Anglo Pacific Group plc
Annual Report 2012

Plain-text annual report

Investing in royalties Annual Report & Accounts 2012 Anglo Pacific Group Plc Annual Report and Accounts 2012 2 Contents Who we are Our strategy How we performed Our royalty portfolio Chairman’s review Commodities review Financial review Directors’ report Corporate governance report Directors’ remuneration report Directors’ responsibilities in the preparation of financial statements Report of the independent auditor Consolidated income statement Consolidated statement of comprehensive income Consolidated and company balance sheets Consolidated statement of changes in equity Company statement of changes in equity Consolidated and company cash flow statements Notes to the consolidated financial statements Shareholder statistics Directors and advisers 3 4 6 7 8 10 16 17 24 28 32 33 35 36 37 38 40 41 42 72 73 Creating new royalties Our new royalty agreements tend to come from providing financing to mining operators, usually to help them progress a mine into production. We also develop royalty opportunities through equity investments. Acquiring existing royalties We buy existing royalty agreements, such as those owned by exploration companies who may have retained an interest in a mine they helped discover. Once acquired, royalty companies rarely sell their agreements. Royalties explained A royalty is an entitlement to an agreed percentage of a project’s sales revenue, without any liability for production costs or capital expenditure. There are different reasons for the origination of a royalty ranging from land ownership to exploration rights; however, as a royalty company, our entitlement primarily comes through purchasing existing royalty agreements or as a result of direct financial investment. In the mining industry, most royalties endure for the life of the resource and are paid on a regular basis. Historically there have been different terms for royalties including Gross Revenue Return (“GRR”) or Net Smelter Return (“NSR”) Royalties, which are based on the gross sale price of the actual minerals mined. Our model is based around Gross Revenue or Net Smelter Return Royalties as they provide the best and clearest return. Anglo Pacific Group Plc Annual Report and Accounts 2012 Who we are Anglo Pacific Group PLC is the only fully listed company on the London Stock Exchange focused on the provision of royalty financing derived from the mining of natural resources. Our objective is to build a diversified and growing portfolio of royalties to generate long term cash flow growth for shareholders. Our royalty portfolio is diversified by commodity and geography and encompasses both producing mines and development projects. It is a continuing policy of the Group to pay a substantial proportion of the royalty cash flows to shareholders as dividends. What we offer To operators To shareholders/investors An alternative form of financing which is often less dilutive to shareholders Exposure to natural resource commodities whilst minimising exposure to cost inflation We consider projects from early stage exploration through to production We consider all commodities and jurisdictions with established legal structures, as illustrated by our diversified royalty portfolio Flexible finance structures to suit the operators’ needs; and Track record of investing in successful projects Exposure to a basket of commodities Commitment to a progressive dividend policy Significant growth from our pipeline of development royalties A logical choice for those who continue to believe in the continuing trend of global growth led by urbanisation 3 R e p o r t o f t h e D i r e c t o r s What commodities are we in? Coking Coal 64% Iron Ore 24% Chromite 5% Gold 5% Uranium 2% Anglo Pacific Group Plc Annual Report and Accounts 2012 4 Our strategy Strategic objectives Achieving our strategy To expand our mining We target the acquisition of 2-3 new royalties per annum, through both direct acquisition of existing royalty portfolio in long life projects. royalties and the creation of new royalty agreements. We actively search for existing royalties which may be non-core to the owner. We use an extensive network of contacts built up over many years to search for new opportunities. We take strategic stakes in mining and exploration companies where potential royalty opportunities may exist and aim to profitably exit those companies where royalties are no longer an option. This enables us to make a better assessment of the underlying project whilst providing direct access to management. We create flexible deal structures to meet the needs of operators. We continue to grow a diversified royalty portfolio to reduce dependence on any one royalty or commodity. Royalty companies are not operators and as such have a low cost base. We maintain a progressive dividend policy. To pay a substantial proportion of our royalty income to shareholders as dividends. Our progress to date Focus on becoming a royalty company Acquired: El Valle–Boinás/Carlés (EVBC)8 Engenho7 Acquired: Railway3 Amapa4 Tucano5 Bulqiza14 Acquired: Mount Ida20 Churchrock (option)21 Crinum2 (no further production expected) 2007 2008 2009 2010 2011 2012 Existing royalties: Kestrel1 and Crinum2 (produced £60m to date) Athabasca Basin13 Duggan17(option) Acquired: Acquired: Four Mile11 Salamanca12 Ring of Fire15 Isua6 Highbank19 (option) Eastbank 18 (option) Jogjakarta9 Midway- McKenzie10 Araguaia16 (option) EVBC production commenced 5 R e p o r t o f t h e D i r e c t o r s Anglo Pacific Group Plc Annual Report and Accounts 2012 Strategic risks Managing risk Insufficient funds to acquire We are cash generative, have significant cash balances and liquidity in our mining and exploration interests. royalties. The Group’s dual listing on both the London Stock Exchange and Toronto Stock Exchange provides flexibility in capital markets should additional funding be required for acquisitions. Increased competition as alternative financing becomes more popular. Our experienced management team, an extensive network of contacts and a track record of investing in successful projects positions the Group to grow in a more competitive environment. The Group provides flexible and innovative financing packages to suit the needs of the operator. The Group does not focus on any one commodity. We have the in-house expertise to assess opportunities across a wide spectrum of commodities and jurisdictions. Delays to the commencement/ cessation of production at the underlying mining assets. The Group seeks to register its royalty title such that the royalty will endure both delays in production and changes in ownership. Newly created royalty agreements can include provisions for recourse to funds advanced where key milestones have not been achieved. Resource nationalisation. The Group focuses its royalty investments to those countries with established legal jurisdictions, low geopolitical risk and an established mining industry. Significant falls in commodity prices. The Group’s diversified royalty portfolio provides exposure to a mix of commodities which reduces dependence on any one commodity. The Group operates with a low cost base. Leading to future growth Production expected: Jogjakarta9 (initially 2Mt iron sand concentrate pa) Churchrock21 (option payment $15m) Production expected: Ring of Fire15 (target � 2Mt pa of concentrate and ferrochrome feed) Isua6 (production targeted for late 2016) Production expected: Mount Ida20 (targeting 10Mt pa of magnetite concentrate) – will require $8m to acquire remaining royalty Araguaia16 (commencement of Nickel laterite during the year) – will require $12.5m to exercise our option 2013 2014 2015 2016 2017 2018+ Production expected: Tucano5 (target 0.5mt pa) Four Mile4 (target 3mlb – 5mlb pa) Acquired: Dugbe I22 (Gold 2% NSR royalty financing agreement signed with Hummingbird Resources plc) Production update: Kestrel1 expansion Production to increase to circa 5.7Mt pa Production expected: Salamanca12 (commencement of uranium production expected during the year) 1-22 as illustrated on page 7 Anglo Pacific Group Plc Annual Report and Accounts 2012 6 How we performed KPI’s: The Board has identified the following metrics to assess performance against strategy Value of new royalties acquired Generate significant operating profits It is the strategy of the Group to expand and diversify its royalty portfolio by adding two to three new royalties per annum. The Group, with a diversified income stream and a low cost base, aims to generate significant operating profits. Deliver long term returns to shareholders The Group is committed to offering long term returns to its shareholders with its progressive dividend policy and by outperforming the FTSE350 mining index. Royalties acquired Operating profit Dividend per share £3.7m £m 40 £9.3m £m 40 10.2p p 11 30 20 10 30 20 10 10 9 8 7 6 5 2008 2009 2010 2011 2012 2008* 2009* 2010* 2011* 2012 2008 2009 2010 2011 2012 FTSE 350 Mining Index vs Anglo Pacific Group – 5 years 220 170 120 70 20 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 APF FTSE 350 Mining *Restated (see note 2.1.3) 7 R e p o r t o f t h e D i r e c t o r s 9 3 2 20 1 11 Anglo Pacific Group Plc Annual Report and Accounts 2012 Our royalty portfolio 13 17 15 19 10 18 21 6 4 5 16 7 14 12 8 22 Exploration Development Producing Option Australia Royalty and Operator Commodity Brazil Royalty and Operator 1 Kestrel Rio Tinto Ltd Coking coal 4 Amapá Anglo American Plc 2 Crinum BHP Billiton Ltd Coking coal 5 Tucano Beadell Resources Ltd 3 Pilbara royalties BHP Billiton Ltd 11 Four Mile Quasar Resources/ Alliance Resources Ltd 20 Mount Ida Jupiter Mines Iron Ore Uranium Iron Ore Commodity Iron Ore Non-precious metals Iron Ore Canada Royalty and Operator 10 Malartic-Midway and McKenzie Break Northern Star Mining Corp Commodity Gold 13 Athabasca Basin royalties Various Uranium 7 Engenho Minera Gold Ltd Gold 15 Ring of Fire Cliffs Natural Resources Inc Chromite 16 Araguaia Horizonte Minerals Plc Nickel 17 Duggan Creso Exploration Inc** Gold 18 Eastbank Northern Shield Platinum group metals 19 Highbank Lake Northern Shield Platinum group metals Europe Royalty and Operator Commodity Greenland Royalty and Operator Commodity Indonesia Royalty and Operator Commodity 8 El Valle-Boinás/Carlés Gold and Copper 6 Isua London Mining Plc Iron ore 9 Jogjakarta Indo Mines Ltd Iron sands Orvana Minerals Corp 12 Salamanca Berkeley Resources Ltd Uranium 14 Bulqiza Columbus Copper Corporation Chromite Liberia Royalty and Operator Commodity USA Royalty and Operator Commodity 22 Dugbe 1 Hummingbird Resources Plc* Gold 21 Churchrock Uranium Resources Inc Uranium *Royalty financing agreement signed December 2012 **Option conversion expected in 2013 Anglo Pacific Group Plc Annual Report and Accounts 2012 8 Chairman’s review “ The Group will continue to make the acquisition of new royalties its principal strategic focus, as it maintains its belief that the long term urbanisation of the developing world should still drive demand for those commodities covered by its royalties.” Total assets £353 m Dividend for year 10.2 p 4.6% Anglo Pacific Group Plc Annual Report and Accounts 2012 9 R e p o r t o f t h e D i r e c t o r s 2012 was an exceptionally difficult year for the financial world in general and the mining industry in particular. China was seen to be growing at a slower pace than anticipated and Europe’s continuing debt crisis appeared overwhelming. The uncertainty over the US election and regime change in China together with the fiscal cliff stalemate in the USA further reduced international business confidence. These factors severely impacted commodity prices throughout the year. In particular steel oversupply and destocking in China had a severe effect on iron ore and coking coal prices, the latter falling by some 50%. Royalties from the Kestrel coking coal mine in Australia were also impacted early in the year by a number of special factors including disruption of production due to a longwall changeover as well as adverse weather conditions. In the last quarter, production was also affected by commissioning delays of the new coal processing plant. Elsewhere, the Amapá iron ore mine in Brazil produced a steady flow of royalties albeit at lower prices whilst the Group received its first full year of royalties from the El Valle-Boinás/Carlés gold mine in Spain at buoyant gold prices. During the year there was a further decline in the junior mining sector due to reduced commodity prices, the scarcity of financing for new mining projects and the impact of severe cost and capital expenditure inflation across the mining industry. This produced opportunities for the acquisition of new royalties, enabling the Group to further diversify its royalty portfolio with three new projects in gold, uranium and iron ore. Despite weaker mining markets the Group continued to realise gains from its strategic mining interests. The Group’s balance sheet remained ungeared with a resilient asset backing. The Group offers a stable hedge against weaker currencies as well as against inflation due to its royalty income being directly linked to the sales prices of the commodities it finances. The Group’s strategy remains focused on acquiring new royalties by providing mining finance and through its associated strategic mining investments. The Group is fully committed to generating consistent cash flows and dividends for shareholders. Outlook The outlook for the world economy appears to have improved since the year end with an increase in Chinese output and infrastructure spending and continuing signs of recovery in the US economy. Japan, India and South Korea appear similarly committed to a growth strategy. This confidence has produced better mining markets and a more optimistic outlook for metal prices and in particular iron ore. As Rio Tinto continue to progress with the Kestrel expansion project, we remain confident of a recovery in production from Kestrel in 2013. This, together with the substantial increase in royalty rates announced by the Queensland Government in September last year from 10% to 12.5% above A$100 and 10% to 15% for coal prices realised above A$150 per tonne, should impact positively on royalty receipts from Kestrel in 2013. The progress made during the year at a number of the Group’s development royalties has been positive and should bring forward future royalty cash flows. The Group’s revenue is directly linked to the top line of its royalty mining operations, whilst avoiding exposure to the current inflationary escalation in mining costs. The Group itself has no operating mines of its own. The Group will continue to make the acquisition of new royalties its principal strategic focus, as it maintains its belief that the long term urbanisation of the developing world should still drive demand for those commodities covered by its royalties. I would like to take this opportunity to welcome both Mr Paul Cooke and Mr Michael Blyth to the Board as Non-Executive Directors. They both bring a wealth of expertise and experience in areas which will considerably benefit our Group and we look forward to working with them. Finally, I would like to thank my Board colleagues and staff for their application and hard work in what has been a challenging year for the Group. B.M. Wides Acting Chairman March 27, 2013 10 Anglo Pacific Group Plc Annual Report and Accounts 2012 Metallurgical Coal What we own The Group’s core asset is its 50% ownership of certain sub-stratum lands which entitle it to coal royalty receipts from the Kestrel and Crinum mines, located in Queensland, Australia (other than Crown areas). These mines are operated by Rio Tinto Coal Australia Pty Ltd and BM Alliance Coal Operations Pty Ltd (a 50/50 joint venture between BHP Billiton Limited and Mitsubishi Development Pty Ltd), respectively. The Kestrel coking coal mine has been in production since 1992 and is a world class coking coal deposit which has the capability of producing between 3 to 6 million tonnes of hard coking coal per annum. Production from the adjacent Crinum mine largely left the Group’s private royalty ground in 2011. What is metallurgical coal and what are its uses Metallurgical coal normally trades at a premium to thermal coal and is an essential raw material in the production of iron for steel making. The highest quality coals include hard coking coal and ultra-low volatile Pulverised Coal Injection (PCI) coal. How our coal royalties work The Group’s royalty entitlements from the Kestrel and Crinum mines arise under Queensland Government law and are to be paid on coal mined from certain private subterranean lands. The royalty rate to which the Group is presently entitled is prescribed by the Queensland Mineral Resources Regulations. These regulations currently stipulate that the basis of calculation is a three-tiered fixed percentage of the invoiced value of the coal, without deduction for any costs pertaining to rail and road freight or any other costs incurred in relation to the sale or disposal of the coal other than port and related charges, as set out in the chart opposite. Valuation As the Group owns the physical right to the minerals, its royalty entitlement from the Kestrel mine is treated and accounted for as property, plant and equipment. As such, the royalty entitlement is valued at fair value based on future discounted cash flows calculated on a quarterly basis by an independent external consultant and classified as “Coal royalties”. The value of the Group’s Kestrel royalty increased by £5million to £171million as at December 31, 2012, from £166million as at December 31, 2011 (restated). This increase is largely attributable to the announcement of increased royalty rates by the Queensland government, which will benefit future royalty receipts to the Group. Anglo Pacific Group Plc Annual Report and Accounts 2012 In addition to our royalties, the Group owns several coal exploration licences over thermal coal in British Columbia, Canada. These assets are being carried in the balance sheet at just over £2.2m, with £0.9m in deferred exploration costs. Trefi Coal Corp is a thermal and PCI coal prospect – 100% owned subsidiary – with NI 43-101 compliant measured coal resources of 14.25million tonnes, indicated resources of 24.85million tonnes of coal, and inferred resources of 51.50million tonnes. Panorama Coal Corp is an ultra-low volatile metallurgical coal prospect – 100% owned subsidiary – with NI 43-101 indicated resources of 13.70million tonnes semi-anthracite to anthracite coal, and inferred resources of 24.10million tonnes. The Group is actively seeking partners in order to progress these projects towards the Group’s objective of earning a royalty entitlement and retaining a carried interest. 11 R e p o r t o f t h e D i r e c t o r s Coal royalty rates (%) 15 12 9 6 $0 $100 $150 A$/tonne New rates Previous rates Coal royalty income £m 40 30 20 10 2008 2009 2010 2011 2012 Coal royalty valuation £m 200 150 100 50 2008 2009 2010 2011 2012 Performance Kestrel, Australia Coking coal receipts from the Kestrel mine operated by Rio Tinto Coal Australia Pty Ltd were £10.9million (2011: £26.1million (restated)) on approximately 2.7million tonnes of hard coking and thermal coal (2011: 3.8million tonnes restated). Royalty income was impacted in the first half of 2012 by a longwall changeover and lower productivity during the ramp up and in the second half of 2012 by a major coal preparation plant shutdown as part of Kestrel’s mine expansion project. Benchmark hard coking coal quarterly contract prices fell from $235 FOB in Q1 2012 to $170 FOB in Q4 2012. During the second quarter of 2012 the Group was informed by Rio Tinto that an audit by the Queensland Office of State Revenue had identified a misallocation of royalty revenue relating to areas reserved by the State of Queensland for roads. This resulted in an overpayment of royalties to the Group of £4.6million (A$7.1million) for the period September 2006 to December 2011, together with an associated interest charge of £1.4million (A$2.2million). The misallocation of royalty revenues and associated interest charge has been reflected in the restated balance sheet at December 31, 2011, the impact of which is described in note 2.1.3. Crinum, Australia Production at Crinum has now moved away from our private royalty area and as such we are no longer expecting any future income, and the asset is ascribed no value on the balance sheet. 12 Anglo Pacific Group Plc Annual Report and Accounts 2012 Iron Ore What we own Producing Amapá: 1% GRR over Anglo American Plc’s project in Brazil Pre-Development Pilbara royalties (inc Railway): 1.5% GRR over BHP Billiton Ltd’s project in Western Australia Development Jogjakarta: Royalty over Indo Mines Ltd’s project in Indonesia. (Please see below for details on rates) Isua: 1% GRR over London Mining Plc’s project in Greenland Mount Ida: 0.3% GRR over Jupiter Mines Ltd’s project in Western Australia. Tucano: 1% GRR over Beadell Resources Ltd’s project in Brazil Valuation The Group does not own the physical rights to the minerals contained within the Amapá, Tucano, Isua, Mount Ida and Pilbara Iron Ore projects. The royalties receivable from the interests held are derived from the rights attached to the underlying mineral resources. As such these interests are classified as “Intangibles” and are carried at amortised cost. The Group’s interest in the Jogjakarta project arises from a debenture instrument whereby initial royalty receipts are repayments of principal. As such this interest is classified as “Royalty Instruments” and is carried at fair value. Performance Amapá, Brazil Jogjakarta, Indonesia Tucano, Brazil In Brazil, royalty receipts from the Anglo American Plc operated Amapá Iron Ore System (“Amapá”) were £2.2million (2011: £2.7million) from circa 5.2million tonnes of pellet and sinter feed sales. On January 4, 2013 Zamin Ferrous announced they had signed a binding agreement for the purchase of Amapá from Anglo American Plc (70%) and Cliffs Natural Resources Inc (30%). Isua, Greenland On January 24, 2013 London Mining Plc announced that they had completed the Department of Minerals and Petroleum’s permitting process requirements for its Isua iron ore project in Greenland. London Mining Plc also announced that they expected all required approvals to be completed in 2013. For further information on the project please see www.londonmining.co.uk Indo Mines Ltd (“Indo”) announced on October 25, 2012 that the Indonesian Ministry of Energy and Mineral Resources issued a decree confirming approval of the application for the commencement of the construction phase of the Jogjakarta Iron Project within the Contract of Works area. Indo had previously announced the AMDAL Environmental Impact Assessment approval on February 1, 2012. The project will follow a staged implementation to achieve 2million tonnes of iron concentrate production per annum before moving downstream into the manufacture of pig iron. Anglo Pacific holds a 2% NSR royalty which changes to a 1% NSR royalty once our principal is repaid and provided the pig iron price is less than $700 per tonne. The NSR royalty remains at 2% if the pig iron price is more than $700 per tonne. For further information see www.indomines.com.au On January 24, 2013 Beadell Resources Ltd (“Beadell”) announced that the magnetic separation plant is due to produce its first concentrate in April 2013. Beadell previously announced on August 24, 2012 an “Iron Ore Concentrate Off-take Agreement” with Anglo American Plc with an indicated production level of 500,000 tonnes per annum of ~65% Fe concentrate. For further information please see www.beadellresources.com.au 2012 Acquisition: Mount Ida, Australia The Group completed the first tranche of a 50% interest in the 1.5% GRR from Red Rock Resources PLC. Tranche 1 was completed with the payment of US$6million being settled by $3.7million in cash with the remainder in ordinary shares of the Company. Anglo Pacific Group Plc Annual Report and Accounts 2012 Gold What we own Producing El-Valle Bonáis/Carlés: 2.5% NSR (3% over US$1,100/oz) over Orvana Mineral Corporation’s project in Spain Pre-Development Malartic-Midway and McKenzie: 2.5% NSR over Northern Star Mining Corporation’s project in Canada Development Engenho: 2.5% NSR over Minera Gold Ltd’s project in Brazil Duggan (option): 2% NSR on Creso Exploration Inc’s project in Canada. The Group has notified the operator of its intention to exercise the option Dugbe I: 2% variable NSR royalty financing agreement over Hummingbird Resources Plc’s project in Liberia, announced in December 2012 13 R e p o r t o f t h e D i r e c t o r s Valuation The Group’s interests in the EVBC, Engenho, and Malartic Midway mines arise from debenture instruments whereby initial royalty receipts are repayments of principal. As such these interests are classified as “Royalty Instruments” and carried at fair value. The Group does not own the physical rights to the minerals contained within the Dugbe I project. The royalties receivable from the interest held are derived from the rights attached to the underlying mineral resources. As such these interests are classified as “Intangibles” and carried at amortised cost. The Group’s option to acquire a 2% NSR over the Duggan project is classified as “Mining and exploration interests – royalty options” and carried at fair value. Performance El Valle-Boinás/Carlés, Spain 2012 Acquisition: Dugbe I, Liberia The Group announced in December 2012 the signing of a royalty financing agreement with Hummingbird Resources Plc to acquire a 2.0% to 2.5% variable NSR royalty on its Dugbe I gold project in Liberia. Receipts from the El Valle-Boinás/Carlés (“EVBC”) mine operated by Orvana Minerals Corp (“Orvana”) were £1.9million (2011: £0.3million). The mine continues to build up to full production with a new 420 metre deep shaft commissioned during 2012. On February 8, 2013 Orvana announced a fiscal 2013 (year- end September, 2013) projected production for EVBC of 63,000 ounces of gold, 200,000 ounces of silver and 6million pounds of copper. 14 Anglo Pacific Group Plc Annual Report and Accounts 2012 Energy Minerals What we own Pre-Development Salamanca: 1% NSR over Berkeley Resources Ltd’s project in Spain Athabasca: 2% to 3% variable NSR over Advance Royalty Corp’s Project in Canada Development Four Mile: 1% NSR over Quasar Resources Pty Ltd/Alliance Resources Ltd’s project in Australia Churchrock (option): 5% GRR option over Uranium Rerources Inc’s project in USA What are energy minerals Energy is essential for modern life and the Group invests in uranium projects and has exposure to thermal coal via by- product production from Kestrel and through its own private coal holdings. Valuation The Group does not own the physical rights to the minerals contained within the Four Mile Uranium, Salamanca Uranium and Athabasca Uranium projects. The royalties receivable from the interests held are derived from the rights attached to the underlying mineral resources. As such these interests are classified as “Intangibles” and carried at amortised cost. The Group’s option over the Chruchrock Properties is classified as “Mining and exploration interests – royalty options”. No value is ascribed to this asset due to the uncertainty over the eventual exercise of the option. Performance Four Mile Uranium, South Australia On October 24, 2012 Alliance Resources Ltd announced the Four Mile Project start-up with in-situ recovery (“ISR”) mining operations commencing at Four Mile East in Q2 2013 and at Four Mile West in Q4 2013. Production guidance for 2013 and Q1 2014 is 2.128Mlb of uranium oxide and sales of 1.306Mlb with first sales expected in Q3 2013. For additional information please see www.allianceresources.com.au 2012 Acquisition Churchrock Uranium option, USA On August 13, 2012 the Group agreed to provide Laramide Resources Ltd with an interest bearing facility of CDN$5million in return for being granted an option to acquire a 5% GRR over the Churchrock Properties. The facility is repayable in December 2015, and bears interest at a rate of 7% per annum payable quarterly in arrears. The option has an exercise price of US$15million. Anglo Pacific Group Plc Annual Report and Accounts 2012 Non-Ferrous Metals What we own Pre-Development Bulqiza: 3% NSR over Columbus Copper Corp’s Chromite project in Albania Development Ring of Fire: 1% NSR over Cliffs Natural Resources Inc’s Chromite project in Canada Eastbank and Highbank options: 1% NSR over Northern Shield Resources Inc’s projects in Canada Araguaia option: 1.1% to 1.5% NSR over Horizonte Minerals Plc’s Nickel project in Brazil 15 R e p o r t o f t h e D i r e c t o r s What are non-ferrous metals and what are their uses Non-ferrous metals are metals other than iron, gold and platinum group elements used in all aspects of modern life eg. copper (shown here), nickel and chromite. Valuation The Group does not own the physical rights to the minerals contained within the Ring of Fire Chromite and Bulqiza Chromite projects. The royalties receivable from the interests held are derived from the rights attached to the underlying mineral resources. As such these interests are classified as “Intangibles” and carried at amortised cost. The Group’s options to acquire royalties over the Araguaia Nickel, East bank and Highbank Platinum Group Elements projects are classified as “Mining and exploration interests – royalty options” and carried at fair value. Performance Ring of Fire Chromite, Canada Araguaia Nickel, Brazil (Variable NSR) On May 20, 2012 Cliffs Natural Resources Inc announced that the Ring of Fire project would be advanced to the feasibility stage. The project is expected to produce up to 2.3million tonnes of chromite concentrate per annum and is scheduled to start production in 2016. Additional information can be found at www.cliffsnaturalresources.com Horizonte Minerals Plc (”Horizonte”) announced on August 22, 2012 that its NI 43-101 compliant Preliminary Economic Assessment (“PEA”) showed strong economics based on a low strip ratio, excellent infrastructure, large mineral resource with two viable alternatives for processing. The PEA recommended moving to pre-feasibility which Horizonte expected to begin in 2013. Anglo Pacific holds an option on a sliding scale 1.1% to 1.5% NSR royalty to be exercised for US$12.5million by the earlier of 120 days from the completion of a pre-feasibility study or January 10, 2017. Further information can be found at www.horizonteminerals.com and www.sedar.com 16 Anglo Pacific Group Plc Annual Report and Accounts 2012 Report of the Directors Financial review Income statement Royalty entitlements Kestrel Crinum Amapá Royalty income El Valle-Boinás/Carlés* Royalty entitlements amounts receivable from royalty instruments, though £0.8million of this was recovered in 2012. Other income represents returns from the Group’s mining and exploration interests. Overall this resulted in profit before tax for the year of £14.2million compared to £48.5million (restated) reported in 2011. Allowing for a tax charge of £4.2million (2011: £12.2million (restated)), profit after tax was £10.1million (2011: £36.3million (restated)) which translates to an earnings per share of 9.27p (2011: 33.51p (restated)). Restated 2011 £’000 2012 £’000 10,921 26,083 117 5,902 2,229 2,694 13,267 34,679 Balance sheet 1,890 275 15,157 34,954 Asset summary * El Valle-Boinás/Carlés is a debenture instrument whereby initial royalty receipts are repayments of principal and therefore do not appear as royalty income in the income statement. Royalty income was £13.3million for the year ended December 31, 2012, down from £34.7million in 2011. The 2011 numbers have been restated as a result of the previously announced misallocation of royalty revenue at the Group’s Kestrel royalty which came to light after an audit by the Queensland Office of State Revenue. This restatement is discussed further in note 2.1.3, but resulted in a reduction in the reported Kestrel income in 2011 of £0.4million. As discussed in the Metallurgical Coal review, there were several adverse production occurrences at Kestrel in the year, resulting in unusually low levels of income. Overall income has also been adversely impacted by continued downward pressure on the coking coal price throughout 2012. Production at Crinum had largely left the Group’s private royalty ground in the first half of 2011, and no future royalty receipts are now expected. El Valle-Boinás/Carlés continued its ramp up to full production in the year, though as this royalty was structured as a debenture originally, royalty receipts are treated as repayments of principal, until such time as the outstanding balance has been repaid. From 2013 onwards, these royalty receipts will be included in the income statement. Operating expenses increased by £0.2million in the year, largely as a result of an increase in professional fees associated with managing our existing royalty portfolio and exploring new royalty opportunities. This increase in professional fees was offset somewhat by the decision not to award the Executive Directors an annual bonus this year. A reduction in finance income of £0.8million in the year, largely as a result of the cessation of interest bearing royalty instruments, along with no change in the amortisation of the Amapá royalty, resulted in an operating profit of £9.3million in the year, compared to £31.8million in 2011 (restated). In spite of very difficult equity markets, the Group realised gains of £7.3million (2011: £20.3million) from its mining and exploration interests in the year. The Group continued its strategy of taking equity stakes in strategic opportunities with the prospect of potential royalties. Where royalties cease to be a financing option, the Group will seek to dispose of the particular equity investment in a manner that is profitable to the Group, while minimising disruption to the investee company. The reduction in gains compared to those achieved in 2011 largely reflects the difficulties in the junior mining equity markets over the last year. Other losses of £4.2million reflect write downs in the mining and exploration interests of £3.7million which the Directors consider to be impaired. Further information can be found in note 18. The losses of £4.3million in 2011 largely represented provisions in respect of Restated 2011 £’000 2012 £’000 Coal royalties (Kestrel and Crinum)* 170,995 165,967 Royalty instruments** Intangibles - royalties*** Total royalty assets Mining and exploration interests Cash 24,032 24,736 70,477 68,334 265,504 259,037 55,793 64,551 24,036 32,197 Other intangibles (deferred exploration costs) 931 804 Other Total assets 7,204 14,450 353,468 371,039 * Coal royalties relate to the Group’s entitlement to royalties from the Kestrel and Crinum mines. As the Group owns the physical right to the minerals in its coal royalties, its royalty entitlement is treated as property, plant and equipment, as such it is carried at fair value as calculated by an independent consultant. ** Royalty instruments represent the Group’s royalties which are structured as debentures. As these are financial assets they are carried at their fair value on the balance sheet. *** Intangibles – royalties are carried at amortised cost. Though the expected future cash flows from these royalties may enhance significantly post investment, accounting rules prevent the Group from reflecting this on the balance sheet. The Group’s royalty assets maintained their value in spite of a difficult year for the mining and commodity sector. The Kestrel royalty increased in value by £5.0million. This was largely as a result of the increase to the Queensland royalty rate announced in September. The decrease in production has also had a positive impact, as resource depletion was lower in 2012, which should result in future sales at both higher prices and higher royalty rates. The Directors, as part of the annual impairment review, conducted a discounted cash flow valuation of the Group’s other royalties. As royalty investments are usually made at an early stage of a project, changes in the project’s development between the point of investing and the commencement of production can significantly impact on the expected cash flows the Group could receive. If forecast commodity prices and production schedules used by the Directors transpire, the Group could achieve additional cash flows of £60.6million (2011: £52.2million), on a discounted basis, above the initial investment. This amount is not reflected on the balance sheet. The Group ended the year in a strong position, with £24.0million (2011: £32.2million) in cash along with further potential liquidity in its mining and exploration portfolio. Allowing for the provision for deferred tax of £48.5million, mainly relating to the valuation of royalties and debentures, the Group had net assets for the year ended December 31, 2012 of £301.0million. This is down slightly on £306.2million at the end of 2011 (restated). 17 R e p o r t o f t h e D i r e c t o r s Anglo Pacific Group Plc Annual Report and Accounts 2012 Report of the Directors Directors’ report The Group continues to expand and diversify its royalty portfolio The Directors submit their report and the audited financial statements for the year ended December 31, 2012. Anglo Pacific Group PLC is a public limited company, incorporated in England, and listed on the London Stock Exchange under the symbol APF and the Toronto Stock Exchange under the symbol APY. Strategy Anglo Pacific Group PLC’s strategy, conducted through the holding company (the “Company”) and its subsidiary undertakings (together, the “Group”), is set out in the Our Strategy section on pages 4 to 5. Principal activities The Group’s principal royalty activities and coal interests are set out in the Commodities Review on the Group’s principal activities is set out in the Our Royalty Portfolio section on pages 10 to 15. The location of page 7. In addition to the Group’s principal royalty activities and coal interests, the Group owns a number of strategic mining and exploration interests held for the purpose of generating additional royalty opportunities including a number of quoted and unquoted coal, uranium, gold, base metals and platinum mining projects. Results and dividends The consolidated income statement is set out on the financial statements. page 35 of The Group’s profit after tax decreased by 72% to £10.1million (2011: £36.3million (restated)). The Directors recommend a final dividend of 5.75p per share for the year ended December 31, 2012 which, with the interim dividend of 4.45p per share paid on February 5, 2013, will make total dividends for 2012 of 10.2p per share (2011: 9.75p per share). The final dividend is subject to shareholder approval at the 2013 Annual General Meeting. The Board proposes to pay the final dividend on August 7, 2013 to shareholders on the Company’s share register at the close of business on June 7, 2013. The shares will be quoted ex-dividend on the London Stock Exchange and the Toronto Stock Exchange on June 5, 2013. As with previous dividends, depending on the share price at the time the Board will consider whether shareholders will be given the opportunity to elect to receive new shares instead of cash. The Board is seeking to renew its authority to offer this alternative at the Annual General Meeting. Should this alternative be offered, the price will be calculated on the basis of the average mid-market closing price of the ordinary shares for the five business days commencing June 5, 2013. The last date for elections under such an alternative, if offered, will be July 19, 2013. Review of the business This business review comprises the Chairman’s Review on page 9, the Key Performance Indicators included in the How We Performed section on page 17, the Commodities Review on page 6 and those laid out on pages 10 to 15, page 16. together with the Financial Review set out on The Principal Risks and Uncertainties laid out on page 17 together with the strategic risks identified under the Our Strategy section on page 5 also form part of this review. Operational review The Group’s operational review of its royalty and coal interests is set out in the Commodities Review on pages 10 to 15. Mining and exploration interests The Group’s equity investments in both listed and unlisted mineral exploration and development companies continued to generate opportunities for royalty acquisitions during the year. The Group’s equity investments remained focused on copper, precious metals, iron ore and uranium at December 31, 2012. Where royalty opportunities appeared no longer identifiable within an equity investment, the Group disposed of the interest. Difficult equity market conditions during the year resulted in the Group realising decreased profits on these disposals. In addition to the difficult equity market conditions, the filing for protection under a corporate reconstruction by one of the Group’s mining and exploration interests subsequent to the year end, resulted in the Group recognising an impairment loss of £3.7million for the year ending December 31, 2012. Key performance indicators Consistent with the Group’s strategy of expanding our mineral royalty portfolio and continuing to pay a substantial proportion of our royalty income to shareholders as dividends, the Board has identified three main key performance indicators, as a measure of our success in delivering on our strategy, all of which are financial: (i) Value of new royalties acquired (ii) Operating profit (iii) Dividends per share In addition to these financial KPIs, the Board also considers non- financial factors such as the Group’s compliance with Corporate Governance Standards and environmental considerations relevant to some of the Group’s mining interests. These factors cannot be efficiently measured so do not form part of the Group’s KPIs. Principal risks and uncertainties In addition to normal business risks and the strategic risks set out in the Our Strategy section on page 5, the Board has identified, inter alia, four main macro-economic risks that could affect the Group’s performance:- (i) A prolonged, world-wide economic recession (ii) Sustained low commodity prices (iii) A fall in precious metal prices (iv) Currency volatility Measures taken by the Board to manage these risks include:- • Regular mining project management meetings and discussions • Regular documented project review meetings • Substantial cash holdings • A diversified portfolio of projects covering a number of commodities and geographical areas • Substantial exposure to gold and other precious metals • Regular review of sovereign risk 18 Anglo Pacific Group Plc Annual Report and Accounts 2012 Report of the Directors Directors’ report • Cash being held at a number of banks and stockbrokers in a variety of currencies and short term financial instruments The Board is also aware of the need for succession planning and the associated risks to the Group are under constant review. Further appointments will be made to the Board as required. Financial instruments The Group’s principal treasury objective is to provide sufficient liquidity to meet operational cash flow and dividend requirements and to allow the Group to take advantage of new growth opportunities whilst maximising shareholder value. The Group operates controlled treasury policies which are monitored by management to ensure that the needs of the Group are met as they evolve. The impact of the risks required to be discussed in accordance with IFRS 7 are summarised below, while detailed discussion and sensitivity analysis relating to these risks is contained in note 3 to these accounts. Liquidity and funding risk The objective of the Company in managing funding risk is to ensure that it can meet its financial obligations as and when they fall due. At the year end there was no debt outstanding and the Company, with its strong balance sheet, had good access to capital markets, if required. Credit risk The Group’s principal financial assets are bank balances, royalty instruments held as financial assets, trade and other receivables and investments. These represent the Group’s maximum exposure to credit risk in relation to financial assets. The Group’s credit risk is primarily attributable to its other receivables, including royalty receivables. It is the policy of the Group to present the amounts in the balance sheet net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and the current economic environment. Where possible the Group has registered its interests against the relevant mining titles for the royalties it has acquired. In addition, the Group is generally entitled to full reconciliations of amounts paid and retains the right to audit the royalty returns and verify the calculations. The Group’s credit risk on royalty instruments held as financial instruments, has been reviewed and the estimated current exposure is as disclosed in note 16 where the future contractual right to cash flow from these instruments is reflected in their fair value. The credit risk on bank deposits is limited because the counterparties have high credit-ratings assigned by international credit-rating agencies. The Group has no significant concentration of credit risk, with exposure spread over a large number of currencies and counterparties. In 2007, the Group created a derivative financial instrument to provide finance to an unlisted mining development company, which has subsequently listed (note 18). This instrument is convertible into equity in the company or royalties over the company’s properties at the Group’s option for a period of up to five years. In the event of default the instrument becomes repayable and the Group would rank equally with the company’s other unsecured creditors. The Group undertakes detailed analysis of factors which mitigate the risk of default to the Group on a regular basis. Foreign exchange risk The Group’s transactional foreign exchange exposure arises from income, expenditure and purchase and sale of assets denominated in foreign currencies. As each material commitment is made, the risk in relation to currency fluctuations is assessed by the Board and regularly reviewed. The Group does not consider it necessary to have a hedging programme in place at this time. The tables below show the extent to which the Group has residual financial assets and liabilities in currencies other than sterling. Foreign exchange differences on retranslation of these assets and liabilities are taken to the income statement of the Group. Net foreign currency monetary asset AUD CAD USD NOK EUR Total £’000 £’000 £’000 £’000 £’000 £’000 20,385 21,996 4,180 16,371 37,928 30,514 3,117 3,191 6 6 62,938 74,756 Functional currency of operation 2012 Sterling 2011 Sterling Interest rate risk The Group has no borrowings or debt and the Group’s financial instruments have limited exposure to fluctuations as a result of changes in interest rates. This is regularly reviewed by management. Other price risk The Group’s mining and exploration interests are held for the purposes of generating additional royalties and are considered long-term, strategic investments. This strategy is unaffected by fluctuations in prices for mining and exploration equities; however, changes in market conditions may affect the value and recoverability of the amounts invested. The Group has detailed investment review processes in place to manage this risk to the greatest extent possible. The royalty portfolio exposes the Group to other price risk through fluctuations in commodity prices, particularly the price of hard coking coal and iron ore, which may affect the future cash flows received from the Group’s royalties. Management Directors The Group’s directors have extensive experience in the mining industry, with backgrounds in corporate finance, equity markets and mining operations. This combination of skills continues to deliver new royalties from long-life mining assets to grow returns for shareholders. The following individuals have held office as directors of the Company since January 1, 2012, unless stated otherwise: Executive: P.M. Boycott (Executive Director) A.C. Orchard (Chief Investment Officer) J. Theobald B.M. Wides Non Executive: M.H. Atkinson (Chief Executive Officer) (Acting Chairman) (Senior Independent Director, Nomination Committee and Remuneration Committee Chairman) W.M. Blyth (appointed March 20, 2013) P.N.R. Cooke (appointed December 10, 2012) J.G. Whellock (Audit Committee Chairman) A.H. Yadgaroff (Non-Executive Director) 19 R e p o r t o f t h e D i r e c t o r s Anglo Pacific Group Plc Annual Report and Accounts 2012 Report of the Directors Directors’ report Peter M. Boycott was appointed to the Board in May 1997 and as Chairman in June 1997. He has an MA in Mechanical Sciences from the University of Cambridge and is a Chartered Accountant. During his career he has been involved as Finance Director and substantial shareholder in a number of private investment and property groups including engineering and manufacturing companies supplying thermal processing systems to major mining groups. He has been a director of several public companies quoted in Australia and Canada. He is currently taking a leave of absence from his role as Chairman for health reasons. A. Chris Orchard joined the Group as Chief Investment Officer in December 2007 and was appointed to the Board in June 2009. He has a BSc Honours in Mining from the University of Leeds and is a Member of the Chartered Institute for Securities and Investment. After graduating he worked in the South African mining industry and on returning to the UK spent twenty years as an investment banker in the City specialising in the resources sector. He was Managing Director of Hambros Equity UK, a Director of RBC Dominion Securities and prior to joining the Group managed the investment operations of a private wealth management firm. He has been a director of several public companies quoted in Canada and Australia. John Theobald joined the Group as Chief Operating Officer in April 2008, joined the Board in June 2009 and was appointed Chief Executive Officer on October 6, 2010. He is a Chartered Engineer with a BSc Honours in Geology from the University of Nottingham. He is a Fellow of the Geological Society, Fellow of the Institute of Materials, Minerals and Mining and Member of the Institute of Directors. Prior to joining the Group he held senior positions with the major industrial minerals group SCR-Sibelco; he has also worked in the junior resource sector and for major companies such as Anglo American, Phelps Dodge and Iscor covering a wide range of metals, coal and industrial minerals. He has been a director of several public companies quoted in Canada. Brian M. Wides joined the Board in June 1997 and was appointed Finance Director in September 1997. In July 2006 he was appointed Chief Executive Officer and on October 6, 2010 was appointed Director of International Business Development after standing down as Chief Executive Officer. He has a Bachelor of Commerce degree from the University of Witswatersrand and is a Chartered Accountant (South Africa). His specialist experience includes corporate finance, management consultancy and creating shareholder value for a large spectrum of private and public companies in the UK, Australia and Canada. Mike H. Atkinson was appointed director in February 2006 and is currently the Group’s Senior Independent Director. He also chairs the Nomination Committee and the Remuneration Committee. He has an MA in History from the University of Cambridge and is a qualified management accountant. He worked for the National Coal Board as a capital investment analyst before joining the UK Department of Energy (later the Department of Trade and Industry). He was a senior civil servant for nearly twenty years until his retirement in 2004, and held a range of financial, management and policy posts including Director of Coal and Chairman of British Coal. W. Mike Blyth was appointed director in March 2013. He has a BSc from St Andrews University and is a Chartered Accountant. He was, until his retirement in 2011, a partner for 30 years in Baker Tilly, specialising in providing audit and related services to AIM and full list clients. During his career he held a number of senior management positions with the firm, including a period on its National Executive Committee. Paul N. R. Cooke was appointed director in December 2012. He has an MA in History from the University of Cambridge and is a qualified Chartered Surveyor. He is a substantial shareholder in a number of property companies specialising in property development, investment and financing. He is also involved in farming and forestry interests in the UK and abroad. He serves on the boards of several charities. Dr. John G. Whellock was appointed director in March 2003 and currently chairs the Audit Committee. He has a BSc and PhD in Chemical Engineering from the University of Birmingham and is a member of the Minerals, Metals and Materials Society of the American Institute of Mining, Metallurgy and Petroleum. He has over thirty years of experience in the development and implementation of extractive metallurgy, mineral and chemical plants. He is the founder of JW Technologies providing innovative technology and thermal processing equipment for the metals, minerals and chemical industries. Prior to this he worked for Minproc Technology Inc and was founder and Vice-President of Tolltreck International Ltd. Anthony H. Yadgaroff was appointed director in March 2003 and previously chaired the Group’s Remuneration Committee. He is a Member of the Chartered Institute for Securities and Investment, and has specialised in investment research and management consultancy during a forty year City career. Allenbridge Group, which he founded in 1984 to provide advisory services to private and institutional investors, was acquired by Close Brothers in February 2011. He is Chairman of Allenbridge Investment Solutions LLP (“AIS”), and is a member of the partnership alongside Moody’s, the global rating agency. AIS is a leading UK investment advisory business, consulting to pension funds and charity clients which control some £30 billion of assets. With regard to the appointment and replacement of directors, the Company is governed by its Articles of Association, the UK Corporate Governance Code, the Companies Act 2006 and related legislation. At the next Annual General Meeting, all of the Company’s Directors will be offering themselves for re-election. The Directors may exercise all the powers of the Company subject to applicable legislation and regulation and the Articles of Association of the Company. The Company’s Articles of Association may be amended by special resolution of the shareholders. At the 2012 Annual General Meeting, held on April 19, 2012, the Directors were given the power to issue new shares up to an aggregate nominal amount of £727,928. This power will expire at the earlier of the conclusion of the 2017 Annual General Meeting or April 19, 2017. Further, the Directors were given the power to make market purchases of ordinary shares up to a maximum number of 10,918,921. This power will expire at the earlier of the conclusion of the 2013 Annual General Meeting or October 19, 2013. At a General Meeting, held on May 29, 2012, the Directors were given the power to allot equity shares or sell treasury shares for cash other than pro-rata to existing shareholders. This power was limited to 5% of the Company’s issued ordinary share capital (other than in connection with a rights or other similar issue) and will expire at the earlier of the conclusion of the 2013 Annual General Meeting or August 29, 2013. The Group maintains insurance for its Directors and officers against certain liabilities in relation to the Group. 20 Anglo Pacific Group Plc Annual Report and Accounts 2012 Report of the Directors Directors’ report Directors’ interests The beneficial interests of the Directors and their connected persons in the issued share capital of the Company were: Ordinary shares of £0.02 each March 26, 2013 December 31, 2012 December 31, 2011 P.M. Boycott (Executive Director) 2,691,947 2,691,947 2,706,947 A.C. Orchard (Executive Director) 402,049 402,049 J. Theobald (Executive Director) 337,625 337,625 357,245 287,550 B.M. Wides (Executive Director) 2,926,153 2,926,153 2,926,153 M.H. Atkinson (Non-Executive Director) W.M. Blyth (Non-Executive Director) 7,422 1,400 7,422 * P.N.R. Cooke (Non-Executive Director) 8,949,904 8,949,904 7,422 * ** J.G. Whellock (Non-Executive Director) 13,084 13,084 13,084 A.H. Yadgaroff (Non-Executive Director) 175,460 175,460 169,932 * W.M. Blyth was appointed to the board on March 20, 2013. ** P.N.R. Cooke was appointed to the board on December 10, 2012. Remuneration of directors The Remuneration Report on Directors’ Report and includes details of the nature and amount of each element of the remuneration (including share options) of each of the Directors. pages 28 to 31 forms part of the The 2012 Remuneration Report will be proposed for approval at the 2013 Annual General Meeting. In accordance with the Companies Act 2006 (United Kingdom) no entitlement of a person to remuneration is conditional upon the passing of the resolution. The 2011 Remuneration Report was approved by shareholders at the 2012 Annual General Meeting. Corporate governance A full report on corporate governance can be found on and forms part of this Directors’ Report. pages 24 to 27 Corporate responsibility The Group is committed to maintaining the highest standards in all areas of its business and, in so doing, considers the wider ethical, environmental and social impacts of its business. Following on from its publishing of a statement of integrity in 2011, the Group published a broader corporate responsibility statement in 2012, a copy of which is available on the Group’s website. Business conduct In addition to its published statement of integrity, the Group has policies and procedures in place to ensure that all of its directors, officers, employees, consultants, advisers, business partners, or anyone else, who may be acting on its behalf, are aware of their responsibilities in this area. The Group actively promotes a transparent approach to all of its business dealings and expects its employees and representatives to adopt a zero tolerance approach to corruption. The Group has a whistle blowing policy in place and its employees are encouraged to report any potential or apparent misconduct. Any employee that raises any issues honestly and in good faith will be supported by the Group. Environment The Group remains committed to an environmental policy of collaborating fully with statutory authorities, local communities and other interested parties in order to limit any potential adverse impacts of its activities on the natural and human environments associated with its operations. The nature of the Group’s royalty investments is such that it does not operate any of the properties underlying its royalty portfolio and consequently, it does not always have the ability to influence the manner in which the operations are carried out. Nevertheless, a responsible approach to a project’s environmental impact and its sustainability management is essential to the success of the project over its life, and, as part of its investment decision process, the Group has access to consultants with the requisite expertise to ensure that it can consider and, if necessary, mitigate any risks in this regard to a properly maintainable level. The Group complies with all relevant environmental legislation on its private coal interests in British Columbia, Canada and is assisted in this regard by a team of experienced Canadian consultants. We expect our employees and consultants to address environmental and sustainability responsibilities within the framework of normal operating procedures and to look to minimise waste as much as economically practicable. The Audit Committee is responsible for periodically reviewing the Group’s environmental practices and for monitoring their effectiveness. Social and community issues The Group acknowledges that, while its activities have little direct contact with communities, it can positively influence the social practices and policies of companies it conducts business with. Positive social and community relationships are essential to profitable and successful mining activities, and the Group endeavours to ensure that the companies it works with have appropriate procedures in place to facilitate this. Where we believe that our own operational activities may have an impact on local community groups, the Group consults with these groups and provides them with the opportunity to engage at the planning stage. With respect to its private coal interests in British Columbia, Canada, the Group has engaged with First Nations and will continue to engage and consult as the projects advance. The Audit Committee is responsible for periodically reviewing the Group’s social and community practices and for monitoring their effectiveness. Health and safety The health and safety of the Group’s employees is a fundamental responsibility. The small size of the Group’s organisation allows the day-to-day responsibility to remain at the Board level, being monitored by the Chief Executive Officer. Furthermore, a commitment to health and safety is a fundamental component of a successful mining project, and, as part of its investment decision process, the Group has access to consultants with the requisite expertise to ensure that it can consider and, if necessary, mitigate any such risks. Donations It is a continuing policy of the Group not to make either political or charitable donations. The Group’s Directors and employees support philanthropic efforts using their own personal resources. The Group’s philosophy is that charity is a decision best made by shareholders with their own resources, rather than management using the Group’s resources to make this decision on their behalf. The Group aims to increase the value of a shareholder’s investment in the Group, thus indirectly enabling the shareholder to make its own donation decisions. No political or charitable donations were made by the Group during the year (2011: nil). Employees The Group has 11 employees, 4 of whom are Executive Directors. More information regarding the Group’s employees can be found on pages 19 to 21 and 56. Policy on payment of creditors The Company’s policy with regard to the payment of suppliers is to: 21 R e p o r t o f t h e D i r e c t o r s Anglo Pacific Group Plc Annual Report and Accounts 2012 Report of the Directors Directors’ report • agree terms of payment at the start of business with each supplier; • ensure that suppliers are made aware of the terms of payment; • pay suppliers in accordance with contractual and legal obligations; Substantial shareholdings The Company has been notified of the following interests of 3% or more in the share capital of the Company at March 20, 2013. and • encourage a prompt and open dialogue with suppliers where there is any complaint about the supply or dispute about the invoice. The Company acknowledges the importance of paying invoices promptly, especially those of small businesses, and of encouraging best practice with suppliers so that stronger relationships can be built and confidence from certainty of payment increase. During the year to December 31, 2012 the Company took an average of 22 days to settle its bills with suppliers (2011: 33 days). Essential contracts The Group has a number of members of staff, who due to their knowledge of the Group and its intellectual property, are essential to the continued smooth running of the business. The Group reviews its employment policies on an annual basis, including a review of its performance-related pay policies, so as to ensure these members of staff continue to remain incentivised and their goals remain congruent with those of the Group. All employee contracts contain non-compete agreements and also stipulate that all intellectual property remains that of the Group. Capital structure The structure of the Company’s ordinary share capital at March 27, 2013 was as follows: Issued No. Nominal value per share £ Total £ % of total capital Ordinary shares 109,605,376 0.02 2,192,108 100% Rights and obligations Dividends The £0.02 ordinary shares carry the right to dividends determined at the discretion of the Board. Voting rights The £0.02 ordinary shares carry the right to one vote per share. Restrictions on transfer of holdings There are no specific restrictions on the size of a holding nor on the transfer of the Company’s shares, which are both governed by the general provisions of the Articles of Association of the Company and prevailing legislation. There are no known agreements between holders of the Company’s shares that may result in restrictions on the transfer of shares or voting rights. Special control rights None of the shares carry any special control rights. There are no known agreements that take effect, alter or terminate upon a change of control of the Company following a takeover bid, including any agreements between the Company and its Directors or employees. Employee share schemes Details of employee share schemes are set out on below and in note 2.11 to the financial statements. pages 28 to 30 Treasury No shares are currently held in treasury by the Company. Liontrust Investment Partners LLP Schroders PLC AXA Investment Managers UK Legal and General Group PLC Ordinary Shares of 2p each 7,195,364 5,871,201 5,494,332 4,359,058 Representing 6.56% 5.36% 5.01% 3.98% Statement as to disclosure of information to auditors The Directors who were in office on the date of approval of these financial statements have confirmed that, as far as they are aware, there is no relevant audit information of which the auditors are unaware. Each of the Directors have confirmed that they have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the auditors. Auditors Grant Thornton UK LLP have expressed willingness to continue in office. In accordance with section 489(4) of the Companies Act 2006 (United Kingdom) a resolution to reappoint Grant Thornton UK LLP will be proposed at the 2013 Annual General Meeting. Designated Foreign Issuer status The Company continues to be listed on the TSX and to be a “reporting issuer” in the Province of Ontario, Canada. The Company also continues to be a “designated foreign issuer”, as defined in National Instrument 71-102 – Continuous Disclosure and Other Exemptions Relating to Foreign Issuers of the Canadian Securities Administrators. As such, the Company is not subject to the same ongoing reporting requirements as most other reporting issuers in Canada. Generally, the Company will be in compliance with Canadian ongoing reporting requirements if it complies with the UK Financial Services Authority in its capacity as the competent authority for the purposes of Part VI of the Financial Services and Markets Act 2000 (United Kingdom), as amended from time to time, and the applicable laws of England and Wales (the “UK Rules”) and files on its SEDAR profile at www.sedar. com any documents required to be filed or furnished pursuant to the UK Rules. Technical reports The scientific and technical information in this Annual Report relating to the Panorama coal project and the Trefi coal project was derived, respectively, from the technical report entitled “Resource Estimate for the Discovery and Panorama Coal Properties” dated July 12, 2010 (the “Panorama and Discovery Report”) and the technical report entitled “Resource Estimate for the Trefi Coal Property” dated March 18, 2010 (the “Trefi Report”), each of which was prepared by Mr Robert J. Morris, Principal Geologist, and Mr Robert F. Engler, Principal, Moose Mountain Technical Services. Each of Messrs Morris and Engler is a “qualified person” for the purposes of NI 43-101 and is independent of the Company. Each of the Panorama and Discovery Report and the Trefi Report is available on the Company’s SEDAR profile at www.sedar.com. 22 Anglo Pacific Group Plc Annual Report and Accounts 2012 Report of the Directors Directors’ report Standards of disclosure for mineral projects National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”) contains certain requirements relating to the use of mineral resource and mineral reserve categories of an “acceptable foreign code” (as defined in NI 43-101) in “disclosure” (as defined in NI 43-101) made by Anglo Pacific Group Plc with respect to a “mineral project” (as defined in NI 43-101), including the requirement to include a reconciliation of any material differences between the mineral resource and mineral reserve categories used under an acceptable foreign code and the standards developed by the Canadian Institute of Mining, Metallurgy and Petroleum, as the CIM Definition Standards on Mineral Resources and Mineral Reserves adopted by CIM Council, as amended (the “CIM Standards”) in respect of a mineral project. Pursuant to an exemption order granted to Anglo Pacific Group Plc by the Ontario Securities Commission (the “Exemption Order”), the information contained herein with respect to the Four Mile Uranium Project, the Ring of Fire Project, the Jogjakarta Iron Sands and Pig Iron Project, the Tucano Project, the Kestrel Coking Coal Mine and the Mount Ida Iron Ore Project has been extracted from information publicly disclosed, disseminated, filed, furnished or similarly communicated to the public by an issuer whose securities trade on a “specified exchange” (as defined under NI 43-101) that discloses mineral reserves and mineral resources under one of the JORC Code, the PERC Code, the SAMREC Code, SEC Industry Guide 7 or the Certification Code (each as defined in NI 43-101). As the definitions and standards of the JORC Code, the PERC Code, the SAMREC Code, SEC Industry Guide 7 and the Certification Code are substantially similar to the CIM Standards, a reconciliation of any material differences between the mineral resource and mineral reserve categories reported under the JORC Code, the PERC Code, the SAMREC Code, SEC Industry Guide 7 and the Certification Code, as applicable, to categories under the CIM Standards is not included and no Form 43-101F1 technical report will be filed to support the disclosure based upon such exemption. Alliance Resources Limited, Indo Mines Limited, Beadell Resources Limited, Rio Tinto Limited and Jupiter Mines Limited are all listed on the Australian Securities Exchange and report in accordance with the JORC Code. Cliffs Natural Resources Inc. is listed on the New York Stock Exchange and reports in accordance with SEC Industry Guide 7. Cautionary note to U.S. investors concerning estimates of measured, indicated and inferred resources: Certain technical disclosure in this Annual Report has been prepared in accordance with the requirements of Canadian securities laws, including NI 43-101, in certain cases as modified by the Exemption Order referred to above, which differ from the requirements of U.S. securities laws. This Annual Report uses the terms “measured resources”, “indicated resources” and “inferred resources”. U.S. investors are advised that while such terms are recognised and required by Canadian Securities laws, the Securities and Exchange Commission does not recognise them. “Inferred resources” have a great amount of uncertainty as to their existence and as to their economic and legal feasibility. It cannot be assumed that all or any part of an inferred resource will be upgraded to a higher category. Under Canadian Securities laws, estimates of inferred resources may not form the basis of feasibility or other economic studies. U.S. investors are cautioned not to assume that all or any part of measured resources or indicated resources will ever be converted into reserves. U.S. investors are also cautioned not to assume that all or any part of an inferred mineral resource exists, or is economically or legally mineable. References in this Annual Report to websites are made as inactive textual references and for informational purposes only. Information found at the relevant websites is not incorporated by reference into this Annual Report. The Group makes no representation as to the accuracy of any such information. Cautionary statement on forward-looking statements and related information Certain statements in this Annual Report, other than statements of historical fact, are forward-looking statements based on certain assumptions and reflect the Group’s expectations and views of future events. Forward-looking statements (which include the phrase “forward-looking information”) are provided for the purposes of assisting readers in understanding the Group’s financial position and results of operations as at and for the periods ended on certain dates, and of presenting information about management’s current expectations and plans relating to the future. Readers are cautioned that such forward-looking statements may not be appropriate other than for purposes outlined in this Annual Report. These statements may include, without limitation, statements regarding the operations, business, financial condition, expected financial results, cash flow, requirement for and terms of additional financing, performance, prospects, opportunities, priorities, targets, goals, objectives, strategies, growth and outlook of the Group including the outlook for the markets and economies in which the Group operates, costs and timing of acquiring new royalties, mineral reserve and resources estimates, estimates of future production, production costs and revenue, future demand for and prices of precious and base metals and other commodities, for the current fiscal year and subsequent periods. In addition, statements relating to “reserves” or “resources” are forward-looking statements, as they involve implied assessment, based on certain estimates and assumptions, that the resources and reserves described can be profitably produced in the future. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as “expects”, “anticipates”, “plans”, “believes”, “estimates”, “seeks”, “intends”, “targets”, “projects”, “forecasts”, or negative versions thereof and other similar expressions, or future or conditional verbs such as “may”, “will”, “should”, “would” and “could”. Forward-looking statements are based upon certain material factors that were applied in drawing a conclusion or making a forecast or projection, including assumptions and analyses made by the Group in light of its experience and perception of historical trends, current conditions and expected future developments, as well as other factors that are believed to be appropriate in the circumstances. The material factors and assumptions upon which such forward-looking statements are based include: the stability of the global economy; the stability of local governments and legislative background; the relative stability of interest rates; the equity and debt markets continuing to provide access to capital; the continuing of ongoing operations of the properties underlying the Group’s portfolio of royalties by the owners or operators of such properties in a manner consistent with past practice; the accuracy of public statements and disclosures (including feasibility studies, estimates of reserve, resource, production, grades, mine life and cash cost) made by the owners or operators of such underlying properties; no material adverse change in the price of the commodities underlying the Group’s portfolio of royalties and investments; no material adverse change in foreign exchange exposure; no adverse development in respect of any significant Anglo Pacific Group Plc Annual Report and Accounts 2012 Governance 23 Directors’ report This Annual Report also contains forward-looking information contained and derived from publicly available information regarding properties and mining operations owned by third parties. The Group’s management relies upon this forward-looking information in its estimates, projections, plans, and analysis. Although the forward- looking statements contained in this Annual Report are based upon what the Group believes are reasonable assumptions, there can be no assurance that actual results will be consistent with these forward- looking statements. The forward-looking statements made in this Annual Report relate only to events or information as of the date on which the statements are made and, except as specifically required by applicable laws, listing rules and other regulations, the Group undertakes no obligation to update or revise publicly any forward- looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. Registered Office 17 Hill Street London W1J 5LJ By Order of the Board P.T.J. Mason Company Secretary March 27, 2013 G o v e r n a n c e property in which the Group holds a royalty or other interest, including but not limited to unusual or unexpected geological formations and natural disasters; successful completion of new development projects; planned expansions or additional projects being within the timelines anticipated and at anticipated production levels; and maintenance of mining title. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions, which could cause actual results to differ materially from those anticipated, estimated or intended in the forward-looking statements. By its nature, this information is subject to inherent risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate; that assumptions may not be correct and that objectives, strategic goals and priorities will not be achieved. A variety of material factors, many of which are beyond the Group’s control, affect the operations, performance and results of the Group, its businesses and investments, and could cause actual results to differ materially from those suggested by any forward-looking information. Such risks and uncertainties include, but are not limited to current global financial conditions, royalty portfolio and associated risk, adverse development risk, financial viability and operational effectiveness of owners and operators of the relevant properties underlying the Group’s portfolio of royalties, royalties subject to other rights, and contractual terms not being honoured, together with those risks identified in the “Risks and uncertainties” and “Financial instruments” sections herein and the other risks identified in the “Risk Factors” section of the Group’s most recent Annual Information Form available on www.sedar.com and the Group’s website www. anglopacificgroup.com. If any such risks actually occur, they could materially adversely affect the Group’s business, financial condition or results of operations. Readers are cautioned that the list of factors noted in the section herein entitled “Risks and uncertainties” is not exhaustive of the factors that may affect the Group’s forward-looking statements. Readers are also cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on forward-looking statements. 24 Anglo Pacific Group Plc Annual Report and Accounts 2012 Governance Corporate governance report As a premium listed company on the London Stock Exchange, the Company is subject to The UK Corporate Governance Code (the “Code”). Although the Company will need to measure itself against the revised version of the Code, published in September 2012, the focus in this report is on the 2010 version of the Code. Copies of both versions of the Code are available from the Financial Reporting Council’s website. The Company believes that it complies with the Main Principles of the Code, except in respect of a formal annual process to evaluate the performance of the Board and of its Committees and individual directors. The Board believes that corporate governance involves the application of good corporate governance principles in a sensible and pragmatic fashion, which has proper regard to the Group’s particular business profile and size. The key objective is to enhance and protect shareholder value. In this report, the Company explains its degree of compliance with the Code. Leadership The Board is collectively responsible for the long-term success of the Company and meets regularly to provide leadership on the Group’s long-term objectives and strategy and to monitor the Group’s performance. The day to day management of the Group is delegated to the executive team, which includes the Acting Chairman, save for certain matters reserved for consideration by the Board. Other responsibilities are given to the Committees of the Board, as set out in the Committee sections below and in their terms of reference, which are available on the Group’s website. The Acting Chairman, Mr. B.M. Wides, is responsible for the leadership and effectiveness of the Board. As announced on September 17, 2012, Mr. P.M. Boycott has taken a leave of absence from the role of Executive Chairman. At that time, the Board appointed the Company’s Senior Independent Director, Mr. M.H. Atkinson, as Acting Chairman. Mr. Boycott continues in his role as an Executive Director of the Company. On December 20, 2012, the Board announced that Mr. Wides had become Acting Chairman with immediate effect. Mr. Wides is Executive Director of International Business Development and was appointed to the Board as an Executive Director in June 1997. Although Mr. Wides has previously acted as Chief Executive Officer of the Company, the Board felt that the role of Chairman should continue to be an executive one at this time. Both Mr. Boycott and Mr. Wides are employed on a three days a week basis. Furthermore, the anticipated transition to the Chairman role being a non-executive one continues to target completion within the next two years. The Chairman and the Chief Executive Officer continue to have distinct roles, which have been defined in writing and agreed by the Board. Mr. M.H. Atkinson is the Group’s Senior Independent Director (“SID”). The role of the SID is to provide a sounding board for the Chairman and to serve as an intermediary for the other directors where necessary. He also takes the lead on meetings of the Non-Executive Directors outside the formal committee structure and works with the Chairman to encourage constructive relations between the Executive and Non-Executive Directors and to ensure that the Non-Executive Directors are fully able to use their external experiences to constructively challenge and develop proposals on strategy and to scrutinise the performance of management. The SID is also available to shareholders if they have concerns that have not been resolved through the normal channels, or where such channels would be inappropriate. Effectiveness Excluding the Chairman, and following the appointment of Mr. P.N.R. Cooke as a Non-Executive Director in December 2012 and the appointment of Mr. W.M. Blyth also as a Non-Executive Director in March 2013, the Board is currently comprised of eight directors, five of whom are Non-Executive Directors. Dr. J.G. Whellock and Mr. A.H. Yadgaroff were appointed to the Board on March 3, 2003 and as such, have now served as Non-Executive Directors for ten years. The Board, however, continues to value the contributions made by both Dr. Whellock and Mr. Yadgaroff and feels that their personal attributes, judgment and experience still have much to offer the Group. Although Mr. Cooke represents a significant shareholder, he brings to the Board a wealth of experience in a number of businesses, including property and finance, all of which will be useful to the Group. With Mr. M.H. Atkinson (appointed in February 2006) and Mr. Blyth (appointed in March 2013), the Board considers that it now fully complies with the Code’s requirements for at least two independent Non-Executive Directors on the Board and in relation to the composition of the Board Committees. Moreover, the Board recognises the value of refreshing the Board’s composition in a progressive and orderly way taking into account the skills and experience that the Group’s business requires. Although no longer a constituent of the FTSE 350, the Company continues to support Lord Davies’ published strategy and hopes to make progress in increasing the number of females on the Board. However, the Board also continues to be wary of the potential superficiality of quotas and believes that the best approach is to continue to ensure that the appointments process takes account of the benefits of diversity (including gender), that all appointments are made on merit and that the Board represents the best interests of shareholders. The Board, through its Nomination Committee, keeps under review the need for new director appointments, so as to maintain an appropriate balance of skills and independence within the Group and to ensure that the Board is refreshed, as appropriate. The size of the organisation allows the Directors to closely observe the skills, knowledge and behaviour of those employees who have the potential to become future leaders of the Group. New director appointments are made by the Board, having regard to the recommendations of the Nomination Committee. All directors are subject to election by shareholders at the first opportunity after their appointment. Under the terms of the Company’s Articles of Association, all directors are required to retire and seek re- appointment by shareholders at an annual general meeting on the third anniversary of their appointment. The current Non-Executive Directors, other than Mr. Cooke and Mr Blyth, were not appointed to specified terms. Mr. Cooke and Mr Blyth were appointed on rolling three-year contracts and the Board intends that all future Non-Executive Director appointments will be on similar terms. Notwithstanding this, as in 2012, the Board intends that all of the Directors (including the Non-Executive Directors) will offer themselves for re-election at each Annual General Meeting. Each director is required to disclose to the Board their other significant commitments prior to appointment and when there is any significant change. There is a procedure in place whereby actual and potential conflicts of interest are regularly reviewed. As permitted under the Companies Act 2006, the Company’s Articles of Association contain provisions that enable the Board to authorise conflicts or potential conflicts that individual directors may have and to impose such limits or conditions as the Board thinks fit. The Board considers that all of the Directors allocate sufficient time to the Company to discharge their responsibilities effectively. 25 G o v e r n a n c e Anglo Pacific Group Plc Annual Report and Accounts 2012 Governance Corporate governance report The Company’s Directors have a wide range of skills as well as experience in financial, commercial and mining activities. Each director takes responsibility for undertaking the appropriate training required for developing and updating their knowledge and capabilities. Where appropriate, the Group provides the resources to meet the Directors’ requirements. During the year, Directors attended, inter alia, seminars and conferences on mining industry developments and recent economic and financing trends. The nature of the Group’s business and the number of its employees allow the Directors to have a strong understanding of both the Group’s operations and staff. The executive team and the Board Committees report and refer to the full Board at regular intervals on all matters relating to the running of the Group. The Chairman, in conjunction with the Company Secretary, is responsible for setting the Board’s agenda and for ensuring that the Board receives accurate, timely and clear information. The Chairman is also responsible for ensuring that adequate time is available for discussion of all agenda items and, in particular, strategic issues which are further discussed at annual strategy meetings attended by all of the Directors and all of the Company’s employees. The Company Secretary, Mr. P.T.J. Mason, is responsible for advising the Board, through the Chairman, on all governance matters. All of the Directors have access to his services and advice. Further, all of the Directors may seek independent professional advice in the performance of their duties, at the Group’s expense. The Code recommends that the Board undertakes a formal and rigorous annual evaluation of its own performance and that of its committees and individual directors. The Board does not currently have such formal standalone systems. The performance of individual Executive Directors is reviewed by the Chairman and is discussed in a structured way by the Non-Executive Directors in the context of determining annual incentive awards. The Board believes that its approach is appropriate and effective given the current structure of the Board, the compactness of the organisation and the extent of collective decision-making by the Executive Directors. Each Committee and the Board is satisfied overall with its own effectiveness and the contribution and commitment of each of the directors. The Board will annually review the case for a more formal evaluation process. Attendance Directors’ attendance at Board and Committee meetings during 2012 was as follows: Full Board Executive Audit Remuneration Nomination Total meetings held: Attendance: P.M. Boycott A.C. Orchard J. Theobald B.M. Wides M.H. Atkinson W.M. Blyth1 P.N.R. Cooke2 J.G. Whellock A.H. Yadgaroff 16 16 15 16 14 16 – 1 16 15 6 4 6 6 5 – – – – – 4 – – – – 4 – – 4 4 2 – – – – 2 – – 2 2 1 W.M. Blyth was appointed to the board on March 20, 2013 2 P.N.R. Cooke was appointed to the board on December 10, 2012 2 – – – – 2 – – 2 2 Committees of the Board Most of the Board’s work is conducted in Committees comprising mainly of either Executive Directors or Non-Executive Directors. Each Committee deals with specific aspects of the Group’s affairs and has written terms of reference, which are available on the Group’s website. The Committees report to the full Board at regular intervals. Executive Committee The Executive Committee, comprising the Executive Directors of the Company, the Company Secretary and the Chief Financial Officer, is responsible for reaching and implementing decisions on matters not reserved for the full Board. The Committee is chaired by the Chief Executive Officer and held six meetings during the year. Remuneration Committee During the whole of 2012 the Remuneration Committee comprised Mr. Atkinson, Dr. Whellock and Mr. Yadgaroff, who was also the chairman of the Committee. Following Mr. Blyth’s appointment to the Board on March 20, 2013, the Remuneration Committee is currently comprised of Mr. Blyth and Mr. Atkinson, who is now the Chairman of the Committee. The Remuneration Committee is responsible for making recommendations to the Board on the Group’s framework of executive director remuneration. The Committee determines the contract terms, remuneration and other benefits for each of the Executive Directors (including the Chairman), including performance-related incentive awards, pension rights and compensation payments. It has access to the advice of independent remuneration consultants when required. The Committee held two meetings during the year. The Board itself determines the remuneration of the Non-Executive Directors. The Directors’ Remuneration Report is set out on pages 28 to 31. Nomination Committee During the whole of 2012 the Nomination Committee comprised Dr. Whellock, Mr. Yadgaroff and Mr. Atkinson, who was also the Chairman of the Committee. Following Mr. Blyth’s appointment to the Board on March 20, 2013, the Nomination Committee is currently comprised of Mr. Blyth, Mr. Yadgaroff and Mr. Atkinson, who remains the Chairman of the Committee. The Nomination Committee meets as required in order to review the structure, size and composition of the Board (including its balance of skills, experience, independence and knowledge) in light of developments in the leadership needs of the Group and in accepted best corporate governance practice. The Committee is responsible for identifying and nominating candidates for the approval of the Board. It may commission external advice or services as required. The Committee is also responsible for making recommendations to the Board concerning timely succession plans for both Executive and Non-Executive Directors. The Committee met twice during the year to consider interim leadership arrangements following the illness of the Executive Chairman, Mr. P.M. Boycott, and to discuss potential appointments of new directors to the Board as well as to review the timetable and progress of succession plans. At the relevant Board meeting, the appointment of Mr. P.N.R. Cooke to the Board in December 2012 was unanimously supported by the Non-Executive Directors. After the year end the appointment of Mr. Blyth in March 2013 was supported by a majority of the Non- Executive Directors at the relevant Board meeting. Whilst the Committee may commission external advice or services as required, neither an external search consultancy, nor open advertising was used for either of these appointments. These were not considered necessary 26 Anglo Pacific Group Plc Annual Report and Accounts 2012 Governance Corporate governance report due to Mr. Cooke’s long involvement with the Group as representing a significant shareholder and his successful business experience in property and finance and due to Mr. Blyth’s extensive audit experience and knowledge of corporate governance. Audit Committee During the whole of 2012 the Audit Committee comprised Mr. Yadgaroff, Mr. Atkinson and Dr. Whellock, who was also the Chairman of the Committee. Following Mr. Blyth’s appointment to the Board on March 20, 2013, the Audit Committee is currently comprised of Mr. Blyth, Mr. Atkinson and Dr. Whellock, who remains the Chairman of the Committee. The Committee meets at least three times a year at appropriate times in the reporting and audit cycle and may be attended, by invitation, by the Chairman, the Chief Executive Officer, the Chief Financial Officer and the Company Secretary. The external auditors are invited to attend meetings on a regular basis. 2012 saw a broad review of the role of the Committee and its new terms of reference were published on the Group’s website in January 2013. Its primary duty is to monitor the integrity of the Group’s financial statements and the related reports and announcements. In doing so, the Committee reviews and, where necessary, challenges the consistency of the Group’s accounting policies, methods and standards, the clarity and context of disclosures and the material information presented with the financial statements. The Committee is also responsible for monitoring and reviewing the adequacy and effectiveness of the Group’s internal controls, including the Group’s anti-corruption and whistle blowing policies and procedures and in relation to the environmental and social impact of the Group’s activities. The Committee also considers the adequacy of arrangements for the statutory audit and supporting the independence and objectivity of the external auditor. In particular, the Committee advises the Board in respect of the external auditor’s appointment, performance and remuneration and meets regularly with the external auditor to discuss its remit, any issues arising from the audit and its effectiveness. The Committee is responsible for reviewing the extent of non-audit services provided by the external auditor. The Committee accepts that some non-audit work is most appropriately undertaken by the firm responsible for the statutory audit, but requires any such engagement to be approved in advance by the Committee’s Chairman. The Group also uses other accounting firms for non-audit work, with the decision on each engagement being taken with the objective of maintaining an appropriate balance between experience, objectivity, independence and value for money. The Committee also considers, on an annual basis, whether an internal audit function is required. Its present view is that one is not yet justified given the compact size of the Group and the Directors’ involvement with individual transactions. In 2012, the Committee met four times. In addition to its duties related to the reporting and audit cycle, the Committee placed a particular focus on the Group’s risk management systems. In connection with the annual assessment conducted by the Chief Financial Officer and the Company Secretary of the risks that face the Group and the adequacy of the prevention, monitoring and mitigation practices in place for those risks, the Committee oversaw a full review of the associated control and monitoring procedures. This resulted in a revision of the Group’s risk register. In addition, whilst the review did not highlight any significant issues with the effectiveness of the Group’s internal controls and procedures, it did highlight a few areas where improvement could be made and the Group has subsequently implemented the Committee’s recommendations. Additional information on the Group’s internal controls can be found below. 2012 also saw the Committee take the lead on the publishing of the Group’s Corporate Responsibility Statement. Additional information on this can be found on pages 20 to 21. Internal Control The Board retains overall responsibility for the Group’s system of internal control and risk management and determines the nature and extent of the significant risks it is willing to take in achieving its strategic objectives. A statement of directors’ responsibilities in respect of the financial statements is set out on page 32. The Group’s system of internal control is designed to provide the Directors with reasonable, but not absolute, assurance that the Group will not be hindered in achieving its business objectives, or in the orderly and legitimate conduct of its business, by circumstances that may reasonably be foreseen. However, no system of internal control can eliminate the possibility of poor judgment in decision-making, human error, fraud or other unlawful behaviour, management overriding controls, or the occurrence of unforeseeable circumstances and the resulting potential for material misstatement or loss. The key elements of the control system in operation are: • The Board meets regularly with a formal schedule of matters reserved to it for decision and has put in place an organisational structure with clear lines of responsibility and appropriate delegation of authority. • There are established procedures for planning and approving investments and information systems for monitoring the Group’s financial performance against budgets and forecasts. • The Chief Financial Officer is required to undertake an annual assessment process, in conjunction with the Company Secretary, to identify and quantify the risks that face the Group’s businesses and functions, and to assess the adequacy of the prevention, monitoring and mitigation practices in place for those risks. This process covers all material controls, including financial, operational and compliance controls. The Audit Committee is responsible for reviewing the risk assessment process for completeness and accuracy. • In addition to its work on the above, the Audit Committee also receives regular reports about significant risks and associated control and monitoring procedures. The Group’s risk register and internal controls and procedures documentation are regular agenda items for the Committee. The Committee also receives regular reports from the external auditors. • The Audit Committee reports regularly to the Board on these matters, so as to enable the Directors to review the effectiveness of the system of internal control. The Board also receives regular reports from its other Committees and directly from management. • The system accords with the Financial Reporting Council’s Internal Control: Revised Guidance for Directors on the Combined Code. There are no significant issues disclosed in the report and financial statements for the year ended December 31, 2012 and up to the date of approval of the report and financial statements that have required the Board to deal with any related material internal control issues. The Directors confirm that the Board has reviewed the effectiveness of the system of internal control as described during the period and concluded that the controls and procedures are adequate. Relations with shareholders The Group is the only major mining royalty company in the UK and recognises the importance of developing a fuller understanding of its Anglo Pacific Group Plc Annual Report and Accounts 2012 Governance Corporate governance report business model amongst investors. To this end, increased attention was paid to investor relations during the period, and to improving the effectiveness of two-way communication with fund managers, institutional investors and analysts, particularly those focusing on FTSE 350 companies. During the year, the Directors had several meetings with institutional investors whose combined shareholdings represented over 50% of the total issued share capital of the Company. The Company is assisted in this initiative by its external public relations advisers. There are over 2,000 private investors in the Group. The Board was pleased by the attendance at the 2012 Annual General Meeting where investors were able to ask about current business activity. At this year’s Annual General Meeting it is anticipated that the Chairmen of the Audit, Remuneration and Nomination Committees, as well as the Executive Directors, will be available to answer any shareholder questions. Other statutory and regulatory information Additional information on substantial shareholdings, voting rights and the appointment and powers of the Company’s Directors, amongst other things, can be found on Directors’ Report. pages 17 to 23 of the 27 G o v e r n a n c e 28 Anglo Pacific Group Plc Annual Report and Accounts 2012 Governance Directors’ remuneration report During the whole of 2012, the Remuneration Committee comprised Mr. Atkinson, Dr. Whellock and Mr. Yadgaroff, who was also the Chairman of the Committee. Following Mr. Blyth’s appointment to the Board on March 20, 2013, the Committee is currently comprised of Mr. Blyth and Mr. Atkinson who is now the Chairman of the Committee. The Remuneration Committee held two meeting during the year. The Committee’s policy in 2013 – and, most likely, 2014 – is to continue to steadily raise the basic salaries towards the lower quartile of FTSE companies of comparable size and nature, with further increases of £20,000-25,000 in each year for full-time Executive Directors and pro rata for part-time Executive Directors. This is considered to be important for both retention and for attracting new Executive Directors and senior managers in the future. The Committee is responsible for making recommendations to the Board on the Company’s framework for executive remuneration and its cost. The Committee determines the contract terms, remuneration and other benefits for each of the Executive Directors (including the Chairman), including performance related bonus schemes, pension rights and compensation payments. It has access to the advice of independent remuneration consultants when required. The Board itself determines the remuneration of the Non-Executive Directors. No director is involved in deciding his own remuneration. Policy There are three important elements that impact on the Committee’s policy. The Group has: • a high market capitalisation (£296m at December 2012) relative to the size of its management team (staff total: eleven, four of whom are Executive Directors); • long investment horizons (typically there can be an interval of between two and ten years before a royalty comes on stream and the royalty may continue to flow for twenty years or more); • no comparable peer group, certainly in the UK, for the purposes of benchmarking director performance. As with any ‘people’ business the loss of key executives could be seriously disruptive. The Committee has accordingly taken the retention of Executive Directors as a key objective of its remuneration policy, alongside incentivising their performance in acquiring new royalties. Other objectives include a strong alignment of directors’ interests with those of shareholders, and a remuneration level and structure that relates sensibly to the pay and bonuses of non-Board employees. Over the last two to three years, the Committee has pursued a consistent and coherent policy for delivering these objectives. As discussed more fully below, the main elements of the remuneration package are: • a fixed monthly basic salary; • an annual performance-relate bonus; and • longer-term share schemes, particularly a Joint Share Ownership Plan (JSOP). Basic Salary Given the relative simplicity of the Group’s business model, the Committee has taken as its benchmark the lower quartile of basic salaries paid by FTSE companies of similar market capitalisation and nature. The basic salaries paid by the Group have been well below this level. Over the last three years, the Committee’s policy has been to increase the basic salaries of full-time Executive Directors by £20,000- 25,000 per annum in order to narrow this gap, which nevertheless remains significant (it would require an additional increase in the Chief Investment Officer’s salary of approximately 23% to match the lower quartile of operational heads and of 78% in the Chief Executive Officer’s salary to match that of the top full time executive). Mr. B.M. Wides receives fees in lieu of salary. Annual Bonus The Committee views the annual bonus as the primary means for incentivising the performance of the Executive Directors. Annual bonus is capped at 150% of basic salary. Awards over the last three years have been assessed principally by reference to the performance achieved against the Key Performance Indicators set out on page 17, i.e.: • value of new royalties achieved; • operating profit; and • dividends per share. Other factors including adjusted net asset value are also taken into account. Where a new royalty that has been recognised in a bonus award subsequently fails to come into production, the bonus paid in the year the royalty fails will be reduced. Significant and successful corporate activity may also be recognised through a bonus award. A significant increase in the company’s share price during the year, while it will not on its own trigger a bonus, may nevertheless amplify the level of bonus awarded; conversely, a significant decrease in the share price may constrain the level of bonus awarded. The Group’s policy is that at least 25% of any annual bonus award will normally be in the form of shares. It is proposed to retain the annual bonus offer for 2013 on the same basis. The threshold for bonus in respect of the aggregate value of royalty acquisitions remains at $40m. Longer-Term Share Schemes The Group operates two share schemes for Executive Directors and certain employees: a Company Share Option Scheme (“CSOP”) and a Joint Share Ownership Plan (“JSOP”). Both schemes were introduced in 2010, with three purposes. Their primary purpose was to incentivise retention of key personnel: awards under both schemes are dependent on the employee completing three years’ service following the grant of the options (the vesting period). Secondly, the Committee believes that a substantial shareholding in the Group helps provide assurance that the interests of directors and key employees will be firmly aligned with shareholders. Thirdly, the schemes incentivise longer-term performance. Under both schemes, awards are conditional upon the Group’s absolute total shareholder return growing at an annual rate (not compounded) of 3% in excess of the UK Retail Price Index over the three year vesting period, and, in the case of the JSOP, also upon the Group’s share price reaching a hurdle level during the vesting period, as determined by the Committee at the time the option is granted. The Committee believes that the current shareholdings of Executive Directors, together with the share options available under the JSOP, are now sufficient to assure the alignment of their interests with those of shareholders. No further awards to existing Directors under the JSOP are accordingly envisaged during 2013, although awards may still be made to any new Executive Directors appointed during the year. Previous initial awards of JSOP have been substantial (up to 350% of basic salary), falling steadily in subsequent years, and this pattern is expected to be followed in the future. Aside from the usual restrictions on share dealings, the shares awarded to Directors are not subject to 29 G o v e r n a n c e Anglo Pacific Group Plc Annual Report and Accounts 2012 Governance Directors’ remuneration report any additional specific restrictions on sale. However, the Committee has indicated that disposals would make further awards to that Director unlikely. Company Share Option Plan Share options are granted at the prevailing market price on the date of grant. The vesting period for the option plan is three years and, if an option remains unexercised after a period of 10 years from the date of grant, the option will lapse. The exercise condition of the option plan stipulates that the Group’s absolute total shareholder return must grow at a rate of 3% per annum (not compounded) in excess of the UK Retail Price Index over the vesting period. Joint Share Ownership Under the JSOP, the Remuneration Committee invites selected employees and Directors to enter into an agreement with the Anglo Pacific Group Employee Benefit Trust (the “Co-owner”) to acquire a number of ordinary shares in the capital of the Company. The shares are held in the name of the Co-owner; however, the selected employees maintain a beneficial interest in these shares. The JSOP was approved by shareholders at the Annual General Meeting held on April 21, 2010. Awards under the JSOP are conditional on the employee completing three years’ service (the vesting period) and the Group’s absolute total shareholder return growing at an annual rate (not compounded) of 3% in excess of the UK Retail Price Index over the three year vesting period. In addition, the Company’s share price must reach a hurdle price during the three year vesting period as determined by the Remuneration Committee at the time of making the award. Upon satisfying the performance targets and service requirements, the beneficial interest conferred will entitle the employee to receive a proportion of the proceeds of sale of the ordinary shares. Their entitlement will be to receive the equivalent of all sales proceeds in excess of the threshold amount, settled in ordinary shares of the Company. The threshold amount is fixed by the Remuneration Committee and will not be set less than the market value of the ordinary shares of the Company at the time the JSOP award is made. The JSOP awards are limited in value such that the initial value of shares acquired jointly with the Co-owner under the award will not exceed 400% of the employee’s gross annual salary. During the vesting period, the Co-owner and the employee have agreed to limit the exercise of their voting rights to matters concerning alterations to the Articles of Association of the Company that could adversely affect the employee’s rights under the JSOP, and to waive their rights to dividends. The Committee continues to review the scope for an alternative long- term incentive plan designed to offer graduated rewards for increasing levels of long-term performance; but, as noted in last year’s Report, the long investment horizons and the absence of comparable royalty companies in the UK make this difficult. Pension rights The Company makes contributions to employees’ pensions and has designated AEGON Scottish Equitable PLC as its stakeholder pension provider. The Committee is prepared to pay additional basic salary (or fees) in lieu of part or all of a director’s pension contribution. Executive Directors’ service contracts Although all of the Executive Directors’ service contracts are for an indefinite term, it is the Group’s policy that the service contracts do not have a notice period of more than one year. In the event of termination, the service contracts allow the Company to make a payment in lieu of notice. The service contracts of Mr J. Theobald and Mr A.C. Orchard also provide for an additional termination payment equivalent to six months’ basic salary, whereas the service contracts of Mr P.M. Boycott and Mr B.M. Wides simply limit payment for loss of office to twelve months’ basic salary. The service contracts provide that any such payments will be without prejudice to the director’s duty to mitigate his loss. No executive director has provisions in his service contract that relate to a change of control of the Company. The details of the service contracts of the Executive Directors in office at December 31, 2012 are as follows: Executive Directors P.M. Boycott A.C. Orchard J. Theobald B.M. Wides Contract date Notice period November 1, 2010 March 26, 2010 March 26, 2010 October 1, 2010 6 months 6 months 6 months 6 months Non-Executive Directors Other than Mr. W.M. Blyth and Mr. P.N.R. Cooke, the Group’s Non- Executive Directors have letters of appointment for an indefinite term, although they may be terminated by either party subject to 30 days’ notice. Mr. Blyth and Mr. Cooke were appointed on rolling three-year contracts with a one month notice period and the Board intends that all future Non-Executive Director appointments will be on similar terms. None of the letters have provisions that relate to a change of control of the Company. The fees of Non-Executive Directors are determined by the Board and reviewed bi-annually having regard to the commitment of time required and the level of fees in similar companies. Additional amounts are awarded to reflect the increased commitment required for members and chairpersons of the various Board committees and associated with the role of Senior Independent Director. Non- Executive Directors are not eligible to participate in the Company’s annual performance-related incentive award, share option schemes or pension scheme. The details of the Non-Executive Directors’ letters of appointment in office at December 31, 2012 are as follows: Non-Executive Directors M.H. Atkinson W.M. Blyth P.N.R. Cooke J.G. Whellock A.H. Yadgaroff Contract date Notice period February 9, 2006 30 days March 20, 2013 One month December 17, 2012 One month May 19, 2003 May 19, 2003 30 days 30 days External Appointments It remains the Group’s policy that all earnings from Non-Executive Directorships held by the Group’s Executive Directors be retained by the Group. Implementation (i) Basic Salary The basic salaries of the Executive Directors were last increased in December 2011. Despite a recommendation from the Committee that the salary increases continue in line with its policy, the Board concluded that no further increase should be made until at least Spring 2013. This would allow the Group additional time to canvass shareholder views on the Group’s broader remuneration policy. 30 Anglo Pacific Group Plc Annual Report and Accounts 2012 Governance Directors’ remuneration report (ii) Annual Bonus In 2010, bonus awards were around 100% of basic salaries, and in 2011 around 55%. For 2012, the Committee agreed that the award of bonus would be primarily dependent on the acquisition of $40m of new royalties. The value of new royalties acquired during the year fell short of this. As regards the other key performance indicators, although dividends per share rose, operating profit – and to a lesser extent net asset value – fell. The Committee accordingly concluded that no bonus should be paid in respect of 2012. (iii) Longer-Term Share Schemes The market price of the shares at December 31, 2012 was 269.75p and the range during the year was 220p to 345p. Company Share Option Plan In 2010, share options were granted under the CSOP to Mr. A.C. Orchard and Mr. J. Theobald up to the cumulative limit allowable under HMRC rules, and no Executive Director has received further CSOP options since then. The table below shows, for the Directors who served during the year, the options outstanding at December 31, 2012 for which nil has been paid. A.C. Orchard As at December 31, 2011 and December 31, 2012 J. Theobald As at December 31, 2011 and December 31, 2012 No. of Options Exercisable between Exercise price 12,024 20/05/13 – 20/05/20 249.50p 12,024 20/05/13 – 20/05/20 249.50p Joint Share Ownership Plan In the first year of the JSOP (2010), the Board (on the recommendation of the Remuneration Committee), awarded share equivalent to 350% of basic salary to Mr A.C. Orchard and Mr J. Theobald; an award of 175% of basic salary was made in 2011 to each of these individuals and in 2012, a further award of 87.50% of basic salary was made to each of these individuals. The beneficial interests, under the JSOP, as at December 31, 2012 of the Directors who served during the year were as undernoted for which nil as been paid. No. of Shares Exercisable between Grant price Hurdle price A.C. Orchard As at January 1, 2012 169,350 20/05/13 – 20/05/14 248.00p 315.00p As at January 1, 2012 77,837 28/03/14 – 28/03/15 326.00p 422.50p – Granted 44,804 28/03/15 – 28/03/16 332.00p 450.00p As at December 31, 2012 169,350 20/05/13 – 20/05/14 248.00p 315.00p As at December 31, 2012 77,837 28/03/14 – 28/03/15 326.00p 422.50p As at December 31, 2012 44,804 28/03/15 – 28/03/16 332.00p 450.00p J. Theobald As at January 1, 2012 169,350 20/05/13 – 20/05/14 248.00p 315.00p As at January 1, 2012 77,837 28/03/14 – 28/03/15 326.00p 422.50p – Granted 50,075 28/03/15 – 28/03/16 332.00p 450.00p As at December 31, 2012 169,350 20/05/13 – 20/05/14 248.00p 315.00p As at December 31, 2012 77,837 28/03/14 – 28/03/15 326.00p 422.50p As at December 31, 2012 50,075 28/03/15 – 28/03/16 332.00p 450.00p (iv) Pension Rights During the year the Group paid pension contributions in respect of Directors as follows: A.C. Orchard M.J. Tack1 J. Theobald 2012 £ 2,833 – 19,000 2011 £ 14,500 10,875 15,333 1 M.J. Tack resigned from the board on September 23, 2011 Mr. P.M. Boycott, Mr. B.M. Wides, and Mr. A.C. Orchard currently receive additional basic salary (or fees) in lieu of their pension contribution. Non-Executive Directors During the year, the Board conducted its bi-annual review of the Non- Executive Directors’ fees and agreed to increase them to £38,000 a year commencing January 1, 2013. It was further agreed to pay Mr. M. Atkinson an additional £4,000 a year, in order to reflect his additional duties as Senior Independent Director. Mr. W.M. Blyth receives £38,000 a year, whereas Mr. P.N.R. Cooke receives £36,000 a year – a lesser amount to reflect that he is neither a member, nor a chair person of any of the Board committees. 31 G o v e r n a n c e Anglo Pacific Group Plc Annual Report and Accounts 2012 Governance Directors’ remuneration report Total shareholder return 220 200 180 160 140 120 100 80 60 40 20 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 FTSE 350 Mining Anglo Pacific Group The above graph shows the Company’s total shareholder return performance over the last five years against the FTSE 350 Mining Index, both of which have been rebased at the start of the period in order to provide a graphical measure of comparative performance. The Board considers this index to be the nearest relevant index appropriate to the Group. Directors’ emoluments and compensation Salaries and benefits Annual bonus award Fees The remuneration of the Directors was as follows:– P.M. Boycott A.C. Orchard M.J. Tack1 J. Theobald B.M. Wides M.H. Atkinson W.M. Blyth2 P.N.R. Cooke3 J.G. Whellock A.H. Yadgaroff 2012 £ 514,234 – 250,553 764,787 2012 Total £ 140,067 184,167 – 190,000 141,400 37,153 – – 36,000 36,000 764,787 2011 £ 515,983 432,000 216,000 1,163,983 2011 Total £ 218,900 225,000 156,750 237,333 218,000 36,000 – – 36,000 36,000 1,163,983 Salary £ 140,067 184,167 – 190,000 – – – – – – 514,234 Annual bonus award £ – – – – – – – – – – – Fees £ – – – – 141,400 37,153 – – 36,000 36,000 250,553 1 M.J. Tack resigned from the board on September 23, 2011 2 W.M. Blyth was appointed to the board on March 20, 2013 3 P.N.R. Cooke was appointed to the board on December 10, 2012 Audit Under section 421 of the Companies Act 2006 (United Kingdom) the Directors’ emoluments and compensation section, and items (iii) and (iv) of the Directors’ Remuneration Report have been audited. Approval This report was approved by the Board and authorised for issue on March 27, 2013 and signed on its behalf by: P.T.J. Mason Company Secretary March 27, 2013 32 Anglo Pacific Group Plc Annual Report and Accounts 2012 Governance Directors’ responsibilities in the preparation of financial statements Directors’ statement pursuant to the Disclosure and Transparency Rules Each of the Directors, whose names and functions are listed in the management section of the Directors’ Report confirm that, to the best of each person’s knowledge and belief: • the financial statements, prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group and Company; and • the Directors’ Report contained in the Annual Report includes a fair review of the development and performance of the business and the position of the Company and Group, together with a description of the principal risks and uncertainties that they face. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Group’s website, www.anglopacificgroup.com. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. By order of the Board B.M. Wides Acting Chairman March 27, 2013 The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the Group and parent Company financial statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union (“EU”). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group and the Company for that period. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 (United Kingdom) and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors who were in office at the date of this statement confirm that: • so far as they are each aware there is no relevant audit information of which the Company’s auditors are unaware; and • the Directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information. Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts 33 Report of the independent auditor to the members of Anglo Pacific Group PLC We have audited the financial statements of Anglo Pacific Group PLC for the year ended December 31, 2012 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated and company balance sheets, the consolidated and company statements of changes in equity, the consolidated and company cash flow statements and the related notes 1 to 31. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. page 32, the Directors are responsible for the preparation of Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at December 31, 2012 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRS as adopted by the European Union; • the parent Company financial statements have been properly prepared in accordance with IFRS as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; • the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the information given in the Corporate Governance Statement set out on pages 24 to 27 with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit; or • a corporate governance statement has not been prepared by the company. Under the Listing Rules, we are required to review: • the Directors’ statement, set out on page 42, in relation to going concern; and • the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and • certain elements of the report to shareholders by the Board on Directors’ remuneration. A c c o u n t s Christopher Smith Senior Statutory Auditor for and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Grant Thornton UK LLP Grant Thornton House Melton Street, Euston Square LONDON NW1 2EP March 27, 2013 34 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Report of the independent auditor to the directors of Anglo Pacific Group PLC in respect of compatibility with Canadian GAAS In accordance with the requirement contained in National Instrument 52-107 we report below on the compatibility of Canadian Generally Accepted Auditing Standards (“Canadian GAAS”) and International Standard on Auditing (UK and Ireland) (ISAs). We conducted our audits of the Group’s financial statements for each of the two years ended December 31, 2012 in accordance with ISAs. If we had been required to conduct the audits of the Group’s financial statements for each of the two years ended December 31, 2012 in accordance with Canadian GAAS there would have been no material differences in the form or content of our audit reports. Furthermore an auditors’ report prepared in accordance with reporting standards under Canadian GAAS on the aforementioned consolidated financial statements would not contain a qualification. Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Grant Thornton UK LLP Grant Thornton House Melton Street, Euston Square LONDON NW1 2EP March 27, 2013 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts 35 Consolidated income statement for the year ended December 31, 2012 Royalty income Finance income Amortisation of royalties Operating expenses Operating profit Gain on sale of mining and exploration interests Other income Other losses Profit before tax Income tax expense Profit attributable to equity holders Total and continuing earnings per share Basic earnings per share Diluted earnings per share Notes 5 6 17 7(a) 5 9 10 11 12 12 2012 £’000 13,267 676 (1,018) (3,633) 9,292 7,347 1,746 (4,165) 14,220 (4,163) 10,057 Restated 2011 £’000 34,679 1,507 (1,018) (3,393) 31,775 20,303 634 (4,261) 48,451 (12,171) 36,280 9.27p 33.51p 9.27p 33.51p The notes on pages 51 to 86 are an integral part of these consolidated financial statements. The company has elected to take the exemption under section 408 of the Companies Act 2006 (United Kingdom) not to present the parent company profit and loss account. The profit for the parent company for the year was £3,135,000 (2011: £37,005,000). A c c o u n t s 36 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Consolidated statement of comprehensive income for the year ended December 31, 2012 Profit for the year Other comprehensive income: Net gain/(loss) on revaluation of coal royalties Net loss on revaluation of available for sale investments Net exchange (loss)/gain on translation of foreign operations Deferred tax Net income/(expense) recognised directly in equity Transferred from income statement: disposal of available for sale investments Total transferred from equity Notes 2012 £’000 Restated 2011 £’000 10,057 36,280 15 22 9,339 (10,308) (4,482) 3,927 8,533 (4,666) (4,666) (4,139) (51,669) 2,150 5,933 (11,445) (10,090) (10,090) Total comprehensive income/(expense) for the year 3,867 (21,535) The notes on pages 51 to 86 are an integral part of these consolidated financial statements. Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts 37 Consolidated balance sheet and company balance sheet as at December 31, 2012 Non-current assets Property, plant and equipment Coal royalties Royalty instruments Intangibles Mining and exploration interests Other receivables Investments in subsidiaries Deferred tax Current assets Trade and other receivables Cash and cash equivalents Total assets Non-current liabilities Deferred tax Current liabilities Income tax liabilities Trade and other payables Total liabilities Capital and reserves attributable to shareholders Share capital Share premium Coal royalty revaluation reserve Investment revaluation reserve Share based payment reserve Foreign currency translation reserve Special reserve Investment in own shares Retained Earnings Total equity Group Restated 2011 £’000 Restated 2010 £’000 Company 2012 £’000 2011 £’000 Notes 2012 £’000 14 15 16 17 18 20 19(a) 22 2,105 2,152 2,144 170,995 165,967 169,304 24,032 71,408 55,793 3,141 – – 24,736 69,138 64,551 28,061 42,741 128,479 – – – – – – 854 – 24,032 3,997 37,001 13,581 33,545 1,800 875 – 24,736 3,997 56,369 9,038 33,545 – 327,474 326,544 370,729 114,810 128,560 20 21 1,958 24,036 25,994 12,298 32,197 44,495 8,813 28,258 37,071 292 41,157 41,449 1,922 43,672 45,594 353,468 371,039 407,800 156,259 174,154 22 48,532 48,532 54,240 54,240 59,824 59,824 – – 4,401 4,401 23 24 24 1,801 2,171 3,972 3,731 6,896 10,627 52,504 64,867 4,987 6,470 11,457 71,281 1,596 721 2,317 2,317 413 694 1,107 5,508 A c c o u n t s 2,192 26,853 86,721 2,184 25,539 80,285 2,175 24,207 83,405 2,192 26,853 - 2,184 25,539 - (14,204) (4,843) 51,780 (14,032) (5,268) 354 177 65 38,349 41,614 39,686 26 632 632 632 (2,601) (2,601) (1,295) 354 82 632 - 177 82 632 - 27 162,668 163,185 135,864 137,861 145,300 300,964 306,172 336,519 153,942 168,646 Total equity and liabilities 353,468 371,039 407,800 156,259 174,154 The notes on pages 51 to 86 are an integral part of these consolidated financial statements. The financial statements of Anglo Pacific Group Plc (registered number: 897608) on pages 35 to 71 were approved by the Board and authorised for issue on March 27, 2013 and are signed on its behalf by: Brian Wides Acting Chairman John Theobald Chief Executive Officer 38 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Consolidated statement of changes in equity for the two years ended December 31, 2012 Share capital £’000 Share premium £’000 Coal royalty revaluation reserve £’000 Investment revaluation reserve £’000 Share based payment reserve £’000 Foreign currency translation reserve £’000 Investment in own shares £’000 Special reserve £’000 Retained earnings £’000 Total equity £’000 Balance at January 1, 2011 (as previously reported – note 2.1.3) 2,175 24,207 88,883 51,780 Impact of restatement – (5,478) – Balance at January 1, 2011 (as restated – note 2.1.3) Profit for the year (restated) Other comprehensive income: Coal Royalties: Royalties valuation movement taken to equity (restated) Deferred tax on valuation (restated) Available-for-sale investments: Valuation movement taken to equity Deferred tax on valuation Transferred to income statement on disposal Foreign currency translation Total comprehensive expense Dividends Issue of share capital under share-based payment Total transactions with owners of the company Balance at December 31, 2011 (restated) 2,175 24,207 83,405 51,780 – – – – – – – – – 9 9 – – – – – – – – – 1,332 1,332 – (4,139) 1,019 – – – – – – – (51,669) 5,136 (10,090) – (3,120) (56,623) – – – – – – The notes on pages 51 to 86 are an integral part of these consolidated financial statements. 65 – 65 – – – – – – – – – 112 112 39,686 632 (1,295) 139,755 345,888 – 39,686 – – 632 – – (3,891) (9,369) (1,295) 135,864 336,519 – 36,280 36,280 802 (235) (237) 13 – 1,585 1,928 – – – – – – – – – – – – – – – – – – – – – – – – – – – (3,337) 784 (51,906) 5,149 (10,090) 1,585 36,280 (21,535) (8,978) (8,978) (1,306) 19 166 (1,306) (8,959) (8,812) 2,184 25,539 80,285 (4,843) 177 41,614 632 (2,601) 163,185 306,172 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Consolidated statement of changes in equity for the two years ended December 31, 2012 (continued) Share capital £’000 Share premium £’000 Coal royalty revaluation reserve £’000 Investment revaluation reserve £’000 Share based payment reserve £’000 Foreign currency translation reserve £’000 Investment in own shares £’000 Special reserve £’000 Retained earnings £’000 Total equity £’000 2,184 25,539 80,285 (4,843) – – – – – – – – – 8 – 8 – – – – – – – – – 1,314 – 1,314 – 9,339 (2,903) – – – – – – – (10,308) 5,613 (4,666) – 6,436 (9,361) – – – – – – – – 177 – – – – – – – – – – 177 177 41,614 632 (2,601) 163,185 306,172 – (4,311) 1,274 (375) (57) – 204 (3,265) – – – – – – – – – – – – – – – – – 10,057 10,057 – – – – – – – – – – – – – – – – – 5,028 (1,629) (10,683) 5,556 (4,666) 204 10,057 3,867 (10,579) (10,579) – 5 1,322 182 (10,574) (9,075) 2,192 26,853 86,721 (14,204) 354 38,349 632 (2,601) 162,668 300,964 Balance at January 1, 2012 (restated) Profit for the year Other comprehensive income: Coal Royalties: Royalties valuation movement taken to equity Deferred tax on valuation Available-for-sale investments: Valuation movement taken to equity Deferred tax on valuation Transferred to income statement on disposal Foreign currency translation Total comprehensive income for the year Dividends Issue of ordinary shares Value of employee services Total transactions with owners of the company Balance at December 31, 2012 The notes on pages 51 to 86 are an integral part of these consolidated financial statements. 39 A c c o u n t s 40 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Company statement of changes in equity for the two years ended December 31, 2012 Balance at January 1, 2011 Changes in equity for 2011 Available-for-sale investments: Valuation movement taken to equity Deferred tax on valuation Transferred to income statement on disposal Net expense recognised direct into equity Profit for the year Total recognised income and expenses Dividends paid Issue of share capital under share based payment Balance at December 31, 2011 Balance at January 1, 2012 Changes in equity for 2012 Available-for-sale investments: Valuation movement taken to equity Deferred tax on valuation Transferred to income statement on disposal Net expense recognised direct into equity Profit for the period Total recognised income and expenses Dividends Issue of ordinary shares Value of employee services Share capital £’000 Share premium £’000 Investment revaluation reserve £’000 Share based payment reserve £’000 Foreign currency translation reserve £’000 Special reserve £’000 Retained earnings £’000 Total equity £’000 2,175 24,207 50,403 65 82 632 117,254 194,818 – – – – – – – 9 2,184 2,184 – – – – – – – 8 – – – – – – – – 1,332 25,539 25,539 – – – – – – – 1,314 – (50,203) 5,078 (10,546) (55,671) – (55,671) – – (5,268) (5,268) (9,449) 5,307 (4,622) (8,764) – (8,764) – – – – – – – – – – 112 177 177 – – – – – – – – 177 354 – – – – – – – – 82 82 – – – – – – – – – – – – – – – – – – – – – 37,005 37,005 (50,203) 5,078 (10,546) (55,671) 37,005 (18,666) (8,978) (8,978) 19 1,472 632 632 145,300 168,646 145,300 168,646 – – – – – – – – – – – – – 3,135 3,135 (9,449) 5,307 (4,622) (8,764) 3,135 (5,629) (10,579) (10,579) – 5 1,322 182 82 632 137,861 153,942 Balance at December 31, 2012 2,192 26,853 (14,032) The notes on pages 51 to 86 are an integral part of these consolidated financial statements. Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts 41 Consolidated cash flow statement and company cash flow statement for the year ended December 31, 2012 Cash flows from operating activities Profit before taxation Adjustments for: Interest received Unrealised foreign currency (gain)/loss Depreciation of property, plant and equipment Amortisation of intangibles – royalties Gain on disposal of mining and exploration interests Provision for non-recovery of interest receivable Royalty instrument (recovery)/provision Loss on impairment of royalty intangible Loss on write down of mining and exploration interests Intercompany dividends Share based payment Decrease/(Increase) in trade and other receivables excluding amounts due from subsidiary companies (Decrease)/Increase in trade and other payables Receipts from royalty instruments Cash generated from operations Income taxes paid Net cash generated from/(used in) operating activities Cash flows from investing activities Proceeds on disposal of mining and exploration interests Purchases of mining and exploration interests Purchases of royalty interests Purchases of property, plant and equipment Exploration and evaluation expenditure Interest received Investment in subsidiaries Group Company 2012 £’000 Restated 2011 £’000 Notes 2012 £’000 2011 £’000 14,220 48,451 4,414 40,110 6,9 (1,723) (1,507) (2,265) (2,786) 14 17 10 10 10 10 8(a) (431) 21 1,018 1,712 21 1,018 – 21 – – 21 – (7,347) (20,303) (6,974) (20,744) – (806) – 4,013 – 183 709 1,563 1,088 42 – 130 - (806) – 3,722 – 183 9,148 32,924 (1,705) 7,199 (3,483) (4,725) 2,898 14,520 (6,186) 8,334 423 742 30,606 (13,083) 17,523 (56) 27 2,898 1,164 697 1,861 709 1,563 – – (19,200) 130 (197) (2,110) (165) 742 (1,730) (2,692) (4,422) 19,280 51,491 18,543 40,604 (23,781) (28,101) (11,182) (27,488) (2,398) (28,395) – (127) 1,110 – (29) (108) 536 – – – – 41 – – (14) – 2,524 (15,233) A c c o u n t s Net cash (used in)/generated from investing activities (5,916) (4,606) 7,402 393 Cash flows from financing activities Dividends paid Financing of related entities Net cash (used in)/generated from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period The notes on pages 51 to 86 are an integral part of these consolidated financial statements. (10,579) (8,978) (10,579) - - (1,199) (10,579) (8,978) (11,778) (8,161) 32,197 21 24,036 3,939 28,258 32,197 (2,515) 43,672 41,157 (8,978) 52,693 43,715 39,686 3,986 43,672 42 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 1 General information Anglo Pacific Group Plc (the “Company”) and its subsidiaries (together, the “Group”) secure natural resources royalties by acquisition and through investment in mining and exploration interests. The Group has royalties and investments in mining and exploration interests primarily in Australia, North and South America and Africa, with a diversified exposure to commodities that is strongly represented by coal, iron ore, gold and uranium. The Company is a public limited company, which is listed on the London Stock Exchange and Toronto Stock Exchange and incorporated and domiciled in the United Kingdom. The address of its registered office is 17 Hill Street, London, W1J 5LJ, United Kingdom (registered number: 897608). 2 Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation The consolidated financial statements of Anglo Pacific Group Plc have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU), IFRIC interpretations and the Companies Act 2006 (United Kingdom) applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of coal royalties, available-for-sale financial assets, and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in note 4. 2.1.1 Going concern After making enquiries and reviewing the Group’s forecasts and projections, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its consolidated financial statements. 2.1.2 Changes in accounting policies and disclosures (a) New and amended standards adopted by the Group There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year beginning on or after January 1, 2012 that would be expected to have a material impact on the Group. (b) New standards and interpretations not yet adopted A number of new standards and amendments to standards and interpretations are effective for annual periods beginning after January 1, 2012, and have not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect on the consolidated financial statements of the Group, except the following set out below: • IAS 1 (Amendments) ‘Presentation of Financial Statements’ IAS 1 (Amendments) requires an entity to group items presented in other comprehensive income into those that, in accordance with other IFRSs: (a) will not be reclassified subsequently to profit or loss and (b) will be reclassified subsequently to profit or loss when specific conditions are met. It is applicable for annual periods beginning on or after July 1, 2012. The Group’s management expects this will change the current presentation of items in other comprehensive income; however, it will not affect the measurement or recognition of such items. • IFRS 9 ‘Financial Instruments’ – effective January 1, 2015 • IFRS 10 ‘Consolidated Financial Statements’ – effective January 1, 2014 • IFRS 12 ‘Disclosure of Interests in Other Entities’ – effective January 1, 2013 • IFRS 13 ‘Fair Value Measurement’ – effective January 1, 2013 • IAS 19 ‘Employee Benefits’ (Revised June 2011) – effective January 1, 2013 • IAS 27 (Revised 2011), ‘Separate Financial Statements’ – effective January 1, 2013 The Group’s management has yet to assess the impact of IFRS 13 and IAS 19. In respect of the other Standards, the Directors anticipate that their adoption in future periods will have no material impact on the financial statements of the Group. The Group does not intend to apply any of these pronouncements early. 2.1.3 Prior period adjustment As mentioned in the royalty review, an audit conducted by the Queensland Office of State Revenue identified a misallocation of royalty revenue attributable to the Group. As a result, the Group received £4.6million (A$7.1 million) more than it was entitled to over a six year period ended December 31, 2011. An associated interest charge of £1.4million (A$2.2million) was also incurred on the overpayments. In accordance with IAS 8, the prior periods financial statements are restated to reflect what the position would have been, taking into account this information. The following tables reconcile the restated position to that previously reported: 43 A c c o u n t s Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 Consolidated Income Statement Royalty income Operating expenses Operating profit Profit before tax Income tax expense Profit attributable to equity holders Total and continuing earnings per share Basic earnings per share Diluted earnings per share Consolidated Statement of Comprehensive Income Profit for the financial period Other comprehensive income Net loss on revaluation of coal royalties Net exchange gain on translation of foreign operations Deferred tax Net expense recognised directly in equity Total comprehensive expense for the financial period Year ended December 31, 2011 Restated £’000 As previously reported £’000 Adjustment £’000 34,679 (3,393) 31,775 48,451 (12,171) 36,280 35,103 (3,262) 32,330 49,006 (12,337) 36,669 (424) (131) (555) (555) 166 (389) 33.51p 33.51p 33.87p 33.87p (0.36p) (0.36p) Year ended December 31, 2011 Restated £’000 As previously reported £’000 Adjustment £’000 36,280 36,669 (389) (4,139) 2,150 5,933 (11,445) (21,535) (2,844) 2,188 5,532 (10,124) (20,214) (1,295) (38) 401 (1,321) (1,321) Consolidated Balance Sheet Coal royalties Total assets Deferred tax Trade and other payables Total liabilities Total equity and liabilities Consolidated Statement of Cash Flows Cash flows from operating activities Profit before taxation Decrease in trade and other payables Restated £’000 165,967 371,039 54,240 6,896 64,867 371,039 December 31, 2011 As previously reported £’000 Adjustment £’000 Restated £’000 December 31, 2010 As previously reported £’000 Adjustment £’000 175,124 380,196 58,822 781 63,334 380,196 (9,157) (9,157) (4,582) 6,115 1,533 (9,157) 169,304 407,800 59,824 6,470 71,281 407,800 177,130 415,626 63,838 913 69,738 415,626 (7,826) (7,826) (4,014) 5,557 1,543 (7,826) Year ended December 31, 2011 Restated £’000 As previously reported £’000 Adjustment £’000 48,451 423 49,006 (132) (555) 555 Overall, the net assets of the Group at December 31, 2011 were overstated by £10.7million as a result of this overpayment and the corresponding impact on the coal royalty valuation. The value of the coal royalty was £9.2million less when taking into account road areas over the remaining portion of the private royalty ground which are payable to the State. Trade and other payables now reflect an amount owing to the mine operator as a result of these overpayments and the associated interest charge. The deferred tax balance has been recalculated based on the new coal royalty valuation and also reflects a credit to the group arising on the payment of tax on the previously overstated revenue. 44 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 2.2 Consolidation (a) Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Investments in subsidiaries are accounted for in the parent company at cost less impairment. Cost is adjusted to reflect changes in consideration arising from contingent consideration amendments. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated on consolidation. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. (b) Associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s investment in associates includes goodwill identified on acquisition, net of any accumulated impairment loss. The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the associates have been changed where necessary to ensure consistency with the policies adopted by the Group. (c) Joint ventures A joint venture is an entity in which the Group holds an interest on a long-term basis and which is jointly controlled by the Group and one or more other partners under a contractual arrangement. The results and assets and liabilities of joint ventures are incorporated in these financial statements using the proportionate consolidation method of accounting. The Group’s share of the assets, liabilities, income and expenses of the joint ventures are incorporated with the similar items, line by line, in its financial statements. Where a Group company transacts with a joint venture of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant joint venture. Losses may provide evidence of an impairment of the asset transferred in which case appropriate provision is made for impairment. Where necessary, adjustments are made to the results of joint ventures to bring their accounting policies into line with those used by the Group. (d) Transactions and loss of control or significant influence When the Group ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. 2.3 Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the Group’s operating segments, has been identified as the Executive Committee which makes the strategic decisions for the Group. 2.4 Foreign currencies (a) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in pounds sterling, which is the Company’s functional and the Group’s presentation currency. (b) Transactions and balances Foreign currency transactions are translated into the functional currency of the respective Group entity, using the exchange rates prevailing at the dates of the transactions (spot exchange rate). Foreign exchange gains and losses resulting from the settlement of such transactions and from the remeasurement of monetary items at year-end exchange rates are recognised in profit or loss. Non-monetary items measured at Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 45 historical cost are translated using the exchange rates at the date of the transaction (not retranslated). Non-monetary items measured at fair value are translated using the exchange rates at the date when fair value was determined. (c) Group companies The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (a) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (b) income and expenses for each income statement are translated at average exchange rates; and (c) all resulting exchange differences are charged/credited to other comprehensive income and recognised in the currency translation reserve in equity. On consolidation, exchange differences arising from the translation of the net investment in foreign operations are taken to the currency translation reserve in equity. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are reclassified in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 2.5 Property, plant and equipment (excluding coal royalties) Property, plant and equipment is stated at cost, less accumulated depreciation and accumulated impairment losses. The cost of property, plant and equipment comprises its purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Once a mining project has been established as commercially viable, expenditure other than that on land, buildings, plant and equipment is capitalised under ‘Producing assets’ together with any amount transferred from ‘Exploration and evaluation costs’ (note 2.7(a)). Property, plant and equipment is depreciated over its useful life, or over the remaining life of the mine if shorter. The major categories of property, plant and equipment are depreciated on a units of production and/or straight line basis as follows: Producing assets Coal tenures Fixtures and equipment Units of production Units of production 4 to 10 years The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. 2.6 Coal royalties The Group owns a royalty entitlement to the output from the Kestrel and Crinum underground mines in Queensland, Australia, excluding the output from Crown areas. As the Group owns the physical right to the minerals this entitlement is treated in the consolidated financial statements as a tangible fixed asset under IAS 16 Property, Plant and Equipment and the Group has adopted the revaluation method accordingly. The coal royalties are valued at fair value based on future discounted cash flows calculated on a quarterly basis by an independent external consultant. Management consider the valuation on a quarterly basis for any indications of possible impairment considering factors such as pricing and production forecasts. A c c o u n t s Any movement in the valuation of the royalties is recognised in the coal royalty revaluation reserve, excluding the effects of foreign currency changes, which are recognised in the foreign currency translation reserve and net of deferred taxation in accordance with IAS 12 ‘Income taxes’. 2.7 Intangibles (a) Exploration and evaluation costs Exploration and evaluation expenditure comprises costs that are directly attributable to: • researching and analysing exploration data; • conducting geological studies, exploratory drilling and sampling; • examining and testing extraction and treatment methods; and/or • compiling prefeasibility and feasibility studies. Exploration expenditure relates to the initial search for deposits with economic potential. Evaluation expenditure arises from a detailed assessment of deposits or other projects that have been identified as having economic potential. Expenditure on exploration and evaluation activities is capitalised when there is a high degree of confidence in the project’s viability and hence it is probable that future economic benefits will flow to the Group. The carrying values of capitalised amounts are reviewed twice per annum by management and the results of these reviews are reported to the Audit Committee. In the case of undeveloped projects there may be only inferred resources to form a basis for the impairment review. The review is based on a status report regarding the Group’s intentions for development of the undeveloped project. Subsequent recovery of the resulting carrying value depends on successful development or sale of the undeveloped project. If a project does not prove viable, all irrecoverable costs associated with the project net of any related impairment provisions are written off to the income statement. For developments that are considered viable and move to commercial production, these are transferred to producing assets. 46 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 (b) Royalty interests Royalty interests represent the net smelter royalties acquired on the Four Mile project in South Australia, the Salamanca uranium project in Spain, the Black Thor, Black Label and Big Daddy chromite projects in Northern Ontario, Canada and a number of tenements in the Athabasca Basin region of Canada, together with the gross revenue royalties covering the Amapá iron ore system in Brazil, the Isua iron ore project in Greenland, the Mt Ida magnetite iron ore project in Western Australia and three exploration licences, including the Railway iron ore deposit, in the central Pilbara region of Western Australia. The Group does not own the physical rights to the minerals contained within these deposits. The royalties receivable from the interests held are derived from the rights attached to the underlying mineral resources. In line with IAS 38 ‘Intangible assets’ these royalties are recognised at cost. The useful life of the royalty interests will be determined by reference to planned mine life on commencement of mining and the cost of the royalty contract will be amortised on a systematic basis over the life of the mine. Amortisation rates are adjusted on a prospective basis for all changes to estimates of the life of mine. Amortisation will stop when the royalty is classified as held for sale or derecognised. 2.8 Impairment of non-financial assets Intangible assets are reviewed for impairment at least at each reporting date and the assessment includes variables such as the production profiles, commodity prices and management representations. Property, plant and equipment is tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount, which is the higher of fair value less costs to sell or value-in-use. To determine the value-in-use, management estimates expected future cash flows from each asset and determines a suitable discount rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly linked to the Group’s latest forecasts. Discount factors are determined individually for each asset and reflect their respective risk profiles as assessed by management. Impairment losses for business combinations reduce the carrying amount of any goodwill allocated to that business combination first. Any remaining impairment loss is charged to the investment in the subsidiary or associate. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. An impairment charge is reversed if the asset’s recoverable amount exceeds its carrying amount. 2.9 Financial instruments Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group has become a party to the contractual provisions of the instrument. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. On initial recognition loans and receivables are stated at their fair value. After initial recognition these are measured at amortised cost using the effective interest method, less provision for impairment. Discounting is omitted where the effect of discounting is immaterial. The Group’s trade and most other receivables fall into this category of financial instruments. Individually significant receivables are considered for impairment when they are past due or when other objective evidence is received that a specific counterparty will default. Receivables that are not considered to be individually impaired are reviewed for impairment in groups, which are determined by reference to the industry and region of a counterparty and other available features of shared credit risk characteristics. The percentage of the write down is then based on recent historical counterparty default rates for each identified group. Impairment of trade receivables are presented within ‘other losses’. Mining and exploration interests Mining and exploration interests are recognised and derecognised on a trade date where a purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, including transaction costs. Mining and exploration interests are classified upon initial recognition as either available-for-sale or as assets at fair value through profit or loss, depending on the characteristics of the particular instrument and its purpose. Interests classified as available-for-sale are measured at subsequent reporting dates at their fair value. For available-for-sale investments, gains and losses arising from changes in fair value are recognised directly in equity within the investment revaluation reserve, until the security is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is included in the profit or loss for the period. Unquoted investments are measured at cost where fair value cannot be reliably determined. When a market price can be established these investments are revalued to fair value accordingly. For those mining and exploration interests which contain a convertible embedded derivative, these derivatives are separated and recognised at fair value through profit or loss with gains and losses arising from changes in fair value being recognised directly in the income statement. The fair values of such instruments are assessed with reference to the relevant factors, which include, inter alia, equity prices in active markets, commodity prices, production profiles and management representations. These assets are reviewed regularly to ensure that the initial classification remains correct given the asset characteristics and the Group’s investment policies. These assets may be initially recognised using 47 A c c o u n t s Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 transaction price as the best evidence of fair value at acquisition (see note 18). Options can be carried at cost if they are linked to unquoted equities where fair value cannot be reliably measured. All mining and exploration interests held as available for sale are assessed for impairment at least at each reporting date and the assessment includes variables such as the instrument’s valuation in active markets, the company’s underlying assets as well as any potential for economic mineral development within the relevant company’s licences. The Company has determined that impairment exists when the outcome of this assessment indicates a significant or prolonged fall in value of the interest. Royalty instruments Royalty instruments are recognised or derecognised on completion date where a purchase or sale of the royalty is under a contract, and are initially measured at fair value, including transaction costs. Royalty instruments are classified upon initial recognition as available-for-sale or as assets at fair value through profit or loss, depending on the characteristics of the particular instrument and its purpose. Some royalty contracts include clauses relating to the possibility of conversion to equity in the company granting the royalty. These clauses are treated as embedded derivatives and are classified as fair value through profit or loss. Royalty instruments classified as available-for-sale are measured at subsequent reporting dates at their fair value. For royalties classified in this manner gains and losses arising from changes in fair value are recognised directly in equity within the investment revaluation reserve, until the royalty is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in equity is reclassified in the profit or loss for the period. For royalty instruments which contain an embedded derivative, these derivatives are separated and measured as assets at fair value through profit or loss, gains and losses arising from changes in fair value are recognised directly in the income statement. The fair values of such instruments are assessed with reference to the relevant factors, which include, inter alia, equity prices in active markets, production profiles, commodity prices and management representations. These assets are reviewed regularly to ensure that the initial classification remains correct given the asset characteristics and the Group’s investment policies. These assets may be initially recognised using transaction price as the best evidence of fair value at acquisition; however, embedded derivatives are valued at acquisition and are recognised separately from the host royalty instrument (see note 16). All royalty instruments, except those held at fair value through profit and loss, are assessed for impairment at least at each reporting date and the assessment includes variables such as the instrument’s valuation in active markets, production profiles, commodity prices or management representations. Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Trade payables Trade payables are not interest bearing and are stated at their fair value on initial recognition. After initial recognition these are measured at amortised cost using the effective interest method. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. 2.10 Current and deferred income tax The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated by using tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary differences arise from initial recognition of goodwill on business combinations. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. 2.11 Share based payments The Group operates a number of equity-settled, share based compensation plans, under which the entity receives services from employees as 48 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 consideration for equity instruments (options and jointly-owned shares) of the Company. The fair value of the employee services received in exchange for the grant of the options is recognised as an expense. The total amount to be expensed is determined by reference to the fair value of the options granted: • including any market performance conditions; • excluding the impact of any service and non-market performance vesting conditions; and • including the impact of any non-vesting conditions. Non-market vesting conditions are included in assumptions about the number of options and jointly-owned shares that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each reporting period, the entity revises its estimates of the number of options and jointly-owned shares that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the income statement, with a corresponding adjustment to equity. When options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital and share premium when the options are exercised. The grant by the company of options over its equity instruments to employees of subsidiary undertakings in the Group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity. 2.12 Reserves Equity comprises the following: • “Share capital” represents the nominal value of equity shares. • “Share premium” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. • “Coal royalty revaluation reserve” represents revaluation of the coal royalty from the opening carrying value, excluding the effects of deferred tax and foreign currency changes. • “Investment revaluation reserve” represents gains and losses due to the revaluation of the investments in mining and exploration interests and other royalties from the opening carrying values, including the effects of deferred tax and foreign currency changes. • “Share based payment reserve” represents equity-settled share based employee remuneration until such share options are exercised. • “Foreign currency reserve” represents the differences arising from translation of investments in overseas subsidiaries. • “Special reserve” represents the level of profit attributable to the Group for the period ended June 30, 2002 which was created as part of a capital reduction performed in 2002. • “Investment in own shares” represents the shares held by the Anglo Pacific Group Employee Benefit Trust for awards made under the Joint Share Ownership Plan (note 25). • “Retained earnings” represents retained profits. 2.13 Revenue recognition The revenue of the Group comprises royalty income and amounts receivable from external customers for services excluding value added tax and other sales related taxes. It is measured at the fair value of the consideration received or receivable. The royalty income becomes receivable on extraction and sale of the relevant minerals, at which point the revenue is recognised. Disposals of mining and exploration interests are disclosed net of any commissions and foreign exchange. Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. Dividend income from investments is recognised when the shareholders’ rights to receive payment have been established. 2.14 Leases Rentals payable under operating leases where substantially all of the benefits and risks of ownership are not transferred to the lessee are charged against profits on a straight line basis over the term of the lease. 2.15 Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. 3 Financial risk management The Group’s principal treasury objective is to provide sufficient liquidity to meet operational cash flow and dividend requirements and to allow the Group to take advantage of new growth opportunities whilst maximising shareholder value. The Group’s activities expose it to a variety of financial risks including liquidity risk, credit risk, foreign exchange risk, interest rate risk and price risk. The Group operates controlled treasury policies which are monitored by management to ensure that the needs of the Group are met while minimising potential adverse effects of unpredictability of financial markets on the Group’s financial performance. Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 49 Liquidity and funding risk The objective of the Company in managing funding risk is to ensure that it can meet its financial obligations as and when they fall due. At the year end there was no debt outstanding and the Company, with its strong balance sheet, had good access to capital markets, if required. Credit risk The Group’s principal financial assets are bank balances, royalty instruments held as financial assets, trade and other receivables and investments. These represent the Group’s maximum exposure to credit risk in relation to financial assets. The Group’s credit risk is primarily attributable to its other receivables, including royalty receivables. It is the policy of the Group to present the amounts in the balance sheet net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and the current economic environment. Where possible the Group has registered its interests against the relevant mining titles for the royalties it has acquired. In addition, the Group is generally entitled to full reconciliations of amounts paid and retains the right to audit the royalty returns and verify the calculations. The Group's credit risk on royalty instruments held as financial instruments, has been reviewed and the estimated current exposure is as disclosed in note 16 where the future contractual right to cash flow from these instruments is reflected in their fair value. The credit risk on bank deposits is limited because the counterparties have high credit-ratings assigned by international credit-rating agencies. The Group has no significant concentration of credit risk, with exposure spread over a large number of currencies and counterparties. In 2007, the Group created a derivative financial instrument to provide finance to an unlisted mining development company, which has subsequently listed (note 18). This instrument is convertible into equity in the company or royalties over the company’s properties at the Group’s option for a period of up to five years. In the event of default the instrument becomes repayable and the Group would rank equally with the company’s other unsecured creditors. The Group undertakes detailed analysis of factors which mitigate the risk of default to the Group on a regular basis. Foreign exchange risk The Group’s transactional foreign exchange exposure arises from income, expenditure and purchase and sale of assets denominated in foreign currencies. As each material commitment is made, the risk in relation to currency fluctuations is assessed by the Executive Committee and regularly reviewed. The Group does not consider it necessary to have a hedging programme in place at this time. Foreign currency denominated financial assets and liabilities, translated into Pound Sterling at the closing rate, are as follows: 2012 2011 GBP AUD CAD USD NOK EUR GBP AUD CAD USD NOK EUR £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Financial assets Financial liabilities Short term exposure 1 – 1 20,385 21,996 4,180 16,371 – – – – 20,385 21,996 4,180 16,371 6 – 6 1 – 1 37,928 30,514 3,117 3,191 – – – – 37,928 30,514 3,117 3,191 6 – 6 A c c o u n t s The following table illustrates the sensitivity of the net result for the year and equity in regards to the Group’s financial assets and financial liabilities and the Australian Dollar / Pound Sterling and the Canadian Dollar / Pound Sterling exchange rate. It assumes a +/- 10% change of the Pound Sterling / Australian Dollar exchange rate for the year ended December 31, 2012 (2011: 10%). A +/- 10% is considered for the Pound Sterling / Canadian Dollar exchange rate (2011: 10%). The sensitivity analysis is based on the Group’s foreign currency financial instruments held at balance sheet date. If the Pound Sterling had weakened against the Australian Dollar and the Canadian Dollar by 10% this would have had the following impact: 2012 2011 GBP AUD CAD USD NOK EUR GBP AUD CAD USD NOK EUR £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Net result for the year Equity – – 720 47 2,039 2,200 20 418 (1) 1,637 – 1 – – 765 3,793 1,267 3,051 – 312 – 319 – 1 If the Pound Sterling had strengthened against the Australian Dollar and the Canadian Dollar by 10% this would have had the following impact: 2012 2011 GBP AUD CAD USD NOK EUR GBP AUD CAD USD NOK EUR £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 Net result for the year Equity – – (720) (47) (20) 1 (2,039) (2,200) (418) (1,637) – (1) – – (765) (1,267) – – (3,793) (3,051) (312) (319) – (1) 50 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the Group’s exposure to currency risk. Interest rate risk The Group is exposed to interest rate risk in respect of the cash balances held with banks and other highly rated counterparties. If the interest rates the Group received had increased by one percent during the year, the net result for the year would have been increased by £537,000 (2011: £268,000). If the interest rates the Group received had decreased by one percent during the year, the net result for the year would have been reduced by £387,000 (2011: £268,000). There would have been no impact on equity. 2012 Assets Cash Trade receivables Other receivables (note 20) Total Financial Assets Financial Liabilities Trade payables Other payables Total Financial Liabilities Net Financial Assets 2011 Assets Cash Trade receivables Other receivables Total Financial Assets Financial Liabilities Trade payables Other payables Total Financial Liabilities Net Financial Assets Weighted average effective interest rate Fixed interest rate £’000 Non interest bearing £’000 0.72% 7.0% 21,463 – 3,141 24,604 – – – 24,604 2,573 – 1,219 3,792 106 1,724 1,830 1,962 Weighted average effective interest rate Fixed interest rate £’000 Non interest bearing £’000 2.00% 22,463 – – 22,463 – – – 22,463 9,734 – 10,111 19,845 100 6,427 6,527 13,318 Total £’000 24,036 – 4,360 28,396 106 1,724 1,830 26,566 Total £’000 32,197 – 10,111 42,308 100 6,427 6,527 35,781 Other price risk The Group is exposed to other price risk in respect of its mining and exploration interests which include listed and unlisted equity securities and any convertible instruments. A sensitivity analysis based on a 30% increase or decrease in listed equity prices has been performed (2011: 26%). If the quoted stock price for these securities had increased or decreased by this percentage the net result for the year would have been increased / reduced by £5.8 million (2011: £13.4 million). Equity would have changed by £15.4 million (2011: £16.2 million). The royalty portfolio exposes the Group to other price risk through fluctuations in commodity prices, particularly the prices of iron ore, gold and uranium. As the Directors obtain independent commodity price forecasts, the generation of which takes into account fluctuations in prices, no detailed analysis of the impact of fluctuations on the valuations of the royalties has been undertaken. The Group is exposed to other price risk through its convertible instruments (note 18(b)) that can be converted into equity or royalties. The underlying value of the equity may change resulting in an increase or decrease in the value of the instrument. As the equity is currently unlisted it is not possible to quantify this risk at this stage. Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 51 The Group’s mining and exploration interests are held for the purposes of generating additional royalties and are considered long-term, strategic investments. This strategy is unaffected by recent fluctuations in prices for mining and exploration equities; however, interests are continually monitored for indicators that may suggest problems for these companies raising capital or continuing their day-to-day business activities to ensure remedial action can be taken if necessary. No specific hedging activities are undertaken in relation to these interests and the voting rights arising from these equity instruments are utilised in the Group’s favour. Capital management and procedures The Group’s capital management objectives are: • to ensure the Group’s ability to continue as a going concern; • to increase the value of the assets of the Group; and • to enhance shareholder value in the Company and returns to shareholders. The achievement of these objectives is undertaken by developing existing assets and identifying new royalty opportunities. The Group will also undertake other transactions where these are deemed financially beneficial to the Group. The Directors continue to monitor the capital requirements of the Group by reference to expected future cash flows. Capital for the reporting periods under review is summarised in the consolidated statement of changes in equity. The Group does not presently need or have any long term funding requirements. Financial Assets The Group and Company held the following investments in financial assets: 2012 2011 Available–for–sale Royalty instruments Mining and exploration interests Fair value through profit or loss Royalty instruments Mining and exploration interests Trade and other receivables Cash and cash equivalents Group £’000 24,032 55,545 – 248 4,360 24,036 Company £’000 24,032 36,753 – 248 13,581 41,157 Group £’000 24,736 64,303 – 248 10,111 32,197 Company £’000 24,736 56,121 – 248 9,038 43,672 A c c o u n t s Cash and cash equivalents comprise cash and short-term deposits held by the Group treasury function. The carrying amount of these assets is approximately their fair value. Fair value hierarchy The following table presents financial assets and liabilities measured at fair value in the balance sheet in accordance with the fair value hierarchy. This hierarchy groups financial assets and liabilities into three levels based on the significance of inputs used in measuring the fair value of the financial assets and liabilities. The fair value hierarchy has the following levels: • Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities; • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement. The following tables present the Group’s assets and liabilities that are measured at fair value at December 31, 2012 and December 31, 2011: 52 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 Group Assets Royalty instruments Mining and exploration interests – quoted Mining and exploration interests – unquoted Mining and exploration interests – royalty options Total Net fair value Group Assets Royalty instruments Mining and exploration interests – quoted Mining and exploration interests – unquoted Mining and exploration interests – royalty options Total Net fair value Note (a) (b) (c) (d) Note (a) (b) (c) (d) Level 1 £’000 – 51,547 – – 51,547 51,547 Level 1 £’000 – 62,389 – – 62,389 62,389 2012 Level 2 £’000 – – 3,518 728 4,246 4,246 2011 Level 2 £’000 – – 1,434 728 2,162 2,162 Level 3 £’000 24,032 – – – 24,032 24,032 Level 3 £’000 24,736 – – – 24,736 24,736 Total £’000 24,032 51,547 3,518 728 79,825 79,825 Total £’000 24,736 62,389 1,434 728 89,287 89,287 The following tables present the Company’s assets and liabilities that are measured at fair value at December 31, 2012 and December 31, 2011: Company Assets Royalty instruments Mining and exploration interests – quoted Mining and exploration interests – unquoted Mining and exploration interests – royalty options Total Net fair value Company Assets Royalty instruments Mining and exploration interests – quoted Mining and exploration interests – unquoted Mining and exploration interests – royalty options Total Net fair value Note (a) (b) (c) (d) Note (a) (b) (c) (d) Level 1 £’000 – 35,102 – – 35,102 35,102 Level 1 £’000 – 54,656 – – 54,656 54,656 2012 Level 2 £’000 – – 1,171 728 1,899 1,899 2011 Level 2 £’000 – – 985 728 1,713 1,713 Level 3 £’000 24,032 – – – 24,032 24,032 Level 3 £’000 24,736 – – – 24,736 24,736 Total £’000 24,032 35,102 1,171 728 61,033 61,033 Total £’000 24,736 54,656 985 728 81,105 81,105 There have been no significant transfers between levels 1 and 2 in the reporting period. The methods and valuation techniques used for the purposes of measuring fair value are unchanged compared to the previous reporting period. (a) Royalty instruments The Group’s royalty streams arising from its four royalty instruments have been classified as available for sale, with value on initial recognition being calculated as the total cost of the agreement less the valuation of the option to convert to shares. At the reporting date the royalty streams have been valued on the net present value of the pre-tax cash flows discounted at a rate management considers reflects the risk associated with each of the projects. Note 16 details the discount rates used. 53 A c c o u n t s Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 The option to convert to shares has been treated as fair value through profit or loss as designated on initial recognition at the date of acquisition and has been valued at December 31, 2012 utilising an option model. The key assumptions, in addition to those utilised in the royalty stream valuations such as mine life and expected cash flows, include the price, volatility of the projects listed equity and where applicable the conversion price and redemption value of redeemable shares. (b) Mining and exploration interests – quoted All the quoted mining and exploration interests have been issued by publicly traded companies in Australia, Canada, the United Kingdom and Norway. Fair values for these securities have been determined by reference to their quoted bid prices at the reporting date. (c) Mining and exploration interests – unquoted All the unquoted mining and exploration interests are initially recognised using cost where fair value cannot be reliably determined. (d) Mining and exploration interests – royalty options All the royalty options are initially recognised using cost where fair value cannot be reliably determined. The Group considers the progress of the projects related to each of the royalty options to ensure there has been no material change in the fair value since initial recognition. Fair value measurements in Level 3 The Group’s financial assets classified in Level 3 uses valuation techniques based on significant inputs that are not based on observable market data. The following table presents the changes in Level 3 instruments for the year ended December 31, 2012. At January 1, 2012 Revaluation gains or losses recognised in: Other comprehensive income Receipts from royalty instruments At December 31, 2012 Available-for- sale financial assets Net smelter return royalty £’000 24,736 1,185 (1,889) 24,032 The following table presents the changes in Level 3 instruments for the year ended December 31, 2011. At January 1, 2011 Revaluation gains or losses recognised in: Other comprehensive income Royalty instrument provision Receipts from royalty instruments At December 31, 2011 Available-for- sale financial assets Net smelter return royalty £’000 28,061 (1,377) (1,563) (385) 24,736 Financial assets at fair value through profit and loss Optionality to convert debenture £’000 – – – – Financial assets at fair value through profit and loss Optionality to convert debenture £’000 – – – – Total £’000 24,736 1,185 (1,889) 24,032 Total £’000 28,061 (1,377) (1,563) (385) 24,736 There have been no transfers into or out of Level 3 in either year. The Group measures its entitlement to the royalty streams and any optionality embedded within the royalty instruments using discounted cash flow models. In determining the discount rate to be applied, management consider the country and sovereign risk associated with the projects, together with the time horizon to the commencement of production and the success or failure of projects of a similar nature. Management have not undertaken detailed analysis of the impact of using alternative discount rates on the fair value of the royalty streams or the optionality embedded in the royalty instruments, as the rates used reflect the risks inherent in the four projects and the use of alternative rates would be unjustified. 54 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 4 Critical accounting estimates and judgements Estimates and judgements are regularly evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 4.1 Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates and assumptions will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below: (a) Review of asset carrying values and impairment charges and reversals – note 2.6, note 2.7, note 2.8, note 15, note 16, note 17 and note 18. (b) Recoverability of deferred tax assets – note 2.10 and note 22. 4.2 Critical judgements in applying the Group’s accounting policies Areas of judgement that have the most significant effect on the amounts recognised in the financial statements are: (a) Classification of mining and exploration interests – note 2.9 and note 18. (b) Classification of royalty instruments and royalty interests. The Directors review each royalty acquired to determine whether there is a contractual right to receive cash which would meet the definition of a financial asset, or if the royalty receivable for the interest acquired is derived from the rights attached to the underlying asset/mineral resource. In the latter case these are treated as an intangible asset – note 2.7(b) and note 17. Where a royalty agreement contains a convertible option within it, the contracts are reviewed to determine whether the assets should be classified as a derivative at fair value through profit or loss or can be classified as an available for sale financial asset with an embedded derivative – note 2.9 and note 16. (c) Review of assumptions underlying the independent coal industry advisors’ valuation of the Kestrel and Crinum coal royalty – note 15. (d) Review of assumptions underlying the valuation of royalty instruments and their associated embedded derivatives – note 17. The Directors review the latest available mine plans and obtain independent foreign exchange and commodity price forecasts to determine each of the royalty instruments carrying value at reporting date. (e) Review of asset carrying values and impairment charges and reversals – note 2.6, note 2.7, note 2.8, note 15, note 16, note 17 and note 18. (f) Recognition of deferred tax liabilities and the continued application of relevant exemptions – note 2.10, note 11 and note 22. (g) Treatment of unrealised losses on mining and exploration interests – note 18. The Directors review the fair value of all quoted mining and exploration interests in light of market conditions and assess unrealised losses for indications or impairment. As at December 31, 2012 the Group’s unrealised losses totalled £39.5 million. In light of events occurring after year end, the Directors considered £3.7 million of the unrealised losses to be impaired and recognised these losses through “other losses” in the income statement (note 30). The Directors do not consider the remaining losses to be impaired and therefore, the movement in fair value has been recognised directly in equity, resulting in a negative investment revaluation reserve of £35.8 million. 5 Segment information Management has determined the operating segments based on the reports reviewed by the Executive Committee that are used to make strategic decisions. The Committee considers the Group’s undertakings from a business perspective. This has resulted in the Group being organised into two operating segments – royalties and mining and exploration interests. The royalties segment encompasses all Group activities relating directly to the royalties received from mining operations. The mining and exploration interests segment encompasses all Group activities relating directly to the acquisition, disposal and continued monitoring of the Group’s investments in listed and unlisted entities operating in mining and mineral exploration. The segment information provided to the Executive Committee for the reportable segments for the year ended December 31, 2012 is as follows: 55 A c c o u n t s Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 Australia Americas Europe Royalty income Finance income Gain on sale of mining and exploration interests Other income Total segment income Profit before tax Amortisation Income tax expense Total assets Total assets include: Additions to non-current assets (other than financial instruments and deferred tax assets) Total liabilities Royalty £’000 11,038 – – – 11,038 11,038 – (1,686) 191,410 Mining interests £’000 – – 7,021 678 7,699 7,699 – – 24,550 Royalty £’000 2,229 – – – 2,229 2,017 (1,018) (310) 33,241 Mining interests £’000 Royalty £’000 Mining interests £’000 All other segments £’000 – – 337 – 337 337 – (28) – – – – – – – – – – (11) 1,047 1,036 – – 10,804 35,993 20,641 – 676 - 21 – (2,139) 36,829 Total £’000 13,267 676 7,347 1,746 14,220 (1,018) (4,163) 353,468 697 23,036 (2,975) (3,896) 3,720 50,395 – – – – – – – 2,745 – – – (636) 3,720 52,504 The segment information for the year ended December 31, 2011 is as follows: Australia Americas Europe Royalty income (restated) Finance income Gain on sale of mining and exploration interests Other income Total segment income Profit before tax (restated) Amortisation Impairment of royalty intangibles Income tax expense Total assets (restated) Total assets include: Additions to non-current assets (other than financial instruments and deferred tax assets) Total liabilities (restated) Royalty £’000 Mining interests £’000 All other segments £’000 Royalty £’000 31,985 – – – 31,985 31,985 – – (8,533) 191,705 Mining interests £’000 – – 6,714 615 7,329 7,329 – – - 35,672 Royalty £’000 2,694 – – – 2,694 (1,684) (1,018) (1,088) (384) 31,049 Mining interests £’000 – – 12,663 – 12,663 12,621 – – 115 – – – – – – – – – – – 926 – 926 926 – – – 19,877 36,708 9,076 Total £’000 34,679 1,507 20,303 634 57,123 48,451 (1,018) (1,088) (12,171) 371,039 29,105 64,867 – 1,507 – 19 1,526 (2,726) – – (3,369) 46,952 - 9,303 - 52,912 – – 10,714 – – – 18,391 2,652 – – The amounts provided to the Executive Committee with respect to total assets are measured in a manner consistent with that of the financial statements. These assets are allocated based on the operations of the segment and the physical location of the asset. Investments in mining and exploration interests (classified as available-for-sale financial assets or financial assets at fair value through profit or loss) held by the Group are classified by geographic segment by reference to the country of the investee’s primary listing for quoted investments or the country of operations for unquoted investments. The amounts provided to the Executive Committee with respect to total liabilities are measured in a manner consistent with that of the financial statements. These liabilities are allocated based on the operations of the segment. The royalty income in Australia of £11,038,000 (2011: £31,985,000) is derived from a single coal royalty. 56 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 6 Finance income Group Interest on bank deposits Interest on royalty instruments Interest on long term receivables 7a Expense by nature Group Employee benefit expense (note 8a) Listing fees Operating lease payments Other expenses 7b Auditors’ remuneration Group Fees payable to Company’s auditor for the audit of parent company and consolidated financial statements Fees payable to the Company's auditor and its associates for other services: – The audit of the Company's subsidiaries pursuant to legislation – Other services pursuant to legislations – Tax and other services 8a Employee benefits expense Wages and salaries Share-based awards to directors and employees Social security costs Other pension costs 2012 £’000 387 202 87 676 2012 £’000 1,783 178 164 1,508 3,633 2012 £’000 73 6 18 – 97 2011 £’000 536 971 – 1,507 2011 £’000 2,008 243 168 974 3,393 2011 £’000 48 22 13 8 91 Group Company 2012 £’000 1,404 183 155 41 2011 £’000 1,639 130 181 58 2012 £’000 1,312 183 153 41 2011 £’000 1,495 130 176 58 1,783 2,008 1,689 1,859 8b Retirement benefits plans The Group operates a money purchase group personal pension scheme. Under this scheme the Group makes contributions to personal pension plans of individual directors and employees. The pension cost charge represents contributions payable by the Group to these plans in respect of the year. The total cost charged to income of £41,000 (2011: £58,000) represents contributions payable to these schemes by the Group at rates specified in the rules of the schemes. As at December 31, 2012, contributions of £5,000 (2011: £12,000) due in respect of the current reporting period had not been paid over to the schemes. Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 8c Average number of people employed Group Number of employees Group Average number of people (including executive directors) employed: Executive directors Administration Company The average number of administration staff employed by the Company during the year, including executive directors was 10 (2011: 10). Directors’ salaries are shown in the Directors’ Remuneration Report on pages 28 to 31, including the highest paid director. 9 Other income Group Dividends received from mining and exploration interests Fixed income from mining and exploration interests Other income 10 Other (losses)/gains – net Group Net foreign exchange loss Provision for non-recovery of interest receivable (note 20) Recovery/(Loss) on permanent write down of royalty instrument (note 16) Loss on impairment of royalty intangible (note 17) Loss on impairment of mining and exploration interests (note 18) 11 Income tax expense Group Current tax expense Deferred tax charged to income – current year (note 22) Total income tax expense 2012 £’000 678 1,047 21 1,746 2012 £’000 (958) – 806 – (4,013) (4,165) 2012 £’000 5,917 (1,754) 4,163 2012 2011 11 4 7 11 57 A c c o u n t s 11 5 6 11 2011 £’000 615 – 19 634 2011 £’000 (859) (709) (1,563) (1,088) (42) (4,261) Restated 2011 £’000 11,850 321 12,171 58 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 Group Factors affecting the tax charge for the year: Profit on activities before tax Prima facie tax payable at UK rate of 24.5% (2011: 26.5%) and Australian rate of 30% (2011: 30%) Adjustment for tax exempt income Utilisation of losses brought forward Non-deductible expenses Reassessment of 2010 income tax return Foreign controlled profits Total income tax expense Refer to note 22 for information regarding the Group’s deferred tax assets and liabilities. 2012 £’000 14,220 3,215 (713) 78 55 1,060 468 4,163 Restated 2011 £’000 48,451 19,117 (7,460) 54 460 - - 12,171 12 Earnings per share Earnings per ordinary share is calculated on the Group’s profit after tax of £10,057,000 (2011: £36,280,000 (restated)) and the weighted average number of shares in issue during the year of 108,540,723 (2011: 108,263,282). The diluted earnings per ordinary share is calculated on the Group’s profit after tax of £10,057,000 (2011: £36,280,000 (restated)) and 108,544,883 shares (2011: 108,274,402). The dilutive effect is due to options outstanding under the Company Share Option Plan at the year end. Net profit attributable to shareholders Earnings – basic Earnings – diluted Weighted average number of shares in issue Ordinary shares in issue Employee Share Option Scheme 2012 £’000 10,057 10,057 2012 Restated 2011 £’000 36,280 36,280 2011 108,540,723 108,263,282 4,160 11,120 108,544,883 108,274,402 13 Dividends On January 11, 2012 an interim dividend of 4.25 pence per share was paid to shareholders in respect of the year ended December 31, 2011. On July 4, 2012 a final dividend of 5.50 pence per share was paid to shareholders to make a total dividend for the year of 9.75 pence per share. Total dividends paid during the year were £10.58 million (2011: £8.98 million). On February 5, 2013 an interim dividend of 4.45 pence per share was paid to shareholders in respect of the year ended December 31, 2012. This dividend has not been included as a liability in these financial statements. The Directors propose that a final dividend of 5.75 pence per share be paid to shareholders on August 7, 2013, to make a total dividend for the year of 10.20 pence per share. This dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The proposed final dividend for 2012 is payable to all shareholders on the Register of Members on June 7, 2013. The total estimated dividend to be paid is £6.2 million. This will be reduced to the extent that shareholders elect to receive scrip instead of cash under any scrip dividend alternative. The Board will consider whether shareholders will be given the opportunity to elect to receive a scrip dividend instead of cash depending on the share price at the time. 59 A c c o u n t s Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 14 Property, plant and equipment Group Gross carrying amount At January 1, 2012 Foreign currency translation At December 31, 2012 Depreciation and impairment At January 1, 2012 Depreciation At December 31, 2012 Carrying amount December 31, 2012 Group Gross carrying amount At January 1, 2011 Additions At December 31, 2011 Depreciation and impairment At January 1, 2011 Depreciation At December 31, 2011 Carrying amount December 31, 2011 Producing assets £’000 Coal tenures £’000 Equipment and fixtures £’000 821 – 821 (2) – (2) 819 1,277 (26) 1,251 – – – 1,251 175 – 175 (119) (21) (140) 35 Producing assets £’000 Coal tenures £’000 Equipment and fixtures £’000 821 – 821 (2) – (2) 819 1,262 15 1,277 – – – 1,277 161 14 175 (98) (21) (119) 56 Total £’000 2,273 (26) 2,247 (121) (21) (142) 2,105 Total £’000 2,244 29 2,273 (100) (21) (121) 2,152 Coal tenures relate to the Trefi and Panorama coal projects in British Columbia, Canada. As both projects are not yet in production there was no depreciation during the period. Company Gross carrying amount At January 1, 2012 At December 31, 2012 Depreciation and impairment At January 1, 2012 Depreciation At December 31, 2012 Carrying amount December 31, 2012 Producing assets £’000 Coal tenures £’000 Equipment and fixtures £’000 821 821 (2) – (2) 819 – – – – – – 175 175 (119) (21) (140) 35 Total £’000 996 996 (121) (21) (142) 854 60 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 Company Gross carrying amount At January 1, 2011 Additions At December 31, 2011 Depreciation and impairment At January 1, 2011 Depreciation At December 31, 2011 Carrying amount December 31, 2011 Producing assets £’000 Coal tenures £’000 Equipment and fixtures £’000 821 – 821 (2) – (2) 819 – – – – – – – 161 14 175 (98) (21) (119) 56 Total £’000 982 14 996 (100) (21) (121) 875 The Group’s property plant and equipment are carried at cost less depreciation with the exception of leases relating to the talc deposit on Shetland, Scotland held by the parent company. The producing asset on Shetland is included at a directors’ valuation of £0.8 million (2011: £0.8 million) plus additions which are carried at cost. An external valuation was carried out on March 26, 2001. At the date of transition to IFRS, the Group elected to use this valuation as deemed cost at that date. 15 Coal royalties At January 1, 2010 (as previously reported - note 2.1.3) Foreign currency translation Revaluation adjustment At December 31, 2010 (restated - note 2.1.3) Foreign currency translation Revaluation adjustment At December 31, 2011 (restated - note 2.1.3) Foreign currency translation Revaluation adjustment At December 31, 2012 Group £’000 149,896 26,879 (7,471) 169,304 802 (4,139) 165,967 (4,311) 9,339 170,995 Company £’000 – – – – – – – – – – The Group’s coal royalty entitlements comprise the Kestrel and Crinum coal royalties. During the second quarter of 2012 the Group was informed by Rio Tinto that an audit by the Queensland Office of State Revenue had identified a misallocation of royalty revenue relating to areas reserved by the State of Queensland for roads. This resulted in an overpayment of royalties to the Group of £4.6million (A$7.1million) for the period September 2006 to December 2011, together with an associated interest charge of £1.4million (A$2.2million). The misallocation of royalty revenues and associated interest charge has been reflected in the restated balance sheet at December 31, 2011, the impact of which is described in note 2.1.3. The coal royalty was valued during December 2012 at £171.0 million (A$266.6 million) by Resource Management International Pty Ltd, independent coal industry advisors, on a net present value of the pre-tax cash flow discounted at a rate of 7%. The net royalty income from this investment is currently taxed in Australia at a rate of 30%. This valuation is incorporated in the accounts and the above revaluation adjustment represents the difference between the opening carrying value and the external valuation, excluding the effects of foreign currency changes. Were the coal royalty to be realised at the revalued amount there are £2.0 million (A$3.1 million) of capital losses potentially available to offset against taxable gains. These losses have been included in the deferred tax calculation (note 22). Were the coal royalty to be carried at cost the carrying value would be £0.2 million (2011: £0.2 million). The Directors do not presently have any intention to dispose of the coal royalty. 16 Royalty instruments The Group’s royalty instruments are represented by four convertible debentures which entitle the Group to the repayment of principal and a net smelter return (“NSR”) royalty for the life of the mine. Until such time as the principal is repaid the Group retains the option to convert the outstanding balance into the common shares of the grantor. Details of the Group’s royalty instruments are summarised opposite: Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 61 Project Engenho1 El Valle-Boinás/ Carlés mines Malartic-Midway and McKenzie Break2 Jogjakarta Iron Sands Commodity Cost ‘000 Gold A$4,000 Royalty Rate 2.50% Gold C$7,500 2.50% Escalation – 3% >US$1,100/oz 2.75% >US$1,250/oz Option Price A$0.35 C$0.958 C$0.70 C$8,000 2.50% Gold Iron Sands A$5,000 2.00%3 – A$0.10 - A$0.50 Discount Rate – 8% – 15% Royalty Valuation £’000 – 14,083 – 9,949 24,032 Option Valuation £’000 – – – – – 1 Engenho royalty instrument was fully provided for as at December 31, 2011. 2 Malartic-Midway and McKenzie Break royalty instrument was fully provided for as at December 31, 2010. 3 Jogjakarta Iron Sands royalty rate decreases to 1% following repayment of principal, unless liquid iron prices exceed US$700/t. (a) Available for sale The Group’s entitlement to the repayment of the principal and the NSR royalty have been classified as available for sale and are carried at fair value. Any gains and losses arising from changes in fair value are recognised directly in equity with the investment revaluation reserve as detailed below: Fair value At January 1, 2011 Receipts from royalty instruments Revaluation adjustment Royalty instrument provision At December 31, 2011 Receipts from royalty instruments Revaluation adjustment At December 31, 2012 Group £’000 28,061 (385) (1,377) 26,299 (1,563) 24,736 (1,889) 1,185 24,032 Company £’000 28,061 (385) (1,377) 26,299 (1,563) 24,736 (1,889) 1,185 24,032 A c c o u n t s (b) Fair value through profit and loss The Group’s option to convert the outstanding balance of the debentures into common shares of the grantors is an embedded derivative requiring a separate valuation to the NSR royalty. As at December 31, 2011 and December 31, 2012 the Directors considered the likelihood of the options being exercised to be remote and therefore, assessed the fair value of the options to be nil. The options are classified as fair value through profit and loss, with gains and losses arising from changes in fair value directly recognised in the income statement as detailed below: Fair Value At December 31, 2011 and December 31, 2012 Royalty instruments Royalty instrument provision Total royalty instruments Group £’000 – 2012 2011 Group £’000 28,983 (4,951) 24,032 Company £’000 28,983 (4,951) 24,032 Group £’000 30,493 (5,757) 24,736 Company £’000 – Company £’000 30,493 (5,757) 24,736 62 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 The total royalty instrument provision of £4.95 million (2011: £5.76 million) relates to the Group’s convertible debentures with Northern Star Mining Corp. and Minera Gold Limited (formerly Mundo Minerals Limited) which give rise to the royalties over the Malartic-Midway and McKenzie Break and the Engenho projects respectively (note 10). During the year the Group received £0.8 million in principal repayments from Minera Gold Limited, which were previously provided for in full. The Group continues to pursue its rights under the terms of the convertible debentures with Northern Star Mining Corp. and Minera Gold Limited however, the outstanding debenture balances remain fully provided for. 17 Intangibles The Group’s intangibles comprise capitalised exploration and evaluation costs and royalty interests. Group Gross carrying amount At January 1, 2012 Additions Foreign currency translation At December 31, 2012 Amortisation and impairment At January 1, 2012 Amortisation charge At December 31, 2012 Carrying amount December 31, 2012 Group Gross carrying amount At January 1, 2011 Additions Acquisition costs returned At December 31, 2011 Amortisation and impairment At January 1, 2011 Impairment charge Amortisation charge At December 31, 2011 Carrying amount December 31, 2011 Company Carrying amount December 31, 2011 and December 31, 2012 Exploration and evaluation costs £’000 804 127 – 931 – – – 931 Exploration and evaluation costs £’000 696 108 – 804 – – – – 823 Royalty interests £’000 70,525 3,720 (559) 73,686 (2,191) (1,018) (3,209) 70,477 Royalty interests £’000 42,130 29,105 (710) 70,525 (85) (1,088) (1,018) (2,191) 68,334 Royalty interests £’000 3,997 Total £’000 71,329 3,847 (559) 74,617 (2,191) (1,018) (3,209) 71,408 Total £’000 42,826 29,213 (710) 71,329 (85) (1,088) (1,018) (2,191) 69,138 Total £’000 3,997 The exploration and evaluation costs comprise expenditure that is directly attributable to the Trefi and Panorama coal projects in British Columbia, Canada. Royalty interests represent the net smelter return royalties acquired on the Four Mile project in South Australia, the Salamanca uranium project in Spain, the Black Thor, Black Label and Big Daddy chromite projects in Northern Ontario, Canada and a number of tenements in the Athabasca Basin region of Canada, together with the gross revenue royalties covering the Amapá iron ore system in Brazil, the Isua iron ore project in Greenland, the Mt Ida magnetite iron ore project in Western Australia and three exploration licences, including the Railway iron ore deposit, in the central Pilbara region of Western Australia. 63 A c c o u n t s Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 The net smelter royalties on the exploration licences in the Athabasca Basin region of Canada remain impaired as a result of the inherent uncertainty of these licences entering commercial production and have a carrying value of nil (2011: nil). The Group will continue to review the development of these licences on an annual basis. The Amapá royalty interest is the only producing interest and therefore, subject to amortisation. Amortisation of the remaining interests will commence once they begin commercial production. No intangible assets have been pledged as security for liabilities. 18 Mining and exploration interests (a) Available for sale Fair value At January 1, 2011 Additions Disposals Impairment Revaluation adjustment Foreign currency translation At December 31, 2011 Additions Disposals Impairment Revaluation adjustment Foreign currency translation At December 31, 2012 Group £’000 128,231 28,101 (41,458) (42) (50,292) (237) 64,303 23,781 (16,660) (4,011) (11,493) (375) 55,545 Company £’000 107,865 27,488 (30,406) – (48,826) – 56,121 11,182 (16,195) (3,721) (10,634) – 36,753 The Group’s investments are acquired as part of the Group’s strategy to acquire new royalties and are not held for the purpose of trading. Gains may be realised where it is deemed appropriate. The fair values of listed securities are based on quoted market prices. Unquoted investments and royalty options are initially recognised using cost where fair value cannot be reliably determined. In the absence of an active market for these securities, the Group considers each unquoted security to ensure there has been no material change in the fair value since initial recognition. Further guidance on fair value measurement is provided in note 3. The impairment represents £3.7 million in unrealised losses the Directors consider to be impaired at December 31, 2012, following the underlying investee company filing for protection under a corporate reconstruction. (b) Fair value through profit and loss At January 1, 2012 and December 31, 2012 Group £’000 248 Company £’000 248 A non-repayable convertible instrument was acquired by the Group in 2007. The convertible instrument was designated as fair value through profit or loss. This convertible instrument was created to provide finance to a listed mining development company and is convertible into equity in the company or royalties over the company’s properties at the Group’s option for a period of up to five years. The instrument was initially recognised using cost as fair value could not be reliably determined. The Group considers that there had been no material change in the fair value of the instrument at the reporting date, and this will be re-examined on a regular basis considering factors such as the presence of an active market for the equity and valuations of the potential royalty streams. Prior to the instrument’s expiration in November 2012, the Group notified the underlying company of its intention to convert the instrument to royalties. The conversion is expected to be completed in 2013. Total mining and exploration interests at 31 December are represented by: Quoted investments Unquoted investments Royalty Options Number of investments 2012 2011 Group £’000 51,547 3,518 728 55,793 37 Company £’000 35,102 1,171 728 37,001 31 Group £’000 62,389 1,434 728 64,551 42 Company £’000 54,656 985 728 56,369 33 64 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 19a Investments in subsidiaries Company Cost: At January 1, 2011 Capital injection into existing subsidiary At December 31, 2011 and December 31, 2012 Provisions: At January 1, 2011 At December 31, 2011 and December 31, 2012 Net book value: At January 1, 2011 At December 31, 2011 and December 31, 2012 Investments in subsidiaries £’000 18,657 15,233 33,890 345 345 18,312 33,545 The Group’s full listing of subsidiaries is provided in note 31. 19b Joint ventures The Group previously held a 50% equity shareholding (and voting rights) in a joint venture established in Australia between Jandale Holdings Pty Ltd (a wholly owned subsidiary of the Company) and Core Coal Holdings Pty Ltd for the purpose of exploration and development. The following amounts are included in the Group’s financial statements using proportionate consolidation: Current assets Current liabilities Expenses 2012 £’000 – – 13 2011 £’000 7 1 12 Following the disposal of its interest in Jandale Holdings Pty Ltd in 2012, the Group has no contingent liabilities or any capital commitments under this joint venture (2011: nil). 20 Trade and other receivables Current Prepayments and accrued income Royalty receivables Other receivables Provision for non-recovery of interest receivable 2012 2011 Group £’000 136 1,219 603 – 1,958 Company £’000 123 – 169 – 292 Group £’000 158 10,111 2,738 (709) 12,298 Company £’000 146 – 2,485 (709) 1,922 Trade and other receivables principally comprise amounts relating to royalties receivable for the final quarter in each year. The Directors consider that the carrying amount of trade and other receivables is approximately their fair value. Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 65 Non–current Other receivables Amounts due from subsidiaries 2012 2011 Company £’000 Group £’000 Company £’000 – 13,581 13,581 – – – – 9,038 9,038 Group £’000 3,141 – 3,141 On August 13, 2013, the Group provided Laramide Resources Ltd with an interest bearing facility of C$5 million, which is repayable in December 2015. In return Laramide Resources Ltd granted Anglo Pacific an option to acquire a 5% gross revenue royalty for an exercise price of US$15 million. The facility bears interest at a rate of 7% per annum payable quarterly in arrears. Amounts due from subsidiaries, are considered long term loans. The Directors consider that the carrying amount of amounts due from subsidiaries is approximately their fair value. 21 Cash and cash equivalents Cash and cash equivalents include the following for the purposes of the statement of cash flows: Cash at bank and on hand Trading deposits with brokers Cash and cash equivalents 22 Deferred tax The movement in the year in the Group’s net deferred tax position was as follows: 2012 2011 Group £’000 23,083 953 24,036 Company £’000 40,206 951 41,157 Group £’000 31,116 1,081 32,197 Company £’000 42,595 1,077 43,672 At 1 January (restated – note 2.1.3) Released to income for the year (Credit)/Charge to equity for the year Foreign currency translation At 31 December 2012 2011 2010 Group £’000 54,240 (1,754) (2,710) (1,244) 48,532 Company £’000 4,401 (894) (5,307) – (1,800) Group £’000 59,824 321 (6,155) 250 54,240 Company £’000 9,479 - (5,078) - 4,401 Group £’000 46,459 760 4,353 8,252 59,824 Company £’000 3,189 - 6,290 - 9,479 A c c o u n t s 66 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 The following are the major deferred tax liabilities/(assets) recognised by the Group and the movements thereon during the period: Group Coal royalties Available-for-sale investments At January 1, 2010 (restated - note 2.1.3) Released to income for the year (note 11) (Credit)/Charge to equity for the year Foreign currency translation At December 31, 2010 (restated - note 2.1.3) Released to income for the year (note 11) (Credit)/Charge to equity for the year Foreign currency translation At December 31, 2011 (restated - note 2.1.3) Released to income for the year (note 11) Charge/(Credit) to equity for the year Foreign currency translation At December 31, 2012 Revaluation of coal royalty £’000 Effects of tax losses £’000 Revaluation of royalty instruments £’000 Revaluation of mining interests £’000 Accrual of royalty receivable £’000 44,456 – (2,241) 8,062 50,277 – (1,244) 239 49,272 – 2,802 (1,293) 50,781 (757) – (52) (136) (945) – 225 (4) (724) – 101 19 (604) 2,665 – 2,230 – 4,895 – 2 – 4,897 – (939) – 3,958 410 – 4,416 23 4,849 – (5,138) (13) (302) (893) (4,674) 57 (5,812) (315) 760 – 303 748 321 – 28 1,097 (861) – (27) 209 Total £’000 46,459 760 4,353 8,252 59,824 321 (6,155) 250 54,240 (1,754) (2,710) (1,244) 48,532 This provision represents the Group’s full potential liability to deferred taxation. This may be reduced by tax losses available to the Group. Australian capital losses are disclosed in note 15. Temporary differences arising in connection with interests in associates and joint ventures are insignificant. The following are the major deferred tax liabilities recognised by the Company and the movements thereon during the period: Company Available-for-sale investments At January 1, 2011 Charge to equity for the year At December 31, 2011 Released to income for the year Charge to equity for the year At December 31, 2012 23 Trade and other payables Other taxation and social security payable Trade payables Other payables Accruals and deferred income Revaluation of royalty instruments £’000 4,895 2 4,897 – (939) 3,958 Revaluation of mining interests £’000 4,584 (5,080) (496) (894) (4,368) (5,758) 2012 2011 Group £’000 121 106 1,724 220 2,171 Company £’000 117 103 291 210 721 Group £’000 302 100 6,427 67 6,896 Company £’000 301 90 245 58 694 Total £’000 9,479 (5,078) 4,401 (894) (5,307) (1,800) 2010 Group £’000 364 131 5,801 174 6,470 Trade and other payables principally comprise amounts outstanding for other taxation, investment purchases and ongoing costs. The liability arising from the overpayment of royalties identified by the Queensland Office of State Revenue as discussed in note 2.1.3 has been included in other payables. The average credit period taken for trade purchases is 22 days (2011: 33 days). The Directors consider that the carrying amount of trade and other payables is approximately their fair value. All amounts are considered short term and none are past due. Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 67 24 Share capital and share premium Group and Company At January 1, 2011 Issue of share capital under share-based payment At December 31, 2011 Issue of share capital under share-based payment At December 31, 2012 Number of shares 108,771,332 417,883 109,189,215 416,161 109,605,376 Share capital £’000 2,175 9 2,184 8 2,192 Share premium £’000 24,207 1,332 25,539 1,314 26,853 Total £’000 26,382 1,341 27,723 1,322 29,045 25 Share based payments Following the approval at the 2010 Annual General Meeting, the Group operates two equity-settled share based compensation plans as follows: • The HMRC approved Company Share Ownership Plan (the “CSOP”); and • The Joint Share Ownership Plan (the “JSOP”) operated through the Anglo Pacific Group Employee Benefit Trust. (a) Company Share Ownership Plan Under the CSOP, share options are granted to directors and to selected employees. The exercise price of the granted options is equal to the average mid market closing price of an ordinary share for the three days before the grant. The options are conditional on the employee completing three years’ service (the vesting period). The options are exercisable starting three years from the grant date, subject to the Group achieving its target growth in absolute total shareholder return over the period of 3% per annum (not compounded) in excess of the UK Retail Price Index; the options have a contractual option term of ten years. The Group has no legal or constructive obligation to repurchase or settle the options in cash. Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: Outstanding at 1 January Granted during the year Exercised during the year Surrendered during the year Forfeited during the year Outstanding at 31 December 2012 2011 Weighted average exercise price (£) 2.6681 2.9446 – – 2.9535 2.7406 Options 67,463 20,375 – – (10,157) 77,681 Weighted average exercise price (£) 2.4950 3.0981 – – 2.4950 2.6681 A c c o u n t s Options 60,120 19,367 – – (12,024) 67,463 Out of the 77,681 outstanding options (2011: 67,463), nil options (2011: nil) were exercisable. Share options outstanding at the end of the year have the following expiry date and exercise prices: Expiry date 2019 2021 2021 2022 2022 Exercise price in £ per share 2.4950 3.2570 2.9535 3.2860 2.6675 Shares 2012 48,096 9,210 – 9,129 11,246 77,681 2011 48,096 9,210 10,157 – – 67,463 68 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 The weighted average fair value of options granted during the period determined using the Black-Scholes valuation model was £1.649 per option granted in March 2012 and £1.318 per option granted in September 2012 (March 2011: £1.741 and September 2011: £1.482). The significant inputs into the model were weighted average share price of £3.286 and £2.668 (March 2011: £3.257 and September 2011: £2.953) at the grant date in March and September 2012 respectively, exercise price shown above, volatility of 40% (2011: 40%), expected option life of three years (2011: three years) and an annual risk-free interest rate of 1.1% and 0.8% for the options granted in March and September 2012 respectively (March 2011: 2.3% and September 2011: 1.1%). See note 8a for the total expense recognised in the income statement for share options granted to directors and employees. (b) Joint Share Ownership Plan Under the JSOP, the Remuneration Committee invites selected directors and employees to enter into an agreement with the Anglo Pacific Group Employee Benefit Trust (the ‘Co-owner’) to acquire a number of ordinary shares in the capital of the Company. The shares are held in the name of the Co-owner, however, the selected directors and employees maintain a beneficial interest in these shares. Awards under the JSOP are conditional on the employee completing three years’ service (the vesting period) and the Group’s absolute total shareholder return growing at an annual rate (not compounded) of 3% in excess of the UK Retail Price Index over the three year vesting period. In addition the Company’s share price must reach a hurdle price during the three year vesting period as determined by the Remuneration Committee at the time of making the award. Upon satisfying the performance targets and service requirements, the beneficial interest conferred will entitle the director or employee to receive a proportion of the proceeds of sale of the ordinary shares. Their entitlement will be to receive the equivalent of all sales proceeds in excess of the threshold amount, settled in ordinary shares of the Company. The threshold amount is fixed by the Remuneration Committee and will not be set less than the market value of the ordinary shares of the Company at the time the JSOP award is made. JSOP awards made during the year were as follows: Outstanding at 1 January Awarded in March 2011 Awarded in September 2011 Awarded in March 2012 Awarded in September 2012 Surrendered during the year Outstanding at 31 December Grant price in £ per share Hurdle price in £ per share 2.480 3.260 2.919 3.320 2.668 3.150 4.225 4.625 4.500 3.692 Shares 2010 Expiry Date 2014 2015 2015 2016 2016 508,050 356,208 61,675 – – (247,187) 678,746 2012 678,746 – – 205,420 71,227 (88,783) 866,610 The weighted average fair value of shares awarded during the period determined using the Monte Carlo valuation model was £0.75 per share granted in March 2012 and £0.57 per share granted in September 2012 (March 2011: £0.79 and September 2011: £0.55). The significant inputs into the model were weighted average share price of £3.32 and £2.67 (March 2011: £3.26 and September 2011: £2.87) at the grant date in March and September 2012 respectively, share price hurdle shown above, volatility of 40% (2011: 40%), expected option life of four years and an annual risk-free interest rate of 1.1% and 0.8% for the shares granted in March and September 2012 (March 2011: 2.3% and September 2011: 1.1%). See note 8a for the total expense recognised in the income statement for share options granted to directors and employees. 26 Special reserve As part of the capital reduction in 2002, a special reserve was created, which represents the level of profit attributable to the Group for the period ended June 30, 2002. At December 31, 2011, this reserve remains unavailable for distribution. At January 1, 2012 and December 31, 2012 Group £’000 632 Company £’000 632 69 A c c o u n t s Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 27 Retained earnings Balance at January 1, 2011 (restated) Surrender of options from share-based payment Dividends paid Profit for the financial year (restated) Balance at December 31, 2011 (restated) Surrender of options from share-based payment Dividends paid Profit for the financial year Balance at December 31, 2012 Group £’000 135,864 19 (8,978) 36,280 163,185 5 (10,579) 10,057 162,668 Company £’000 117,254 19 (8,978) 37,005 145,300 5 (10,579) 3,135 137,861 28 Financial commitments Operating leases The Group’s most significant operating lease commitments relate to premises maintained in both London, England and Shetland, Scotland. At the balance sheet date, the Group had outstanding commitments under non-cancellable operating leases. The total commitments due under these leases are shown according to the scheduled expiry dates of the leases as follows: Group Within one year In the second to fifth years inclusive After five years 2012 £’000 168 218 171 557 2011 £’000 168 436 125 729 The annual commitments for leases expiring after five years total £50,000 per annum. Capital commitments At the year end the Group had capital commitments of £nil (2011: £nil) in respect of purchases of quoted investments. The Group’s share of capital commitments of joint ventures at the balance sheet date amounted to £nil (2011: £nil). Subsidiary undertakings have commitments as detailed below: Shetland Talc Limited A bond was granted to Shetland Islands Council for £10,000 in respect of the installation of a Talc processing plant at Broonies Taing, Sandwick and the extraction of talc magnesite rock at Catpund, Cunningsburgh. 29 Related party transactions During the year, Group companies entered into the following transactions with subsidiaries: Funding transactions Management fee Amounts owed by related parties at year end All transactions were made in the course of funding the Group’s continuing activities. Subsidiaries 2012 £’000 (1,199) 2,176 13,581 2011 £’000 51,984 2,384 9,039 70 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 Remuneration of key management personnel The remuneration of the key management personnel including directors of the Group is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Further information about the remuneration of individual directors is provided in the audited part of the Directors’ Remuneration Report on pages 28 to 31. Short–term employee benefits Post–employment benefits Share based payment Directors’ transactions During the year, the Group entered into the following related party transactions: Allenbridge Group Plc JW Technologies 2012 £’000 841 22 120 983 2012 – – – 2011 £’000 1,384 44 104 1,532 2011 2,489 1,130 3,619 The payments to Allenbridge Group Plc, a company in which Mr A.H. Yadgaroff, a non-executive director, is both a director and shareholder, were for the provision of office support services. The payments to JW Technologies, a company in which Dr J.G. Whellock, a non-executive director, is both a director and shareholder, were for the provision of consulting services. As at December 31, 2012 a total of £nil was owing to both Allenbridge Group Plc and JW Technologies (2011: £nil). During the year the Directors received dividends as ordinary shareholders of the Company in cash or scrip totalling: P.M. Boycott A.C. Orchard M.J. Tack1 J. Theobald B.M. Wides M.H. Atkinson W.M. Blyth2 P.N.R. Cooke3 J.G. Whellock4 A.H. Yadgaroff 2012 263,102 10,731 – 3,935 285,300 724 – – 1,276 16,788 581,856 2011 246,164 9,105 10,520 3,378 264,817 355 – – 1,184 14,875 550,398 1 Mr M.J. Tack resigned as a director on September 23, 2011. 2 Mr W.M. Blyth was appointed as a director on March 20, 2013. 3 Mr P.N.R. Cooke was appointed as a director on December 10, 2012. 4 Dr J.G. Whellock, being a resident of the United States of America, is unable to receive scrip, as such all dividends were received in cash. 30 Events occurring after year end On February 8, 2013, an investee company in which the Group holds both secured and unsecured mining and exploration interests filed for protection under a corporate reconstruction based on a shortage of liquidity. As at December 31, 2012, the Group’s mark to market losses on the unsecured interest was £3.7million. In light of the investee company’s filing on February 8, 2013, management consider the fall in the market value of the investee company at December 31, 2012 to be impaired and have recognised these losses through “other losses” in the income statement. The Group considered that there was sufficient recourse attached to the secured interest and as such, no impairment was considered necessary as at December 31, 2012. Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Notes to the consolidated financial statements for the year ended December 31, 2012 On March 15, 2013, the Group made its first advance of US$5million in relation to royalty financing agreement, entered into with Hummingbird Resources Plc in December 2012. 31 Principal subsidiaries Starmont Holdings Pty Ltd Indian Ocean Resources Ltd Alkormy Pty Ltd Argo Royalties Pty Ltd Starmont Ventures Pty Ltd Gordon Resources Ltd APG Aus No 1 Pty Ltd APG Aus No 2 Pty Ltd APG Aus No 3 Pty Ltd APG Aus No 4 Pty Ltd APG Aus No 5 Pty Ltd APG Aus No 6 Pty Ltd Anglo Pacific Finance Ltd Country of registration and operation Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Ireland Principal activity Intermediate holding company Investments Investments Investments Investments Owner of coal royalty Investments Investments Investments Investments Investments Investments Treasury Anglo Pacific Group Employee Benefit Trust Guernsey Administering Group incentive plans Centaurus Royalties Ltd Southern Cross Royalties Ltd Shetland Talc Ltd Advance Royalty Corporation Panorama Coal Corporation Trefi Coal Corporation Polaris Royalty Corporation Albany River Royalty Corporation †Denotes held by a subsidiary company England Owner of iron ore royalties England Owner of iron ore and uranium royalties Scotland Canada Canada Canada Canada Canada Mineral exploration Owner of uranium royalties Owner of coal tenures Owner of coal tenures Intermediate holding company Owner of chromite royalty Proportion of shares held at December 31, 2012 100% 100%† 100%† 100%† 100%† 100%† 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%† 100% 100% 100%† 100%† 71 A c c o u n t s 72 Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts Accounts Shareholder statistics (a) Size of Holding (at March 20, 2013) Category UK and Canada 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – and over Number of Shareholders 752 1,019 219 412 2,402 % 31.31 42.42 9.12 17.15 100.00 Number of Shares 411,998 2,502,369 1,627,252 105,063,757 109,605,376 % 0.38 2.28 1.48 95.86 100.00 (b) The percentage of total shares held by or on behalf of the twenty largest shareholders as at March 20, 2013 was 53.00%. Anglo Pacific Group Plc Annual Report and Accounts 2012 73 Directors Executive P.M. Boycott (Executive Director) A.C. Orchard (Chief Investment Officer) J. Theobald (Chief Executive Officer) B.M. Wides (Acting Chairman) Non-Executive M.H. Atkinson (Senior Independent Director) W.M. Blyth P.N.R. Cooke J.G. Whellock A.H. Yadgaroff Secretary P.T.J. Mason Head office 17 Hill Street, London W1J 5LJ Registered office 17 Hill Street, London W1J 5LJ Registered in England No. 897608 Auditors Grant Thornton UK LLP Grant Thornton House, Melton Street, London NW1 2EP Bankers Barclays Bank PLC Business Banking Larger Business 27th Floor Churchill Place London E14 5HP Registrars Equiniti Registrars Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA Transfer Agent Equity Transfer & Trust Company Suite 400 200 University Avenue Toronto Ontario M5H 4H1 Stockbrokers Liberum Capital Limited Ropemaker Place 12th Floor 25 Ropemaker Street London EC2Y 9LY Listings London Stock Exchange Full Listing Symbol APF Toronto Stock Exchange Secondary Listing Symbol APY Website www.anglopacificgroup.com This annual report has been printed on Chromomat paper and board. It has 15% recycled content and is made up of 100% ECF virgin wood fibre. It is independently certified in accordance with the FSC (Forest Stewardship Council). The paper is manufactured at a mill that is certified to ISO 14001 environmental management standards. All the pulp is bleached using an elemental chlorine free (ECF) process and inks used are all vegetable oil based. Design by straightedge.co.uk Anglo Pacific Group Plc Annual Report and Accounts 2012 Accounts 74 A c c o u n t s Anglo Pacific Group Plc 17 Hill Street, Mayfair London W1J 5LJ United Kingdom T +44 (0) 20 3435 7400 F +44 (0) 20 7629 0370 info@anglopacificgroup.com www.anglopacificgroup.com 

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