16 14 12 10 8 6 01/2 012 0 3/2 012 0 5/2 012 0 7/2 012 0 9/2 012 11/2 012 01/2 013 0 3/2 013 0 5/2 013 0 7/2 013 0 9/2 013 11/2 013 01/2 014 0 3/2 014 0 5/2 014 0 7/2 014 0 9/2 014 11/2 014 01/2 015 0 3/2 015 0 5/2 015 0 7/2 015 0 9/2 015 11/2 015 01/2 016 0 3/2 016 TRY/USD GBP/USD EUR/USD 01/2 014 0 2/2 014 0 3/2 014 0 4 /2 014 0 5/2 014 0 6/2 014 0 7/2 014 0 8/2 014 0 9/2 014 10 /2 014 11/2 014 12/2 014 01/2 015 0 2/2 015 0 3/2 015 0 4 /2 015 0 5/2 015 0 6/2 015 0 7/2 015 0 8/2 015 0 9/2 015 10 /2 015 11/2 015 12/2 015 01/2 016 0 2/2 016 0 3/2 016 2 1.5 1 0.5 0 OPERATIONAL REVIEW 24 We achieved. During 2015, both production and sales volumes segment, the increase in mining activity by 37.1% to increased over a year earlier contributing to the 49,152 (35,848) tonnes was primarily derived from overall positive performance of the Group. having the Turkish mines operating at normal levels throughout most of 2015 as opposed to the previous Production -------------------------------- Production for the year increased by 39.4% to year during which mining at TMS stopped during June 2014 due to a strike and lockout. Production of 565,372 (405,660) tonnes. The increase was mainly processed material decreased at the Speciality Alloys attributable to the resumption of normal mining processing plant of EWW when compared to the activity levels at the Mecklenburg mine throughout previous year as a result of decreased demand and 2015 following a seven-month suspension of mining inventory management. On the other hand, annual activity during 2014 and due to bulk sampling activity processing levels at the Ferro Alloys processing plant at Vlakpoort mine which commenced in June 2015. of Mogale Alloys were higher than those registered These factors were crucial in increasing mining during the previous year primarily as a result of activity in the FerroAlloys segment by 53.8% to medium carbon charge chrome production. 412,629 (268,351) tonnes. In the Speciality Alloys Group Production Tonnes Q1 Q2 Q3 Q4 FY15 FY14 Change Speciality Alloys - Mining* 5,997 13,685 11,663 17,807 49,152 35,848 37.1% FerroAlloys - Mining* 102,776 116,732 115,341 77,780 412,629 268,351 53.8% Speciality Alloys - Processing 7,862 7,365 4,585 6,422 26,234 28,784 FerroAlloys - Processing 19,586 20,491 14,763 22,517 77,357 72,677 -8.9% 6.4% * Including both chromite concentrate and lumpy ore production Sales -------------------------------- The Group’s sales from processing, which includes the previous year due to lower demand during the second and third quarters of the year. On the other all the products produced at the Mogale Alloys hand, sales volumes in the FerroAlloys segment and EWW processing plants, were 104,150 (97,351) increased by 11.5% when compared to the previous tonnes in 2015, an increase of 7.0% compared year due to a stronger demand seen during the to 2014. Sales volumes in the Speciality Alloys segment decreased by 3.9% when compared to second and fourth quarters. 25 Group Sales Tonnes Q1 Q2 Q3 Q4 FY15 FY14 Change Speciality Alloys - Processing 7,375 7,970 6,287 5,705 27,337 28,448 -3.9% FerroAlloys - Processing 15,024 22,586 13,771 25,432 76,813 68,903 Total – Processing 22,399 30,556 20,058 31,137 104,150 97,351 11.5% 7.0% Human resources -------------------------------- Afarak operates in a very competitive industry demonstrated by the number of senior female executives across the Group’s key business units. and the Group’s ability to successfully execute its In South Africa specifically, as part of the Group’s business is dependent upon the competencies and compliance with local legislation, the FerroAlloys motivations of its employees, as well as its ability division monitors its employment equity and it to attract and retain a high calibre personnel. The is a vital component of the recruitment process Group follows local legislation and applicable to ensure Afarak is playing its part in the regulations at each of its operations in regards to transformation of South Africa. The FerroAlloys its human resources management. division continues to aim for an aggressive target At the end of 2015, the Group’s headcount was 773, compared to 698 in 2014. of at least 50% of its workforce is represented by historically disadvantaged individuals. Highly skilled, motivated and diverse Equal opportunities and diversity are important employees are essential to the Group’s success to an international company such as Afarak and in implementing its business strategies and the Group’s commitment to gender diversity is executing its objective. Group Personnel Speciality Alloys FerroAlloys Other operations Total 31 December 2015 31 December 2014 402 365 6 773 355 339 4 698 Change 13.2% 7.7% 50.0% 10.7% FINANCIAL REVIEW 26 We performed. from November 2014 and Kavak from March 2015 following the cessation of operations due to the strike Afarak posted a profit of €8.5 million when compared and lockout of the mines from June 2014 also had a to the €2.2 million posted a year earlier. The main positive effect on EBITDA. driver behind this significant improvement was increased production and sales levels. The Synergy Africa Ltd joint venture managed to reduce its losses during 2015 amounting to EUR Revenue and profitability -------------------------------- Revenue for the full year 2015 increased by 8.7% to -0.1 (-3.3) million. Such improvement occurred as a result of resumption of normal mining activity at the EUR 187.7 (172.7) million. Revenue in the Speciality Mecklenburg mine throughout 2015 and as a result of Alloys segment decreased marginally by 2.3% as a the absence of net write-down of assets which during result of lower sales volumes of processed material, the previous year amounted to EUR 1.6 million. whereas in the FerroAlloys segment revenue increased by 22.7% due to higher sales volumes. Profit from discontinued operations during 2015 EBITDA for the full year was EUR 17.2 (8.4) million. release of a EUR 0.2 (0.6) million from provision in The increase was more accentuated in the Speciality relation to the discontinued wood segment as the Alloys segment due to a stronger US dollar average Group sold part of the saw mill equipment that was rate on conversion of revenue as material prices did acquired in 2008. amounted to EUR 0.8 (1.8) million which includes a not reduce in US dollar terms like they did in the FerroAlloys segment. Normal levels of mining activity being restored at the Turkish mines of Tavas The full year earnings per share was EUR 0.03 (0.01). EUR million Revenue EBITDA Q1 40.7 4.6 Q2 53.1 7.6 EBITDA margin 11.4% 14.4% EBIT EBIT margin Profit for the period 2.9 7.2% 2.3 5.8 11.0% 5.7 Q3 44.8 1.3 2.8% -0.7 -1.5% -1.0 Q4 49.2 3.7 7.5% 1.8 3.7% 1.6 FY15 187.7 17.2 9.2% 9.9 5.3% 8.5 FY14 Change 172.7 8.7% 8.4 4.9% 1.7 1.0% 2.2 Balance Sheet, Cash Flow and Financing -------------------------------- The Group’s net assets totalled EUR 171.2 (182.2) where a new dust exhaustion was commissioned in December 2015. Capital expenditure also included the dryer in the ferrochrome plant million at 31 December 2015. This decrease mainly at Mogale Alloys, replacement of the furnace resulted from the impact of the weaker South refractories during the shutdown period and the African rand on conversion of our South African acquisition of new plant vehicles. At Vlakpoort investments which had a decrease in value during mine the Group continued investing to ramp up 2015 of EUR 17.3 million. This was partially offset by the bulk sample operation. The Synergy Africa the positive operating performance that led to an Joint Venture also made investments during the increase in cash position of EUR 6.5 million. year with the commencement of the shaking table 27 project at Stellite Mine. The equity ratio was 64.2% (62.8%), which continues to be at a conservative level. This stance During 2015, Afarak divested its holding in the has been adopted by Afarak’s management not associate company Speciality Super Alloys Inc. to put pressure on the balance sheet. This could This led to a loss on sale of investment in associate also be seen by the gearing ratio for 2015 which of EUR 0.3 million and has been classified as an stood at -2.6% (-0.7%). Net interest-bearing debt extraordinary item. amounted to EUR -4.5 (-1.2) million. Working Capital, as at 31 December 2015, was Research and development -------------------------------- Afarak remains committed to investing in Research EUR 76.1 (74,4) million. During the year Afarak and Development. As a Group it believes that new managed to significantly reduce the inventory technology leads to improved productivity levels level and improve liquidity, which as at 31 and reduced costs over the long-term leading to a December 2015 was EUR 19.6 (13.3) million. This positive effect on its financial performance. To this enabled Afarak to reduce its trade and other end, it adopted a policy whereby all subsidiaries payables by EUR 16.6 million. have R&D investment projects and investments The positive performance together with the more in the pipeline. In 2015, Afarak’s R&D expenditure totalled EUR 0.5 (0.3) million. Following the efficient working capital management has led to an installation of the new refining and granulation increase of EUR 7.4 million in operating cash flow plant at Mogale Alloys which was completed during during 2015 when compared to 2014.. Total operating the last quarter of 2014, the Group announced the cash flows in 2015 was EUR 12.5 (5.1) million. completion of the shaking table plant at the Stellite Investments, acquisitions and divestments -------------------------------- Capital expenditure for the full year 2015 totalled mine early in 2016. The shaking table technology will allow the Group to treat the tailing dump for chrome and increase Stellite mine’s total plant mass yield to 65% from a current level of 49% EUR 8.0 (14.8) million. In the Speciality Alloys leading to a reduction in operating cost per ton. segment, capital expenditure was incurred both at TMS as the company continued the investment of fines tailing processing plant at Kavak to increase annual mining volume by 15,600 tonnes following the commissioning of the plants, and at EWW, BUSINESS SEGMENTS 28 Afarak is a diversified company. With mines and assets in South Africa, Turkey and Germany; Afarak Production -------------------------------- Annual production increased by 43.7% to 489,986 is mainly active in the FerroAlloys and Special Alloys (341,028) tonnes. The increase is mainly attributable industries. FerroAlloys to the resumption of normal mining activity levels at the Mecklenburg mine throughout 2015 following a seven-month suspension of mining activity during 2014 due to the unrest in the local community. Annual processing levels at Mogale Alloys were The FerroAlloys business consists of the processing higher than those registered during the previous plant Mogale Alloys, Vlakpoort mine and the joint year primarily as a result of medium carbon charge ventures, the Stellite mine and the Mecklenburg mine chrome production following the commissioning in in South Africa. The business produces chrome ore, December 2014 of the converter and granulator. charge chrome, medium carbon ferrochrome and silico mangan ese for sale to global markets. Tonnes Mining* Processing Q1 Q2 Q3 Q4 FY15 FY14 Change 102,776 116,732 115,341 77,780 412,629 268,351 53.8% 19,586 20,491 14,763 22,517 77,357 72,677 6.4% * Including both chromite concentrate and lumpy ore production Financial performance -------------------------------- Revenue for the full year increased to EUR 91.8 reduced loss from the joint venture occurred as a result of the resumption of normal mining activity (74.8) million, representing an increase of 22.7% at the Mecklenburg mine throughout the first compared to the equivalent period in 2014. The eleven months of 2015 following a seven-month increase in trading volumes of processed material suspension of mining activity during the previous was the main contributor towards the improvement year and the absence of net write-down of assets in revenue when compared to 2014. The joint which during the previous year amounted to EUR venture share of profit for 2015 was that of EUR 1.6 million. The positive performance during the -0.1 (-3.3) million, the reduction in losses was key year enabled the FerroAlloys segment to register a in increasing EBITDA in the FerroAlloys segment positive EBIT of EUR 2.8 (-1.4) million. for the full year to EUR 7.5 (3.1) million. The EUR million Revenue EBITDA Q1 16.8 1.8 Q2 27.0 3.9 Q3 20.2 0.7 EBITDA margin 10.5% 14.6% -3.6% EBIT EBIT margin 0.6 2.7 -0.5 3.6% 10.1% -2.5% -0.20% 3.0% -1.8% 29 Q4 27.7 1.0 3.7% -0.1 FY15 FY14 Change 91.8 7.5 8.1% 2.8 74.8 22.7% 3.1 4.1% -1.4 Afarak’s share of joint ventures revenue for the full positive share of joint venture EBITDA for the full year increased to EUR 9.7 (5.7) million representing year amounting to EUR 1.3 (-2.2) million as opposed an increase of 69.9% compared to the equivalent to a negative share of joint venture EBITDA incurred period in 2014. The increase in revenue was during the previous year. The results of the previous mainly due to the increase in sales volumes of the year were negatively affected by write-downs in Mecklenburg mine material as operations were relation to Waylox mining project of EUR 0.5 million resumed in December 2014. The increase in revenue and a net write-down on the assets of Stellite mine of was also attributable to the increase in processed EUR 1.1 million. material at the Stellite mine, particularly from concentrate material. Resumption of mining activity The share of profit from joint ventures is made up as at the Mecklenburg mine also contributed to the follows: EUR million Revenue EBITDA Q1 2.2 0.3 Q2 3.2 0.6 Q3 2.7 0.4 Q4 1.6 -0.1 FY15 FY14 Change 9.7 1.3 5.7 -2.2 69.9% EBITDA margin 14.2% 18.8% 15.7% -3.7% 13.2% -38.0% EBIT EBIT margin 0.0 0.3 -0.2% 9.8% 0.2 7.3% -0.2 -11.1% 0.3 -3.1 3.4% -54.1% 30 Afarak’s FerroAlloys Mines & Processing Plant Vlakpoort Mine South Africa Mecklenburg Mine South Africa The Vlakpoort Mine is situated on the Northern Mecklenburg Mine is situated on the Eastern limb part of the western limb of the Bushveld complex of the Bushveld complex. It was forms part of the in South Africa. It was acquired in 2011 when Chromex Mining Company that was bought by the prospecting right was bought. Since then Afarak in 2010. It consists of about 5Mt of mineable extensive exploration work was conducted which LG6 material. Mining started in 2012 with an include Geological drilling, trenching and a bulk opencast mine producing about 20kt per month of sample of the LG5 and LG 6 seams that were LG6 Run of Mine material. The opencast resource 31 taken to test the market. was depleted in January 2016, and it is envisaged to establish and underground mine out of the The property has a resource of in excess of 6Mt current opencast. of Chrome and 300,000 ounces of PGMs. The resource consists of the LG1-6, MG1-4 and the UG1- 2 and Merensky reefs outcropping on the property. The Stellite Mine South Africa Mogale Alloys Processing Plant South Africa The Stellite mine was acquired in late 2010, as part Afarak acquired Mogale in 2009, providing it with of the Chromex acquisition and will be the primary access to the bulk minerals processing sector in ore supply to Mogale Alloys, thereby integrating South Africa. The acquisition marked a strategic the FerroAlloys business. Excess lumpy chrome step forward for the Group by providing access ore mined at Stellite is exported directly to China. to direct current (DC) furnace technology, which has been in operation at Mogale since 1983 and is Stellite is located on the western limb of the considered to be a centre of excellence. Bushveld complex in South Africa, where 70% of the world’s chrome resources are located and 40% of chrome production is sourced. The mine Mogale operates four furnaces; two submerged arc furnaces and two DC furnaces, with a total has a chromite resource of 32Mt comprising of production capacity of 110,000 tonnes per annum. four seams, namely the LG6, MG1, MG2 and MG4. These furnaces are capable of producing four key All four seams outcrop on the property. products: silico manganese, plasma ferrochrome, charge ferrochrome and stainless steel alloy (chromium-iron-nickel alloy). Towards the end of December 2014, the company finalized an investment of €13 million in a ferroalloy refining and granulation plant. Speciality Alloys Production -------------------------------- Annual production increased by 16.6% to 75,386 The Speciality Alloys business consists of Türk (64,632) tonnes. The increase was primarily 32 Maadin Şirketi A.S (“TMS”), the mining and derived from having the Turkish mines operating beneficiation operation in Turkey and Elektrowerk at normal levels throughout most of 2015 as Weisweiler GmbH (“EWW”), the chromite opposed to the previous year during which mining concentrate processing plant in Germany. at TMS stopped during June 2014 due to a strike TMS supplies EWW with high quality chromite and lockout. Tavas mine also restarted operations concentrate which produces speciality products following the end of the lockout in November including specialised low carbon and ultra low 2014 and mining also recommenced in March 2015 carbon ferrochrome. Chrome ore from TMS that is at Kavak. Processing levels decreased at EWW not utilised for the production of specialised low when compared to the previous year as a result of carbon ferrochrome is sold to the market. decreased demand and inventory management. Tonnes Mining* Processing Q1 Q2 Q3 Q4 FY15 FY14 Change 5,997 13,685 11,663 17,807 49,152 35,848 7,862 7,365 4,585 6,422 26,234 28,784 37.1% -8.9% * Including both chromite concentrate and lumpy ore production Financial Performance -------------------------------- Revenue for the full year 2015 was EUR 95.6 (97.8) attributable to a stronger US dollar average rate million, representing a marginal decrease of 2.3% on conversion of revenue when compared to 2014. compared to the previous year. The decrease in revenue was mainly attributable to lower sales Having the Turkish mines in operation during the majority of 2015 also had a positive impact on volumes of processed material and third party EBITDA and EBIT, as compared to 2014, where material in 2015. EBITDA was EUR 12.7 (7.9) million profit was impacted due to the lockout and strike and EBIT for the year was EUR 10.1 (5.7) million. at the Group’s Turkish operations. The improvement in EBITDA and EBIT was mainly EUR million Revenue EBITDA Q1 23.7 3.4 Q2 26.1 4.5 Q3 24.5 1.4 Q4 21.3 3.4 FY15 95.6 12.7 EBITDA margin 14.5% 17.2% 5.7% 16.2% 13.3% EBIT EBIT margin 2.9 3.9 0.7 2.7 10.1 12.1% 15.0% 2.8% 12.6% 10.6% FY14 Change -2.3% 97.8 7.9 8.0% 5.7 5.8% Afarak’s Speciality Alloys Mines & Processing Plant 33 TMS Turkey TMS operations consist of open pit and underground mining, as well as ore enrichment facilities equipped with primary and secondary crushing, milling and concentration tables. The production facilities are located in Kavak, in the Eskisehir province, and in Tavas, in the Denizli province. It also holds 27 licences, of which 12 are exploitation licences. The annual production capacity is between 100,000 – 120,000 tonnes. TMS produces two chrome ore types: special grade chromite concentrates and lumpy chrome ore. EWW Plant Germany EWW is a world-renowned processing facility with state-of-the-art facilities and laboratories. With a heritage in processing spanning close to 100 years, EWW has a reputation of being a highly specialised smelting operation producing a range of specialist products, such as specialised Low Carbon and Ultralow Carbon Ferrochrome. The products are sold internationally to customers in the automotive, aerospace and power generation industries. RISK MANAGEMENT 34 Understanding our risks and developing policies The section below gives an overview of the and procedures to manage and to minimize our risks identified as well as the measures taken to exposure to such risks is critical to our success. mitigate such risks. Afarak has defined its risks as being operational, financial and compliance. Additional information on financial risks and financial risk management are presented in the notes to the consolidated financial statements. FINANCIAL RISK Risks Consequences Controls to mitigate risk Liquidity risk - whether Afarak has sufficient liquidity to service and finance its operations and pay back loans Foreign exchange exposure Materialised liquidity risks may cause • Overdue interest expenses • Negative impact to the Group’s relationship with its goods and service suppliers • • Affect the pricing and other terms for input goods and services • The Group continuously assesses its working capital to ensure that it has sufficient funds to meet its liabilities • Prepares and assess forecast reports • Direct risk – commercial cash flows • The Group constantly evaluates and currency positions • Indirect risk – loss of competitiveness within the industry the need to enter into forward contract arrangements Interest rate risks Changes in interest rates can • Influence the repayment of loans • The Group constantly evaluates the need to enter into forward contract arrangements • Impact the profitability of investments • Alter the fair value of the Group’s assets FINANCIAL RISK (CONT.) 35 Credit risks • Afarak’s key customers • Analyse credit limits are typically long business relationships including major international steel and stainless steel companies and some specialty agents selling to the steel sector. Major changes in that industry’s future outlook or profitability could increase the Group’s credit risk • The Group’s processing operations are exposed to the availability, quality and price fluctuations in raw materials Price risks Price and demand volatility in the commodities markets • The global market for Group’s products may not progress or develop at the levels forecast and a drop in demand for the Group’s products could have an adverse effect on the Group’s revenues and profits Acquisition and organic growth strategy risk • There is a risk that the investment will not perform as expected and the group will not achieve the desired future operating cash flows and profitable results from the investment • There is a risk that the Group might not be able to find the appropriate site or to obtain the necessary licences to develop and operate or to secure the required financing • Assesses the likelihood that a borrower will default on the debt obligations • The price risks on input materials and commodities are managed by pricing contracts so that, where possible, any changes in input materials and commodities may be absorbed in the sales prices • The Group’s business units seek long-term contract agreements with known counterparties where possible • Using its strong customer interface and market intelligence to adjust its production volumes to match demand • Adapting its diverse product mix to meet customer requirements • The Group’s policy is to carry out extensive R&D to mitigate the risk that such investment will not be successful COMPLIANCE RISK Risks Consequences Controls to mitigate risk Environmental risks • Direct potential harm to the environment • Environmental risks are managed closely and regularly assessed’ • Potential post-production rehabilitation or landscaping obligations • Regular assessment of environmental liabilities • External experts are appointed to assist in identifying potential liabilities and ensuring compliance with environmental legislation Legal risks • Legal disputes may relate to • Currently there is no significant contractual or other liabilities or environmental or other regulatory matters legal case pending and the group policy is to publish all significant legal cases and their outcomes 36 Political and social risks • Changes in the mining, employment and fiscal regulatory environment may materially adversely affect the business and its financial results • Operations may be affected to varying degrees by government regulations • Afarak seeks to maintain good relationships with stakeholders Employment legislation • If not observed may negatively impact Afarak’s financial results. • Afarak regularly re-assesses its policies in terms of employment legislations Tax risks • Changes in tax laws and regulation, or a change in interpretation of the tax authorities in the different jurisdiction we operate in could have an adverse impact on Afarak’s financial results. • Afarak keeps abrest with changes in tax regulation and external experts are appointed to assist in identifying potential tax liabilities and ensuring compliance with the tax legislation Data protection risk • If data protection legislation is not observed the business may be adversely affected and have an impact on the financial results • Data protection law is closely and regularly assessed in terms of the Group operations OPERATIONAL RISK Risks Consequences Controls to mitigate risk Loss of key personnel or the engagement of inappropriate personnel • Adverse effect on operations, • Regularly re-assesses its particularly its processing plants, which could impact the Group’s operating and financial results remuneration policies and packages to attract and retain suitably skilled and qualified personnel • Afarak has set up a remuneration commitee to set guidelines OPERATIONAL RISK (CONT.) Risk of mining and smelting accidents (fire, flooding, rock bursts, weather conditions, seismic events and other natural phenomena) Volatility of fuel and energy prices with general cost inflation • This could affect both employees’ • “Zero Harm” policy and operations, resulting in suspension of operations • May negatively impact Afarak’s current operations, particularly its processing plants, which could have a consequent effect on the Group’s operating and financial results. It may also impact the plans to expand its operations and implement its growth strategy • Health and safety guidelines, policies and procedures • Continuous employee training • The Group constantly evaluates the need to enter into financial arrangements to mitigate such risk Electricity power cuts • Stoppages in smelting can cause • To mitigate this risk Afarak 37 Social risk • the contents of furnaces to solidify, resulting in a plant closure for a significant period and expensive repairs employs experienced operating managers and has standard operating procedures in place for most foreseeable circumstances Industry or social unrest and labour actions may materially adversely affect the business and its financial results by temporarily closing down operations. • Afarak seeks to resolve the matters with all stakeholders to reduce the impact on it operation Loss of key suppliers • Adverse effect on operations, • Afarak carry out continuous which could impact the Group’s operating and financial results financial health checks of key suppliers • Evaluations of key supplier controls in order to minimize the impact associate with disruption • Assess safety and security stock levels • Understand alternate supply options and how long it will take to employ alternatives • The future success depend on the ability to attract and retain suitably skilled and qualified personnel. Afarak regularly re- assesses its remuneration policies. Competition & Rivalry • May negatively impact Afarak’s current operations which could have a consequent effect on the Group’s operating and financial results. It may also impact the plans to expand its operations and implement its growth strategy Distribution network risk • This may have adverse effect on operations which could impact the Group’s operating and financial results • To mitigate this risk Afarak has standard operating procedures in place for most foreseeable circumstances Technology risk • There may be advances in • Afarak regularly assesses the technology which the company is not aware off or has not kept abreast with which may eventually hinder the operating activity of the company and affect the financial results lastest technological equipment and software available on the market BUILDING SUSTAINABLE COMMUNITIES 38 We care. Afarak is a people-centered organization. Through its support and initiatives, Afarak is investing in Feeding schemes -------------------------------- Afarak supports 5 day-care centres in the various communities close to its operations in South Rietvallei area and provides daily meals to 155 Africa and is making a difference in people’s lives. children. The day-care centres are the following; Monwametsi Agri Project, Rustenburg ------------ Dams and irrigation projects are central to Thembelihle, Ntlanta, Wise Girl, Little Achievers and Busy Bee. Similar schemes are also run in conjunction with Magda Fourie at the Paardekraal communities in South Africa improving the and Millenium Primary schools quality of life for hundreds of families. Through the Monwametsi Agri Project, Afarak contributed in the repair and development of two dams, boreholes and an irrigation system. It extended Community entrepreneurship, Mogale City -------------------------------- The Mzimhlope Service Centre operates a crafts its support to develop an agricultural project and shop and centre in which various members of the various vegetables are being farmed on the land community produce various items, mainly woolen since water is now available. items, that are used to finance their daily needs. Afarak supports the centre through the purchase Umephi Jade House, Mogale City -------------------- Afarak is supporting 7 orphans that are currently of materials. residing at Jade House. The House was built as a place of safety for orphans and offers foster care CK Trust -------------------------------- Afarak supports the CK Trust by paying a non- to these children. government teacher to provide support to destitute children at the Patrick Mashego Primary Patrick Masego School, Mogale City --------------- Afarak has a number of projects at Rietvallei school. The teacher is specialized in supporting the emotional well-being of children who come particularly directed towards the Patrick Masego from broken families. Primary school. Through Afarak’s support, the school also has an extensive garden which is used to farm vegetables and fruits which are then used Polekego Centre -------------------------------- Afarak supports this Centre in Krugersdorp that as part of the feeding scheme that the school provides shelter for abused women and children. operates. The Patrick Masego school provides a The Centre can hold up to 40 mothers. daily meal to close to 2,000 children including weekends and holiday periods. 39 A 40 F A R A K G R O U P RESOURCE STATEMENTS A F G A R O R U A P K U P K A R A F A O G R 41 2 MINERAL RESOURCE AND MINERAL RESERVE1 STATEMENT FOR CHROMITE FOR THE AFARAK GROUP IN SOUTHERN-AFRICA AS AT 31 DECEMBER 2015. Mineral Reserves1 (ROM Feed numbers) Mineral Resources (Geological Losses Applied) Tonnage (kt) Cr2O3 (%) Cr:Fe ratio Tonnage (kt) Cr2O3 (%) Cr:Fe ratio PROVED: Stellite Tailings MEASURED: Stellite Tailings LG6-MG4 683 24.49 1.14 LG6-MG4 683 24.49 1.14 Stellite; Underground Stellite; Underground 42 MG4 MG3 MG1 LG6 MG4 MG3 MG1 4,568 34.98 1.36 LG6 Stellite; Open Pit Stellite; Open Pit MG4 MG3 MG2 MG1 LG6+6A 15 96 - - 70 29.59 30.64 31.00 33.34 33.68 1.19 MG4 1.18 MG3 1.23 MG2 1.31 MG1 1.37 LG6+6A 4,810 2,830 3,460 5,680 28 371 188 158 120 33.59 31.51 35.30 37.70 31.86 31.68 37.20 39.00 38.11 1.24 1.19 1.28 1.41 1.22 1.19 1.32 1.40 1.46 Mecklenburg; Underground Mecklenburg; Underground LG6 3,416 41.47 1.57 LG6 4,495 43.36 1.59 Mecklenburg; Open Pit Mecklenburg; Open Pit LG6+6A - 40.76 1.58 LG6+6A 0 44.10 1.64 Vlakpoort; Open Pit Vlakpoort; Open Pit LG1-3 LG5 LG6 MG1-4 UG1-2 23 18 65 52 101 37.30 39.12 36.72 29.72 22.40 1.74 LG1-3 1.52 LG5 1.51 LG6 1.25 MG1-4 1.14 UG1-UG2 Vlakpoort; Underground Vlakpoort; Underground LG6 UG2 LG6 UG2 Total 32 42 151 131 164 398 754 41.57 38.77 36.85 30.01 21.46 33.32 19.65 1.59 1.59 1.59 1.59 1.59 1.59 1.06 Total Proved 9,107 36.42 1.42 Measured 24,495 35.64 1.35 PROBABLE: Stellite; Underground MG4 MG3 MG1 LG6 INDICATED: Stellite; Underground MG4 MG3 MG1 1,241 34.26 1.35 LG6 1,490 1,040 800 1,600 33.80 31.88 36.50 37.50 1.25 1.20 1.30 1.41 Stellite; Open Pit Stellite; Open Pit MG4 MG3 MG2 MG1 LG6+6A 266 254 - - 165 30.02 30.82 30.99 33.25 33.88 1.20 MG4 1.19 MG3 1.22 MG2 1.31 MG1 1.37 LG6+6A 808 990 320 260 280 32.35 31.68 37.30 38.80 38.54 Mecklenburg; Underground Mecklenburg; Underground LG6 2,273 41.45 1.57 LG6 3,008 43.37 Mecklenburg; Open Pit Mecklenburg; Open Pit LG6+6A - 40.76 1.58 LG6+6A 0 44.10 Vlakpoort; Open Pit Vlakpoort; Open Pit LG1-3 LG5 LG6 MG1-4 UG1-2 40 3 37 16 9 37.93 35.01 31.25 30.52 27.09 1.78 LG1-3 1.45 LG5 1.63 LG6 1.36 MG1-4 1.22 UG1-UG2 Vlakpoort; Underground Vlakpoort; Underground LG6 UG2 LG6 UG2 Total 53 10 64 75 24 793 421 41.57 39.92 33.95 29.92 27.61 33.92 19.83 43 1.23 1.19 1.31 1.41 1.46 1.59 1.64 1.86 1.55 1.58 1.35 1.25 1.58 1.06 Total Proved 4,304 37.56 1.45 Indicated 12,036 36.26 1.38 Proved & Probable Reserves 13,411 36.78 1.43 Measured & Indicated Resources INFERRED Stellite; Open Pit MG4 MG3 MG2 MG1 LG6+6A 1,480 790 210 80 40 33.18 32.64 37.10 38.90 37.82 36,531 35.85 1.36 1.24 1.26 1.32 1.41 1.44 1.59 1.59 1.79 1.59 1.30 Mecklenburg; Underground LG6 1,138 43.41 Mecklenburg; Open Pit LG6+6A 0 43.44 Vlakpoort; Open Pit LG1-3 LG5 LG6 MG1-4 UG1-UG2 41 1 119 41.55 33.49 28.61 MINERAL RESOURCE AND MINERAL RESERVE1 STATEMENT FOR CHROMITE FOR THE AFARAK GROUP IN SOUTHERN-AFRICA AS AT 31 DECEMBER 2015 (CONT.) Vlakpoort; Underground LG6 UG2 Inferred Resources Total Resources (Excl Exploration Results2) 1,321 33.67 1.59 115 20.27 1.08 5,335 35.36 1.41 41,866 35.78 1.36 Total Reserves 44 13,411 36.78 1.43 Exploration Results2 Vlakpoort; Underground LG6 UG2 Vlakpoort; Open Pit LG1 LG2 LG3 LG5 LG6 MG1 MG2 MG3 MG4+4A UG1 UG2 Exploration Results2 Total (Incl Exploration Results2) 1,243 34.16 1.60 10 7 33 365 20 5 264 38.35 33.51 38.73 33.55 39.73 27.47 29.70 1.70 1.75 2.01 1.60 2.09 1.21 1.23 1,947 33.58 1.56 43,813 35.69 1.37 • Mineral Reserves1 used in SAMREC and IMMM Codes whereas termed Ore Reserves in the JORC Code • Exploration Target Mineralisation used in JORC Code whereas termed Exploration Results2 in the SAMREC Code. The potential quantity and grade is conceptual in nature and there has been insufficient exploration to define Mineral Resources and it is uncertain if further exploration will result in the determination of a Mineral Resource. The information in this report that relates to exploration results for Stellite, Mecklenburg and Vlakpoort is based on information compiled by the MSA Group, Andrew Scogins and Shango Solutions respectively. The team of people involved in the Mecklenburg, MSA and Shango Solutions estimation process is listed below: Person: Sifiso Siwela (MSA) Mike Hall (MSA) Position: Affiliations: Exploration Project Manager Pr.Sci.Nat, MGSSA Mineral Resources Consultant Pr.Sci.Nat, MGSSA, MAusIMM Andrew Scogings (Independent) Geological Consultant Hendrik Pretorius (Shango) Geological Consultant MAusIMM, MAIG Pr.Sci.Nat, MGSSA Stefanie Weise (Shango) Geological Consultant MGSSA The combined Stellite, Mecklenburg and Vlakpoort Measured and Indicated Resource category declared as at 31 December 2015, decreased from that declared in December 2014 by 0.8 million tonnes mainly due to depletion at all three operations. The depletion at the three operations was as follows (rounded up to nearest 0.1 million): Stellite 0.3 million tonnes in the MG4 open pit, • • Mecklenburg 0.2 million tonnes in the LG6/6A open pit, and • Vlakpoort almost 0.1 million tonnes mainly in the LG6 open pit with minor amounts in the LG5, LG2, MG3 and MG4 open pits. The combined total Stellite, Mecklenburg and Vlakpoort Mineral Resources declared as at 31 December 2015, decreased from that declared in December 2014, by 1.516 million tonnes and the grade decreased by 0.2% to 35.78% Cr2O3 and the Cr to Fe ratio decreased by 0.01 to 1.36. The Mineral Resources for Stellite declared as at 31 December 2015, decreased by 0.228 million tonnes from that declared in December 2014, mainly due to depletion in the MG4 open pit. The Mineral Resources were positively impacted by the addition of tailings material of 0.125 million tonnes. 45 The Mineral Resources for Mecklenburg declared as at 31 December 2015, decreased by 0.195 million tonnes from that declared in December 2014, due to depletion in the open pit. Mecklenburg has no remaining open pit Mineral Resources. The Mineral Resources for Vlakpoort declared as at 31 December 2015, decreased by 1.093 million tonnes from that declared in December 2014. This was mainly due to trenching and drilling that disproved the presence of LG chromitite seams west of portion 1 of Vlakpoort on surface, despite surface boreholes proving the existence of underground LG Mineral Resources. A revised exploration programme will be designed to locate LG open pit Mineral Resources on portion 4. The combined Stellite, Mecklenburg and Vlakpoort Mineral Reserves1 declared as at 31 December 2015, decreased from that declared in December 2014, by 0.77 million tonnes mainly due to depletion as stated before and the Cr2O3 grade decreased by 0.01% to 36.78% Cr2O3 and the Cr to Fe ratio remained on 1.43. The exploration results were severely affected due to trenching and drilling that encountered the Bushveld Gap between the Amandelbult and Union Sectors further east than estimated in 2014. This eliminated all the seams over a strike length of 900 meters. MINERAL RESOURCE AND MINERAL RESERVE1 STATEMENT FOR GMS FOR THE AFARAK GROUP IN SOUTHERN-AFRICA AS AT 31 DECEMBER 2015. Mineral Reserves1 (ROM Feed numbers) Mineral Resources (Geological Losses Applied) Tonnage (kt) 2E+Au (g/t) Ozs Tonnage (kt) 2E+Au (g/t) Ozs PROVED: Stellite; Underground MG4 MG3 MG1 LG6 MEASURED: Stellite; Underground MG4 MG3 MG1 LG6 Stellite; Open Pit Stellite; Open Pit MG4 MG3 MG2 MG1 LG6+6A MG4 MG3 MG2 MG1 LG6+6A 46 Vlakpoort; Open Pit Vlakpoort; Open Pit LG1-3 LG5 LG6+6A MG1-4 UG1-MR LG1-3 LG5 LG6 MG1-4 159 1.40 7,158 UG1-UG2 Vlakpoort; Underground Vlakpoort; Underground LG6 UG2 MR LG6 UG2 MR 3,050 1,720 2,250 3,191 28 221 110 60 39 32 42 151 131 205 398 754 618 1.18 1.86 0.79 0.63 1.14 1.46 1.62 0.71 0.49 0.18 0.74 0.46 1.13 1.77 0.43 4.04 2.15 115,723 102,868 57,154 64,641 1,026 10,375 5,730 1,370 614 185 999 2,233 4,760 11,667 5,503 97,947 42,723 Total Proved 159 1.97 7,158 Total Measured 13,000 1.26 525,521 PROBABLE: Stellite; Underground INDICATED: Stellite; Underground MG4 MG3 MG1 LG6 MG4 MG3 MG1 LG6 Stellite; Open Pit Stellite; Open Pit MG4 MG3 MG2 MG1 LG6+6A MG4 MG3 MG2 MG1 LG6+6A Vlakpoort; Open Pit Vlakpoort; Open Pit LG1-3 LG5 LG6+6A MG1-4 UG1-MR LG1-3 LG5 LG6 MG1-4 9 0.19 55 UG1-UG2 3,020 2,141 1,810 3,220 583 690 260 130 70 53 10 64 75 24 1.24 1.86 0.80 0.54 1.18 1.59 1.66 0.74 0.48 0.22 0.66 0.40 0.85 0.31 120,412 128,047 46,559 55,910 22,120 35,277 13,878 3,093 1,080 375 212 823 2,050 239 Vlakpoort; Underground Vlakpoort; Underground LG6 UG2 MR Total Probable Proved & Probable Reserves 9 168 1.97 7,213 LG6 UG2 MR 793 421 208 0.43 4.45 2.96 10,964 60,240 19,797 55 Total Indicated 13,572 1.19 521,076 Measured & Indicated Resources INDICATE D: Stellite Tailings LG6-MG4 Stellite; Underground MG4 MG3 MG1 LG6 Stellite; Open Pit MG4 MG3 MG2 MG1 LG6+6A Vlakpoort; Open Pit LG1-3 LG5 LG6 MG1-4 UG1-UG2 Vlakpoort; Underground LG6 UG2 MR Inferred Resources Total Resources (Excl Exploration Results2) Exploration Results2 Vlakpoort; Underground LG6 UG2 MR 26,572 1.22 1,046,597 47 683 1.37 30,087 200 20 190 860 1,970 1,240 310 140 490 41 1 119 1,321 115 1.59 1.86 0.78 0.48 1.27 1.51 0.76 0.63 0.47 0.23 0.42 1.00 0.42 4.78 10,225 1,196 4,765 13,273 80,447 60,206 7,576 2,836 7,405 303 - 14 3,826 17,840 17,675 - 7,700 1.04 257,675 34,272 1.18 1,304,272 1,243 0.41 16,387 - - Total Reserves 168 1.97 7,213 48 Vlakpoort; Open Pit LG1 LG2 LG3 UG2 LG5 LG6 MG1 MG2 MG3 MG4+4A UG1 MR Exploration Results2 Total (Incl Exploration Results2) 10 7 33 365 20 5 264 0.30 0.17 0.27 0.42 0.85 1.67 0.87 96 38 286 - - 4,929 547 - 268 7,385 1,947 0.48 29,938 36,219 1.15 1,334,209 • Mineral Reserves1 used in SAMREC and IMMM Codes whereas termed Ore Reserves in the JORC Code • Exploration Target Mineralisation2 used in JORC Code whereas termed Exploration Results in the SAMREC Code. The potential quantity and grade is conceptual in nature and there has been insufficient exploration to define Mineral Resources and it is uncertain if further exploration will result in the determination of a Mineral Resource. • The PGM rights at Mecklenburg do not belong to Afarak and therefore do not satisfy all requirements for reporting. • No Mineral Reserves could be declared for Stellite yet as the feasibility study to extract PGMs, are still in progress. The Measured and Indicated Mineral Resources for Stellite declared as at 31 December 2015, decreased from that declared in December 2014 due to depletion in the MG4 open pit. The Measured and Indicated Mineral Resources for Vlakpoort declared as at 31 December 2015, decreased from that declared in December 2014. Trenching and drilling encountered the Bushveld Gap between the Amandelbult and Union Sectors further east than estimated in 2014 which resulted in a 0.458 million tonnes decrease. The combined Stellite and Vlakpoort Mineral Resources declared as at 31 December 2015, decreased from that declared in December 2014, by 1.872 million tonnes and the PGM grade decreased by 0.18g/t. Vlakpoort contributed 1.699 million tonnes to the total decrease due to exploration results mentioned before. The information in this statement that relates to Exploration Results and Mineral Resources is based on information compiled by Hermanus Berhardus Swart, a Competent Person who is a Professional Natural Scientist registered with South African Council for Natural Scientific Professions accredited (No. 400101/00) and a Member of the Geological Society of South Africa, each of which is a “Recognised Professional Organisation” (RPO) that is included in a list that is posted on the ASX website from time to time. The Competent Person is employed by Dunrose Trading 186 (PTY) Ltd trading as Shango Solutions, which provides services as geological consultants. The Competent Person has sufficient experience which is relevant to the style of mineralisation and types of deposits under consideration, and to the activity which has been undertaken, to qualify as a Competent Person as defined by the 2012 edition of the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC), the 2001 Code for reporting of Mineral Exploration Results, Mineral Resources and Mineral Reserves in the United Kingdom, Ireland and Europe (IMMM) as well as the 2007 edition of the South African Code for Reporting of Exploration Results, Mineral Resources and Mineral Reserves (SAMREC). The Competent Person consents to the inclusion of the matters based on his information in the form and context in which it appears. 49 H.B. SWART PR.SCI.NAT MGSSA Principal Geologist – Shango Solutions TMS RESOURCES AND RESERVES Ore (kt) Cr2O3 (%) 2,336.46 7-23% - 398.52 2,734.98 1,500.00 193.36 - 155.90 295.26 193.10 101.96 - 235.97 337.93 257.17 6.00 - 24.00 30.00 40.00 30.00 - 20.00 50.00 150.00 - - 7-23% 7-23% 14-34% - 14-34% 14-34% 14-34% 8-28% - 8-28% 8-28% 8-28% 12-14% - 12-14% 12-14% 12-14% 36-44% - 36-44% 36-44% 36-44% 3,395.18 - 4-13% - Ore Deposit KAVAK CONCESSIONS Proven Probable Possible Total reserves Hypothetical resources 50 BEYAGAC CONCESSIONS Proven Probable Possible Total reserves Hypothetical resources FETHIYE & KOYCEGIZ CONCESSIONS Proven Probable Possible Total reserves Hypothetical resources ADANA CONCESSIONS Proven Probable Possible Total reserves Hypothetical resources EAGLE CONCESSION Proven Probable Possible Total reserves Hypothetical resources KAVAK TAILINGS DAM Proven Probable Possible Total reserves TAVAS TAILINGS DAM Proven Probable Possible Total reserves Grand total reserves Total hypothetical resources TAHIR ACAR Geology Engineer Chamber of Geology Engineers Registration Nr. 14239 - 3,395.18 - 4-13% 560.56 9-11% - - - - 560.56 9-11% 51 7,403.91 2,140.27 A 52 F A R A K G R O U P GOVERNANCE REVIEW A F A R A K G R O U P 3 CHAIRMAN’S INTRODUCTION 54 A F A R A K G R O U P Dr Alfredo Parodi CHAIRMAN Dear Shareholders, 2015 was a record year for Afarak. Despite the very challenging economic and market environment, Afarak has managed to register very positive results. Throughout 2015, Afarak strengthened its operations and we should all be proud of this achievement. The Board has made significant progress in corporate governance oversight, the strategic orientation of the company and deepening the sustainability agenda. The Board ----------------------------------- Following the election of the new Board in May 2015, we set out to implement an ambitious agenda focused at strengthening the policies and procedures of Afarak. The new Board brought to the table an extensive skill-set and together with the new management team our combined efforts are already showing results. We also appointed a new CEO, Dr Alistair Ruiters who replaced Dr Danko Koncar. Dr Koncar, who held the position of CEO since 2013, was appointed to Business Development Director. In addition to these changes, the management team was strengthened through new appointments. Soon after its election, the Board held a two- day induction and corporate governance work- shop. A review of the mandates of all the sub- committees, company policies and procedures and subsidiary boards was initiated during 2015. The Board also continued to keep abreast of changes to corporate governance reporting requirements under our two jurisdictions; 55 Finland and the United Kingdom. We remain and will lower production costs once fully committed to strengthening both the implemented. Although R&D projects are governance framework and the reporting administered separately by each operation, structures within Afarak. Afarak’s Board is committed to continuous investment in R&D. Committees ----------------------------------- In 2015, the Board set-up a new Board committee tasked to work with the existing management- Community Development ----------------------------------- The Group continues to make positive led HSS team, to oversee our work on health, contributions to the local communities in which it safety and sustainable development. Being a operates. Afarak’s current community programs people-centered organization, we are committed in South Africa are primarily focused on children. to offer a healthy and safe environment for all Apart from financing feeding schemes and our stakeholders, both internal and external, education projects, we have also invested in to work in an empowering environment. The community infrastructure. We are privileged to two Committees are working together at the be in a position to make a difference in peoples’ operational and strategic level to ensure that our lives and will continue to honour its corporate ‘Zero Harm’ policy is implemented throughout social responsibility. our operations. The Audit and Risk Management Committee reviewed all main policies throughout Looking ahead, the Board is set on guiding the year, in particular those relating to risk Afarak in these challenging times. Building on our assessment and mitigation. Looking forward, positive performance in 2015, I am optimistic that this Committee is now focused on reviewing reporting frameworks and accountabilities within the team at Afarak will continue to deliver results. the organization. During 2015, the Nomination and Remuneration Committee took a broader Dr Alfredo Parodi Chairman remit and started a review of the company’s HR function and relationships. Research & Development ----------------------------------- The Board is determined to continue implementing research and development projects within Afarak. R&D projects will contribute significantly to the Group’s future growth and sustainability through the introduction of new technologies and production processes. Our latest investment in shaking tables technology will result in tangible gains in productivity BOARD OF DIRECTORS REPORT 56 In 2015, the Board of Directors was focused on The Nomination and Remuneration Committee improving the ogranisational structure of Afarak broadened its remit to look at the HR function of and its subsidiaries. The transformation that Afarak the Group. It embarked on a streamlining exercise was embarking upon was a collective effort and all between employment grades and categories of parties were focused on transforming Afarak into a the Group and its subsidiaries. It also continued resilient speciality alloy producer even in the face with its work to build and foster relationships of tough market conditions. The Board ----------------------------------- The new Board that was elected in May, was with key employment stakeholders in the various countries of operation and continued monitoring the employment policy of the Group. immersed into a deep and thorough corporate The Audit and Risk Management Committee review of Afarak and of all its subsidiaries. In continued with its exercise to monitor the risks August, the Board held its first extended Board faced by the Group and to follow measures taken strategy meeting. The focus of the meeting was to to reduce and mitigate such risks. A more detailed understand and define the commercial strategy of risk assessment is presented in this report. In the Group together with management. This process addition, a detailed review of internal policies also included an in-depth review of the role and was adopted. The Board wants to strengthen the contribution of the subsidiaries. The Board is relationships and processes between Group level determined to ensure that our products, processes, and its subsidiaries. To this end, a review of internal safety and customers, both at a Group level and management and meeting practices together for each subsidiary, are aligned. Given the new with an internal information and communication direction of the Group, we are particularly focused on both technology and market insight. review was started by the Committee. Reporting frameworks are also being reviewed with the aim of further strengthening them in the near future. The ongoing strategic orientation of the Group is now a constant part of the Boards’ work The newly-established Health Safety and programme. In December 2015, we started Sustainable Development Committee is solely focusing on a single-channel marketing strategy focused on ensuring that our operations do not of the company. We reviewed the structure, brand constitute any harm to our stakeholders. We are and performance of RCS, our trading company, focusing on reducing injuries during operations and and in line with our rebranding efforts, the Board it is worth noting that only 0.1% of hours worked decided to change its name to Afarak Trading. were lost due to injury. Various Protocols were Committees ----------------------------------- Today, the Board has three committees which implemented throughout 2015. In addition, the Board was focused on reducing its environmental impact emanating from its operations. Afarak focus on particular areas and which are key drivers of change and improvements. respects the environment in which it operates and aims to manage its operations in a sustainable 57 way, minimising its footprint as much as possible speciality ferroalloy prod ucts, Afarak believes it to preserve the environment. As an example, in can mitigate some of this risk by using its strong Turkey, TMS does not use chemical reagents in its customer interface and market intelligence to production process. In addition, at Tavas operation adjust its production volumes to match demand the Group conducted a research program with and adapt its diverse product mix to meet an aim to recycle into the production unit the customer requirements. fines resulting from past years’operation. This project has been approved and will result in a Afarak has mining operations and projects in substantial reduction of fines stock pile as well as Turkey and South Africa where political and social in a reduction of the cost of production.In South risks remain a challenge. Changes in the mining, Africa, the Group has a number of initiatives in employment and fiscal regulatory environment place to address its impact on the environment. At may materially adversely affect Afarak’s business EWW the Group is investing substantial amounts and its financial results. Operations may be into R&D to reduce the amount of waste from its affected to varying degrees by government production processes and the aim is to achieve regulations with respect to matters including, but 100% recycling of all materials.Both of Afarak’s not limited to: export controls; currency remittance; processing plants, EWW and Mogale Alloy, hold a income taxes; expropriation of property; foreign ISO 9001 certification for adopting the very best in investment; maintenance of claims; environmental quality systems and emphasises our commitment legislation; land use; land claims of local people at Group level to continuously improve and build and water use. Afarak seeks to maintain good excellence into every process of its integrated relationships through direct, regular engagement management systems. Investments ----------------------------------- The Board is always keen to invest in either and communication with government at local, regional and national levels, the relevant regulatory departments, its local communities, the unions, its BEE partners, as well as other stakeholders. Social technologies or through mergers and acquisitions risk is also a key challenge in the mining sector. to further strengthen the company. The current Industry or social unrest and labour actions may investment programme is focused on the shaking materially adversely affect Afarak’s business and tables project. The shaking table technology its financial results by temporarily closing down will allow the Group to treat the tailing dump for operations. In the occurrence of such event Afarak chrome and increase Stellite mine’s total plant mass seeks to resolve the matters with all stakeholders yield to 65% from a current level of 49% leading to to reduce the impact on it operation. a reduction in operating cost per ton.This will also allow the firm to recycle third party mining waste Afarak’s strategy is focused on acquisitive and further reducing the environmental impact of organic growth. Subject to market conditions, the mining activity. In addition, the Group is following Group expects to continue to expand its business a number of investment projects throughout its through acquisitions. There can be no assurance subsidiaries. In Turkey, the fines tailing processing that the Group will be able to identify suitable plant investment is ongoing and will be finalised throughout 2016. The Board is following a number acquisition targets, obtain the necessary financing to fund such acquisitions or acquire acquisition of projects it might consider acquiring. targets on satisfactory terms. If an acquisition Risk Management ----------------------------------- Afarak’s business is cyclical in nature and a has been successful, there are a number of risks involved in integrating the acquisition into the Group, including but not limited to: a failure to retain significant strategic risk is the Afarak’s exposure key personnel, difficulties in integrating the acquired to price and demand volatility in the commodities operations in the Group’s structure, risks arising markets as well as the steel and stainless steel from the change of control provisions in contracts of industries. The global market for Group’s products an acquired company, risk the acquisition may not may not progress or develop at the levels forecast become profitable and possible adverse effects on and a drop in demand for the Group’s products the Group’s financial results. could have an adverse effect on the Group’s revenues and profits. As a vertically integrated As part of the organic growth strategy, the Group producer who sells a diverse range of products, from raw chrome ore through to premium, has recently completed the shaking table plant at the Stellite mine. The shaking table technology will increase the mine’s total plant mass yield and safety in the workplace. It has conducted significantly, leading to a decrease in the operating baseline assessment risks at all of its operations, cost per ton. There is a risk that the new plant will has developed a comprehensive set of health and not perform as expected and the Group will not safety guidelines, policies and procedures and has achieve the desired future operating cash flows a programme of regular, continuous employee from this investment. training. This is all overseen at the highest level in the Group by the Board of Directors. The future organic growth strategy of the Group is changing and the idea of producing niche Afarak’s processing operations in Germany and products is taking over that of producing larger South Africa are intensive users of energy, primarily volumes. Furthermore, the Group is also trying to electricity. Fuel and energy prices globally increase its Resources and Reserves by acquiring have been characterised by volatility coupled new mines or expanding its current operations. with general cost inflation in excess of broader There is a risk that Afarak might not be able to find measures of inflation. In South Africa the majority the appropriate site, or to obtain the necessary of the electricity supply, price and availability 58 licences to develop and operate them or to secure are all controlled by one entity, namely Eskom. the required financing, either through financial Increased electricity prices and/or reduced or institutions or through strategic partnerships. If all unreliable electricity supply or allocation may or some of these risks materialise it would hinder negatively impact Afarak’s current operations, the implementation of this part of the Group’s particularly its processing plants, which could have growth strategy. a consequent effect on the Group’s operating and financial results. It may also impact the Group’s Afarak operates in a highly competitive industry plans to expand its operations and implement its and is dependent on the technical skill and growth strategy. management expertise of a small number of key personnel. The loss of key personnel or the Afarak’s processing plants are vulnerable to engagement of inappropriate personnel could have interruptions such as power cuts, particularly an adverse effect on Afarak’s ability to operate where these events cause a stoppage, which some of its operations, particularly its processing necessitates a shutdown in operations. Stoppages plants, which could impact the Group’s operating in smelting, even for only a few hours, can cause and financial results. Afarak’s future success will the contents of furnaces to solidify, resulting depend on its ability to attract and retain suitably in a plant closure for a significant period and skilled and qualified personnel. It regularly re- expensive repairs. To mitigate this risk Afarak assesses its remuneration policies and packages, employs experienced operating managers and has based on Remuneration Committee guidelines, standard operating procedures in place for most to ensure they are attractively competitive and foreseeable circumstances. reviews its succession plans. Due to the nature of its business, Afarak has a There is always the risk of a severe mining and/ or smelting accident at Afarak’s operations, such large, potential exposure to environmental risks. Environmental risks relate first to direct potential as adverse mining conditions, fire, flooding, rock harm to the environment, and second to potential bursts, unusual weather conditions, seismic events, post-production rehabilitation or landscaping other natural phenomena and other conditions obligations. Both these types of environmental resulting from drilling, blasting and the removal and risks are managed closely and regularly assessed. processing of material associated with underground Afarak has appointed external experts to assist in and/or opencast mining, which could have a identifying potential liabilities and ensuring that the serious impact on the Group. This could affect different entities within the Group are compliant both employees’ physical wellbeing and morale, with the relevant environmental legislation. The as well as the operations themselves, resulting Group regularly assesses the need to conduct in suspension of operations until the accident studies regarding the environmental liabilities. has been fully investigated and appropriate In the recent reviews done in our South African measures taken to prevent a re-occurrence. To operations Afarak concluded that the provisions in mitigate this risk as much as possible, Afarak has adopted a policy of Zero Harm towards health the accounts are sufficient at current level. Afarak is exposed to litigation risk in various part can influence the repayment of loans, impact the of it business cycle. Legal disputes may relate to profitability of investments or alter the fair value of the contractual or other liabilities or environmental or Group’s assets. other regulatory matters. The Group policy is to publish all significant legal cases and their outcomes. Credit risks are realised when the counterparties in commercial, financial or other agreements cannot Liquidity risks involve whether Afarak has enough take care of their obligations and cause a negative liquidity to service and finance its operations and financial impact to the Group. Afarak’s key pay back loans. If liquidity risks materialised, it customers are typically long business relationships may cause overdue interest expenses and could and include major international steel and stainless negatively impact the Group’s relationship with its steel companies and some specialty agents selling goods and service suppliers as well as affect the to the steel sector. As these customers are sector pricing and other terms for input goods and services. specific, major changes in that industry’s future outlook or profitability could also increase the Afarak is an international business and has Group’s credit risk. operations in Turkey, Germany, Malta and South Africa so the Group has significant foreign Afarak is exposed to price risks on various output exchange rate exposure. The risks arise from both and input products, materials and commodities. direct risk, such as commercial cash flows and The price risks on input materials and commodities currency positions as well as indirect risk, such as are managed by pricing contracts so that, where changes in the Group’s competitiveness as a result possible, any changes in input materials and of its foreign exchange rateexposures compared to commodities may be absorbed in the sales prices. its competitors. The Group’s processing operations are exposed to the availability, quality and price fluctuations in Afarak is exposed to interest rate risks where the raw materials. To diminish these risks, the Group’s Group’s subsidiaries enter into loans or other financing business units seek long-term contract agreements agreements or make deposits and investments related with known counterparties where possible. to liquidity management. Changes in interest rates 59 A F G A R R O U A P K INFORMATION PRESENTED BY REFERENCE 60 The Group’s key financial figures, related party The Corporate Governance Statement and the disclosures, information on share capital and Remuneration Report are presented as separate option rights are presented in the notes to reports in this Annual Report. the consolidated financial statements. The share ownership of the parent company’s For the purposes of United Kingdom Listing Board members and Chief Executive Officer is Authority listing rules (“LR”) 9.8.4C R, the presented in the notes to the parent company’s information required to be disclosed by LR 9.8.4 R financial statements. can be found in the following locations:- Sector Topic Location 1 2 4 5 6 7 8 9 Interest capitalised 1.7. Notes to the statement of financial position, 10. Property, plant & equipment Publication of unaudited financial information Not applicable Detals of long-term incentive schemes 1.7. Notes to the statement of financial position, 19. Share-based payments Waiver of emoluments by a director Not applicable Waiver of future emoluments by a director Not applicable Non pre-emptive issues of equity for cash Not applicable Item (7) in relation to major subsidiary undertakings Parent participation in a placing by a listed subsidiary Not applicable Not applicable 10 Contracts of significance 1.7. Notes to the statement of financial position, 1.8.2 Related party transaction 11 12 13 14 Provision of services by a controlling shareholder Not applicable Shareholder waivers of dividends Not applicable Shareholder waivers of future dividends Not applicable Agreements with controlling shareholders Not applicable All the information cross-referenced above is hereby incorporated by reference into this Board of Directors report. OUR PEOPLE THE BOARD OF DIRECTORS A F A R A K G R O U P CHAIRMAN A F A R A K G R O U P Dr Alfredo Parodi Chairman, Independent Non-Executive Director. Ph.D in Chemical Engineering. Born 1940. Dr Parodi has been working as a technical consultant for ferrochrome and chrome-chemical productions. He has numerous years of engineering and managerial experience and has served in a number of positions in the petrochemical and alloys industries. He was responsible for production, technical organisation and plant construction in several international companies such as SIR & Saras Chemical (Italy), Stoppani Engineering (Italy), Dirox (Uruguay), Vanetta Sarasota (USA) and Anxian Sichnan (China). Dr Parodi is the Chairman of the Health & Safety Committee of the Company. EXECUTIVE DIRECTORS A F A R A G R O U P K Dr Alistair Ruiters Executive Director & CEO. BA Hons in Economic History, Ph.D in Sociology. Born 1964. Dr Ruiters served as a public servant in the new South African Democratic Government from 1994 to 2005. He has held a numerous senior positions in Government including the Commissioner of the Competition Commission and the Director General of the Department of Trade and Industry. After leaving the public sector, Dr Ruiters started his own business and in addition has served on numerous Boards. He started his career in Afarak in October 2009 when he as appointed as a consultant. He joined on a full time basis in 2010 and May 2015 he was appointed as CEO. He holds degrees from the University of Cape Town and a Doctorate from Oxford University. A F A R A K G R O U P Michael Lillja Executive Director. M.Sc in Economics. Born 1962. Michael Lillja is currently member of the Executive Management Team and is Marketing Director at Afarak. Prior to joining Afarak, Mr. Lillja has served for decades in several different positions in the mining and metals industry, the oil & gas sector, and in international trade for companies such as, Alloy 2000 SA/ENRC -Kazakhstan, International Ferro Metals Ltd, and SamChrome Ltd/Samancor Cr. DEPENDENT NON- EXECUTIVE DIRECTOR A F A R A K G R O U P Dr Jelena Manojlovic Dependent Non-Executive Director. Ph.D in Medicine, Clin. D. in Psychology, MA in Psychotherapy. Born 1950. Jelena Manojlovic has been a member of the Board since 11 July 2008, and has acted as Chairperson of the Board since 16 June 2009 till 8 May 2015. She is also the Chairperson of the Remuneration and Nomination Committee. She is an established university lecturer and organizational consultant and has 35 years’ experience in the human resources field and 20 years’ in management positions in a diverse range of organisations, including the UK’s National Health Service, universities and other companies. She was previously Human Resources Director of Kermas Limited (a major shareholder in the Company). Manojlovic is independent of the Company but through a controlled entity of her husband Danko Koncar, she is dependent on a major shareholder of the Company. INDEPENDENT NON- EXECUTIVE DIRECTORS A F A R A K G R O U P Mr Markku Kankaala Independent Non-Executive Director. B.Sc. in Engineering. Born 1963. Markku Kankaala has been a member of the Board since 30 June 2003. He is also a member of the Audit and Risk Management and Nomination and Remuneration Committees. He was also the CEO of the Group from 2003 to 2004 and worked as an Executive Director in Ruukki Group Plc (currently, Afarak Group Plc) until 31 August 2006. Mr Kankaala is a co- founder of Ruukki Group back in 1993 and since then he worked for 10 years as an entrepreneur and Managing Director of the Group. Before the era of Ruukki he worked in different positions in Ahlström and Rautaruukki. A F A R A G R O U P K Ivan Jakovčić Independent Non-Executive Director. BA in Foreign Trade Faculty. Born 1957. Ivan Jakovčić is a Croatian politician and a member of the European Parliament where he is in the Committee on Regional Development, Committee on Agriculture and Rural Development and the Committee of the Regions of the European Union. Prior to joining the European Parliament Mr Jakovčić has held numerous political positions in Croatia where he has been a member of the Croatian Parliament, the President of the Istrian Democratic Assembly and served as Minister of European Integration. A F A R A K G R O U P Barry Rourke Independent Non-Executive Director. FCA. Born 1950. Barry Rourke was a member of the Afarak Board, the Chairman of the Audit Committee and a member of the Remuneration Committee from April 2010 to February 2013. Previously, he was an Audit Partner at PWC’s for 17 years from 1984 to 2001 where he specialised in the Oil and Gas and Mining sectors. He currently holds a number of non- executive directorships and positions on the audit committees in other listed companies. OUR PEOPLE LEADERSHIP TEAM A F A R A K G R O U P K A R A F A P U O R G THE EXECUTIVE MANAGEMENT TEAM The Group’s Executive Management Team (EMT) assists the Group CEO in effectively accomplishing his duties. The EMT is an advisory body which was set up by the Board of Directors in November 2009. It has neither authority, based on laws or the Articles of Association, nor any independent decision-making rights. Decisions on matters discussed by the EMT are taken by the CEO, the EMT member responsible for the matter in question or the Group’s Board of Directors, as appropriate. A F A R A G R O U P K Dr Alistair Ruiters CEO BA Hons in Economic History, Ph.D in Sociology A F A R A G R O U P K Michael Lillja Marketing Director M.Sc in Economics A F A R A K G R O U P Dr Danko Koncar Business Development Director. Diploma, M.Sc. & Ph.D. in Engineering. Born 1942. Dr Danko Koncar was appointed as a member of the Board at the Extraordinary General Meeting on 11 August 2010 and as the CEO on 11 February 2013. He was also the Acting Managing Director of the Company between October 2010 and April 2011. He has extensive experience in minerals processing and trading, including more than 20 years in ferrochrome processing with more than 10 years of experience in application of direct current technology to ferrochrome processing. He has served as Chairman of Samancor Chrome and General Director of RCS Limited and is still General Director of Kermas. A F A R A K G R O U P THE CORPORATE MANAGEMENT TEAM The Company’s Corporate Management includes, in addition to the Executive Management Team, the following personnel responsible for corporate functions: A F A R A K G R O U P A F A R A K G R O U P Melvin Grima Finance Director FCCA, MIA, CPA. Born 1982. Melvin Grima joined Afarak in 2013 as Group Finance Manager. He was responsible of the relocation of the Group’s corporate finance function to Malta and its setup. He was promoted to Finance Director in 2015. Prior to joining Afarak, he held a number of management positions including Group Accountant of a hotel Group and Finance Manager of a Group trading in the petroleum industry. Julia Simonsson General Counsel. Master of Laws (LL.M.). Born 1975. Julia Simonsson joined Afarak in September 2015 as General Counsel. Mrs Simonsson is a German lawyer with prior experience as General Counsel for an international multi-disciplinary Group. GOVERNANCE STRUCTURE A F A R A K G R O U P 68 Governance Structure ----------------------------------- The management and control of Afarak Group plc of the financial year. Pursuant to the Company’s Articles of Association, the convening notice for a and its subsidiaries (Group) is divided between General Meeting will be published on the Group’s the shareholders, the Board of Directors (Board), website and in a stock exchange release no earlier supported by the Board’s audit & risk management than two months, and no later than 21 days, prior committee; nomination & remuneration committee, to the General Meeting or nine days prior to the health safety & sustainable development record date of the General Meeting. committee; and the Chief Executive Officer. General Meeting ----------------------------------- Afarak’s ultimate decision-making body is the The notice of a General Meeting, the proposals for resolutions, and the documents to be submitted to the General Meeting, such as the financial shareholders’ General Meeting which convenes once a year and is held within six months of the end statements, the annual report and the auditor’s report, will be available on the Group’s website 69 and at the Group’s office in Helsinki at least three publishes the details of how and when to submit weeks before the meeting. The resolutions passed the requests to the Board on its website. by the General Meeting will be published as a stock exchange release without undue delay and will be The Company uses the Annual General Meeting available on the Group’s website, along with the to develop an understanding of the views of its minutes of the General Meeting, no later than two shareholders about the Company. weeks after the meeting. Shareholders have the right to add items falling if the Board of Directors deems it necessary or if the within the scope of the Annual General Meeting auditor of the Company or the shareholders owning to the meeting’s agenda. The request must be at least 10 percent of the shares demand one in submitted to the Board of Directors in advance so that the item can be included to the notice. Afarak writing in order to deal with a specific matter, or if it is required by law or other regulations. An Extraordinary General Meeting can be convened The most significant items on the Annual General Meeting’s agenda include: • Approving the year’s financial statements; • Determining the number of directors on the • Confirming the financial year’s profit or loss, the dividend distribution or other distribution, such as capital redemption; Board of Directors, their remuneration and electing those directors to the Board; and • Electing the auditor or auditors and approving their fees. In addition, certain significant matters (such as Resolutions by a General Meeting usually require a amending the Articles of Association or deciding simple majority. Certain resolutions, however, such on a capital increase) require a resolution by the as amending the Articles of Association and directed shareholders in a General Meeting. share issues require a qualified majority represented by shares, and the votes conferred by the shares, at the General Meetings are organised in a manner that General Meeting. 70 permits shareholders to exercise their ownership rights effectively. A shareholder wishing to exercise The majority of the Board members, if not all, attend his or her ownership rights shall register for a General General Meetings together with the CEO and the Meeting in the manner stated in the notice of meeting. auditor. In addition, if a person is proposed f or election All the shareholders who have been registered in as a director for the first time, he or she will also attend the Company’s shareholder register, maintained the General Meeting. by Euroclear Finland Ltd, on the record date of the meeting have the right to attend a General Meeting, provided they have delivered a proper notice to attend General Meetings in 2015 ----------------------------------- The Annual General Meeting was held on 8 May the meeting. Holders of nominee registered shares may 2015 at Restaurant Palace in Helsinki, Finland. All be registered temporarily on the shareholder register, the resolutions of the above-mentioned General and they are advised to request further instructions Meeting can be found at: http://www.afarak.com/en/ from their custodian bank regarding the temporary investors/shareholder-meetings/2015/ registration and issuing of a proxy document. THE BOARD OF DIRECTORS Tasks & Responsibilities ----------------------------------- The Board of Directors is composed of between The Board of Directors oversees the administration of the Group and is responsible three and nine members who are elected by for the internal control of its assets, finances and the General Meeting of shareholders, which also approves their remuneration. The tenure of each Board member is for one year and expires at the end of the next annual General Meeting immediately following their election. The Board elects a chairman from among its members. None of the non-executive directors has a accounts on behalf of shareholders. Its specific responsibilities include: Formulating the Group’s business strategy and overseeing its implementation; » Deciding on the Group’s capital structure; » Making decisions on significant investments, divestments, credits and collaterals, guarantees and service contract with the Company and none of the directors has waived or agreed to waive any emoluments from the Company or any other commitments; » Approving the quarterly interim reports, the Board of Directors Report, the annual financial results subsidiary undertaking. The duties of a Board member are specified in the Finnish Companies Act. The Afarak Board also has a written charter governing its functions. and future forecasts and/or outlook; » Deciding on the Group’s organisational structure; » Appointing the CEO and approving his or her service agreement and remuneration; » And convening and submitting proposals to the shareholders’ General Meeting. Key elements of the Board’s charter and evaluates the operations and working methods operations are: of each committee and the Board. The evaluation » It convenes on prearranged dates, with a view is conducted as internal self-evaluation. The to meeting approximately once a month, or more Board is also regularly in contact with the major often if necessary. Meetings can be arranged as shareholders of the Company to ensure that the conference calls; » Matters to be dealt with by the Board are presented by the Chairman, the CEO or another Board is aware of their views. The 2015 Annual General Meeting elected seven person who has participated directly in assessing members to the Board: Dr Alfredo Parodi, Dr Jelena and preparing the issue for consideration; » It aims to make unanimous decisions; » It prepares an annual plan for its operation; and » It acts at all times in the interest of the Group and all of its shareholders. Manojlovic, Mr Michael Lillja, Mr Markku Kankaala were re-elected and Mr Barry Rourke, Mr Ivan Jakovčić and Dr Alistair Ruiters were newly elected. Board Independence ----------------------------------- The Finnish Corporate Governance Code requires The Board oversees all communications and that the majority of the directors are independent other requirements stipulated by the rules of the of the Company. In addition, at least two of the relevant stock exchanges and financial supervision directors representing this majority must be 71 authorities and conducts regular self -assessments independent of the significant shareholders of the to ensure these requirements continue to be Company. The Company believes that Mr Barry fulfilled. The Group has established specific targets Rourke, Mr Ivan Jakovčić, Mr Markku Kankaala for the development of its administrative functions and Dr Alfredo Parodi are independent of the and processes, and continues to implement these. Company and significant shareholders and Dr Jelena Manojlovic is independent of the Company. The Board also evaluates and decides on The Board has named Mr Barry Rourke as the senior acquisitions and disposals of subsidiaries and independent non-executive director. associated companies. To ensure the efficiency of board and committee work, the Board regularly Members of Current Appointed to the the Board Position Board Audit & Risk Nomination & Health Status Management Remuneration & Safety Committee Committee Committee Alfredo Parodi Chairman 11 February 2013 Independent - Chair Jelena Manojlovic Barry Rourke Ivan Jakovčić NED NED NED 11 July 2008 Dependent Chair 8 May 2015 Independent Chair - 8 May 2015 Independent Member Member Member - - Michael Lillja Executive 11 February 2013 Executive - - Member Markku Kankaala NED 30 June 2003 Independent Member Member Member Alistair Ruiters Executive 8 May 2015 Executive Danko Koncar n/a Bernice Smart n/a 11 August 2010 - 8 May 2015 11 February 2013 - 8 May 2015 (Executive) - - - - (Independent) (Chair) (Member) - - - - - THE BOARD IN 2015 72 The new Board of Directors made it a priority during their term to review various elements Company performance ----------------------------------- As part of the focus to improve the company’s relating to the operation and corporate governance performance, it was decided to strengthen the of Afarak. A review of the main discussions and oversight of subsidiaries as well as reporting decision is presented below. frameworks. Given the exchange rate volatility it was Corporate Governance ----------------------------------- Strengthening the corporate governance structure also decided to close off foreign exchange positions in order to minimize the exchange rate risk. of Afarak was selected as a priority area for the A total of 17 meetings of the Board were held new Board. To this end, a review of the corporate during the reporting period and the attendance of reporting structure was undertaken whilst a review the directors is tabled below. of the corporate structures was initiated. This is an ongoing process and work in this area is underway. In tandem, a review of internal policies and procedures was also initiated by the Board. Review of policies & procedures ----------------------- A thorough review of internal policies and procedures was initiated. Although the review is holistic in its nature, special focus was directed towards the human resources element where a review of employment scales, positions and wages was undertaken. A review of the Group’s insurance was also undertaken by the Board together with the setting up of a Health Safety & Environment Committee which started to focus on the Group’s health and safety policies. An exercise focusing on subsidiary meetings, corporate level meetings and information requirements was initiated. A decision Meetings Attended Alfredo Parodi Jelena Manojlovic Markku Kankaala Michael Lillja Barry Rourke Alistair Ruiters Ivan Jakovčić Danko Koncar Bernice Smart 17/17 17/17 17/17 16/17 10/10 10/10 9/10 7/7 7/7 A total of 17 meetings were held during the reporting period. The differences in the meetings attended relate to the changes in the Board composition. Remuneration ----------------------------------- The Annual General Meeting held on 8 May 2015 was taken to kick-start a re-branding exercise so approved that the Chairman of the Board and that all subsidiary companies will carry the Afarak the Chairman of the Audit and Risk Management brand. This is an ongoing process and will continue Committee shall be paid EUR 4,500 per month and well into 2016. Share performance ----------------------------------- The Board implemented a decision taken by the AGM to move the London listing from primary all Board Members are paid EUR 3,500 per month. Non-executive Board Members who serve on the Board’s Committees shall be paid additional EUR 1,500 per month for the committee work. to standard. Discussion on how to continue Those members of the Board of Directors that improving the share performance of the are executives of the Company are not entitled Company and various meetings were held with to receive any remuneration for the Board or stakeholders in order to draw a road-map for Committee memberships. improving liquidity and share performance. It was decided that a greater emphasis should be placed on investors relations with the aim of having road shows targeting a number of institutional investors. This process is currently underway, in parallel with the re-branding organisation. During the financial year 2015, the Board members received a total of EUR 285,967 in Board and Committee membership fees. BOARD COMMITTEES Audit and Risk Management Committee ----------------------------------- The Audit and Risk Management Committee Nomination and Remuneration Committee ----------------------------------- The combined Nomination and Remuneration currently has three members: Mr Barry Rourke Committee of the Company currently has three (committee chairman), Mr Markku Kankaala and Mr members: Dr Jelena Manojlovic (committee Ivan Jakovčić. chairperson), Mr Markku Kankaala and Ivan Jakovčić. The Board has defined the committee’s duties The Committee leads the process for making in accordance with the recommendations of the appointments to the Board and the executive Finnish and the UK Corporate Governance Codes. management and submits recommendations to The Audit and Risk Management Committee the Board in this regard. The Committee also leads reviews the auditors’ work and monitors the the process relating to the remuneration of the Group’s financial position and the appropriateness executive management and the Board, and makes of its financial reporting. The committee evaluates recommendations to the Board and to the General 73 internal audit and risk management, maintaining Meeting in relation to the Board’s remuneration. contact with auditors and evaluating their reports. The Committee’s duty is to ensure that Afarak’s The committee reports regularly to the Board. goal to have a diverse Board in every aspect, including in respect of gender, is implemented. In 2015, the Audit and Risk Management Committee evaluated and monitored the During 2015, the Committee took a broad review development of internal controls and risk of the company’s HR function. It reviewed management policies. The Group had no policies and procedures in this regard focusing permanent internal auditor during the years, on HR relationships across the Group. A although operational management commissioned streamlining exercise of employment grades and local specialists to conduct internal audit reviews categories was initiated. within several business units as part of their local assurance process. The Board has received assurance from a number of sources, including a Board review of the Group’s overall strategy Health Safety and Sustainable Development Committee ----------------------------------- The Health and Safety Committee of the Company and management processes, which has exercised currently has three members: Dr Alfredo Parodi substantial supervision over the local operations. (committee chairman), Mr Markku Kankaala, Mr Michael Lillja. Dr Stefano Bonati acts as a All significant Group companies are audited by the consultant to the Committee. Company’s auditor in order to ensure a consistent approach and to facilitate communication between The Committee was set-up in 2015 with the stated the auditors and the Committee. mission to ensure Afarak conduct its business in a responsible and ethical manner for the benefit The Committee has focused on improving of all its stakeholders. The Committee’s priority management information flow to the Board and was to focus on its ‘Zero Harm’ policy and to this on the identification and management of the main end, the Committee worked together with the risks facing the Group. The risks are discussed in CEO to establish a Health Safety and Environment the Board of Directors’ Report. These priorities Committee with the task of generating, implementing continued to form the core of the committee’s and maintaining a common global culture about business during 2015, along with the regular safety, health, environment and communities. The scrutiny of the Group’s compliance with laws, Committee also continued to monitor Afarak’s regulations and best practice. investment in environmental initiatives and projects. CORPORATE GOVERNANCE STATEMENT Afarak Group Plc (“Afarak”, the “Company” or Listing, Disclosure and Transparency Rules, the the “Group”) is a Finnish public limited company NASDAQ Helsinki Stock Exchange and the London listed on the NASDAQ Helsinki Stock Exchange Stock Exchange. As Afarak primarily follows the (AFAGR) and the Main Market of the London Stock Finnish Corporate Governance Code, certain Exchange (AFRK). sections of the UK Corporate Governance Code issued in September 2012 (“UK CG”) are not strictly Afarak’s corporate governance is based on, and complied with. However, in the areas that the complies with, the laws of Finland, the Articles of Company diverges from the UK CG the Company Association of the Company, the Finnish Corporate believes that its policies are acceptable for the Governance Code and the regulations of the reasons which are set out below. 74 Finnish Financial Supervisory Authority, the UK UK CG Section Description The Reason for Non-Compliance C.3.8 E.2.1 A separate section of the annual report should describe the work of the Audit committee in discharging its responsibilities While this report includes a description of the work of the audit and risk management committee, the contents requirements of this section under the UK GC are not the same as those under the Finnish CG and, therefore some information required under the UK GC may not be included. For each resolution, proxy appointment forms should provide shareholders with the option to direct their proxy to vote either for or against the resolution or to withhold their vote. The Company’s AGM is arranged in accordance with the Finnish Companies Act so certain procedural and other matters differ from the UK CG recommendation. The Company does not provide proxy voting forms. E.2.2 Miscellaneous general meeting procedures The Company’s AGM is arranged in accordance with the Finnish Companies Act so certain procedural and other matters may differ from the UK CG recommendation. Afarak’s foreign subsidiaries operate under the Code which can be found on the Securities Market local laws and regulations of the countries in which Association’s website at www.cgfinland.fi. Afarak they are located, including but not limited to local has made no exceptions in its Finnish Corporate accounting and tax legislation as well as exchange Governance Code compliance. controls. This Corporate Governance Statement for the financial period 1 January to 31 December 2015 is issued as a separate report to the Board of Directors’ Report and is available on the Group’s website at www.afarak.com. It has been prepared pursuant to the Finnish Corporate Governance Code 2010 and the guideline of the Securities Market Association dated 1 December 2010. Afarak complies with the Finnish Corporate Governance INTERNAL CONTROL 75 The principles of internal control are confirmed Internal control refers to elements of financial by the Board. The Group’s EMT members are in and operational management which are designed charge of the day-to-day business management and administrative control in their respective responsibility areas. Main Principles of Risk Management & Internal Control ----------------------------------- The purpose of risk management is to identify, evaluate and mitigate the potential risks that could impact the Group’s business and the implementation of its strategy, and to ensure that risks are proportional to the Group’s risk-bearing capacity. The Group’s risk management policy is approved by the Board of Directors and defines the objectives, approaches and areas of responsibility of risk management activities. The Group’s key risks are reviewed and assessed by the Board on a regular basis. The Group’s business segments, and the business units within those segments, are primarily responsible for managing their risks, their financial performance and their compliance with the Group’s risk management policies and internal control procedures. The Board of Directors is responsible for organising and maintaining adequate and effective internal control performed by the senior and executive management as well as other Afarak personnel, and assisted by third-party experts when appropriate. to ensure: » Achievement of defined performance targets; » Efficient use of resources and protection of assets; » Effective management of risks; » Accurate, timely and continuous delivery of financial and operational information; » Full compliance with laws and regulations as well as internal policies; and » Business continuity through secure systems and stable operating prodecures. The Structure of Internal Control Systems ----------------------------------- The main structural elements of the Group’s internal control system are: » The risk management and internal control policies and principles defined by the Board; » Implementation of the policies and principles under the surveillance of Group management; » Supervision of the efficiency and functionality of the business operations ny Group management; » Supervision of the quality and compliance of the financial reporting by the Group finance department; » An effective control environment within all organisational levels and business units, including tailored controls for each business process; and » Internal audits conducted as and when needed. The Board of Directors decides on the Group’s management system and the corporate and organisational structure required by each business The Internal Control of the Financial Reporting Process ----------------------------------- The Group’s financial organisation is structured so that each business unit has its own finance unit with a view to providing solid foundations function, but overall financial management for effective internal control. Internal control and including accounting, taxation and financing is risk management related to financial reporting at centralised within the Group’s parent company. the Group level are performed in a coordinated way by a function independent of the business The Group finance department is responsible for areas. Each subsidiary’s executive management ensuring the compliance, quality and timeliness is responsible for the implementation of internal of the Group’s external and internal financial control and risk management to the agreed Group reporting. The internal control mechanisms principles and guidelines. are based on the policies, procedures and authorisations established and approved by the The system of internal control provides reasonable Board. In addition to control mechanisms, training rather than absolute assurance that Afarak’s and sharing of knowledge are also significant tools business objectives will be achieved within the risk tolerance levels defined by the Board. of internal control. Each business unit has its own finance function which reports to the Group Finance. The business Group Management ----------------------------------- The Group’s management is in charge of the day- unit’s finance function is responsible for the to-day management of the Group in accordance unit’s accounting and daily financial operations with the instructions and orders given by the and internal reporting. The finance function Board. It sets the framework of the internal control and administration is overseen by the unit’s environment and is in charge of the Group’s management team and reports to the head of the risk management process and its continuous business unit’s segment. development. This includes allocation of resources The tasks of the Group Finance consist, among management policies, as well as defining the other things, of monthly consolidation of the Group’s principles of operation and overall processes. to the work and continuous review of the risk accounts, preparation of the quarterly interim reports and consolidated financial statements, financing of the Group, and tax planning. External Audit ----------------------------------- According to the Articles of Association, the Annual General Meeting of shareholders elects the 76 Consolidated financial statements are prepared by Company’s auditor, which must be a firm authorised using consolidation software. The accounting of the by the Finnish Central Chamber of Commerce; Company’s subsidiaries is carried out by accounting otherwise the Company will have one main auditor systems and the accountants within each subsidiary and one deputy auditor. The auditor’s term is for enter the accounting information directly into the one year and finishes at the end of the first General consolidation system, or in some cases send the Meeting following election. information in a predefined format to the Group’s financial administration to be consolidated. On Afarak’s General Meeting elected Authorised Roles and Responsibilities Regarding Risk Management and Internal Control Board of Directors ----------------------------------- The Board of Directors is ultimately responsible Public Accountant Ernst & Young Oy (“EY”) as auditor, with Authorised Public Accountant Erkka Talvinko having the principal responsibility. EY is also the local auditor of all of the Group companies. In 2015 the Company paid EUR 365,000 (412,000) for the administration and the proper organisation for audit fees and EUR 29,000 for non-audit of the Group’s operations and approves all services (20,000) to EY. internal control, risk management and corporate governance policies. The Board establishes the risk- taking level and risk-bearing capacity of the Group and reassess them on a regular basis as part of the Group’s strategy and goal-setting process. The Board reports to the shareholders of the Company. Audit and Risk Management Committee ----------------------------------- The Audit and Risk Management Committee is responsible for the following internal control related activities: » Monitoring the reporting process of the financial statements; » Supervising the financial reporting process; » Monitoring the efficiency of the Group’s internal control, internal audit and risk management systems; and » Monitoring the statutory audit of the financial statements and consolidated financial statements. stable operating prodecures. INSIDER ADMINISTRATION The Company complies with the legal provisions applying to the management of insiders, the Guidelines for Insiders issued by the NASDAQ Helsinki Company-specific Insider Register ----------------------------------- In addition to the public insider register, the Stock Exchange and the stipulations and guidelines of Company holds a company-specific insider register the Finnish Financial Supervision Authority. of persons who regularly receive information Public Insider Register ----------------------------------- The Company’s permanent public insiders that can have material impact on the value of its securities. These persons include all Afarak Group Plc employees, corporate management and comprise the Board members, the CEO, the subsidiary and other third-party service providers Executive Management Team and the auditors. who regularly obtain insider information. All permanent public insiders and the statutory information about them, their related parties When necessary, the Company sets up a separate and the entities controlled by them or in which project-specific insider register. Project-specific they exercise influence, have been entered into insiders are those who, in connection with the the Company’s public insider register which is insider project receive information that might have published on the Group’s website. material impact on the value of the Company’s shares. The establishment of a project is decided Afarak imposes a restriction on trading for insiders by the Board or the CEO. 77 which forbids trading in the Company’s shares for 30 days before the publication of financial reports. Prior to the preliminary announcement of the Company’s annual results and the publication of its annual financial report the closed period is 60 days or, if shorter, the period from the end of the relevant financial year up to and including the time of the announcement. Shareholdings of the Public Insiders at 31 December 2015 Members of the Board Title Shares Related Party Shares Options Jelena Manojlovic Chairman 150,000 0 Markku Kankaala Non-executive Director 7,066,116 24,500 Michael Lillja Executive Director 0 Alfredo Parodi Chairman 22,600 Alistair Ruiters Executive Director 400,000 Ivan Jakovčić Non-executive Director 0 Barry Rourke Non-executive Director 150,000 Auditors Erkka Talvinko Other Insiders Danko Koncar Auditor Executive 0 0 0 0 200,000 0 600,000 0 0 0 71 0 0 0 0 0 70,459,254 800,000 RESOLUTIONS OF THE ANNUAL GENERAL MEETING The Company’s Annual General Meeting (“AGM”) and other special rights that entitle to shares was held on 8 May 2015. The AGM adopted in one or more tranches up to a maximum of the financial statements. The AGM resolved in 25,000,000 new shares or shares owned by the accordance with the proposal of the Board of Company. This equates to approximately 9.6% Directors a capital redemption of EUR 0.02 per of the Company’s currently registered shares. share for the year ended on 31 December 2014. The The authorisation may be used among other capital redemption was paid on 20 May 2015. things in financing, enabling corporate and business acquisitions or other arrangements The AGM resolved that the Chairman of the and investments of business activities and in the Board and the Chairman of the Audit and Risk employee incentive and commitment programs. 78 Management Committee would be paid EUR 4,500 By virtue of the authorisation, the Board of per month and the ordinary Board Members would Directors can decide both on share issues be paid EUR 3,500 per month. Furthermore, the against payment and on share issues without non-executive Board Members who serve on the payment. The payment of the subscription price Board’s Committees shall be paid an additional can also be made with consideration other than EUR 1,500 per month for the committee work. money. The authorisation contains the right to Those members of the Board of Directors that are decide on derogating from shareholders’ pre- executives of the Group are not entitled to receive emptive right to share subscriptions provided any remuneration for Board membership. that the conditions set in the Companies’ Act are fulfilled. The authorisation replaces all previous The AGM resolved that the Board of Directors authorisations and is valid 2 years from the comprises of seven members. Mr Michael Lillja, Mr decision of the Annual General Meeting. Markku Kankaala, Dr Jelena Manojlovic and Dr Alfredo Parodi were re-elected to the Board. Mr Barry Rourke, The AGM authorised the Board of Directors to Dr Alistair Ruiters and Mr Ivan Jakovčić were elected. resolve upon acquiring a maximum of 15,000,000 The Board appointed from among its members the of the Company’s own shares. The authorisation following members to the Committees: replaces all previous authorisations and it is valid Audit Committee Barry Rourke (Chairman), Markku Kankaala, Ivan Jakovčić for 18 months from the decision of the Annual General Meeting. The AGM resolved to approve the proposed transfer of the Company’s equity share listing on the Official List of the United Kingdom Listing Authority The Nomination and Remuneration Committee Jelena Manojlovic (Chairperson), (‘’UKLA’’) and on the Main Market of the London Stock Exchange plc from the Premium listing Markku Kankaala, Ivan Jakovčić Health, Safety and Environment Committee Alfredo Parodi (Chairman), Michael Lillja, Markku Kankaala The AGM resolved that authorised public accountant firm Ernst & Young Oy was re-elected as the Auditor of the Group for the year 2015. (commercial company) segment to the Standard listing (shares) segment as described in detail in the circular to shareholders dated 16 April 2015. 2016 Annual General Meeting ----------------------------------- Afarak’s 2016 Annual General Meeting will be held on 11 May 2016 at the Palace Restaurant, Helsinki. Dividend Payout Proposal ----------------------------------- The Board of Directors will propose a new dividend policy to the Annual General Meeting, which will be The AGM resolved to authorise the Board of Directors to issue shares and stock options held on 11 May 2016. The Group will in future review it distributions to shareholders either through a capital redemption or dividend twice yearly at the with shareholders. In line with this new policy the time of full year and the half year announcements. Board will be recommending a EUR 0.02 per share This new policy will allow the Board to take distribution where EUR 0.01 will be paid in May 2016 prudent decisions based on market conditions and subject to market conditions a further EUR 0.01 whilst continuing to share its positive results will be paid in August 2016. ADDITIONAL INFORMATION Ligitation ----------------------------------- Further to the announcement of 27 March 2014, the share price was EUR 0.40 and GBP 0.33 respectively. During 2015 the Company’s share whereby Afarak announced that the Group had been price on NASDAQ Helsinki ranged from EUR served a notice of arbitration by Chinese Suzhou 0.33 to EUR 0.67 per share and the market 79 Kaiyuan Chemical Co. Ltd (“Suzhou”), on 14 July capitalisation, as at 31 December 2015, was EUR 2015, Afarak announced that the claim by Suzhou 105.7 (1 January 2015: 83.1) million. For the same was withdrawn. Suzhou’s claim of EUR 2.66 million had related to a chrome ore sales agreement entered period on the London Stock Exchange the share price range was GBP 0.25 to GBP 0.33 per share into by Chromex Mining Plc (“Chromex”) prior to and the market capitalisation, as at 31 December the acquisition of Chromex by Afarak together in a 2015 was GBP 85.5 (1 January 2015: 65.5) million. joint venture with Kermas Limited and was served on Afarak’s marketing arm Afarak Trading Limited Based on the resolution at the AGM on 8 May (previously known as RCS Limited) and various 2015, the Board is authorised to buy-back up to companies which form part of the Chromex joint a maximum of 15,000,000 of its own shares. This venture. As a result of the withdrawal the arbitration authorisation is valid until 8 November 2016. The tribunal dismissed the claim and ordered Suzhou to Company did not carry out any share buy-backs pay the full arbitration cost. during 2015. Share Information ----------------------------------- Afarak Group Plc’s shares are listed on NASDAQ Flagging Notifications ----------------------------------- On 30 April 2015, Afarak announced that as a Helsinki (AFAGR) and on the Main Market of the result of a transaction that occurred between London Stock Exchange (AFRK). two controlled corporations of Dr Danko Koncar, Kermas Limited and Kermas Resources Limited, On 31 December 2015, the registered number Kermas Limited has decreased below the threshold of Afarak Group Plc shares was 263,040,695 of 5% and Kermas Resources Limited has increased (259,562,434) and the share capital was EUR 23,642,049.59 (23,642,049.59). above the threshold of 25%. However, the total combined beneficial ownership of Dr Danko Koncar remains unchanged. On 31 December 2015, the Company had 4,244,717 (4,244,717) own shares in treasury, which was On 2 January 2015, Afarak announced that as a equivalent to 1.61% (1.64%) of the issued share result of a transaction that occurred between Ms capital. The total amount of shares outstanding, Aida Djakov and her controller corporation Atkey excluding the treasury shares held by the Limited (“Atkey”), Ms Aida Djakov has personally Company on 31 December 2015, was 258,795,978 decreased below the threshold of 5% and Atkey (255,317,717). has increased above the threshold of 25%. However, the total combined ownership of Ms Aida At the beginning of the period under review, Djakov and Atkey remained unchanged. the Company’s share price was EUR 0.33 on NASDAQ Helsinki and GBP 0.25 on the London Stock Exchange. At the end of the review period, REMUNERATION REPORT 80 This report sets out the remuneration policy The members of the committee in 2015 were Dr and practices for Afarak’s Board and Executive Jelena Manojlovic (Chairman), Mr Markku Kankaala Management Team (“EMT”), and provides details of and Mr Ivan Jakovcic. their remuneration and share interests for the year ended 31 December 2015. Remuneration Policy ----------------------------------- Afarak operates in a very competitive sector where CEO Service Agreement ----------------------------------- The Board appoints the Chief Executive Officer (CEO), who manages, develops, guides and supervises the Group’s activities and leads the EMT. there is a shortage of highly qualified, experienced The Board decides upon the CEO’s remuneration executives. The Group’s remuneration policy is based on the recommendations made by the designed to attract, retain and incentivise high- Remuneration Committee. calibre executives to implement its business strategy and enhance shareholder value. The CEO receives an annual salary of EUR The policy seeks to align the interests of the Shares as an incentive for each completed year of business and shareholders by rewarding executives service acting as the Chief Executive Officer, the appropriately for achieving individual and group first 500,000 Company shares shall be received on targets and thereby ensuring long-term value 22 May 2016 and the second 500,000 shares shall creation for the benefit of all the shareholders. be received on 22 May 2017 if he is still acting as 360,000. He shall also receive 500,000 Company CEO at that time. Nomination and Remuneration Committee ----------------------------------- The Nomination and Remuneration Committee makes The Group makes no pension arrangements for the CEO beyond the statutory pension coverage, and recommendations to the Board regarding executive there is no set retirement age. CEO’s agreement is a remuneration, and submits proposals to the Annual definite agreement for 2 years until 30th June 2017. General Meeting of shareholders regarding the Board’s remuneration. The committee is responsible for the overall direction of Non-Executive Directors’ Service Contracts ----------------------------------- The remuneration of members of the Board of the remuneration policy, as well as determining, within Directors is agreed at the Company’s General agreed terms of reference, the specific remuneration Meetings. Directors’ remuneration consists of packages of the EMT. This includes pension rights, monthly fixed fees. The Annual General Meeting executive incentive schemes and any compensation held on 8 May 2014 approved that all Board payments. To ensure that the Group’s remuneration Members are paid EUR 3,500 per month and packages are both appropriate and competitive, the the Chairman of the Board and the Chairman of committee evaluates information on market-based remuneration levels for comparable companies. the Audit and Risk Committee are paid 4,500 per month. The non-executive Board Members who serve on the Board’s Committees shall be As some of the Board members have also had paid additional EUR 1,500 per month for the executive management roles, both the Board fees committee work. and the salaries in relation to the executive role have been presented below. Those members of the Board of Directors that are executives of the company are not entitled to receive any remuneration for the Board or Committee memberships. EUR ‘000 2015 2014 Salaries Fees Share- based remuneration Salaries Fees Share- based remuneration Kankaala Markku Koncar Danko Lillja Michael CEO 11.2.2013 – 20.5.2015, Board member 11.8.2010 – 7.5.2015 Board member 11.2.2013 onwards Board member 86 120 Manojlovic 11.7.2008 onwards, Jelena Parodi Afredo Smart Bernice Alistair Ruiters Rourke Barry Ivan Jakovcic Total Chairperson 17.6.2009 - 7.5.2015 Board member 11.2.2013 onwards. Chairman 8.5.2015 onwards Board member 11.2.2013 – 7.5.2015 Board member 8.5.2015 onwards, CEO 21.5.2015 onwards Board member 8.5.2015 onwards Board member 8.5.2015 onwards 81 58 58 66 19 54 0 0 240 120 0 54 0 54 54 242 183 47 39 0 448 287 183 360 216 0 Other EMT Members’ Service Contracts ----------------------------------- As Afarak operates within a highly competitive There are no early retirement options in the EMT’s employment contracts, and the notice period and/ or non-compete period is normally six months, environment, its performance depends on the unless agreed otherwise. individual contributions of the executive directors and other senior employees. The remuneration The table includes the Executive Management packages are designed to attract, motivate and Team remuneration excluding the CEO. The CEO retain executives to manage the Group’s operations and Board members compensation has been effectively and to reward them for enhancing presented separately. shareholder value. The EMT remuneration package is a combination of received any compensation for serving as a NED a base salary and long-term share-based incentives. in other companies. None of Afarak’s executive directors have Fringe benefits include liability insurance, traveller’s insurance and mobile phones. 82 Management remuneration EUR ‘000 Short-term employee benefits Post-employment benefits Termination benefits Share-based payments Total 2015 258 0 0 0 258 2014 185 0 0 42 227 Share-based Compensation The share subscription period for 1,450,000 share options commenced on 1 October 2009 and on 1 Share Options ----------------------------------- The Company has three incentive-related option October 2010 for the remaining 1,450,000 options. The subscription period matured on 31 December schemes, known as I/2005, I/2008 and I/2011. 2015, and the maximum number of 2,900,000 options has been issued. Option rights relating to the I/2005 scheme are granted to the EMT and other key employees and Option rights relating to the I/2011 scheme are to non-executive directors, as recommended by granted to the key personnel of the Company, as the Board. The scheme entitles option holders recommended by the Board. The scheme entitles to subscribe for a maximum of 2,700,000 shares the option holders to subscribe for a maximum in the Company. The share subscription period is from 1 July 2007 to 30 June 2015 for various of 6,900,000 shares in the Company. To date, the total of 6,291,997 options have been issued. options series denoted with different letters, and The vesting period is 1 July 2014 to 1 August 2017 the subscription price range is EUR 0.32 – 0.82 for various option series denoted with different (with dividend and capital redemption adjustment). letters and years. The share subscription price To date, options on A, B, C, D, E and F series of is calculated by a formula based on the Volume the I/2005 scheme have been issued totalling Weighted Average Price of the Company’s share 1,175,000 option rights. and varies between the option series. Option rights relating to the I/2008 scheme were In May 2015 the Group has granted the CEO, granted to the Company’s previous CEO, Alwyn Alistair Ruiters 1,000,000 shares in the Company. Smit, in October 2008. The scheme entitled These will be awarded in two tranches and vested the option holder to subscribe for a maximum based on completed year of service. The first of 2,900,000 shares in the Company for a 500,000 Company shares shall be received once subscription price of EUR 2.18 per share (with dividend and capital redemption adjustment). the first vesting period has lapsed, on 22 May 2016. The second 500,000 Company shares shall be received by the employee on 22 May 2017. These shares have a lock-up period of two years form subscription date. The fair value of the granted shares is determined based on the market price of Afarak Group share at the grant date which was EUR 0.40 per share. The value at year end was EUR 182,870.24 Directors’ and EMT members’ Shareholdings and Options at 31 December 2015 Members of the Board Title Shares Related Party Shares Options Jelena Manojlovic Chairman 150,000 0 Markku Kankaala Non-executive Director 7,066,116 24,500 Michael Lillja Executive Director 0 Alfredo Parodi Chairman 22,600 Alistair Ruiters Executive Director 400,000 Ivan Jakovčić Non-executive Director 0 Barry Rourke Non-executive Director 150,000 Auditors Erkka Talvinko Other Insiders Danko Koncar Auditor Executive 0 0 83 0 0 200,000 0 600,000 0 0 0 71 0 0 0 0 0 70,459,254 800,000 K P A U R O A R G F A A F A R A K G R O U P FINANCIAL STATEMENTS A F G A R R O U A P K 4 KEY FIGURES FINANCIAL INDICATORS Continuing Operations 2015 2014 2013 Revenue EBITDA % of revenue EUR’000 EUR’000 Operating profit / loss (EBIT) EUR’000 % of revenue Profit / loss before taxes EUR’000 86 % of revenue Return in equity Return on capital employed Equity ratio Gearing % % % % Personnel at the end of the accounting period 187,711 17,190 9.2% 9,888 5.3% 6,521 3.5% 4.4% 9.3% 64.2% -2.6% 773 172,669 8,447 4.9% 1,725 1.0% 460 0.3% 1.2% 3.1% 62.8% -0.7% 698 135,509 14,090 10.4% -7,984 -5.9% -11,130 -8.2% -2.2% 0.0% 68.5% -6.4% 779 KEY FIGURES SHARE-RELATED KEY INDICATORS 2013 Continuing Operations -0.02 -0.02 0.74 87 2015 2014 Group Continuing Operations Group Continuing Operations 0.00 0.00 0.69 Earnings per share, basic Earnings per share, diluted Equity per share EUR EUR EUR 0.03 0.03 0.65 0.03 0.03 0.65 Distribution* EUR’000 2,588 Distribution per share* Price to earnings EUR EUR 0.01 11.7 Average number of shares 1000 256,652 Average number of shares, diluted Number of shares at the end of the period 1000 1000 259,849 263,040 Share price information (NASDAQ Helsinki) Average share price Lowest share price Highest share price EUR EUR EUR 0.44 0.33 0.67 Market capitalisation EUR’000 105,742 Share turnover EUR’000 16,936 Share turnover % 14.5% Share price information (London Stock Exchange) Average share price Lowest share price Highest share price Market capitalisation Share turnover Share turnover EUR GBP EUR GBP EUR GBP EUR’000 GBP’000 EUR’000 GBP’000 % 0.45 0.33 0.34 0.25 0.45 0.33 116,479 85,488 6 4 0.0% 0.01 0.01 0.69 5,106 0.02 27.9 249,280 253,077 259,562 0.32 0.21 0.42 83,060 6,638 8.1% 0.37 0.30 0.30 0.24 0.39 0.32 84,144 65,540 9 7 0.0% Group -0.02 -0.02 0.74 4,884 0.02 neg. 244,135 248,532 248,432 0.40 0.30 0.48 79,498 1,826 1.8% 0.43 0.37 0.35 0.30 0.47 0.40 89,396 74,530 19 16 0.0% * In 2014 and 2015 the Company distributed a capital redemption of EUR 0.02 per share out of the paid-up unrestricted equity fund. In 2016 the Board will propose to the AGM a new dividend policy and will recommend a EUR 0.02 per share distribution where EUR 0.01 per share will be paid in May 2016 and subject to market conditions a further EUR 0.01 will be paid in August 2016. KEY FIGURES FORMULAS FOR CALCULATION OF INDICATORS Financial indicators Return on equity Profit for the period / Total equity (average for the period) * 100 Return on capital employed 88 Equity ratio Gearing EBITDA (Profit before taxes + financing expenses) / (Total assets – Interest-free liabilities) average * 100 Total equity / (Total assets - prepayments received) * 100 (Interest-bearing debt - liquid funds) / Total equity * 100 Operating profit + depreciation + amortisation + impairment losses Operating profit is the net of revenue plus other operating income, plus gain/loss on finished goods inventory change, minus employee benefits expense, minus depreciation, amortisation and Operating profit / loss impairment and minus other operating expense. Foreign exchange gains or losses are included in operating profit when generated from ordinary activities. Exchange gains or losses related to financing activities are recognised as financial income or expense. Share-related key indicators Earnings per share, basic Earnings per share, diluted Equity per share Profit attributable to owners of the parent company / Average number of shares during the period Profit attributable to owners of the parent company / Average number of shares during the period, diluted Equity attributable to owners of the parent / Average number of shares during the period Distribution / Number of shares at the end of the period. In the attached table of share related key indicators, the dividend and Distribution per share capital redemptions are presented in that year’s column on which Price to earnings Average share price Market capitalisation results the pay-out are based; hence the actual payment takes place during next year. Share price at the end of the period / Earnings per share Total value of shares traded in currency / Number of shares traded during the period Number of shares * Share price at the end of the period CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT AND STATEMENT OF COMPREHENSIVE INCOME EUR '000 Revenue Other operating income Materials and supplies Employee benefits expense Depreciation and amortisation Other operating expenses Impairment, net Loss on disposal on investment in associate Share of profit from associates Share of profit from joint ventures Operating profit Finance Income Finance Cost Profit before taxes Income taxes Profit for the year from continuing operations Discontinued operations Profit for the year from discontinued operations Profit for the year Profit attributable to: Owners of the parent Non-controlling interests Earnings per share (counted from profit attributable to owners of the parent): basic (EUR), Group total diluted (EUR), Group total basic (EUR), continuing operations diluted (EUR), continuing operations Note 1.1.- 31.12.2015 1.1 - 31.12.2014 1 2 3 4 5 4 12 12 13 6 6 7 8 9 187,711 172,669 2,331 -142,349 -17,836 -7,302 -11,928 0 -327 2 -414 9,888 7,906 -11,274 6,520 1,236 7,756 783 8,539 8,854 -315 8,539 0.03 0.03 0.03 0.03 3,370 -136,552 89 -16,123 -6,717 -11,612 -5 0 6 -3,311 1,725 4,166 -5,431 460 12 472 1,773 2,245 2,858 -613 2,245 0.01 0.01 0.00 0.00 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME EUR ‘000 Profit for the year 1.1.- 31.12.2015 1.1 - 31.12.2014 8,539 2,245 Other comprehensive income 90 Items that will not be reclassified to profit and loss Remeasurements of defined benefit pension plans 986 -4,036 Items that may be reclassified to profit and loss Exchange differences on translation of foreign operations - Group Exchange differences on translation of foreign operations – Associate and Joint Venture Income tax relating to other comprehensive income -18,844 -3,126 4,552 -5,198 -997 -964 Other comprehensive income, net of tax -16,432 -11,195 Total comprehensive income for the year -7,893 -8,950 Profit attributable to: Owners of the parent Non-controlling interests -6,790 -1,103 -7,893 -8,527 -423 -8,950 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF FINANCIAL POSITION EUR '000 ASSETS Non-current assets Property, plant and equipment Goodwill Other intangible assets Investments in associates Other financial assets Receivables Deferred tax assets Current assets Inventories Trade and other receivables Cash and cash equivalents Note 31.12.2015 31.12.2014 10 11 11 12 14 14 20 15 16 17 43,559 58,349 17,015 0 597 38,638 3,260 161,418 45,153 40,779 19,644 105,576 91 47,972 63,051 20,358 92 587 39,910 4,166 176,136 60,052 40,769 13,332 114,153 Total assets 266,994 290,289 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF FINANCIAL POSITION (CONT.) EUR '000 Note 31.12.2015 31.12.2014 EQUITY AND LIABILITIES Equity attributable to owners of the parent 6,520 460 Share capital 92 Share premium reserve Legal Reserve Paid-up unrestricted equity reserve Translation reserve Retained earnings Non-controlling interests Total equity Non-current liabilities Deferred tax liabilities Interest-bearing debt Share of joint ventures´ losses Non-current liabilities (cont.) Pension liabilities Other non-current debt Provisions Current liabilities Trade and other payables Provisions Tax liabilities Interest-bearing debt 18 20 14 13 22 23 21 23 21 23 14 23,642 25,740 187 240,240 -28,692 -93,755 167,362 3,845 171,207 5,949 2,977 23,218 18,734 1,969 9,309 62,156 15,364 99 6,036 12,132 33,631 23,642 25,740 210 243,424 -12,061 -103,657 177,298 4,947 182,245 8,200 6,263 19,580 19,954 42 10,137 64,176 31,974 77 5,951 5,866 43,868 Total liabilities 95,787 108,044 Total equity and liabilities 266,994 290,289 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS EUR ‘000 Operating activities Profit for the year Adjustments to net profit: Non-cash items Depreciation and impairment Finance income and cost Income from associates Income taxes Share-based payments Proceeds from non-current assets Working capital changes: Change in trade receivables and other receivables Change in inventories Change in trade payables and other debt Change in provisions Interest paid Interest received Other financing items Income taxes paid Discontinued operations Net cash from operating activities Investing activities Acquisitions of subsidiaries, net of cash acquired Capital expenditure on non-current assets, net Other investments, net Disposals of subsidiaries, net of cash sold Disposals of associated companies Repayments of loan receivables and loans given, net Net cash used in investing activities Financing activities Capital redemption Proceeds from borrowings Repayments of borrowings Repayments of finance leases Net cash used in / from financing activities 1.1.-31.12.2015 1.1.-31.12.2014 8,539 2,245 93 7,302 3,191 414 -1,236 103 -563 -5,525 12,234 -9,148 -145 -1,796 369 -218 -1,163 177 12,535 -201 -7,317 -239 212 109 3,517 -3,919 -5,106 8,728 -5,649 -71 -2,098 6,722 2,352 3,305 -12 154 -3,029 2,732 -13,298 7,140 -1,113 -1,240 782 -47 -478 -1,087 5,129 0 -14,347 1,785 -2 0 2,351 -10,213 -4,884 11,365 -1,801 -89 4,590 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS (CONT.) EUR ‘000 Change in cash and cash equivalents Cash at beginning of period 94 Exchange rate differences Cash at end of period Change in the statement of financial position 1.1.-31.12.2015 1.1.-31.12.2014 6,518 13,332 -206 19,644 6,518 -494 13,769 57 13,332 -494 The cash flow from operating activites in 2015 includes discontinued operations relating to cash received in December 2015 of Eur 560 thousand less the storage costs of the saw mill equipment of Eur 327 thousand and commissions of Eur 56 thousand. The cash flow from operating activites in 2014 includes discontinued operations relating to LP Kunnanharju cleaning cost of Eur 585 thousand and the storage cost of the Sawmill equipment of Eur 501 thousand. The first part of the Sawmill equipment was sold in December 2014, however the cash inflows were actually received in January 2015. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CHANGES IN EQUITY A = Share capital B = Share premium reserve C = Paid-up unrestricted equity reserve D = Translation reserve E = Retained earnings F = Legal reserve G = Equity attributable to owners of the parent, total H = Non-controlling interests I = Total equity ATTRIBUTABLE TO OWNERS OF THE PARENT 95 EUR ‘000 A B C D E F G H I Equity at 31.12.2013 23,642 25,740 242,725 -4,773 -102,574 201 184,961 5,367 190,328 Profit for the period 1-12/2014 Other comprehensive income Total comprehensive income Share-based payments Share Issue Capital redemption Acquisitions and disposals of subsidiaries Other changes in equity 2,858 -7,349 -4,036 2,858 -11,385 -613 190 2,245 -11,195 -7,349 -1,178 -8,527 -423 -8,950 5,583 -4,884 154 2 -61 61 154 5,583 -4,884 2 9 9 3 0 0 0 157 5,583 -4,884 2 9 Equity at 31.12.2014 23,642 25,740 243,424 -12,061 -103,657 210 177,298 4,947 182,245 Profit for the period 1-12/2015 Other comprehensive income Total comprehensive income Share-based payments Share Issue Capital redemption Acquisitions and disposals of subsidiaries Other changes in equity -16,631 8,854 986 8,854 -315 8,539 -15,645 -787 -16,432 -16,631 9,840 -6,791 -1,102 -7,893 183 1,739 -5,106 91 -29 274 1,739 -5,106 -29 -23 -23 0 0 0 0 0 274 1,739 -5,106 -29 -23 Equity at 31.12.2015 23,642 25,740 240,240 28,692 -93,755 187 167,362 3,845 171,207             1.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1.1 COMPANY INFORMATION Afarak Group is a chrome mining and minerals producer focused on delivering sustainable growth with a speciality alloys business in southern Europe and a ferro alloys business in southern Africa. The Group’s parent company is Afarak Group Plc (business ID: 0618181-8). The parent company is domiciled in Helsinki, and its registered address is Kasarmikatu 36, 00130 Helsinki, Finland. Copies of the consolidated financial statements are available at Afarak Group Plc’s head office or at the Company’s website: www.afarakgroup.com. Afarak Group Plc is quoted on the NASDAQ Helsinki Oy (trading code: AFAGR) in the industrials group, in the small-cap category, and on the main market of the London Stock Exchange (AFRK). 96 1.2 ACCOUNTING PRINCIPLES BASIS OF PREPARATION These consolidated financial statements of Afarak Group have been prepared in accordance with the International Financial Reporting Standards (IFRS) and in conformity with the IAS and IFRS standards as well as the SIC and IFRIC interpretations in force on 31 December 2015. In the Finnish Accounting Act and the regulations issued on the basis thereof, International Financial Reporting Standards refer to the standards and their interpretations that have been approved for application within the EU in accordance with the procedure prescribed in the EU regulation (EC) 1606/2002. Notes to the consolidated financial statements also meet the requirements set forth in the Finnish accounting and company legislation. The consolidated financial statements have been prepared on the historical cost basis, unless otherwise explicitly stated. All the figures in the consolidated financial statements are given in EUR thousands. Afarak Group Plc’s Board of Directors resolved on 31 March 2016 that these financial statements are to be published. According to the Finnish Companies Act, shareholders shall endorse the financial statements in the Annual General Meeting convening after the financial statements have been published. PRESENTATION OF FINANCIAL STATEMENTS The consolidated financial statements provide comparative information in respect of the previous period. In addition, the Group presents an additional statement of financial position at the beginning of the earliest period presented when there is: a retrospective application of an accounting policy; a retrospective restatement; or a reclassification of items in financial statements that has a material impact on the Group. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the parent company Afarak Group Plc, its subsidiaries, joint ventures and associated companies. Subsidiaries refer to companies controlled by the Group. The Group gains control of a company when it holds more than half of the voting rights or otherwise exercises control. The existence of potential voting rights has been taken into account in assessing the requirements for control in cases where the instruments entitling their holder to potential voting rights can be exercised at the time of assessment. Control refers to the right to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Acquired subsidiaries are consolidated from the time when the Group gained control, and divested subsidiaries until the time when control ceased. All intra-group transactions, receivables, debts, and unrealised profits, as well as internal distribution of profits, are eliminated when the consolidated financial statements are prepared. The distribution of profits between parent company owners and non-controlling owners is shown in the statement of comprehensive income, and the non-controlling interest of equity is shown as a separate item in the statement of financial position under shareholders’ equity. Afarak Group Plc has consolidated Elektrowerk Weisweiler GmbH to its financial statements since 1 November 2008 based on potential voting rights arising from a call option. Afarak exercised the call option on 10 May 2012 and acquired 100 % of the shares in Elektrowerk Weisweiler GmbH. The transaction has been treated as an adjustment to the cost of acquisition in accordance with the earlier IFRS 3 which was applied in 2008. The Group holds 51% of shares of Synergy Africa Ltd. However, the shareholders of Synergy Africa Ltd have entered into a joint venture agreement with joint control over the company. Therefore, the company and its subsidiaries are not consolidated into the Group as subsidiaries but as joint ventures. 97 Joint ventures are entities in which each venturer has an interest and there is a contractual arrangement establishing joint control over the economic activity of the entity. Afarak Group changed the accounting method in 2012 and the interests in joint ventures are now recognised using the equity method. The Group’s share of net assets or liabilities in the Joint venture is recorded on one line in the balance sheet. The Group’s share of net profit or loss of the Joint venture is also shown on one line in the income statement. Associates are companies in which Afarak Group exercises significant influence. The Group exercises significant influence if it holds more than 20% of the target company’s voting rights, or if the Group in other ways exercises significant influence but not control. Associates have been consolidated in the Group’s financial statements using the equity method. If the Group’s share of the associate’s losses exceeds the carrying amount of the investment, the investment is recognised at zero value on the statement of financial position, and losses exceeding the carrying amount are not consolidated unless the Group has made a commitment to fulfil the associates’ obligations. Investment in an associate includes the goodwill arising from its acquisition. TRANSLATION OF FOREIGN CURRENCY ITEMS Amounts indicating the profit or loss and financial position of Group entities are measured in the currency of each entity’s main operating environment (‘functional currency’). Figures in the consolidated financial statements are presented in euro, the functional and presentation currency of the Group’s parent company, Afarak Group Plc. Transactions in foreign currencies have been recorded at the functional currency using the exchange rate on the date of the transaction or mid reference rates of central banks. Monetary items denominated in foreign currencies have been translated into the functional currency using the exchange rates at the end of each reporting period. Exchange rate gains and losses are included in the revenue, operational costs or financial items, corresponding to their respective origin. Hedge accounting has not been applied. In the Group accounts, foreign subsidiaries’ income statements and statements of cash flows are converted into euro by using average exchange rates for the period, and the statement of financial position is converted by using the period-end exchange rate. The translation differences arising from this are recognised in other comprehensive income. Translation differences arising from the elimination of the acquisition cost and post- acquisition equity changes are also recognised in other comprehensive income. If and when the foreign subsidiary is partially or fully divested, these accrued translation differences will be taken into account in adjusting the sales gain or sales loss. Goodwill, other assets and liabilities arising from acquisitions of subsidiaries are recognised in the Group accounts using the functional currency of each acquired subsidiary. The balances in that functional currency have then been translated into euro using the exchange rates prevailing at the end of the reporting period. OPERATING PROFIT IAS 1 Presentation of financial statements does not define the concept of operating profit. Afarak Group has defined it as follows: Operating profit is the net amount derived by adding to revenue other operating income, less materials and supplies, and expenses from work performed by the enterprise and capitalised, less costs from employee benefits, depreciation and impairment losses, and other expenses. Shares of associated companies’and joint venture companies’ profit or loss are included in the operating profit to the extent to which they relate to the Group’s core businesses. Exchange differences arising from operational transactions with third parties are included in operating profit; otherwise they are recorded under financial items. All other items of the income statement are excluded from operating profit. 98 IAS 1 amendment introduced the requirement for grouping of items presented in Other Comprehensive Income. Items that are reclassified (or `recycled`) to profit or loss at a future point in time will be presented separately from items which will never be reclassified. The amendment affected the presentation of Other Comprehensive Income. REVENUE RECOGNITION Income from the sale of goods is recognised once the substantial risks and benefits associated with ownership have been transferred to the buyer. The transfer of risks depends on, among others, terms of delivery (Incoterms). The most often used term is FCA or FOB, under which the revenue is recognised when the goods are assigned to the buyer’s carrier or loaded on board the vessel nominated by the buyer. As typical in the business, preliminary invoices are issued for the mineral concentrates at the time of delivery. Final invoices are issued when quantity, mineral content and pricing have been defined for the delivery lot. Income not generated by the Group’s main businesses is accounted for as other operating income. The expenses incurred from disposals of non-current assets or a disposal group of assets are deducted from the gain on disposal. PENSION LIABILITIES Pension arrangements in Afarak Group are classified as defined contribution plans or defined benefit plans (Germany and Turkey). Payments for defined contribution plans are recognised as expenses for the relevant period. The present value of obligation for the defined benefit plans has been estimated applying the Projected Unit Credit Method and recognised as a non-current liability on the statement of financial position. The standard IAS 19 was revised and includes changes to the presentation and measurement of defined benefit plans as well as amendments to the accounting treatment of other employee benefits. The amendment has changed the determination of the applicable discount rate and also the possibility to apply the so called “corridor method” has been abolished. Consequently, actuarial gains and losses are recognised in other comprehensive income when they occur and the net defined benefit liability or asset are presented in full on the statement of financial position. SHARE-BASED PAYMENTS Option rights are measured at fair value at the time they were granted and recorded as expenses on a straight- line basis during the vesting period. The expenses at the time the options were granted are determined according to the Group’s estimate of the number of options expected to vest at the end of the vesting period. Fair value is determined on the basis of an applicable option pricing model (e.g. Black-Scholes). The effects of non-market- based terms and conditions are not included in the fair value of the option; instead, they are taken into account in the estimated number of options expected to vest at the end of the vesting period. The Group updates the estimated final number of options at the end of each reporting period. Changes in the estimates are recorded in the statement of comprehensive income. When the option rights are exercised, the cash payments received from the subscriptions adjusted with potential transaction costs are recorded under paid-up unrestricted equity reserve. The Group from time to time directs free issues of shares to the members of the Board of Directors or key executives, as approved by the AGM. The compensation is settled in shares and is accordingly recognised as share-based payment in the Group’s financial statements. The fair value of the granted shares is determined based on the market price of the Afarak Group share at the grant date. The total fair value is therefore the amount of granted shares multiplied by the share market price at grant date. The cost is recognised as expense in personnel costs over the vesting periods and credited to equity (retained earnings). BLACK ECONOMIC EMPOWERMENT (BEE) TRANSACTIONS The purpose of South African Black Economic Empowerment (BEE) regulation is to enable previously disadvantaged people meaningfully to participate in the South African economy. The Group is committed to making a positive contribution towards the objectives of BEE. Where the Group disposes of a portion of a South African based subsidiary or operation to a BEE company at a discount to fair value, the transaction is considered to be a share-based payment (in line with the principle contained in South Africa interpretation AC 503 Accounting for Black Economic Empowerment (BEE) Transactions). The discount provided or value given is calculated in accordance with IFRS 2 and recognised as an expense. Where the BEE transaction includes service conditions, the expense is recognised over the vesting period. Otherwise the expense is recognised immediately on the grant date. 99 LEASE AGREEMENTS (THE GROUP AS THE LESSEE) Leases of tangible assets where the Group possesses a material portion of the risks and benefits of ownership are classified as financial leases. An asset acquired through a financial lease agreement is recognised at the fair value of the leased object at the beginning of the lease period, or at a lower current value of minimum lease. An asset obtained through a finance lease is depreciated over the useful life of the asset or the lease term, whichever is shorter. The leases payable are divided into financial expenses and loan repayment during the lease term so that the interest rate for the remaining loan is roughly the same each financial year. Leasing obligations are included in interest-bearing liabilities. Lease agreements in which the risks and benefits typical of ownership remain with the lessor are classified as other leases. Leases paid under other lease agreements, for instance operating leases, are recognised as expenses on a straight-line basis over the lease term. IMPAIRMENT At the end of each reporting period, the Group makes an assessment of whether there are any indications of asset impairment. If such indications exist, the recoverable amount of the asset is estimated. In addition, goodwill is assessed annually for its recoverable amount regardless of whether there are any signs of impairment. Impairment is examined at the cash-generating unit level; in other words, the lowest level of entity that is primarily independent of other entities and whose cash flows can be separated from other cash flows. Impairment related to associates and other assets are tested on a company/asset basis. The recoverable amount is the fair value of an asset less divestment costs, or the higher value in use. Value in use means the present value of estimated future cash flows expected to arise from the asset or cash- generating unit. Value in use is forecast on the basis of circumstances and expectations at the time of testing. The discount rate takes into account the time value of money as well as the special risks involved for each asset, different industry-specific capital structures in different lines of business, and the investors’ return expectations for similar investments. An impairment loss is recorded when the carrying amount of an asset is greater than its recoverable amount. If the impairment loss is allocable to a cash-flow-generating unit, it is allocated first to reduce the goodwill of the unit and subsequently to reduce other assets of the unit. An impairment loss is reversed if a change has occurred in circumstances and the recoverable amount of the asset has changed since the impairment loss was recognised. An impairment loss recognised for goodwill is not reversed in any circumstances. Goodwill is tested for impairment annually at year end; for the 2015 financial year, testing took place on 31 December 2015. Impairment testing and the methods used are discussed in more detail in section 1.4 in the ‘Notes to the consolidated financial statements’. FINANCIAL INCOME AND EXPENSE Interest income and expense is recognised using the effective interest method, and dividends are recognised when the right to dividends is established. Unrealised changes in value of items measured at fair value are recognised in the statement of comprehensive income. These items relate to currency forward contracts. Exchange rate gains or losses that arise from intercompany loans that are considered as part of the net investment in the foreign entity are included, net of any deferred tax effects, in the translation reserve within the equity. These exchange differences are recognised in other comprehensive income while accumulated exchange differences are presented in the translation reserves in the equity. 100 BORROWING COSTS Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset forming part of the cost of that asset, are capitalised if it is likely that they will provide future economic benefit and can be measured in a reliable manner. Other borrowing costs are recognised as an expense in the period in which they are incurred. INCOME TAXES Tax expenses in the statement of comprehensive income consist of the tax based on taxable income for the year and deferred taxes. Taxes based on taxable income for the year are calculated using the applicable tax rates. Taxes are adjusted with any taxes arising from previous years. Maltese companies’ income taxes are recognised and paid applying the nominal income tax rate which is 35%. Six sevenths of this tax is refunded when the company pays dividend. Consequently the effective tax rate is 5%. The tax refund is recognised when the dividend isdeclared. Taxes arising from items recognised directly in equity are presented as income tax relating to other comprehensive income. Deferred taxes have been calculated for all temporary differences between the carrying amount and taxable amount. Deferred taxes have been calculated using the tax rates set at the end of the reporting period. Deferred tax assets arising from taxable losses carried forward have been recognised up to the amount for which there is likely to be taxable income in the future, and against which the temporary difference can be used. TANGIBLE ASSETS Tangible assets have been measured at historical cost less accumulated depreciation and impairment losses. The initial cost of an asset comprises its purchase price, costs directly attributable to bringing the asset into operation and the initial estimate of the rehabilitation and decommissioning obligation. Heavy production machinery often contains components with different useful lives, and therefore the component approach is applied. Material component replacements and repairs are capitalised. The repair and maintenance of lighter machinery and other intangible items are recognised as expense when occurred. Interest expenses are capitalised as part of the tangible asset’s value if and when the Group acquires or constructs assets that satisfy the required terms and conditions. Assets are depreciated over their useful lives using the straight-line method, except for the mineral resources and ore reserves which are depreciated based on estimated or reported consumption. Land areas are not depreciated. The estimated useful lives of assets are as follows: Buildings Machinery and equipment Other tangible assets 15–50 years 3–15 years 5–10 years Mines and mineral assets Units-of-production method The residual value of assets and their useful life are reviewed in connection with each financial statement and, if necessary, they will be adjusted to reflect the changes that have occurred in the expected financial benefit. The sales gains or losses arising from the decommissioning or divestment of tangible assets are included in other operating income or expenses. MINES AND MINERAL ASSETS Measurement of mineral resources and ore reserves in business combinations Mineral resources and ore reserves acquired in business combinations are recognised as separate assets. In the recognition and measurement of mineral resources and ore reserves the Group utilises available third party reports of the quantities, mineral content, estimated production costs and exploitation potential of the resource. The probability of the ore reserve is also an essential factor. In the mining and minerals business, the probability 101 is commonly described by classifying a mineral resource into categories such as ‘proven’, ‘probable’, ‘inferred’ and ‘hypothetical’. There are also generally accepted standards for the classification of mineral resources in the business, such as the standards of the South African Code for the Reporting of Exploration Results, Mineral Resources and Mineral Reserves (‘SAMREC’). The measurement of ore reserves is based on estimated market prices, estimated production costs and quantities. In the Group’s statement of financial position, mineral resources and ore reserves are presented as tangible assets. Rehabilitation liabilities related to mines are included in their cost of acquisition, and corresponding provision is recognised on the statement of financial position. Exploration and evaluation expenses of mineral resources Exploration and evaluation expenditure relates to costs incurred on the exploration and evaluation of potential mineral reserves and resources when new potential ore reserves are sought, for example by exploratory drilling. Exploration and evaluation expenditure is carried forward as an asset if the Group expects such costs to be recouped in full through the successful development of the area of interest; or alternatively by its sale; or if exploration and evaluation activities in the area of interest have not yet reached a stage which permits the reasonable assessment of the existence of economically recoverable reserves and active and significant operations in relation to the area are either continuing or planned for the future. Exploration and evaluation expenditure includes material and other direct costs incurred, for instance, by exploratory drilling and surveys. Overheads are included in the exploration and evaluation asset to the degree to which they can be associated with finding and evaluating a specific mineral resource. Exploration and evaluation assets are measured at cost and are transferred to mine development assets when utilisation of the mine begins. The asset is then depreciated using the units-of-production method. Exploration and evaluation assets are assessed for impairment if and when facts and circumstances suggest that the carrying amount exceeds its recoverable amount. In particular, the impairment tests are carried out if the period for which the Group has right to explore the specific area expires or will expire in the near future and future exploration and evaluation activities are not planned for the area. Exploration and evaluation assets acquired in conjunction with business combinations are accounted for at fair value in accordance with the principles of IFRS 3. Mine establishment costs Mine establishment costs are capitalised as part of the mine’s acquisition cost and depreciated using the units- of-production method when the production of the mine begins. The costs arising from changes in mining plan after the production has begun are expensed as incurred. Impairment The value of mineral resources and ore reserves acquired in business combinations is tested for impairment if there are indications of deterioration in the long-term ability to utilise the asset economically. In the test the cash flows generated by the asset are assessed based on most recent information on the technical and economic utilisation of the asset. GOODWILL AND INTANGIBLE ASSETS IDENTIFIED AT ACQUISITION Goodwill represents the portion of acquisition cost that exceeds the Group’s share of the fair value at the time of acquisition of the net assets of the acquired company. Instead of regular amortisation, goodwill is tested annually for potential impairment. For this purpose, goodwill has been allocated to cash-generating units or, in the case of an associated company, is included in the acquisition cost of the associate in question. Goodwill is measured at original acquisition cost less impairment losses. Changes in purchase considerations, for example due to earn-out arrangements, relating to acquisitions carried out before 2010 have been recognised against goodwill in accordance with the earlier IFRS 3. 102 The net assets of an entity acquired in a business combination are measured at fair value at the date of acquisition. In connection with business combinations, the Group also identifies intangible assets that are not necessarily recorded on the statement of financial position of the acquired entity. These assets include, for instance, customer relationships, trademarks and technology. The assets are recognised at fair value and amortised over their useful lives. The amortisation periods for these intangible assets are as follows: Customer relationships: 2-5 years depending on contractual circumstances Technology: 5-15 years Trademarks: 1 year RESEARCH AND DEVELOPMENT COSTS Research costs are always recognised as expenses. Mine development costs are capitalised as part of mining assets and depreciated on a unit of production basis. The development costs, which primarily relate to the development of existing products, are expensed as incurred. OTHER INTANGIBLE ASSETS Other intangible assets are initially recognised on the statement of financial position at cost when the costs can be reliably determined and it is probable that the expected financial benefits of those assets will be reaped by the Group. Other intangible assets mainly relate to IT software utilised in support of the Group’s business operations and they are amortised over 3-5 years. INVENTORIES Inventories are measured at acquisition cost or a lower probable net realisable value. Acquisition costs are determined using the average cost method. The cost of finished goods and work in progress comprises raw materials, direct labour expenses, other direct expenses, and an appropriate share of fixed and variable production overheads based on the normal capacity of the production facilities. In open pit mining operations, the removal costs of overburden and waste material (stripping costs) are included in the cost of inventory. The net realisable value is the estimated selling price that is obtainable, less the estimated costs incurred in completing the product and the selling expenses. FINANCIAL ASSETS Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets or as derivatives designated as hedging instruments, as appropriate. The Group determines the classification of its financial assets at initial recognition. All financial assets are recognised initially at fair value plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group’s financial assets include cash and cash equivalents, short-term deposits, money market instruments, trade and other receivables, loan and other receivables, unquoted financial instruments and derivative financial instruments. Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. This category includes derivative financial instruments that are not designated as hedging instruments. Financial assets at fair value through profit and loss are carried in the statement of financial position at fair value with changes in fair value recognised in finance income or finance cost. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate method (EIR), less impairment. The EIR amortisation is included 103 in finance income. The impairment losses are recognised as finance costs. Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to-maturity when the Group has the positive intention and ability to hold it to maturity. After initial measurement, held-to-maturity investments are measured at amortised cost using the effective interest method, less impairment. Financial assets classified as available-for-sale are those which are neither classified as held for trading nor designated at fair value through profit or loss. After initial measurement, available-for-sale financial investments are subsequently measured either at fair value with unrealised gains or losses recognised as other comprehensive income until the investment is derecognised, at which time the cumulative gain or loss is recognised in finance income or cost, or determined to be impaired, at which time the cumulative loss is recognised as finance costs and removed from the available-for-sale assets. The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations, without any deduction for transaction costs. For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. Such techniques may include: using recent arm’s length market transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis; or other valuation models. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING When necessary, the Group utilises derivative financial instruments, such as forward currency contracts and interest rate swaps, to hedge its foreign currency risks and interest rate risks. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on derivatives are recognised on the income statement. The Group does not apply hedge accounting. TREASURY SHARES Own equity instruments, which are reacquired (treasury shares), are recognised at cost and deducted from the paid-up unrestricted equity reserve. No gain or loss is recognised on the purchase, sale, issue or cancellation of the Group’s own equity instruments. FINANCIAL LIABILITIES Liabilities are classified as current and non-current, and include both interest-bearing and interest-free liabilities. Interest-bearing liabilities are liabilities that either include a contractual interest component, or are discounted to reflect the fair value of the liability. In the earlier financial years discounted non-current liabilities have included acquisition-related deferred conditional and unconditional liabilities. Certain conditional liabilities have included an earn-out component that needed to be met to make the liability unconditional and fix the amount of the future payment. Acquisition-related conditional purchase considerations that were payable in the Company’s shares were presented as interest-free liabilities. Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss; loans and borrowings; or derivatives designated as hedging instruments, as appropriate. The Group determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair value, and in the case of loans and borrowings, plus directly attributable transaction costs. The Group’s financial liabilities include trade and other payables, bank overdrafts, loans and borrowings, and derivative financial instruments. 104 After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Gains and losses are recognised on the income statement when the liabilities are derecognised as well as through the effective interest rate method (EIR) amortisation process. Amortised cost is calculated by taking into account any discounts or premiums and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance cost. PROVISIONS Provisions are recognised when the Group has a present obligation (legal or constructive), as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. The provision for rehabilitation and decommissioning costs has arisen on operating mines and minerals’ processing facilities. These costs are provided at the present value of expected costs to settle the obligation using estimated cash flows. The cash flows are discounted at a current pre-tax rate that reflects the risks specific to the rehabilitation and decommissioning liability. The estimated future costs of decommissioning are reviewed annually and adjusted as appropriate. Changes in the estimated future costs of or in the discount rate applied to the rehabilitation obligation are added or deducted from the profit or loss or, respectively, decommissioning obligation adjusted to the carrying value of the asset dismantled. NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS The standard IFRS 5 requires that an entity must classify a non-current asset or a disposal group as assets held for sale if the amount equivalent to its carrying amount is accumulated primarily from the sale of the item rather than from its continued use. In this case, the asset or disposal group must be available for immediate sale in its present condition under general and standard terms for the sale of such assets, and the sale must be highly probable. ACCOUNTING POLICIES REQUIRING MANAGEMENT DISCRETION AND KEY UNCERTAINTY FACTORS FOR ESTIMATES Preparation of the financial statements requires management to make estimates, assumptions and forecasts regarding the future. Future developments may deviate significantly from the assumptions made if changes occur in the business environment and/or business operations. In addition, management is required to use its discretion in the application of the financial statements’ preparation principles. The scope of the financial statements The consolidated financial statements include the parent company Afarak Group Plc, its subsidiaries, joint ventures and associated companies. Subsidiaries refer to companies in which the Group has control. The Group gains control of a company when it holds more than half of the voting rights or otherwise exercises control. The assessment of whether control is exercised requires management discretion. The Group holds 51% of shares of Synergy Africa Limited. However, the shareholders of Synergy Africa Limited have entered into a joint venture agreement with joint control over the company. The joint venture agreement includes terms and conditions which give the other shareholder participating rights. Therefore, the Group’s management has assessed, using its discretion, that the company and its subsidiaries are not consolidated into the Group as subsidiaries but as joint ventures. 105 IFRS 11 requires considering all facts and circumstances relating to joint arrangements instead of legal form only, which influences the accounting treatment of the arrangements. Under the new standard Afarak’s share in Synergy Africa Limited and its subsidiaries are consolidated under the equity method instead of the proportionate method of consolidation. Synergy Africa Limited and its subsidiaries form a part of Afarak’s mining operations in South Africa. Allocation of the cost of a business combination In accordance with IFRS 3, the acquisition cost of an acquired company is allocated to the assets of the acquired company. The management has to use estimates when determining the fair value of identifiable assets and liabilities. Determining a value for intangible assets, such as trademarks and customer relationships, requires estimation and discretion because in most cases, no market value can be assigned to these assets. Determining fair value for tangible assets requires particular judgment as well, since there are seldom active markets for them where the fair value could be obtained. In these cases, the management has to select an appropriate method for determining the value and must estimate future cash flows. Impairment testing Goodwill is tested annually for impairment, and assessments of whether there are indications of any other asset impairment are made at each balance sheet date, and more often if needed. The recoverable amounts of cash- generating units have been determined by means of calculations based on value in use. Preparation of these calculations requires the use of estimates to predict future developments. The forecasts used in the testing are based on the budgets and projections of the operative units, which strive to identify any expansion investments and rearrangements. To prepare the estimates, efforts have been made to collect background information from the operative business area management as well as from different sources describing general market activity. The risk associated with the estimates is taken into account in the discount rate used. The definition of components of discount rates applied in impairment testing requires discretion, such as estimating the asset or business related risk premiums and average capital structure for each business segment. Tangible and intangible assets Afarak Group management is required to use its discretion when determining the useful lives of various tangible and intangible assets, which affects the amount of depreciation and thereby the carrying amount of the assets concerned. The capitalising of mine development assets and exploration and evaluation expenditure, in particular, requires the use of discretion. Similarly, management is required to use its discretion in determining the useful lives of intangible assets identified in accordance with IFRS 3, and in determining the amortisation period. This affects the financial result for the period through depreciation and change in deferred taxes. Measurement of mineral resources and ore reserves In the Group’s mining operations, estimates have to be applied in recognising mineral resources acquired in business combinations as assets. In the recognition and measurement of mineral resources and ore reserves, the Group utilises available third party analyses of the quantities, mineral content, estimated production costs and exploitation potential of the resource. The probability of the ore reserve is also a key consideration. In the mining and minerals business, the probability is commonly described by classifying a mineral resource into categories such as ‘proven’, ‘probable’, ‘inferred’ and ‘hypothetical’. The measurement of ore reserves is based on estimated market prices, estimated production costs and on the probability classification of the mineral resource and quantities. Therefore, the Group’s management has to use its discretion in applying recognition and measurement principles for mineral resources. 106 Rehabilitation provisions The Group assesses the rehabilitation liabilities associated with its mines and production facilities annually. The amount of provision reflects the management’s best estimate of the rehabilitation costs. In determining the fair value of the provision, assumptions and estimates are made in relation to discount rates, the expected cost to rehabilitate the area and remove or cover the contaminated soil from the site, the expected timing of those costs, and whether the obligations stem from past activity. These uncertainties may cause the actual costs to differ from the provision which has been made. APPLICATION OF NEW OR AMENDED IFRS STANDARDS The Group applies new or amended IFRS standards and interpretations from their effective date or after they have been endorsed for application within the EU. In these financial statements the Group has applied the following new or amended standards and interpretations: » IFRS 3 Business Combinations The amendment is applied prospectively and clarifies that all contingent consideration arrangements classified as liabilities (or assets) arising from a business combination should be subsequently measured at fair value through profit or loss whether or not they fall within the scope of IAS 39. This is consistent with the Group’s current accounting policy and, thus, this amendment did not impact the Group’s accounting policy. » IFRS 8 Operating Segments The amendments are applied retrospectively and clarify that: • An entity must disclose the judgements made by management in applying the aggregation criteria including a brief description of operating segments that have been aggregated and the economic characteristics used to assess whether the segments are ‘similar’. • The reconciliation of segment assets to total assets is only required to be disclosed if the reconciliation is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities. The Group has not applied the aggregation criteria in IFRS 8. The Group has presented the reconciliation of segment assets to total assets in previous periods and continues to disclose the same in Note 1.5 in this period’s financial statements. » IFRS 3 Business Combinations The amendment is applied prospectively and clarifies for the scope exceptions within IFRS 3 that: • Joint arrangements, not just joint ventures, are outside the scope of IFRS 3 • This scope exception applies only to the accounting in the financial statements of the joint arrangement itself. Afarak Group is not a joint arrangement, and thus this amendment is not relevant for the Group and its subsidiaries. » IFRS 13 Fair Value Measurement The amendment is applied prospectively and clarifies that the portfolio exception in IFRS 13 can be applied not only to financial assets and financial liabilities, but also to other contracts within the scope of IAS 39. The Group does not apply the portfolio exception in IFRS 13. The Group will apply the following new or amended standards and interpretations in the financial statements for the year 2016 or subsequent financial years: » IFRS 9 Financial Instruments will replace IAS 39 Financial Instruments: Recognition and measurement in its entirety. The mandatory effective date of IFRS 9 is for annual periods beginning on or after 1 January 2018, early adoption is allowed. According to IFRS 9, at initial recognition, all financial assets are measured at fair value. For subsequent measurement, financial assets that are debt instruments are classified at amortized cost or fair value either through profit or loss or Other Comprehensive Income (OCI). The classification is based on the entity’s business model for managing the financial asset and the contractual cash flow characteristics of the financial asset. The new hedge accounting model is designed to align the accounting for hedging activities more closely with risk management practices and to simplify certain aspects of hedge accounting. The Group is assessing the impact of the standard to its financial statements. 107 » IFRS 15 Revenue from Contracts with Customers as issued in May 2014, establishes a new five-step model that will apply to revenue earned from a contract with a customer, regardless of the type of revenue or industry. The principles in IFRS 15 provides a more structured approach to measuring and recognising revenue and will be applied using the following five steps: 1. 2. Identify the contract(s) with a customer Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognise revenue when (or as) the entity satisfies a performance obligation This new revenue standard is applicable to all entities and will supersede the current revenue recognition requirements under IFRS. Either a full or modified retrospective application is required for annual periods beginning on or after 1 January 2017. The Group is currently assessing the impact of IFRS 15 on the entities within the Group. » IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests in Joint Operations The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business, must apply the relevant IFRS 3 Business Combinations principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party. The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments will impact the Group to the extent that it undertakes future transactions of this nature, as this accounting approach differs to that which it would currently apply. » IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments address the conflict between IFRS 10 Consolidated Financial Statements and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture, is recognised in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture. These amendments must be applied prospectively and are effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments will impact the Group to the extent that it undertakes future transactions of this nature, as this accounting approach differs to that which it would currently apply. » IAS 1 Disclosure Initiative The amendments to IAS 1 clarify, rather than significantly change, existing IAS 1 requirements. 108 The amendments clarify: • The materiality requirements in IAS 1 • That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may be disaggregated • That entities have flexibility as to the order in which they present the notes to financial statements • That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in aggregate as a single line item, and classified between those items that will or will not be subsequently reclassified to profit or loss Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statement(s) of profit or loss and other comprehensive income. These amendments are effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. The Group is assessing the impact of this amendment to its financial statements. There are no other IFRS standards, amendments, IFRIC interpretations that are not yet effective and that would be expected to have material impact to the Group’s financial statements. 1.3 BUSINESS COMBINATIONS AND ACQUISTION OF NON-CONTROLLING INTERESTS 1.3.1 FINANCIAL YEAR 2015 Afarak did not carry out any acquisitions during the financial year 2015. 1.3.2 FINANCIAL YEAR 2014 Afarak did not carry out any acquisitions during the financial year 2014. 1.4 IMPAIRMENT TESTING GENERAL PRINCIPLES OF IMPAIRMENT TESTING Afarak Group has carried out impairment testing on goodwill and other assets as of 31 December 2015. The following cash generating units were defined for the impairment testing: » Speciality Alloys business (Türk Maadin Sirketi and Elektrowerk Weisweiler) with a vertically integrated mining-beneficiation-smelting-sales operation in the specialty grade ferrochrome business; and » South African minerals processing business (Mogale Alloys) which has ferroalloys smelting operations with four furnaces; The Group assesses at the end of each reporting period whether there is any indication that assets may be impaired. If any such indication exists, the recoverable amount of these assets is estimated. Moreover, the recoverable amount of any goodwill and unfinished investment projects will be estimated annually, irrespective of whether there is an indication of impairment. As a result, no impairment was recognised. At the end of 2015, there were no indications of impairment of any other assets, such as shares in associated companies. The joint venture Synergy Africa owns and operates mines in South Africa, These have been tested for impairment at the joint venture level. This is further explained in note 13. CHANGES IN GOODWILL DURING 2015 During the financial year 2015, the total goodwill of the Group decreased by EUR 4.7 million to a total of EUR 109 58.3 million. The decrease was mainly attributable to an exchange rate movement of EUR 4.4 million. A further decrease of EUR 0.3 million was recognised resulting from the disposal of investment in associate. In 2014, the synergy goodwill identified in the Mogale acquisition, related to Afarak Trading (previously known as RCS) acting as a global sales entity for the whole Group, was initially tested within Speciality Alloys segment, into which segment Afarak Trading (previously known as RCS) was included. To reflect the change in segments, where Afarak Trading (previously known as RCS) is now divided to both segments to reflect the nature of serving the whole Group, the Afarak Trading (previously known as RCS) synergy related goodwill is now considered as a group asset and also annually allocated to both segments based on their relative revenue, reflecting the volume of Afarak Trading (previously known as RCS) related benefits enjoyed by the CGU. The changes are described below: EUR ‘000 Goodwill 1.1.2015 Disposal of investment in associate Exchange rate movement Goodwill 31.12.2015 Speciality Alloys Business FerroAlloys Business Group Total 41,412 -307 -671 40,434 21,639 0 -3,724 17,915 63,051 -307 -4,395 58,349 The changes in goodwill during 2014 are presented below: EUR ‘000 Goodwill 1.1.2014 Reclassification between segments Exchange rate movement Goodwill 31.12.2014 Speciality Alloys Business FerroAlloys Business Group Total 57,104 -9,052 -6,640 41,412 5,184 9,052 7,403 21,639 62,288 0 763 63,051 Goodwill as a ratio of the Group’s equity on 31 December 2015 and 31 December 2014 was as follows: EUR ‘000 Goodwill Equity Goodwill/Equity, % 31.12.2015 31.12.2014 58,349 171,207 34% 63,051 182,245 35% METHODOLOGY APPLIED IN IMPAIRMENT TESTING For the cash generating units that were tested, the test was carried out by calculating their value in use. Value in use has been calculated by discounting estimated future net cash flows based on the conditions and assumptions prevailing at the time of the testing. Future cash flows have been projected for a five-year period, after which a growth rate equalling projected long-term inflation has been applied (Speciality Alloys: 2%, South African minerals processing: 6%). For the terminal year after the five-year estimation period, the essential assumptions (e.g. revenue, variable costs and fixed costs) have been based at the estimation period’s previous year’s figures. 110 The weighted average cost of capital (WACC) has been calculated separately for each cash generating unit and testable asset, taking into account each business’s typical capital structures, investors’ average required rate of return for similar investments and company size and operational location related factors, as well as risk-free interest rates and margins for debt financing. The Group has used publicly available information on the peer group companies’ capital structure, risk premium and other factors. The market interest rates reflect the rates applicable on 31 December 2015. The information used in the 31 December 2015 impairment testing is based on business units’ management future forecasts, on general third-party industry expert or analyst reports where available, and to the extent possible on the current business and asset base excluding any non-committed expansion plans. Forecasted sales volumes and profitability are based on the management’s view on future development while also taking past performance into account. Price forecasts are based on independent market forecasts. The cash flow models have been prepared at constant foreign exchange rates. The management’s approach in preparing cash flow forecasts has not changed significantly from the previous impairment testing. Cash Generating Unit Pre-tax discount rate Speciality Alloys South African minerals processing 2015 11.9% 24.1% 2014 14.9% 23.3% The key reasons for the changes in the discount rates compared to 2014 were the changes in risk-free interest rates in both cash-generating units. The results of impairment testing have been evaluated by comparing the cash generating units’ recoverable amount to the corresponding carrying amount based on the following judgment rules: Recoverable amount divided by the carrying amount: Conclusion: < 100% 101-120% 121-150% > 150% Impairment Slightly above Clearly above Significantly above TEST RESULTS 31 DECEMBER 2015 The impairment test results were as follows: Cash generating unit Speciality Alloys South African minerals processing Goodwill (MEUR), pre-testing Goodwill (MEUR), post-testing Carrying amount (MEUR), pre-testing 40.4 17.9 40.4 17.9 63.4 66.4 Conclusion Clearly above Clearly above 111 The testable asset base (carrying amount) includes goodwill, intangible and tangible assets and net working capital less provisions and deferred tax liabilities (in relation to purchase price allocation entries). Key background and assumptions used in the cash flow forecasts of the impairment testing process are summarised in the following table: Cash generating unit Sales volume Sales prices Costs Speciality Alloys business FeCr: 26,000 – 31,000 t/a Lumpy Cr ore: 21,000 – 29,000 t/a LC/ULC ferrochrome with average Cr content of 70 %, based on external experts (Heinz Pariser) price forecasts Raw material costs generally change in line with sales price; other costs growing at inflation rate South African minerals processing Metal alloys: 81,000 – 85,000 t/a Based on external experts (Heinz Pariser) metal alloys price forecasts Raw material costs generally change in line with sales price; other costs growing at inflation rate Moreover, the USD/ZAR foreign exchange rate affects significantly the testing of the South African minerals business. The foreign exchange rate used in the test was 13.55. SENSITIVITY ANALYSIS OF THE IMPAIRMENT TESTS The Group has analysed the sensitivity of the impairment test results by estimating how the essential assumptions should change in order for the recoverable amount to be equal to the carrying amount. The results of this sensitivity analysis as of 31 December 2015 are given below: Cash generating unit Speciality Alloys Change in pre- tax discount rate (compared to the level used in testing) 4.3% - points South African minerals processing 10.2% - points Change in free cash flow (annual average) -31.5% -32.5% Change in CGU’s average EBITDA margin -3.8% - points -7.7% - points 1.5 OPERATING SEGMENTS Afarak Group has two operating segments, FerroAlloys and Speciality Alloys, which are also the reporting segments. The operating segments are organised based on their products and production processes. The current reporting structure was adopted in 2011. The Group’s executive management reviews the operating results of the segments for the purpose of making decisions on resource allocation and performance assessment. Segment performance is measured based on revenue as well as earnings before interest, taxes, depreciation and amortisation (EBITDA) as included in the internal management reports and defined consistently with the consolidated EBITDA. 112 The FerroAlloys business consists of the processing plant Mogale Alloys, Vlakpoort mine and the joint ventures, the Stellite mine and Mecklenburg mine in South Africa. The business produces chrome ore, charge chrome, charge chrome, medium carbon ferrochrome and silicomanganese for sale to global markets. The Speciality Alloys business consists of Türk Maadin Şirketi A.S (“TMS”), the mining and beneficiation operation in Turkey, and Elektrowerk Weisweiler GmbH (“EWW”), the chromite concentrate processing plant in Germany. TMS supplies EWW with high quality chromite concentrate which produces speciality products including specialised low carbon and ultra low carbon ferrochrome. Chrome ore from TMS that is not utilised for the production of specialised low carbon ferrochrome is sold to the market. The revenue and costs of the Group’s sales and marketing arm Afarak Trading (previously known as RCS) is allocated to the segments in proportion to their sales. Afarak’s other operations, including the Group’s headquarters and other Group companies that do not have significant operations, are presented as unallocated items. Intercompany transactions are carried out on an arm’s length basis. The transactions between the segments have been limited but the parent company has provided funding and administrative services to the Group’s subsidiaries. The accounting policies applied in the operating segment information are the same as those in the consolidated financial statements. Operating segment information 2015 Year ended 31.12.2015 EUR ‘000 Speciality Alloys Ferro Alloys Segments total Unallocated items Eliminations Consolidated Group External revenue Rendering of services Sale of goods Total external revenue Inter-segment revenue Total revenue 0 95,555 95,555 924 259 91,515 91,774 0 259 187,070 187,329 924 96,480 91,774 188,254 Items related to associates (core) Items related to joint ventures (core) 0 0 0 -414 0 -414 125 257 382 1,133 1,516 0 0 Segment EBITDA 12,740 7,467 20,207 -3,017 Depreciation and amortisation -2,617 -4,678 -7,295 Impairment 0 0 0 -7 0 0 0 0 -2,058 -2,0581 0 0 0 0 0 384 187,327 187,711 0 187,711 0 -414 17,190 -7,302 0             10,123 2,789 12,912 -3,024 0 9,888 Segment operating profit/loss Finance income Finance cost Income taxes Profit / loss for the period from continuing Operations Profit for the period from discontinued operations Profit / loss for the period 7,906 -11,274 1,236 7,756 782 113 8,539 Segment’s assets 2 150,216 129,187 279,303 12,519 -24,929 266,994 Segment’s liabilities 52,367 58,855 111,122 2,565 -18,000 95,787 Other disclosures Gross capital expenditure 3 4,035 3,952 7,988 Investments in associates 4 Investment in joint ventures 4 0 0 0 0 -23,218 -23,218 Provisions 4 2,954 6,455 9,308 0 0 0 0 0 0 0 0 7,988 0 -23,218 9,408 1. Inter-segment items are eliminated on consolidation. 2. The assets and liabilities of the segments represent items that these segments use in their activities or that can be reasonably allocated to them. 3. Capital expenditure consists of net increase in the year. 4. Balance sheet values. Operating segment information 2014 Speciality Alloys Ferro Alloys Segments total Unallocated items Eliminations Consolidated Group Year ended 31.12.2014 EUR ‘000 External revenue Rendering of services Sale of goods Total external revenue Inter-segment revenue Total revenue 0 160 97,836 74,658 97,836 74,818 0 0 160 172,494 172,654 0 97,836 74,818 172,654 Items related to associates (core) 3 Items related to joint ventures (core) 3 -3,311 6 -3,311 Segment EBITDA 7,865 3,084 10,949 -2,502 15 0 15 132 147 0 0 0 0 0 -132 -132 0 0 0 175 172,494 172,669 0 172,669 6 -3,311 8,447             Depreciation and amortisation -2,206 -4,466 -6,672 Impairment 0 0 0 -45 -5 Segment operating profit/loss 5,659 -1,381 4,277 -2,552 0 0 0 Finance income Finance cost Income taxes 114 Profit / loss for the period from continuing Operations Profit for the period from discontinued operations Profit / loss for the period -6,717 -5 1,725 4,166 -5,431 12 472 1,773 2,245 Segment’s assets 2 148,276 146,514 294,790 9,645 -14,146 290,289 Segment’s liabilities 2 68,419 52,451 120,870 3,720 -16,547 108,044 Other disclosures Gross capital expenditure 3 1,213 13,598 Investments in associates 4 Investment in joint ventures 4 70 0 14,811 92 22 -19,580 -19,580 Provisions 4 3,189 7,025 10,214 0 0 0 0 0 0 0 0 14,811 92 -19,580 10,214 1. Inter-segment items are eliminated on consolidation. 2. The assets and liabilities of the segments represent items that these segments use in their activities or that can be reasonably allocated to them. 3. Capital expenditure consists of net increase in the year. 4. Balance sheet values. Geographical information - Revenues from external customers EUR ‘000 Other EU countries United States China Africa Finland Other countries Total revenue Non-current assets EUR ‘000 Africa Other EU countries Finland Other countries Total 2015 74,945 42,244 15,407 23,834 5,704 2014 77,530 41,282 3,090 23,351 7,040 25,577 20,376 187,711 172,669 2015 46,183 6,636 14 7,741 2014 53,835 5,177 25 9,385 60,574 68,422 Revenue figures are based on the location of the customers. The largest customer of the Group is in the Speciality Alloys business segment and represents approximately 14% (16%) of the Group’s revenue in 2015. In the FerroAlloys business segment the largest customer represents 5% (7%) of the Group’s revenue in 2015. In presenting geographical information, assets are based on the location of the assets. Non-current assets consist of property, plant and equipment, intangible assets and investments in associates. 1.6 NOTES TO THE INCOME STATEMENT 115 1. Revenue EUR ‘000 Sale of goods Rendering of services Total 2. Other operating income EUR ‘000 Gain on disposal of tangible and intangible assets Gain on disposal of investments Rental income Other Total 2015 187,327 384 187,711 2015 50 57 307 1,917 2,331 2014 172,494 175 172,669 2014 45 1,211 297 1,817 3,370 3. Employee benefits EUR ‘000 Salaries and wages Share-based payments Pensions costs Other employee related costs Total Average personnel during the accounting period 116 Speciality Alloys business FerroAlloys business Group Management and other operations Total Personnel at the end of the accounting period Speciality Alloys business FerroAlloys business Group Management and other operations Total 2015 -16,330 -293 237 -1,450 -17,836 2015 372 365 5 742 2015 402 365 6 773 2014 -14,325 -154 -241 -1,403 -16,123 2014 387 335 4 726 2014 355 339 4 698 4. Depreciation, amortisation and impairment Depreciation / amortisation by asset category 2015 2014 Intangible assets Clientele and technology Other intangible assets Total Property, plant and equipment Buildings and constructions Machinery and equipment Other tangible assets Total Impairment by asset category Other intangible assets Total -1,740 -350 -2,090 -523 -3,280 -1,409 -5,212 0 0 -2,563 -341 -2,904 -398 -2,142 -1,273 -3,813 -5 -5 5. Other operating expenses EUR ‘000 Rental costs External services1 Travel expenses Other operating expenses2 Total 2015 -673 -3,122 -1,059 -7,074 -11,928 2014 -825 -2,796 -855 -7,136 -11,612 1. Audit fees paid to EY totalled EUR 365 (2014: 412) thousand in the financial year. The fees for non-audit services totalled EUR 29 (2014: 20) thousand. 2. Other operating expenses include shutdown costs of EUR 2,093 (2014: 2,324) thousand in the financial year. 117 6. Financial income and expense EUR '000 Finance income Interest income on loans and trade receivables Foreign exchange gains Other finance income Total Finance expense Interest expense on financial liabilities measured at amortised cost Impairment losses on receivables Foreign exchange losses Loss on assets at fair value Loss on disposal, assets available for sale Unwinding of discount, provisions Other finance expenses Total Net finance expense 7. Income taxes EUR '000 Income tax for the period Income tax for previous years Deferred taxes Other direct taxes Income tax for continuing operations Income tax for discontinued operations Total 2015 1,327 6,530 49 7,906 -1,734 -1 -8,867 0 -113 -642 83 -11,274 -3,368 2015 494 0 742 0 1,236 0 1,236 2014 1,785 2,379 2 4,166 -1,223 0 -3,141 -461 0 -546 -61 -5,431 -1,265 2014 -772 -24 808 0 12 0 12 EUR '000 Profit before taxes Income tax calculated at income tax rate Tax exempt income Difference between domestic and foreign tax rates Tax credit Items recognised only for taxation purposes 118 Income tax for previous years Income from JV and associates Impairment losses Tax losses not recognised as deferred tax assets Non-tax deductible expenses Previously unrecognised tax losses now recognised Total adjustments Income tax recognised 2015 7,303 -1,461 60 -1,542 3,717 557 0 83 0 -352 -96 270 2,697 1,236 2014 2,233 -447 639 432 2,031 -1,218 -24 -661 -1 -461 -434 156 459 12 On 31 December 2015 the Group companies had unused tax losses totalling EUR 24.6 (24.2) million for which the Group has not recognised deferred tax assets. 8. Discontinued operations EUR ‘000 Other operating income Other operating expenses Gain on disposal from discontinued operations Profit for the period 2015 580 -357 560 783 2014 1,286 -713 1,200 1,773 The discontinued operation items relate to expenses in connection with the sawmill machinery and environmental cleaning costs. The Group sold part of the saw mill equipment which positively affected profit by EUR 0.8 (2014: 1.8) million that includes a release of EUR 0.2 (2014: 0.6) million from the provision in relation to the discontinued wood business. 9. Earnings per share 2015 2014 Continuing operations Discontinued operations Total Continuing operations Discontinued operations Profit attributable to owners of the 8,071 783 8,854 1,085 1,773 Total 2,858 parent company (EUR '000) Weighted average number of shares, basic (1,000) Basic earnings per share (EUR) total Profit attributable to owners of the parent company (EUR '000) Weighted average number of shares, basic (1,000) Effect of share options on issue (1,000) Weighted average number of shares, diluted (1,000) Diluted earnings per share (EUR) total 256,652 256,652 256,652 249,280 249,280 249,280 0.03 0.01 0.03 0.00 0.01 0.01 8,071 783 8,854 1,085 1,773 2,858 119 256,652 256,652 256,652 249,280 249,280 249,280 3,197 3,197 3,197 3,798 3,798 3,798 259,849 259,849 259,849 253,077 253,077 253,077 0.03 0.00 0.03 0.00 0.01 0.01 Basic earnings per share is calculated by dividing profit attributable to the owners of the parent company by weighted average number of shares during the financial year. When calculating the diluted earnings per share, all convertible securities with a potential dilutive effect are assumed to be converted into shares. Share options have a dilutive effect if the exercise price is lower than the share price. The diluted number of shares is the number of shares that will be issued free of charge when share options are exercised since with the funds received from exercising options, the Company is not able to issue the same number of shares at fair value. The fair value of shares is based on average share price of the period. 1.7 NOTES TO THE STATEMENT OF FINANCIAL POSITION 10. Property, plant and equipment EUR '000 Land and water property Buildings and constructions Machinery and equipment Mines and mineral assets Other tangible assets Total Balance at 1.1.2015 2,346 Additions Disposals Reclass between items Effect of movements in exchange rates 6,515 1,520 54,475 4,971 -893 -28 11,802 437 2,915 78,053 408 -5 339 7,336 -898 311 -297 -535 -8,391 -1,308 -329 -10,860 Balance at 31.12.2015 2,049 7,500 50,134 10,931 3,328 73,942 Accumulated depreciation and impairment 1.1.2015 Depreciation Disposals Reclass between items -3,060 -18,256 -7,230 -1,534 -30,080 -523 -3,280 -1,164 54 -245 3 -5,212 57 0 Effect of movements in exchange rates Accumulated depreciation and impairment at 31.12.2015 Carrying amount at 1.1.2015 Carrying amount at 31.12.2015 Balance at 1.1.2014 120 Additions Disposals Reclass between items Effect of movements in exchange rates 257 3,455 840 300 4,852 0 -3,326 -18,027 -7,554 -1,476 -30,383 2,346 2,049 2,283 3,455 4,174 6,148 183 4,572 3,377 11,092 210 36,219 32,107 39,721 13,646 -277 -24 63 184 1,409 500 1,381 1,852 2,502 331 -22 46 59 47,973 43,559 61,745 14,369 -298 22 2,215 Balance at 31.12.2014 2,346 6,515 54,475 11,802 2,915 78,053 Accumulated depreciation and impairment 1.1.2014 Depreciation Disposals Reclass between items Effect of movements in exchange rates Accumulated depreciation and impairment at 31.12.2014 -2,585 -15,735 -5,802 -1,363 -25,485 -398 -2,142 233 -1,135 -138 -3,813 22 -55 233 22 -1,036 -77 -612 -293 0 -3,060 -18,256 -7,230 -1,534 -30,080 Carrying amount at 1.1.2014 Carrying amount at 31.12.2014 2,283 2,346 3,563 3,455 23,986 36,219 5,290 4,572 1,138 1,381 36,260 47,973 Machinery and equipment include the prepayments made for them. In 2014 Mogale Alloys capitalisated interest amounting EUR 0.4 million before the commissioning of the refining and granulation plant to produce medium carbon ferrochrome. 11. Intangible assets EUR '000 Goodwill Intangible assets identified in acquisitions Other intangible assets Exploration and evaluation assets Balance at 1.1.2015 110,481 109,232 4,863 Additions Disposals Reclass between items Effect of movements in exchange rates -307 123 -3 30 -11,720 -6,339 -645 -107 -18,811 699 529 Total 225,275 652 -310 30 Balance at 31.12.2015 98,454 102,893 4,368 1,121 206,836 Accumulated amortisation and impairment 1.1.2015 -47,430 -92,683 Amortisation Impairment Reclass between items 7,325 Effect of movements in exchange rates -1,740 4,982 257 -1,753 -338 174 3,455 0 -12 840 -141,866 -2,090 0 12,481 4,852 Accumulated amortisation and impairment at 31.12.2015 -40,105 -89,441 -1,914 -12 -131,472 Carrying amount at 1.1.2015 Carrying amount at 31.12.2015 63,051 58,349 16,549 13,452 3,110 2,454 Balance at 1.1.2014 Additions Reclass between items 108,167 107,890 4,581 Effect of movements in exchange rates 2,314 1,342 699 1,109 329 356 121 83,409 75,364 220,967 441 24 14 3,843 85 24 173 Balance at 31.12.2014 110,481 109,232 4,863 699 225,275 Accumulated amortisation and impairment at 1.1.2014 Amortisation Impairment -45,879 -89,409 -1,350 0 -136,639 -2,563 -341 -5 -57 -2,904 -5 -2,319 Effect of movements in exchange rates -1,551 -711 Accumulated amortisation and impairment at 31.12.2014 -47,430 -92,683 -1,753 0 -141,866 Carrying amount at 1.1.2014 Carrying amount at 31.12.2014 62,288 63,051 18,481 16,549 3,231 3,110 329 699 84,329 83,409 Other intangible assets include the prepayments made for them. Exploration and evaluation assets consist of mine projects in variours mining projects in Turkey and South Africa. 12. Investments in associates EUR '000 Domicile 2015 Non-core associates Incap Furniture Oy * Finland Valtimo Components Oyj * Finland 122 Value at reporting date Ownership (%) Reporting date Assets Liabilities Revenue Profit 24.1 24.9 0 0 0 EUR '000 Domicile Value at reporting date Ownership (%) Reporting date Assets Liabilities Revenue Profit 2014 Core associates Specialty Super Alloys SSA Inc United States Non-core associates Incap Furniture Oy * Finland Valtimo Components Oyj * Finland 92 92 0 0 0 20.0 31.12.2014 578 116 820 27 24.1 24.9 * Incap Furniture Oy and Valtimo Components Oyj are in a corporate restructuring process. The income statement related items of associated companies of Speciality Alloys and FerroAlloys business segments (´core-associates´) are presented above EBIT; the non-core associates in financial items. During the financial year 2015, Afarak divested EUR ‘000 1.1.2015 its holding in the associated company Speciality Share of profit Super Alloys Inc. This led to a loss on sale of investment in associate of EUR 0.3 million. Exchange rate differences Proceeds from disposal Movements in 2015 During the financial year 2014, Afarak did not acquire or dispose holdings in associates. Movements in 2014 EUR ‘000 Share of profit Exchange rate differences 31.12.2015 1.1.2014 31.12.2014 92 2 15 -109 0 76 6 10 92 13. Investments in joint ventures At the end of the financial year 2015, the Group had joint control over one jointly controlled entity, Synergy Africa Ltd, in which the Group has a 51% interest. The acquisition of Chromex Mining Ltd, a UK company with mining operations and prospecting rights in southern Africa, was carried out by this joint venture company. Synergy Af- rica Group has been consolidated as a joint venture company in the financial reporting of the Group starting at 31 December 2010. Following the 2012 changes in the accounting standards the company changed the accounting method from proportionate consolidation method to equity method. Summarised financial statement information (100% share) of the joint venture, based on its IFRS financial state- ments, and reconciliation with the carrying amount of the investment in the Group’s consolidated financial state- 123 ments are set out below: EUR '000 Revenue Other operating income Materials and supplies Employee benefits expense Depreciation and amortisation Other operating expenses Impairment, net Operating profit / loss Finance income Finance cost Loss before taxes Income taxes Loss for the year Group's share of loss for the year Loss attributable to: Joint venture owners Non-controlling interests 2015 18,954 289 -13,595 -1,124 -1,855 -2,017 0 2014 11,153 212 -7,895 -1,493 -1,798 -1,980 -4,235 652 -6,036 1,891 -3,093 -549 306 -243 -124 -86 -38 -124 382 -2,256 -7,911 1,418 -6,492 -3,311 -2,839 -472 -3,311 Assets and liabilities EUR '000 Non-current assets Intangible assets Mines and mineral assets Property, plant and equipment Non-current assets total 124 Current assets Inventories Trade and other receivables Trade and other receivables from JV owners Cash and cash equivalents Current assets total Total assets Non-current liabilities Interest-bearing debt Interest-bearing debt to JV owners Provisions Deferred tax liability Other non-current liabilities to JV owners Non-current liabilities total Current liabilities Trade and other payables Trade and other payables to JV owners Current liabilities total Total liabilities Net Liability 2015 2014 4,187 24,543 2,824 31,555 1,239 419 747 1,264 3,669 2,668 30,712 3,761 37,141 1,911 546 166 511 3,134 35,224 40,275 26,423 32,573 1,665 7,046 5,624 73,332 5,255 2,163 7,418 23,679 34,406 1,725 8,820 5,004 73,634 3,648 1,385 5,033 80,750 78,667 -45,526 -38,392 Proportion of Group's Ownership 51 % 51 % Carrying amount of Joint venture -23,218 -19,580 At the end of 2015, Synergy Africa Group had 65 (56) employees. The average number of employees in full year 2015 was 63 (59). IMPAIRMENT REVIEW OF JOINT VENTURE General principles of impairment testing Synergy Africa Ltd, the South African mining business which operates Stellite and Mecklenburg mines has carried out impairment testing on assets as at 31 December 2015. The statement of financial position of Synergy Africa has been assessed whether there is any indication that assets may be impaired. If any such indication exists, the recoverable amount of these assets is estimated. Moreover, the recoverable amount of any goodwill and unfinished investment projects is estimated annually, irrespective of whether there is an indication of impairment. The South African mining business did not have any goodwill on its statement of financial position at the end of the financial year 2015. Similarly to 2014, in view of the weak situation in the chrome market, Synergy Group assessesed whether there is any indication of impairment and consequently the assets of the business were tested for impairment. Contrary to the impairment recognised in the previous year in view of the weak market conditions, no further impairment was recognised in 2015 subsequent to the impairment assessment made on the assets of Synergy Group. 125 Methodology applied in impairment testing For the cash generating units that were tested, the test was carried out by calculating their value in use. Value in use has been calculated by discounting estimated future net cash flows based on the conditions and assumptions prevailing at the time of the testing. Future cash flows have been projected for the life of mine with a 6% growth rate equalling projected long-term inflation has been applied. The weighted average cost of capital (WACC) has been calculated taking into account the business’s typical capital structures, investors’ average required rate of return for similar investments and company size and operational location related factors, as well as risk-free interest rates and margins for debt financing. Synergy Africa has used publicly available information on the peer group companies’ capital structure, risk premium and other factors. The market interest rates reflect the rates applicable on 31 December 2015. The information used in the 31 December 2015 impairment testing is based on business units’ management future forecasts, on general third-party industry expert or analyst reports where available, and to the extent possible on the current business and asset base excluding any non-committed expansion plans. Forecasted sales volumes and profitability are based on the management’s view on future development while also taking past performance into account. Price forecasts are based on independent market forecasts. The cash flow models have been prepared at constant foreign exchange rates. The underground production in the models does not solely come from reserves, as some come from resources that are not yet converted to reserves. This increases the risk that some of the grades may differ, and tonnes could possibly not be economically extractable. There is also the risk that costs could be different than anticipated even though due care was taken in the cost evaluation. The pre-tax discount rates applied in 2015 impairment testing was 23.64% for Mecklenburg mine and 21.52% for Stellite mine. The cash flows in the Stellite mine impairment test review include both opencast and recycling of tailing dam by way of using the shaking table technology. The cash flows in the Mecklenburg mine impairment test review only includes underground operation. The Stellite mine model has a life of mine of 30 years whereas the Mecklenburg mine model has a life of mine of 16 years. The results of impairment testing have been evaluated by comparing the cash generating units’ recoverable amount to the corresponding carrying amount. Test results 31 December 2015 As a result of the tests carried out Synergy Africa did not pass any impairment as the impairment tests indicated that the recoverable amounts from the mines exceed the carrying amount and consequently no impairment was required. The testable asset base includes intangible and tangible assets and net working capital less provisions and deferred tax liabilities (in relation to purchase price allocation entries). The USD/ZAR foreign exchange rate affects significantly the testing of the South African minerals business. The foreign exchange rate used in the test was 15.75. 126 Key background and assumptions used in the cash flow forecasts of the impairment testing process are summarised in the following table: Cash generating unit Sales volume Sales prices Costs Stellite mine Concentrate: Opencast mining of 169,500t/a in 2016; 193,000 in 2017 and 2018; 168,000 in 2019; and 72,000 as from 2020 till 2045 PGM: 5,591oz t/a from 2018 till 2045 SA Chrome Ore – UG2 CIF adjusted for FOM, based on external experts (Heinz Pariser) price forecasts 2018 forecast price for PGM based on current market price Mecklenburg mine ROM: Underground 5,300t/a in 2016; 140,600t/a in 2017; and is planned to increase to an average of 380,000t/a as from 2018 till 2031 SA Chrome Ore – Lumpy CIF adjusted for FOM, based on external experts (Heinz Pariser) price forecasts The costs applied for opencast operation is based on the current historical cost adjusted for a reduction in production cost per ton as a result of higher recoveries due to the implementation of new technology. This cost has been estimated and adjusted for inflation for the opencast life of mine. The cost over the life of mine excluding inflation is estimated to be ZAR 745 per saleable ton of chrome. The costs for underground are based on past experiences of our mining team in underground operations adjusted for inflation rate. The cost over the life of mine excluding inflation is estimated to be ZAR 550 per saleable ton of chrome. Synergy Africa has analysed the sensitivity of the impairment test results by estimating how the essential assumptions should change in order for the recoverable amount to be equal to the carrying amount. The results of this sensitivity analysis as of 31 December 2015 are given below: Cash generating unit Stellite Mine Mecklenburg Mine Change in pre- tax discount rate (compared to the level used in testing) Change in free cash flow (annual average) Change in CGU’s average Cost of Production Change in CGU’s average EBITDA margin 15.8% - points 12.7% - points -57.6% -60.0% 3.3% 9.9% -19.6%- points -33.1% - points 127 14. Financial assets and liabilities 31.12.2015, EUR '000 Non-current financial assets Non-current interest-bearing receivables Trade and other receivables * Current financial assets Current interest-bearing receivables Trade and other receivables * Other financial assets Cash and cash equivalents Carrying amount of financial assets Fair value of financial assets Non-current financial liabilities Non-current interest-bearing liabilities Other non-current liabilities Current financial liabilities Current interest-bearing liabilities Trade and other payables * Derivatives Carrying amount of financial liabilities Fair value of financial liabilities Assets available- for-sale Assets held-to- maturity Loans and other receivables Liabilities measured at amortised cost Total carrying amount 597 33,165 441 3,519 23,407 0 19,644 80,176 80,176 0 0 597 597 33,763 441 3,519 23,407 0 19,644 80,773 80,773 2,975 1,969 12,133 11,783 0 0 0 2,975 1,969 12,133 11,783 0 28,860 28,860 28,860 28,860 31.12.2014, EUR '000 Non-current financial assets Non-current interest-bearing receivables Trade and other receivables * Current financial assets 128 Current interest-bearing receivables Trade and other receivables * Other financial assets Cash and cash equivalents Carrying amount of financial assets Fair value of financial assets Non-current financial liabilities Non-current interest-bearing liabilities Other non-current liabilities Current financial liabilities Current interest-bearing liabilities Trade and other payables * Derivatives Carrying amount of financial liabilities Fair value of financial liabilities Assets available- for-sale Assets held-to- maturity Loans and other receivables Liabilities measured at amortised cost Total carrying amount 587 34,406 499 9,213 19,447 1,656 13,332 78,554 78,554 0 0 587 587 34,993 499 9,213 19,447 1,656 13,332 79,141 79,141 0 0 6,263 6,263 42 42 5,866 5,866 22,052 4,066 22,052 4,066 38,289 38,289 38,289 38,289 * Non-financial assets and liabilities are not included in the figures FAIR VALUE HIERARCHY 31.12.2015, EUR '000 Carrying amounts at the end of the reporting period Financial assets at fair value Level 1 Level 2 Level 3 Derivatives Other financial assets Total Available-for-sale financial assets Other financial assets Financial liabilities at fair value Derivatives Total 129 0 0 31.12.2014, EUR ‘000 Carrying amounts at the end of the reporting period Financial assets at fair value Level 1 Level 2 Level 3 Derivatives Other financial assets Total Available-for-sale financial assets Other financial assets Financial liabilities at fair value Derivatives Total 31.12.2015, EUR ‘000 Level 3 reconciliation Acquisition cost at 1.1.2015 Acquisition cost at 31.12.2015 Accumulated impairment losses at 1.1.2015 Accumulated impairment losses at 31.12.2015 Carrying amount at 31.12.2015 4,066 4,066 40 40 -40 -40 0 31.12.2014, EUR ‘000 Level 3 reconciliation Acquisition cost at 1.1.2014 Acquisition cost at 31.12.2014 Accumulated impairment losses at 1.1.2014 Accumulated impairment losses at 31.12.2014 Carrying amount at 31.12.2014 130 Interest-bearing debt EUR '000 Non-current Bank loans Subordinated loans Finance lease liabilities Total Current Bank loans Finance lease liabilities Cheque account with overdraft facility Other interest-bearing liabilities Total EUR '000 Finance lease liabilities, minimum lease payments No later than 1 year Later than 1 year and not later than 5 years Finance lease liabilities, present value of minimum lease payments No later than 1 year Later than 1 year and not later than 5 years 40 40 -40 -40 0 2015 2014 2,970 5 0 2,975 5,071 22 4,532 2,508 12,133 6,238 5 20 6,263 5,039 70 757 0 5,866 2015 2014 22 0 22 22 0 22 70 20 90 70 20 90 FINANCIAL RISKS AND RISK MANAGEMENT The Board of Directors of Afarak Group Plc has outlined the key risks of the Group in the Board of Directors’ Report. In the following section, the financial and commodity risks are presented in more detail with the related sensitivity analyses. SUMMARY ON FINANCIAL ASSETS AND LOAN ARRANGEMENTS Financial assets 31 December 2015 In addition to the operating result and the cash flow generated from it the factors described below have most significantly affected the year-on-year change in the Group’s financial assets at the 2015 closing date: The Group’s financial assets decreased in consequence of various capital expenditure project that the Group conducted during the year. The capital expenditure related primarily to the Speciality Alloys segment where TMS continued the investment of fines tailing processing plant at Kavak to increase annual mining volume and the new dust exhaustion at EWW which was commissioned in December 2015. Capital expenditure for 2015 also included the dryer in the ferrochrome plant at Mogale Alloys, replacement of the furnace refractories during the shutdown period and the acquisition of new plant vehicles. At Vlakpoort mine the Group continued investing to ramp up the bulk sample operation. The cash flow effect for capital expenditure totalled EUR 7.3 million during the year. 131 Also repayments of financial liabilities reduced the Group’s financial assets during the year. On 31 December 2015, the cash and cash equivalents were invested mainly in interest-bearing EUR, ZAR and USD denominated bank accounts. The Group companies have given pledged deposits for EUR 0.6 (4.6) million. Other financial assets comprise interest-bearing loans and other receivables. During the year Mogale Alloys has been granted an increase in the overdraft facility of ZAR 50 million to ZAR 100 million to better manage its working capital. TMS has also been granted a loan facility during the year of USD 500 thousand to finance the capital expenditure projects at Tavas and Kavak mines. Interest-bearing debt 31 December 2015 » Floating rate loans from financial institutions total EUR 7.8 (11.0) million. Fixed rate loans total EUR 7.5 (1.1) million. » The interest rate of the South African loans is tied to the market rate of JIBAR. The interest rate on 31 December 2015, based on market interest rates at that date, was 6.63 % (5.83%). The interest rate margin for floating rate notes was 3.0% (3.0%) p.a. » The interest rate of the Maltese bank loan facility is tied to the market rate of LIBOR. The interest rate on 31 December 2015, based on market interest rates at that date, was 0.54 % (0.26%). The interest rate margin for floating rate notes was 3.75% (3.75%) p.a. » The interest rate of the Turkish bank loan facility is tied to the market rate of LIBOR. The interest rate on 31 December 2015, based on market interest rates at that date, was 0.45 % (0.26%). The interest rate margin for the fixed rate notes was 0.75% (0.00%) p.a. Capital Management The Group’s capital management objective is to maintain the ability to continue as a going concern and to optimise the cost of capital in order to enhance value to shareholders. As part of this objective, the Group seeks to maintain access to loan and capital markets at all times. The Board of Directors reviews the capital structure of the Group on a regular basis. Capital structure and debt capacity are taken into account when deciding on new investments. Practical tools to manage capital include the application of dividend policy, capital redemption, share buybacks and share issues. Debt capital is managed considering the requirement to secure liquidity. The Group’s internal capital structure is reviewed on a regular basis with the aim of optimising the structure by applying measures such as internal dividends and equity adjustments. The Group’s long term target for capital structure is to keep the equity ratio above 50%. At the end of the reporting period, the Group’s equity ratio stood at 64.2% (62.8%). The Group’s loans from financial institutions include financial covenants that if breached might have a negative effect on the financial positon of the Company. The covenants that the Group is exposed to are: Interest cover ratio of Afarak Trading Limited (previously known as RCS Limited) must not be lower than 5; Debt cover ratio of Afarak Trading Limited (previously known as RCS Limited) must be greater than 3; leverage ratio of Afarak Trading Limited (previously known as RCS Limited) must be lower than 1; the Group’s Net Asset Value must be greater than US$ 175 million; Debt service cover of Mogale Alloys must be greater than 1.4 and Net Debt to EBITDA of Mogale Alloys must be lower than 1.5. Management review these covenants regularly and are in correspondence with the relevant bank if there is indication of breach. In the discussions with the banks the Company would do the utmost to clarify the reason for such breach and present the financial plans to remain within the covenant limits. As at the end of the reporting period there has not been any breach of covenant at Afarak Trading Limited (previously known as RCS Limited). At Mogale Alloys both the debt service cover and the Net Debt to EBITDA ended up in breach. Management will do the utmost to restore the situation within the covenant limits. Despite the covenant breach during the year the same South African bank has granted an increase in the overdraft facility to Mogale Alloys to better manage its working capital. 132 Financial Risk Management In its normal operations, the Group is exposed to various financial risks. The main financial risks are liquidity risk, foreign exchange rate risk, interest rate risk, credit risk and commodity price risk. The objective of the Group’s risk management is to identify and, to as far as reasonably possible, mitigate the adverse effects of changes in the financial markets on the Group’s results. The general risk management principles are accepted by Afarak Group Plc’s Board of Directors and monitored by its Audit and Risk Management Committee. The managements of the Group and its subsidiaries’ are responsible for the implementation of risk management policies and procedures. Group management monitors risk positions and risk management procedures on a regular basis, and supervises that the Group’s policies and risk management principles are followed in all day-to-day operations. Risks and risk management are regularly reported to the Audit and Risk Management Committee. The Group’s significant financial instruments comprise bank loans and overdrafts, finance leases, other long- term liabilities, cash and short-term deposits and money market investments. The main purpose of these financial instruments is to finance the Group’s acquisitions and ongoing operations. The Group also has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations (i) Liquidity risk The Group regularly assesses and monitors its investment and working capital needs and financing, so that it has enough liquidity to serve and finance its operations and pay back loans. The availability and flexibility of financing are targeted to be guaranteed by using multiple financial institutions in the financing and financial instruments, and to agree on financial limit arrangements. The Group’s short-term liquidity at the end of the financial year was good, even though the unutilised credit facility of EUR 45.3 expired on 31 December 2014. If the liquidity risks were to be realised, it would probably result in overdue interest expenses and damage the relations with suppliers. Consequently, the pricing and other terms for input goods and services and for financing could be affected. The maturity distribution of the Group debt at the end of the financial year was as follows: Carrying amount Contractual cash flows 6 months or less 6-12 months 8,042 22 13,310 4,532 0 -8,527 -2,744 -2,314 -22 -13,310 -4,532 0 -12 -11,243 -4,532 0 -10 -82 0 0 1-2 years -3,469 0 -1,984 0 0 25,904 -26,391 -18,530 -2,407 -5,454 2-5 years More than 5 years 0 0 0 0 0 0 0 0 0 0 0 0 133 31.12.2015, EUR ‘000 Financial liabilities Secured bank loans Finance lease liabilities Trade and other payables Bank overdraft Derivatives Total 31.12.2014, EUR ‘000 Financial liabilities Secured bank loans Finance lease liabilities Carrying amount Contractual cash flows 6 months or less 6-12 months 11,277 90 -11,713 -2,636 -2,588 -90 -45 1-2 years -6,490 -20 -57 0 0 -26 -124 0 0 2-5 years More than 5 years 0 0 -47 0 0 -47 0 0 0 0 0 0 Trade and other payables 25,737 -25,784 -25,556 Bank overdraft Derivatives Total 757 4,066 41,928 -757 -757 -4,066 -4,066 -42,410 -33,059 -2,738 -6,567 (ii) Foreign exchange rate risk The Group operates internationally, including in Turkey, Malta and South Africa, and is therefore exposed to foreign exchange rate risks. The risks arise both directly from the outstanding commercial cash flows and currency positions, and indirectly from changes in competitiveness between various competitors. The foreign exchange differences arising from inter-company loans designated as net investments in foreign subsidiaries has been recognised in the translation difference in the equity. The Group is exposed to currency-derived risks that affect its financial results, financial position and cash flows. In particular the exchange rates of US Dollar and South African Rand against the Euro have a significant impact on the Euro-denominated profitability of the Group. The cash inflows of the business are denominated in US Dollars, whereas a significant portion of the costs are denominated in the South African Rand. The fluctuation of the South African Rand has a significant impact on the Group’s profit and loss as well as on the Group’s assets and liabilities. In its risk management, the Group aims to match its cash inflows and outflows as well as receivables and liabilities in terms of the currency in which these items are denominated. The following tables present the currency composition of receivables and debt, and changes thereby relative to the previous year-end. 31.12.2015, EUR ‘000 EUR exchange rate 1 1.0887 0,7340 3,1765 16,9530 Cash and cash equivalents (EUR) EUR 4,026 USD 13,768 GBP 118 Trade and other receivables (EUR) 4,514 22,521 Loans and other financial assets (EUR) 821 913 Trade and other current payables (EUR) 134 Loans and other liabilities (EUR) -3,784 -1,913 -828 -8,061 -15 TRY 227 41 377 -473 -335 ZAR 1,504 3,048 8,229 -5,258 -6,768 Currency exposure, net (EUR) 31,738 28,222 1,016 -162 755 Currency exposure, net in currency ('000) 31,738 30,725 746 -515 12,807 31.12.2014, EUR ‘000 EUR exchange rate 1 1.2141 0.7789 2.832 14.0353 Cash and cash equivalents (EUR) EUR 2,740 USD 8,655 GBP 129 Trade and other receivables (EUR) 17,342 12,908 Loans and other financial assets (EUR) 39,952 Trade and other current payables (EUR) -11,916 -2,795 -9 Loans and other liabilities (EUR) -76 -10,108 TRY 67 545 -363 -488 ZAR 1,741 2,609 0 -6,253 -1,500 Currency exposure, net (EUR) 48,043 8,659 120 -239 -3,403 Currency exposure, net in currency ('000) 48,043 10,513 93 -675 -47,762 The effect on the 31 December 2015 currency denominated net assets by changes in foreign exchange rates compared with the rates used in the Group consolidation is presented below. Due to the high market volatility of the exchange rates, the range of change was kept at +/- 20%. 31 December 2015 20% strengthening 15% strengthening 10% strengthening 5 % strengthening 0% no change -5% weakening -10% weakening -15% weakening -20% weakening 31 December 2014 20% strengthening 15% strengthening 10% strengthening 5 % strengthening 0% no change -5% weakening -10% weakening -15% weakening -20% weakening USD 7,055 4,980 3,136 1,485 0 -1,344 -2,566 -3,681 -4,704 USD 2,165 1,528 962 456 0 -412 -787 -1,129 -1,443 GBP TRY ZAR 254 179 113 53 0 -48 -92 -132 -169 GBP 30 21 13 6 0 -6 -11 -16 -20 -41 -29 -18 -9 0 8 15 21 27 189 133 84 40 0 -36 -69 -99 -126 135 TRY ZAR -60 -42 -27 -13 0 11 22 31 40 -851 -601 -378 -179 0 162 309 444 567 DERIVATIVES The Group’s exposure to the risk of changes in foreign exchange rates relates primarily to the Group’s operating activities (when revenue or expense is denominated in a foreign currency). Operative foreign currency derivatives that are valued at fair value on the reporting date cause timing differences between the changes in the derivative’s fair values and hedged operative transactions. Changes in fair values for derivatives designated to hedge future cash flow but are not accounted for according to the principles of hedge accounting impact the Group’s operating profit for the financial year. The underlying foreign currency transactions will realise in future periods. At the end of 2014 the Group had USD/ZAR foreign currency forward contracts and foreign currency options hedging the operative cash flows. The nominal value and fair value of the contracts is stated in the table below. The group does not apply hedge accounting. EUR ’000 FX-Forwards FX-Options 2015 2014 Nominal value Fair value Nominal value Fair value 0 0 0 0 41,586 4 4,066 0 (iii) Interest rate risk The Group is exposed to interest rate risk when Group companies take loans, or make other financing agreements or deposits and investments related to liquidity management. In addition, changes in interest rates can alter the fair values of the Group’s assets. The Group’s revenue and operative cash flows are mainly independent of the changes in market interest rates. To manage interest rate risks, the Group has used both fixed and floating rate debt instruments and derivative instruments, such as interest rate swaps, when needed. At the end of 2015, the Group’s interest-bearing debt was mainly based on floating interest rates; and there were no interest rate swaps in place. The Group aims to match the loan maturities with the businesses’ needs and to have the maturities spread over various periods so that the Group’s interest rate risks are somewhat diversified. Floating rate financing is mainly tied to the market rates of different countries (United Kingdom, South Africa), changes to which will then influence the Group’s total financing cost and cash flows. 136 The short-term interest-bearing receivables of the Group are mainly loan receivables and receivables on past asset disposals. The Group’s interest-bearing liabilities have been discussed above. The split of interest-bearing debt and receivables, also classified into fixed rate and floating rate instruments on 31 December 2015 and 31 December 2014 was as follows: Interest rate profile of interest-bearing financial instruments (EUR '000) Fixed rate instruments Financial assets Financial liabilities Fixed rate instruments, net Variable rate instruments Financial assets Financial liabilities Variable rate instruments, net 31.12.2015 31.12.2014 3,500 -7,521 -4,021 33,184 -7,755 25,429 7,502 -1,102 6,399 36,705 -11,028 25 677 Interest-bearing net debt 28,151 32 076 The following table presents the approximate effect of changes in market interest rates on the Group’s income statement should the deposits’ and loans’ interest rates change. The analysis includes floating rate financial assets and liabilities. The sensitivity analysis is illustrative in nature and applicable for the forthcoming 12 month period if the period’s asset and liability structure were to be equal to that of 31 December 2015, and if there were no changes in exchange rates. 31 December 2015 Interest rate change Change in interest income Change in interest expense Net effect -2.00% -1.50% -1.00% -0.50% 0.00% 0.50% 1.00% 1.50% 2.00% -664 -498 -332 -166 0 166 332 498 664 155 116 78 39 0 -39 -78 -116 -155 -509 -381 -254 -127 0 127 254 381 509 137 31 December 2014 Interest rate change Change in interest income Change in interest expense Net effect -2.00% -1.50% -1.00% -0.50% 0.00% 0.50% 1.00% 1.50% 2.00% -734 -551 -367 -184 0 184 367 551 734 221 165 110 55 0 -55 -110 -165 -221 -514 -385 -257 -128 0 128 257 385 514 (iv) Credit risk Credit risk can be realised when the counterparties in commercial, financial or other agreements cannot take care of their obligations and thus cause financial damage to the Group. The Group’s operational policies define the creditworthiness requirements for customers and for counterparties in financial and derivative transactions, as well as the principles followed when investing liquidity. In the case of major sales agreements, the counterparty’s credit rating is checked. To date, the Group has not faced any major losses due to this reason. The Group’s key customers are major international stainless steel companies, and a number of specialist agents selling to the steel sector, with typically long and successful business histories. Since the customers represent one sector of industry, major changes in that industry’s profitability could increase the credit risk. The Board of Directors of Afarak Group Plc has determined a cash management policy for the Group’s parent company, according to which the excess cash reserves are deposited for a short-term only and with sound financial institutions with which the Group has established business relations. The credit rating of all significant counterparties is analysed from time to time. During the financial year, credit losses booked through the profit and loss were not significant. The maximum credit risk is equal to the carrying value of the receivables as of 31 December, and is split as follows: Category Interest-bearing Cash and cash equivalents Receivables from related parties Other interest bearing receivables Interest-bearing, total 138 Interest-free Trade receivables Other short-term receivables Trade and other receivable from associate Long-term receivables Interest-free, total Total EUR ‘000 31.12.2015 EUR ‘000 31.12.2014 19,644 36,073 611 56,328 23,407 6,507 2,289 6,070 38,273 13,332 41,406 2,800 57,538 19,447 6,814 1,385 5,504 33,150 94,601 90,688 (v) Commodity risks The Group is exposed to price risks on various output and input products, materials and commodities. Also, securing the availability of raw materials without any serious disruptions is vital to its businesses. The price risks on input materials and commodities are managed by pricing policies so that changes in input materials and commodities can be moved into sales prices. This, however, is not always possible or there may be delays as a result of contractual or competitive reasons. The Group’s units that have production operations are exposed to availability, quality and price fluctuations in raw materials and commodities. To diminish these risks, the Group’s business units seek to enter into long-term agreements with known counterparties; although this is not always possible due to the tradition and practice of the business. For the most part, because it is not possible or economically feasible to hedge commodity price risks in the Group’s business sectors with derivative contracts, the Group did not have any commodity derivative contracts in place as of 31 December 2015. SENSITIVITY ANALYSIS - SPECIALITY ALLOYS BUSINESS The effect of changes in the sales price of special grade ferrochrome, produced by the Group’s Speciality Alloys business, to the Group’s operating profit and equity is illustrated below, assuming that the EUR/USD rate were constant. The analysis is based on December 2015 price level. Since the products are priced in USD, the exchange rate changes could have a major effect on the Group’s profitability in EUR. Full capacity for simulation purposes is set at 36,000 t/a, and it is also assumed that only one ferrochrome quality is produced. Various raw materials are used in ferrochrome production, including chrome concentrate and ferrosilicochrome. The purchase prices of the main raw materials typically in the same direction as the sales prices, although the correlation is not perfect and the timing may differ. In practice, therefore the net effect on the Group’s profitability most probably would be lower than shown below. Electricity usage is also substantial, and hence changes in electricity prices have a significant effect on profitability; electricity prices do not correlate with changes in commodity prices. Financial year 2015 Change in Sales price (USD / lb Cr) Change in Operating Profit Change in Group's Equity EUR ‘000 EUR ‘000 2,72 2,61 2,49 2,38 2,27 2,15 2,04 1,93 1,81 Financial year 2014 Change in Sales price (USD / lb Cr) 2,74 2,63 2,51 2,40 2,29 2,17 2,06 1,94 1,83 20 % 15 % 10 % 5 % 0 % -5 % -10 % -15 % -20 % 20% 15% 10% 5% 0% -5% -10% -15% -20% 23,129 17,347 11,565 5,782 0 -5,782 -11,565 -17,347 -23,129 21,973 16,480 10,986 5,493 0 -5,493 -10,986 -16,480 -21,973 139 Change in Operating Profit Change in Group's Equity EUR ‘000 EUR ‘000 20,912 15,684 10,456 5,228 0 -5,228 -10,456 -15,684 -20,912 19,866 14,900 9,933 4,967 0 -4,967 -9,933 -14,900 -19,866 SENSITIVITY ANALYSIS – FERROALLOYS BUSINESS The FerroAlloys business’s smelting operation, Mogale Alloys, is able to change its product mix quite rapidly and flexibly, and so only rough estimates on its sensitivity to commodity price changes can be given. Its full production capacity is about 110,000 metric t/a of various metal alloys. Assuming, for simplicity, that all of the Mogale capacity was used for charge chrome production only, and using the year-end 2015 sales price indications for charge chrome, the following table represents a rough proxy of the sales price sensitivities. It should also be taken into account that the profitability of the smelting operations can be substantially impacted by changes in the USD and ZAR exchange rates and in electricity prices, as well as changes in market prices. In South Africa the majority of the electricity supply, price and availability are controlled by one entity, Eskom. Mogale Alloys may participate in Eskom’s electricity buyback program in the foreseeable future. Financial year 2015 Change in Sales price (USD / lb Cr) Change in Operating Profit Change in Group's Equity 140 1,10 1,06 1,01 0,97 0,92 0,87 0,83 0,78 0,74 20% 15% 10% 5% 0% -5% -10% -15% -20% 20,903 15,677 10,451 5,226 0 -5,226 -10,451 -15,677 -20,903 15,050 11,288 7,525 3,763 0 -3,763 -7,525 -11,288 -15,050 Financial year 2014 Change in Sales price (USD / lb Cr) Change in Operating Profit Change in Group's Equity 1,30 1,24 1,19 1,13 1,08 1,03 0,97 0,92 0,86 15. Inventories EUR '000 Goods and supplies Unfinished products Finished products Total 20% 15% 10% 5% 0% -5% -10% -15% -20% 22,004 16,503 11,002 5,501 0 -5,501 -11,002 -16,503 -22,004 15,843 11,882 7,921 3,961 0 -3,961 -7,921 -11,882 -15,843 2015 2014 16,389 117 28,646 45,152 30,611 90 29,351 60,052 16. Trade and other current receivables EUR '000 Trade receivables Loan receivables Interest-bearing receivables Prepaid expenses and accrued income Income tax receivables Other receivables Total 2015 23,407 415 3,519 3,307 5,058 5,073 2014 19,447 3,836 7,034 3,201 3,323 3,928 141 40,779 40,769 Prepaid expenses and accruals mainly relate to rental contracts, personnel expenses, VAT receivables and accrued interest for loans. The values of receivables at the end of the reporting period closely correspond to the monetary value of maximum credit risk, excluding the fair value of received guarantees, in the potential case where the counterparties cannot fulfil their commitments. The aging of trade receivables at the end of the reporting period EUR '000 Not past due Past due 0-30 days Past due 31-60 days Past due 61-90 days Past due more than 90 days Total 2015 12,708 10,936 96 99 -432 2014 14,121 5,579 176 0 -430 23,407 19,447 17. Cash and cash equivalents Cash and cash equivalents in the cash flow statement: EUR '000 2015 2014 Cash and bank balances 18,793 12,449 Pledged deposits 508 4,286 EURO ‘000 Cash and bank balances Short-term money market investments Total 18. Notes to equity 142 31.12.2015 31.12.2014 18,793 851 19,644 12,449 883 13,332 Number of registered shares Number of shares on issue Share capital, EUR '000 31.12.2013 248,432,000 244,187,283 23,642 Subscriptions based on option rights 11,130,434 11,130,434 0 31.12.2014 259,562,434 255,317,717 23,642 Subscriptions based on option rights 3,478,261 3,478,261 0 31.12.2015 263,040,695 258,795,978 23,642 There is no nominal value for the Company’s share. The equity reserves are described below: SHARE PREMIUM RESERVE Related to the old Finnish Companies Act, the Company has a share premium reserve in relation to old share issues, where the premium in excess of the par value of the shares subscribed has been recognised in the share premium reserve. PAID-UP UNRESTRICTED EQUITY RESERVE Paid-up unrestricted equity reserve comprises other equity investments and subscription price of shares to the extent that it is not recognised in the share capital based on a specific decision. TRANSLATION RESERVE The translation reserve comprises all foreign currency differences arising from the translation of financial statements of foreign operations. TREASURY SHARES On 31 December 2015 the Company had altogether 4,244,717 (4,244,717) of its own shares, which was equivalent to 1.61 (1.64) % of all registered shares. The total number of shares outstanding, excluding the treasury shares held by the Company on 31 December 2015 was 258,795,978 (255,317,717). The Company’s subsidiaries do not hold any of Afarak Group Plc’s shares. SHARE ISSUE AUTHORISATIONS GIVEN TO THE BOARD OF DIRECTORS The Annual General Meeting held on 8 May 2015 resolved to authorize the Board of Directors to issue shares and stock options and other special rights that entitle to shares in one or more tranches up to a maximum of 25,000,000 new shares or shares owned by the Company. This equates to approximately 9.6% of the Company’s currently registered shares. The authorization may be used among other things in financing, enabling corporate and business acquisitions or other arrangements and investments of business activities and in the employee incentive and commitment programs. By virtue of the authorization, the Board of Directors can decide both on share issues against payment and on share issues without payment. The payment of the subscription price can also be made with consideration other than money. The authorization contains the right to decide on derogating from shareholders’ pre-emptive right to share subscriptions provided that the conditions set in the Companies’ Act are fulfilled. The authorisation replaces all previous authorisations and is valid 2 years from the decision of the Annual General Meeting. 143 The Annual General Meeting authorised the Board of Directors to resolve upon acquiring a maximum of 15,000,000 of the Company’s own shares. The authorisation replaces all previous authorisations and it is valid for 18 months from the decision of the Annual General Meeting. TRADING INFORMATION Afarak Group Plc’s shares are listed on the main market of the London Stock Exchange and on NASDAQ Helsinki. Afarak shares are traded on the London Stock Exchange under the trading code AFRK and on the NASDAQ Helsinki under code AFAGR. The ISIN code is FI0009800098 and the trading takes place in Pound Sterling (GBP) and in Euros (EUR). On 16 April 2015, Afarak announced that the Company intended to transfer the listing segment of its share on the Main Market of the London Stock Exchange to a Standard listing from the current Premium listing. The proposed change to a Standard listing was subject to shareholder approval and the Board sought authority from the shareholders to transfer its listing on the London Stock Exchange. The purpose of the transfer is to allow the Company to reduce the costs of its listing which arise from the regulatory burden applicable to companies with a Premium listing, which would no longer be applicable following transfer to a Standard listing. The trading arrangements for the Company’s shares on the NASDAQ Helsinki Stock Exchange and on the London Stock Exchange remain unchanged. On 16 April 2015, Afarak announced that the company had published a circular to shareholders in connection with the proposed transfer of the listing segment of its shares on the Main Market of the London Stock Exchange to a Standard listing from the current Premium listing. On 9 June 2015 Afarak announced that the United Kingdom Listing Authority had given its approval to effect the shares transfer on the Main Market of the London Stock Exchange to a Standard listing from a Premium listing, and that the transfer had now become effective. SHARE PERFORMANCE AND TRADING During the financial year 2015, the price of Afarak Group’s share in London Stock Exchange varied between GBP 0.25 (0.24) and GBP 0.33 (0.32) and in NASDAQ Helsinki between EUR 0.33 (0.21) and EUR 0.67 (0.42). Afarak’s share closed in London at the end of the financial year at GBP 0.33 (0.25) and Helsinki at EUR 0.40 (0.32). The closing price on 31 December gives the Company a market capitalisation of the entire capital stock 263,040,695 (259,562,434) shares of GBP 85.5 (65.5) million and EUR 105.7 (83.1) million. A total of 13,248 (23,013) Afarak shares were traded in London and 38,224,080 (20,927,217) shares in Helsinki during the financial year, representing 0.01% (0.01%) of stock in London and 14.53% (8.06%) in Helsinki. SHAREHOLDERS On 31 December 2015, the Company had a total of 4,433 shareholders (4,030 shareholders on 31 December 2014), of which eight were nominee-registered. The registered number of shares on 31 December 2015 was 263,040,695 (259,562,434). Largest shareholders on 31 December 2015 Shareholder 1 Nordea Bank Finland Plc * 2 Hino Resources Co. Ltd ** 144 3 Joensuun Kauppa ja Kone Oy 4 Kankaala Markku Olavi 5 Clearstream Banking S.A. 6 Moncheur & Cie 7 Hanwa Company Limited 8 Afarak Group Plc 9 Hukkanen Esa Veikko 10 Danske Bank Plc Total Other Shareholders Total shares registered Shares 164,508,392 34,881,903 11,272,326 7,066,116 6,663,927 6,607,183 6,000,000 4,244,717 4,223,048 925,810 246,393,422 16,647,273 263,040,695 % 62.5 13.3 4.3 2.7 2.5 2.5 2.3 1.6 1.6 0.4 93.7 6.3 100.0 * According to the flagging notification of Aida Djakov published 25 July 2014, the total combined holdings of Aida Djakov and her controlled corporation Atkey Limited are 68,526,701 shares representing 26.4 % of the total number of shares. ** According to the latest flagging notification of Hino Resources Co. Ltd (“Hino”) published 10 October 2014, the total holdings of Hino are 49,991,903 shares representing 19.26 % of the total number of shares. Afarak Group Plc’s Board members and Chief Executive Officer owned in total 7,813,287 (78,078,926) Afarak Group Plc shares on 31 December 2015, including shares owned either directly, through persons closely associated with them or through controlled companies. This corresponds to 3.0% (30.1%) of the total number of registered shares on 31 December 2015. Shareholders by category 31 December 20155 Shares 1-100 101-1,000 1,001-10,000 10,001-100,000 100,001-1,000,000 1,000,001-10,000,000 in excess of 10,000,000 Total of which nominee-registered Total outstanding Number of shareholders % share of shareholders Number of shares held % of shares held 752 2,148 1,312 190 22 6 3 4,433 8 16.96 45,522 48.45 1,133,151 29.60 4,466,944 4.29 0.50 0.14 0.07 5,257,160 6,670,306 34,804,991 210,662,621 100 263,040,695 173,362,087 0.02 0.43 1.70 2.00 2.54 13.23 80.09 93.7 1.6 263,040,695 100.00 Shareholders by shareholder type on 31 December 2015 Finnish shareholders of which: Companies and business enterprises Banking and insurance companies Non-profit organisations Households Foreign shareholders Total of which nominee-registered % of share capital 15.98 % 6.49 % 0.07 % 0.00 % 9.41 % 145 83.95 % 100 % 65.91 % 19. Share-based payments The Company has three incentive-related option schemes, known as I/2005, I/2008 and I/2011. Option rights relating to the I/2005 scheme are granted to the Group’s Executive Management Team and other key employees and to non-executive directors, as recommended by the Board. The scheme entitles option holders to subscribe for a maximum of 2,700,000 shares in the Company. The share subscription period is from 1 July 2007 to 30 June 2015 for various options series denoted with different letters, and the subscription price range is EUR 0.32 – 0.78 (with dividend and capital redemption adjustment). As a result of subscriptions made with the I/2005 options, Afarak Group Plc’s number of shares may be increased by a maximum of 2,700,000 new shares. In accordance with the terms of the option scheme the subscription prices will be recognised in the paid-up unrestricted equity reserve. Option rights relating to the I/2008 scheme were granted to the Group’s previous CEO, Alwyn Smit, in October 2008. The scheme entitles the option holder to subscribe for a maximum of 2,900,000 shares in the Company for a subscription price of EUR 2.18 per share (with dividend and capital redemption adjustment). The share subscription period for 1,450,000 share options commenced on 1 October 2009 and on 1 October 2010 for the remaining 1,450,000 options. The subscription period matures on 31 December 2015. As a result of the subscriptions made with the options, Afarak Group Plc’s number of shares may be increased by a maximum of 2,900,000 new shares. Option rights relating to the I/2011 scheme are granted to the key personnel of the Company, as recommended by the Board. The scheme entitles the option holders to subscribe for a maximum of 6,900,000 shares in the Company. The vesting period is 1 July 2014 to 1 August 2017 for various option series denoted with different letters and years. The share subscription price is calculated by a formula based on the Volume Weighted Average Price of the Company’s share and varies between the option series. Of the option scheme I/2005, options on A, B, C, D, E and F series have been issued to Afarak’s management totalling 1,175,000 option rights, of the option scheme I/2008 a total of 2,900,000 options. Of the option scheme I/2011 a total of 6,291,997 options were issued and 99,999 options were forfeited leaving a balance of 6,191,998 options. All options have been treated according to the principles set forth in IFRS 2 Share-based Payments standard. Share options will be expired if not redeemed as agreed in the terms of options. The main terms of the option arrangements are detailed in the tables below. In May 2015 the Group has granted the CEO, Alistair Ruiters 1,000,000 shares in the Company. These will be awarded in two tranches and vested based on completed year of service. The first 500,000 Company shares shall be received once the first vesting period has lapsed, on 22 May 2016. The second 500,000 Company shares shall be received by the employee on 22 May 2017. These shares have a lock-up period of two years form subscription date. The fair value of the granted shares is determined based on the market price of Afarak Group share at the grant date which was EUR 0.40 per share. The value at year end was EUR 182,870.24 146 On 14 August 2015, Afarak announced that it has resolved to offer 3,478,261 new ordinary shares in the Company (“New Shares”) to Gujo Investment (Pty) Limited, one of the vendors of Mogale Alloys (a company acquired in May 2009) under the settlement agreement announced on 11 October 2012. Following completion of the share issue, the consideration for the acquisition was fully satisfied. All of the New Shares were subscribed for and the subscriptions have been approved by the Board of Directors. The total subscription price of EUR 1,739,130.50 (EUR 0.5 per share) has been fully satisfied through offset against the settlement receivables of the Vendor related to the Mogale Alloys acquisition. Share option plan Nature of the plan Share options. granted to employees in 2012 Share options. granted to CEO in 2008 Share options. granted to CEO in 2008 Share options. granted to employees in 2010 Share options. granted to employees in 2009 Share options Share options Share options Share options Share options issued issued issued issued issued Grant date 1.4.2012 28.10.2008 28.10.2008 17.5.2010 6.8.2009 Number of options 6 191 998 1 450 000 1 450 000 100 000 175 000 Options series I/2011 I/2008 I/2008 F (I/2005) E (I/2005) 147 Exercise period 1.7.2014- 1.8.2017 1.10.2010- 31.12.2015 1.10.2009- 31.12.2015 1.7.2012- 30.6.2015 1.7.2011- 30.6.2014 Dividend adjustment yes yes yes yes yes Exercise price (with dividend and capital redemption adjustment) Share price at grant date Option life Conditions 0.00 - 0.86 2.18 2.18 0.78 0.68 0.90 1.1 - 3.1 1.26 5.3 1.26 6.3 1.00 3.0 1.75 3.0 Employment until the vesting date and target share price Employment until the vesting date Employment until the vesting date Employment until the vesting date Employment until the vesting date Execution In shares In shares In shares In shares In shares Expected volatility 45 % 44 % 44 % 56 % 46 % Expected option life at grant date (years) 5.3 years 5.0 years 5.0 years 5.1 years 4.9 years Risk free rate, Euribor 12 months 2.24% 4.33% 4.33% 3.11% 3.66% Expected dividend yield 0.00% 0.00% 0.00% 0.00% 0.00% Expected personnel reductions 0 0 0 0 0 Fair value at grant date (EUR) 0.14 - 0.46 0.33 0.33 1.06 1.20 Valuation model Up and in Call Black & Scholes Black & Scholes Black & Scholes Black & Scholes Changes in share options issued and in weighted average exercise prices: Weighted average exercise price (with dividend and capital redemption adjustment) EUR/share At the beginning of 2014 Forfeited options At the end of 2014 Exercisable at the end of 2014 148 At the beginning of 2015 Forfeited options Forfeited options At the end of 2015 Exercisable at the end of 2015 0.83 0.68 0.83 1.25 0.83 0.78 2.18 0.26 0.26 Number of options 9,366,998 175,000 9,191,998 5,100,000 9,191,998 100,000 2,900,000 6,191,998 1,400,000 The exercise prices of existing share options and their years of forfeiting are presented below: Year of forfeiting Exercise price (EUR) Number of shares 2015 2015 2017 0.78 2.18 0.00-0.86 100,000 2,900,000 6,900,000 The exercise price above represents the original contractual exercise price adjusted by dividends and capital redemptions before the 2016 AGM. 20. Deferred tax assets and liabilities Movements in deferred taxes in 2015 EUR '000 Deferred tax assets: Unrealised expenses Pension liabilities From translation difference Group eliminations Total Deferred tax liabilities: Assets at fair value in acquisitions Translation difference Other timing differences Total 31.12.2014 Exchange rate differences Recognised in income statement Business combinations and divestments 31.12.2015 1,587 988 983 608 4,166 6,395 0 1,805 8,200 -7 -30 -37 -972 -173 187 132 -826 -504 -944 -182 -686 -621 -1,565 608 815 1,127 710 3,260 4,947 0 1,002 5,949 -43 -43 0 0 Movements in deferred taxes in 2014 EUR '000 Deferred tax assets: Unrealised expenses Pension liabilities From translation difference Group eliminations Total Deferred tax liabilities: Assets at fair value in acquisitions Translation difference Other timing differences Total 21. Provisions EUR ‘000 Balance at 1.1.2015 Additions Releases and reversals Unwinding of discount Exchange differences Balance at 31.12.2015 EUR ‘000 Long-term provisions Short-term provisions Total 31.12.2013 Exchange rate differences Recognised in income statement Recognised in equity 31.12.2014 1,824 1,052 8,822 849 12,546 7,332 0 1,175 8,507 1 12 13 244 56 300 -238 -64 755 -253 200 -1,181 574 -607 -8,594 -8,594 0 0 Environmental and rehabilitation provisions Other provisions 9,133 11 -247 642 -1,362 8,177 2015 9,309 99 9,408 1,081 495 -190 0 -155 1,231 2014 10,137 77 10,214 149 1,587 988 983 608 4,166 6,395 0 1,805 8,200 Total 10,214 506 -437 642 -1,517 9,408 The long-term provisions in the statement of financial position relate to environmental and rehabilitation provi- sions of the Group’s production facilities and mines. The provisions are based on expected liability. 22. Pension liabilities Defined benefit pension plans The majority of the Group’s pension plans are defined contribution plans for which a total expense of EUR 0.8 (0.8) million has been recognised on the 2015 statement of comprehensive income. In addition, the Group’s German subsidiary has defined benefit plans. The obligations relating to the plans have been defined by actuarial calculations. The pension scheme is arranged by recognising a provision on the statement of financial position. The present value of the obligation less fair value of plan assets totalled EUR 18.7 (20.0) million on 31 December 2015. The Group has considered that the value on 31 December also corresponds with the amount of net obligation at the end of the reporting period. The Group does not own the assets of the pension plans. 150 Retirement benefit obligation EUR '000 Present value of funded obligation Fair value of plan assets Net liability Movements in defined benefit obligation EUR '000 Defined benefit obligations at 1.1. Benefits paid by the plan Current service costs Interest expense Actuarial (gains) / losses Closing balance at 31.12. Movements in the fair value of the plan assets EUR '000 Fair value of the plan assets at 1.1. Expected return on plan assets Benefits paid by the plan Asset gains / (losses) Contributions paid into the plan Closing balance at 31.12. 2015 24,101 -5,367 18,734 2015 24,454 -781 393 510 -475 24,101 2015 4,500 98 -131 511 389 2014 24,454 -4,500 19,954 2014 20,187 -707 305 674 3,995 24,454 2014 4,092 143 -100 -40 405 5,367 4,500 The funded pension plan has been financed through an insurance company and therefore asset specification is not available. Expense recognised in statement of comprehensive income EUR '000 Current service cost Interest cost Expected return on plan assets Actual return on plan assets totalled EUR 0.50 (-0.04) million in 2015. Principal actuarial assumptions Discount rate Expected return on plan assets Inflation 2015 -393 -510 98 -805 2015 2.22 % 1.83 % 2.25 % 2014 -305 -674 143 151 -836 2014 2.12 % 2.43 % 2.25 % The expected retirement age has been assumed to be in accordance with German legislation (RVAGAnpG 2007). Similarly, the expected pension increases have been assumed to be in line with the German legislation, and mor- tality expectancy in accordance with the German “Richttafeln 2005 G” has been applied in the valuations. Historical information EUR '000 Present value of defined benefit obligation Fair value of plan assets Deficit in the plan Experience adjustments arising on plan liabilities Experience adjustments arising on plan assets Adjustments due to change in actuarial assumptions 2015 -24,101 5,367 -18,734 -81 -511 -393 2014 -24,454 4,500 -19,954 -398 40 4,394 PROVISION FOR RETIREMENT PAY LIABILITY IN TURKEY In accordance with existing social legislation in Turkey, the Turkish subsidiary of the Group is required to make lump-sum payments to employees whose employment is terminated due to retirement or for reasons other than resignation or misconduct. The computation of the liability was based on the retirement pay ceiling announced by the Turkish government. On 31 December 2015, the employee severance indemnity recognised in accordance with IAS 19 the financial statements totalled EUR 0.8 (0.7) million. 23. Trade payables and other interest-free liabilities EUR ‘000 Non-current Other liabilities Total non-current Current Purchase price liabilities (paid as shares) 152 Current liabilities to related parties Trade payables Payables to associated companies Accrued expenses and deferred income Current advances received Income tax liability Other liabilities Total non-current 1.8 RELATED PARTY DISCLOSURES 1.8.1 Group structure on 31 December 2015 2015 1,969 1,969 0 6 9,673 209 4,797 100 6,036 579 21,400 2014 42 42 2,186 0 19,143 167 10,472 0 5,951 6 37,925 Name Afarak Holdings Ltd Afarak Investments Ltd Afarak Mining Ltd Afarak South Africa (Pty) Ltd Auburn Avenue Trading 88 (Pty) Ltd Destiny Spring Investments 4 (Pty) Ltd Destiny Spring Investments 11 (Pty) Ltd Destiny Spring Investments 12 (Pty) Ltd Duoflex (Pty) Ltd Elektrowerk Weisweiler GmbH Intermetal Madencilik ve Ticaret A.S. LP Kunnanharju Oy Metal ve Maden ic ve Dis Pazarlama Tic Ltd, Sti Mogale Alloys (Pty) Ltd Afarak Trading Ltd (previously known as RCS Ltd) Rekylator Oy Country of incorporation Group's ownership and share of votes (%) Afarak Group Plc's direct ownership and share of votes (%) Malta Malta South Africa South Africa South Africa South Africa South Africa South Africa South Africa Germany Turkey Finland Turkey South Africa Malta Finland 100.00 100.00 100.00 100.00 74.00 100.00 100.00 100.00 74.00 100.00 99.00 100.00 97.76 90.00 100.00 100.00 0.00 99.99 0.00 0.00 0.00 0.00 0.00 0.00 0,00 0.00 0.00 0.00 0.00 0.00 0.00 100.00 Rekylator Invest Oy Rekylator Wood Oy Rekylator Yhtiöt Oy Türk Maadin Sirketi A.S. Joint ventures Synergy Africa Ltd Chromex Mining Ltd Chromex Mining Company (Pty) Ltd Ilitha Mining (Pty) Ltd Mkhombi Stellite (Pty) Ltd Associated companies Incap Furniture Oy Valtimo Components Oyj * Finland Finland Finland Turkey United Kingdom United Kingdom South Africa South Africa South Africa Finland Finland 100.00 100.00 100.00 98.75 51.00 51.00 37.74 41.05 44.24 24.06 24.90 0.00 0.00 100.00 98.75 0.00 0.00 0.00 0.00 0.00 12.45 24.90 153 * Afarak’s share of ownership in Valtimo Components Oyj can increase to 39.23% if the shares sold earlier, held as pledge, are not paid in cash to Afarak. Afarak disposed Afarak Suisse in 2015. Afarak divested its holding in the associated company Speciality Super Alloys Inc. This led to a loss on sale of investment in associate of EUR 0.3 million. Dezzo Trading 184 (Pty) Ltd, Didox (Pty) Ltd, PGR 17 Investments (Pty) Ltd, and Waylox Mining (Pty) Ltd were deregistered as at 31 December 2015. 1.8.2 Related party transactions Afarak Group Plc defines the related parties as: • companies, entities or persons having common control or considerable voting power in Afarak Group • subsidiaries • joint ventures • associates • Afarak Group Plc’s and the above mentioned entities’ top management Related party transactions with persons belonging to the Group’s Board and management Finnish accounting legislation, KPA 2:8 § 4 paragraph disclosure requirement 154 EUR ‘000 2015 2014 Salaries Fees Share- based remuneration Salaries Fees Share- based remuneration Kankaala Markku Koncar Danko Board member 11.8.2010 – 86 CEO 11.2.2013 – 20.5.2015, Lillja Michael Manojlovic Jelena 7.5.2015 Board member 11.2.2013 onwards 120 Board member 11.7.2008 onwards, Chairperson 17.6.2009 - 7.5.2015 Board member 11.2.2013 Parodi Afredo onwards. Chairman 8.5.2015 Smart Bernice onwards Board member 11.2.2013 – 7.5.2015 Board member 8.5.2015 Alistair Ruiters onwards, CEO 21.5.2015 242 onwards Board member 8.5.2015 onwards Board member 8.5.2015 onwards Rourke Barry Ivan Jakovcic Total 54 0 0 54 54 54 0 58 58 66 19 47 39 240 120 0 0 0 183 0 448 287 183 360 216 0 As some of the Board members have also had executive management roles, both the Board fees and the salaries in relation to the executive role have been presented above. The CEO receives an annual salary of EUR 360,000. He shall also receive 500,000 Company Shares as an incentive for each completed year of service acting as the Chief Executive Officer, the first 500,000 Company shares shall be received on 22 May 2016 and the second 500,000 shares shall be received on 22 May 2017 if he is still acting as CEO at that time. The Group makes no pension arrangements for the CEO beyond the statutory pension coverage, and there is no set retirement age. The table includes the Executive Management Team remuneration excluding the CEO. The CEO and Board members compensation has been presented separately. Management remuneration EUR ‘000 Short-term employee benefits Post-employment benefits Termination benefits Share-based payments Total 2015 258 0 0 0 258 2014 185 0 0 42 227 BUSINESS REORGANISATIONS The AGM held on 8 May 2015 resolved that the Board of Directors comprises of seven members. Mr Michael Lillja, Mr Markku Kankaala, Dr Jelena Manojlovic and Dr Alfredo Parodi were re-elected to the Board. Mr Barry 155 Rourke, Dr Alistair Ruiters and Mr Ivan Jakovcic were elected. On 21 May 2015, Afarak announced changes in the Company’s management structure so that its current executive management team and board member Dr Alistair Ruiters was appointed new Chief Executive Officer (“CEO”) of the Company. Dr. Danko Koncar, is now focusing on the operational matters of the Company as Business Development Director, reporting to the CEO. Dr Ruiters continues to serve as a board member of the Company. Further, Mr Michael Lillja, currently head of marketing and a board member, has assumed the responsibilities of Marketing Director while continuing as a board member. The current executive management team is as follows Dr. Alistair Ruiters, CEO Dr. Danko Koncar, Business Development Director Michael Lillja, Marketing Director Furthermore, the board has also reviewed the composition of the board committees. The new committees are as follows: Audit Committee Barry Rourke, Chairman Markku Kankaala Ivan Jakovcic The Nomination and Remuneration Committee Jelena Manojlovic, Chairman Markku Kankaala Ivan Jakovcic The Committee for Health Safety and Sustainable Development Alfredo Parodi, Chairman Michael Lillja Markku Kankaala FINANCING ARRANGEMENT WITH RELATED PARTIES In 2011 Afarak Group Plc had entered into a USD 55 million standby loan facility agreement with its major shareholder Kermas Ltd. The facility was available until 31 December 2014 and the loan term would have been from the first draw-down until 31 December 2015. At the end of the financial year 2014, the Group has not drawn down any of the loan. The expenses recognised for the facilities were EUR 0.1 (0.1) million. The Group has a EUR 32.6 (34.4) million loan receivable and EUR 7.9 (6.4) million trade and other current and non-current receivables from its joint venture companies. Trade and other payables to joint venture companies amounted to EUR 0.2 (0.2) million. Interest income from a joint venture company totalled EUR 1.0 (1.0) million during the financial year 2015. 156 The Group had on 31 December 2015 a EUR 3.5 (7.0) million receivable from Kermas Ltd. OTHER RELATED PARTY TRANSACTIONS The Group has sold its products and rendered services to related parties and joint ventures for a total value of EUR 0.4 (0.2) million. The Group has also made raw material purchases from a joint venture amounting to EUR 9.4 (4.4) million and received services from a related party amounting to EUR 0.1 (0.1) million. Dividends received from associated companies totalled EUR 0.0 (0.0) million. On 31 December 2015 the Group’s parent company had short-term loan receivables from the members of the Board amounting to EUR 0.0 (0.1) million. 1.9 COMMITMENTS AND CONTINGENT LIABILITIES 1.9.1 MORTGAGES AND GUARANTEES PLEDGED AS SECURITY On 31 December 2015 the Group had a loan from a financial institution totalling EUR 8.0 (10.3) million. The Group has provided real estate mortgages and other assets as collaterals for total carrying value of EUR 64.2 (71.2) million. Moreover, the Group companies have given cash deposits totalling EUR 0.1 (4.1) million as security for their commitments. The value of other collaterals totalled EUR 0.5 (0.5) million as at 31 December 2015. Afarak Group Plc has given guarantees for third party loans totalling EUR 1.3 (1.3) million. 1.9.2 COVENANTS INCLUDED IN THE GROUP’S FINANCING AGREEMENTS One of the Group’s Maltese subsidiaries, Afarak Trading Ltd (previously known as RCS Ltd), was granted a loan facility from a Maltese bank in 2013. As at year end 2015 the balance was US$ 7.6 (EUR 7.0) million and the financial covenants attached to this loan were not breached during the year. The Group’s South African subsidiary, Mogale Alloys also had bank facilities with local banks amounting to ZAR 87.4 (EUR 5.2) million at year end and are disclosed as current financial liability in the financial statements. The financial coventants attached to this loan were breached during the year. Management will do the utmost to restore the situation within the covenant limits. 1.9.3 RENTAL AGREEMENTS Liabilities associated with rental and operating lease agreements totalled some EUR 0.7 (0.8) million for the period. Typically, the rental agreements maturity varies between two to five years, and normally there is a possibility to continue these agreements beyond the original maturity date. For these contacts, their price indexing, renewal and other terms differ contract by contract. As guarantees for these rental agreements, the Group companies have made cash deposits of approximately EUR 0.0 (0.0) million as at 31 December 2015. 1.9.4 COLLATERALS GIVEN BY AFARAK GROUP PLC Afarak Group Plc has given guarantees in connection with certain borrowings of Junnikkala Oy, the Group’s former subsidiary which it sold in June 2011. These guarantees will continue to be in force until 30 June 2018. Under the terms of the disposal it has been agreed that Junnikkala will pay a fee of 2% per annum to Afarak Group Plc in consideration for the continuation of these guarantees. At 31 December 2015 the indebtedness subject to these guarantees was EUR 1.3 (1.3) million in aggregate. 1.10 EVENTS AFTER THE REPORTING PERIOD On 5 January 2016, Afarak announced that the Company has signed further sale agreements in relation to parts of the saw mill equipment, acquired by the Company in 2008. The transaction from the discontinued operation 157 positively affects the Q4/2015 profit. On 14 January 2016, Afarak announced that its subsidiary Türk Maadin Şirketi A.S (TMS) has been granted the exploitation mining license for Eskisehir -Mihaliccik Karaagac “Eagle Field”. On 4 February 2016, Afarak announced that its wholly owned subsidiary Afarak Trading Limited (RCS) has entered into a long-term agreement with US company Carpenter Technology Corporation. Afarak Trading Limited will provide low carbon ferrochrome. On 11 February 2016, Afarak announced that Ilitha Mine has completed a Shaking Table plant. Ilitha Mine is part of the Synergy Africa joint venture between Afarak and Kermas Limited. The Shaking Table technology, 13 already used in the mines of Afarak’s Turkish subsidiary TMS, will allow the company to treat the Tailing Dump for chrome and increase Ilitha Mine’s total plant mass yield from currently 49% to 65%.This in turn will drastically reduce the operating cost per ton. Full production is expected to be reached by Mid-March 2016. PARENT COMPANY’S FINANCIAL STATEMENTS INCOME STATEMENT (FAS) Note 1.1.2015 - 31.12.2015 1.1.2014 - 31.12.2014 EUR '000 Revenue Other operating income Personnel expenses Salaries and wages Pension expenses 158 Other social security expenses Social security expenses total Personnel expenses total Depreciation and amortisation Depreciation and amortisation according to plan Depreciation and amortisation total Other operating expenses OPERATING PROFIT (LOSS) Financial income and expenses: Other financial income From Group companies From others Interests and other financial expenses To Group companies To others Financial income and expenses total PROFIT (LOSS) BEFORE EXTRAORDINARY ITEMS PROFIT BEFORE TAXES Income taxes Income taxes NET PROFIT 1 2 3 4 5 6 1,259 57 -861 -4 -30 -34 -895 -5 -5 -1,951 150 46 -556 -16 -28 -44 -601 -11 -11 -1,554 -1,535 -1,969 1,093 488 -51 -110 1,420 -115 -115 0 -115 1,877 159 -56 -206 1,774 -195 -195 0 -195 PARENT COMPANY’S FINANCIAL STATEMENTS BALANCE SHEET (FAS) EUR '000 Assets Non Current Assets Property, plant and equipment Machinery and equipment Total property, plant and equipment Investments Shares in Group companies Receivables from Group companies Total investments Total non-current assets Current Assets Receivables Non-current receivables Receivables from Group companies Other interest-free receivables Total non-current receivables Current receivables Trade receivables Receivables from Group companies Receivables from Holding companies Other interest-bearing receivables Other non interest-bearing receivables Prepaid expenses and accrued income Total current receivables Cash and cash equivalents Total current assets Total Assets Note 1.1.2015 - 31.12.2015 1.1.2014 - 31.12.2014 7 8 9 14 14 215,931 8,015 223,946 223,960 25 25 159 215,931 8,015 223,946 223,971 -1,535 -1,969 47,965 128 48,093 1 9,318 1,164 181 8 192 10,865 603 55,261 128 55,388 1 6,828 988 43 27 131 8,018 221 59,561 63,628 285,521 287,599 PARENT COMPANY’S FINANCIAL STATEMENTS BALANCE SHEET (FAS) (CONT.) EUR '000 Note 31.12.2015 31.12.2014 10 11 EQUITY AND LIABILITIES SHAREHOLDERS’ EQUITY Share capital Share premium reserve Paid-up unrestricted equity reserve 160 Retained earnings Profit for the period Total shareholders' equity LIABILITIES Non-current liabilities Liabilities to Group companies Loans from associated companies Total non-current liabilities Current liabilities Liabilities to Group companies Accounts payable Accounts payable to Group companies Other liabilities Accrued expenses and deferred income TOTAL CURRENT LIABILITIES TOTAL LIABILITIES 23,642 25,223 246,433 -13,839 -115 281,345 1,248 5 1,254 113 77 86 441 206 922 2,176 23,642 25,223 249,800 -13,644 -195 284,827 1,248 5 1,254 66 36 833 24 560 1,518 2,772 TOTAL EQUITY AND LIABILITIES 283,521 287,599 PARENT COMPANY’S FINANCIAL STATEMENTS STATEMENT OF CASH FLOWS (FAS) EUR '000 Note 1.1.2015 - 31.12.2015 1.1.2014 - 31.12.2014 Operating activities Net profit Adjustments: Depreciation and amortisation Unrealised foreign exchange gains and losses Finance income and expense Cash flow before working capital changes Working capital changes: Change in current trade receivables Change in current non interest-bearing debt Cash flow before financing items and taxes Interests received from Group companies Interests received and other financing items Interests paid and other financing items Income taxes paid Net cash from operating activities Investing activities Acquisitions of subsidiaries and associates Net cash used in investing activities Financing activities Repayments of non-current loans to group companies Repayments of current loans given to Group companies Non-current loans to group companies Repayments of current loan receivables Capital redemption Net cash used in financing activities Change in cash and cash equivalents Cash at beginning of period Cash at end of period Change in the balance sheet -115 5 -60 -1361 -1,530 -1,134 -324 -2,988 1,014 166 -110 1 -1,917 6 6 7,929 10 -555 15 -5,106 2,292 2,176 221 603 381 161 -195 11 -90 -1,683 -1,958 109 692 -1,157 0 147 -93 33 -1,070 0 0 6,350 0 -334 9 -4,884 1,141 2,772 150 221 71 2.NOTES TO THE FINANCIAL STATEMENTS OF THE PARENT COMPANY (FAS) 2.1 ACCOUNTING POLICIES SCOPE OF FINANCIAL STATEMENTS AND ACCOUNTING POLICIES The parent company has prepared its separate financial statements in accordance with Finnish Accounting Standards. Consolidated financial statements have been prepared in accordance with International Financial Reporting Standards. Consolidated financial statements are presented separately as a part of these financial statements. 162 Information on holdings in subsidiaries and associated companies and information on their consolidation is presented in the notes to the financial statements. All figures are presented in thousand Euros, unless otherwise explicitly stated. VALUATION PRINCIPLES AND METHODS Investments in associated companies and debt instruments are valued at acquisition cost, less eventual impairment. Dividends received from Group companies and associates have been recorded as financial income. The balance sheet value of property, plant and equipment is stated at acquisition cost, less accumulated depreciation. Other assets have been stated in the balance sheet at the lower of acquisition cost or their likely realisable value. Debt items are valued at acquisition cost. Loan receivables from subsidiaries and Group companies have been valued at acquisition cost. DEPRECIATION METHODS Acquisition costs of property, plant and equipment are depreciated over their useful lives according to plan. Depreciation plans have been defined based on practice and experience. Asset Intangible rights IT equipment Other machinery and equipment Depreciation Method & Period 5 years straight line 2 years straight line 5 years straight line TRANSLATIONS OF FOREIGN CURRENCY ITEMS Balance sheet items denominated in foreign currency are translated into functional currency using the exchange rates of the balance sheet date. Income statement items are translated applying the exchange rates prevailing at the date of the transaction. COMPARABILITY OF THE REPORTED FINANCIAL YEAR AND THE PREVIOUS YEAR The reported financial year and the previous year were both calendar years and are thus comparable. The Company has been actively restructuring its business, which has required various ownership and financial arrangements. The transactions have had significant non-recurring effects on the Company’s income statement, balance sheet and financial position, which make comparison of financial statements and estimating the future more difficult. 2.2 NOTES TO THE INCOME STATEMENT 1. Revenue EUR '000 By business line: Services Other revenue Total By geography: Finland EU countries Other countries Total 2. Other Operating Income EUR '000 Gain on disposal of property, plant and equipment Other income Total 2015 2014 1,259 0 1,259 3 616 640 1,259 163 150 0 150 3 68 79 150 2015 2014 0 57 57 0 46 46 3. Depreciation, Amortisation and Impairment EUR '000 2015 2014 Depreciation and amortisation according to plan Intangible rights Machinery and equipment Total 4. Other Operating Expenses EUR '000 Voluntary employee benefits Premise expenses Machinery and equipment expenses Travelling expenses Representation expenses Marketing expenses Administration expenses Other operating expenses Total 0 -5 -5 -2 -9 -11 2015 2014 -19 -63 -77 -32 -14 -9 -1,720 -17 -1,951 -3 -105 -84 -54 -15 0 -840 -454 -1,554 5. Financial Income and Expense EUR '000 2015 2014 Other financial income From Group companies From others Other financial expense To Group companies 164 To others Total 6. Income Taxes EUR '000 Profit for the period Adjustments for tax calculation Taxable income Tax advances paid Tax deferral based on taxable income Income tax of the period Tax loss carryforward used Net income taxes Income tax receivable Income tax payable 2.3 NOTES TO ASSETS 7. Fixed Assets EUR '000 Machinery and equipment Acquisition cost 1.1. Disposals Acquisition cost 31.12. Accumulated depreciation 1.1. Depreciation for the period Accumulated depreciation 31.12. Book value 31.12. 1,093 488 -51 -110 1,420 2015 -115 26 -88 -34 34 0 0 0 34 0 1,877 159 -56 -206 1,774 2014 -195 41 -154 -35 35 0 0 0 35 0 2015 2014 283 -6 277 258 5 263 14 283 0 283 248 9 258 25 Shares in Group companies Shares in associated companies Receivables from Group companies 8,153 8,153 19,618 19,618 Total 313,750 313,750 8. Investments Acquisition cost 1.1.2015 Additions Acquisition cost 31.12.2015 Accumulated depreciation and impairment 1.1.2015 Impairment Accumulated depreciation and impairment 31.12.2015 Book value 31.12.2015 285,979 285,979 -70,048 0 -70,048 215,931 Holdings in Group and other companies Name Afarak Holdins Ltd Afarak Investments Ltd Afarak Mining (Pty) Ltd Afarak South Africa (Pty) Ltd Auburn Avenue Trading 88 (Pty) Ltd Destiny Spring Investments 4 (Pty) Ltd Destiny Spring Investments 11 (Pty) Ltd Destiny Spring Investments 12 (Pty) Ltd Duoflex (Pty) Ltd Elektrowerk Weisweiler GmbH Intermetal Madencilik ve Ticaret A.S. LP Kunnanharju Oy Metal ve Maden ic ve Dis Pazarlama Tic Ltd, Sti Mogale Alloys (Pty) Ltd Afarak Trading Ltd (previously known as RCS Ltd) Rekylator Oy Rekylator Invest Oy Rekylator Wood Oy Rekylator Yhtiöt Oy Türk Maadin Sirketi A.S. Joint ventures Synergy Africa Ltd Chromex Mining Ltd Chromex Mining Company (Pty) Ltd Ilitha Mining (Pty) Ltd Mkhombi Stellite (Pty) Ltd -8,153 -11,603 -89,804 165 0 -8,153 0 -11,603 8,015 -89,804 223,946 Country of incorporation Group's ownership and share of votes (%) AfarakGroup Plc’s direct ownership and share of votes (%) Malta Malta South Africa South Africa South Africa South Africa South Africa South Africa South Africa Germany Turkey Finland Turkey South Africa Malta Finland Finland Finland Finland Turkey United Kingdom United Kingdom South Africa South Africa South Africa 100.00 100.00 100.00 100.00 74.00 100.00 100.00 100.00 74.00 100.00 99.00 100.00 97.76 90.00 100.00 100.00 100.00 100.00 100.00 98.75 51.00 51.00 37.74 41.05 44.24 0.00 99.99 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 100.00 98.75 0.00 0.00 0.00 0.00 0.00 Associated companies Incap Furniture Oy Valtimo Components Oyj * Finland Finland 24.06 24.90 12.45 24.90 *Afarak’s share of ownership in Valtimo Components Oyj can increase to 39.23% if the shares sold earlier, held as pledge, are not paid in cash to Afarak. Afarak disposed of Afarak Suisse in 2015. 166 Afarak divested its holding in the associated company Speciality Super Alloys Inc. This led to a loss on sale of investment in associate of EUR 0.3 million. Dezzo Trading 184 (Pty) Ltd, Didox (Pty) Ltd, PGR 17 Investments (Pty) Ltd, and Waylox Mining (Pty) Ltd were deregistered as at 31 December 2015. 9. Receivables EUR '000 Receivables from group companies Non-current Loan and other receivables Interest receivables Total Current Loan receivables Trade receivables Interest receivables Prepayments and accrued income Total Other interest-bearing receivables EUR ‘000 Current Loan receivables VAT receivable Total Other interest-free receivables EUR ‘000 Non-current Other prepaid expenses and accrued income Total 2015 2014 47,887 78 47,965 7,304 1,967 35 12 9,318 55,261 0 55,261 5,575 1,218 34 0 6,828 2015 2014 19 162 181 2015 128 128 34 10 43 2014 128 128 Current Trade receivables Receivables from associated companies Other receivables Total Prepaid expenses and accrued income Income tax receivable Accrued interest income Other prepaid expenses and accrued income Total 2.4 NOTES TO EQUITY & LIABILITIES 10. Shareholders’ equity EUR ‘000 Share capital Share capital 1.1. Share capital 31.12. Share premium reserve Share premium reserve 1.1. Share premium reserve 31.12. Paid-up unrestricted equity reserve Paid-up unrestricted equity reserve 1.1. Rights Issue Capital redemption to the shareholders Paid-up unrestricted equity reserve 31.12 1 1,164 8 1,174 2015 34 1 158 192 1 988 27 1,016 2014 35 1 95 131 167 2015 2014 23,642 23,642 23,642 23,642 25,223 25,223 2015 249,800 1,739 -5,106 246,433 25,223 25,223 2014 249,101 5,583 -4,884 249,800 Retained earnings 2015 2014 Retained earnings 1.1. Profit for the previous financial year Retained earnings 31.12. Profit for the financial year Total shareholders’ equity -13,644 -195 -13,839 -115 281,345 -13,756 112 -13,644 -195 284,827 Distributable funds Retained earnings 1.1. Profit for the financial year Retained earnings 31.12. Paid-up unrestricted equity reserve Distributable funds 31.12. 168 11. Liabilities Non-current liabilities EUR ‘000 Non-current interest bearing debt Loans from Group companies Total Non-current interest-free debt Loans from associated companies Earn-out purchase consideration liabilities Total Current Liabilities EUR ‘000 Current interest bearing debt Other debt to Group companies Total Current interest-free debt Accounts payable Payables to Group companies Other debt Other debt to Group companies Accrued expenses and deferred income Total 2015 -13,839 -115 -13,953 246,433 232,480 2014 -13,644 -195 -13,839 249,800 235,962 2015 1,248 1,248 2015 5 0 5 2015 50 50 2015 77 86 441 63 206 872 2014 1,248 1,248 2014 5 0 5 2014 50 50 2014 36 833 24 16 560 1,468 Option rights The Company’s option schemes are presented in the notes to the consolidated financial statements. The Company has option schemes I/2005 (maximum 2,700,000 shares), I/2008 (maximum 2,900,000 shares, all options granted to the Group’s previous CEO) and I/2011 (maximum 6,900,000 shares). 2.5 PLEDGES AND CONTINGENT LIABILITIES EUR million Commitments on behalf of subsidiaries Guarantees Commitments on behalf of others Guarantees Other own contingent liabilities Leasing amd rent liability Commitments and contingent liabilities total 31.12.2015 31.12.2014 11.9 1.3 0.0 13.2 10.7 1.3 0.2 12.2 169 Pension liabilities The Company’s pension liabilities are directly in accordance with the statutory TyEL-system. 2.6 OTHER NOTES Related party loans The Company has short-term loan receivables from the members and past members of the Board amounting to EUR 102 (217) thousand. Information on the personnel Personnel, annual average (all employees) Employees Management remuneration Chief Executive Officer Board members 2015 3 2015 425 286 2014 3 2014 234 216 The CEO receives an annual salary of EUR 360,000. He shall also receive 500,000 Company Shares as an incentive for each completed year of service acting as the Chief Executive Officer, the first 500,000 Company shares shall be received on 22 May 2016 and the second 500,000 shares shall be received on 22 May 2017 if he is still acting as CEO at that time. The Group makes no pension arrangements for the CEO beyond the statutory pension coverage, and there is no set retirement age. INFORMATION ON SHARES AND SHAREHOLDERS Changes in the number of shares and share capital On 31 December 2015, the registered number of Afarak Group Plc shares was 263,040,695 (259,562,434) and the share capital was EUR 23,642,049.59 (23,642,049.59). On 31 December 2015, the Company had 4,244,717 (4,244,717) own shares in treasury, which was equivalent to 1.61% (1.64%) of the issued share capital. The total amount of shares outstanding, excluding the treasury shares held by the Company on 31 December 2015, was 258,795,978 (255,317,717). 170 On 14 August 2015, Afarak announced that it has resolved to offer 3,478,261 new ordinary shares in the Company (“New Shares”) to Gujo Investment (Pty) Limited, one of the vendors of Mogale Alloys (a company acquired in May 2009) under the settlement agreement announced on 11 October 2012. Following completion of the share issue, the consideration for the acquisition was fully satisfied. All of the New Shares were subscribed for and the subscriptions have been approved by the Board of Directors. The total subscription price of EUR 1,739,130.50 (EUR 0.5 per share) has been fully satisfied through offset against the settlement receivables of the Vendor related to the Mogale Alloys acquisition. More information on shares, share capital and shareholders have been presented in the notes to the consolidated financial statements. INFORMATION OBLIGATED TO A GROUP COMPANY The Company is the Group’s parent company. Afarak Group Plc, domicile Helsinki (address: Kasarmikatu 36, 00130 Helsinki) BOARD MEMBERS’ AND CHIEF EXECUTIVE OFFICER’S OWNERSHIP Afarak Group Plc’s Board members and Chief Executive Officer owned in total 7,813,287 (78,078,926) Afarak Group Plc shares on 31 December 2015 when including shares owned either directly, through persons closely associated with them or through controlled companies. This corresponds to 3.0% (30.1%) of all outstanding shares that were registered in the Trade Register on 31 December 2015. 31.12.2015 Board and CEO total: Alistair Ruiters Executive Director & CEO Jelena Manojlovic Dependent Non-Executive Director Markku Kankaala Non-Executive Director Shares 400,000 150,000 7,090,616 Options 600,000 0 0 Michael Lillja Executive Director 71 200,000 Chairman & Non-Executive Director Non-Executive Director Non-Executive Director Alfredo Parodi Barry Rourke Ivan Jakovcic Board and CEO total All shares outstanding Proportion of all shares 22,600 150,000 0 0 0 0 7,813,287 800,000 263,040,695 263,040,695 3.0 % 0.3 % On 31 December 2014 the total number of registered shares was 259,562,434 and the Board and CEO’s ownership corresponded to 30.1% of the total number of registered shares. Auditor’s fees EUR ‘000 Ernst & Young Oy Audit Other services Total 2015 2014 201 28 229 277 20 297 171 BOARD’S DIVIDEND PROPOSAL In 2016 the Board will propose to the AGM a new dividend policy and will recommend a EUR 0.02 per share distribution where EUR 0.01 per share will be paid in May 2016 and subject to market conditions a further EUR 0.01 will be paid in August 2016. SIGNATURES TO THE BOARD OF DIRECTORS REPORT AND THE FINANCIAL STATEMENTS HELSINKI 31 MARCH 2016 172 ALFREDO PARODI Chairman ALISTAIR RUITERS Member of the Board, Chief Executive Officer JELENA MANOJLOVIC Member of the Board MICHAEL LILLJA Member of the Board MARKKU KANKAALA Member of the Board BARRY ROURKE Member of the Board IVAN JAKOVCIC Member of the Board THE AUDITOR’S NOTE Our auditor’s report has been issued today. HELSINKI 31 MARCH 2016 ERNST & YOUNG OY ERKKA TALVINKO Authorised Public Accountant 173 Auditor’s report G A F A R R O U P A K 5 AudiTor’s reporT FinanCial inDiCators translation To The AnnuAl GenerAl MeeTinG of AfArAk Group plc We have audited the accounting records, the financial statements, the report of the Board of Directors, 176 and the administration of afarak Group Plc for the financial period 1.1. - 31.12.2015. the financial statements comprise the consolidated statement of financial position, income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows, and notes to the consolidated financial statements, as well as the parent company’s balance sheet, income statement, cash flow statement and notes to the financial statements. responsibiliTy of The boArd of direcTors And The MAnAGinG direcTor the Board of Directors and the Managing Director are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with international Financial reporting standards (iFrs) as adopted by the EU, as well as for the preparation of financial statements and the report of the Board of Directors that give a true and fair view in accordance with the laws and regulations governing the preparation of the financial statements and the report of the Board of Directors in Finland. the Board of Directors is responsible for the appropriate arrangement of the control of the company’s accounts and finances, and the Managing Director shall see to it that the accounts of the company are in compliance with the law and that its financial affairs have been arranged in a reliable manner. AudiTor’s responsibiliTy our responsibility is to express an opinion on the financial statements, on the consolidated financial statements and on the report of the Board of Directors based on our audit. the auditing act requires that we comply with the requirements of professional ethics. We conducted our audit in accordance with good auditing practice in Finland. Good auditing practice requires that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and the report of the Board of Directors are free from material misstatement, and whether the members of the Board of Directors of the parent company or the Managing Director are guilty of an act or negligence which may result in liability in damages towards the company or have violated the limited liability Companies act or the articles of association of the company. an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements and the report of the Board of Directors. the procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement, whether due to fraud or error. in making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of financial statements and report of the Board of Directors that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. an audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements and the report of the Board of Directors. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.   opinion on The consolidATed finAnciAl sTATeMenTs in our opinion, the consolidated financial statements give a true and fair view of the financial position, financial performance, and cash flows of the group in accordance with international Financial reporting standards (iFrs) as adopted by the EU. 177 opinion on The coMpAny’s finAnciAl sTATeMenTs And The reporT of The boArd of direcTors in our opinion, the financial statements and the report of the Board of Directors give a true and fair view of both the consolidated and the parent company’s financial performance and financial position in accordance with the laws and regulations governing the preparation of the financial statements and the report of the Board of Directors in Finland. the information in the report of the Board of Directors is consistent with the information in the financial statements. helsinki, MArch 31, 2016 ernsT & younG oy authorized Public accountant Firm erkkA TAlvinko authorized Public accountant 180 www.afarak.com

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