Annual Report 2020 1 2020 Australian Strategic Materials Annual Report Competent Persons Previously reported information The Mineral Resources and Ore Reserves Statement as a whole has been approved by Mr D Ian Chalmers, FAusIMM, FAIG, (Director – Technical of the Company), who has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2012 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’. Mr Chalmers has provided his prior written consent to the inclusion in this report of the Mineral Resources and Ore Reserves Statement in the form and context in which it appears. The information in this report that relates to the Dubbo Project Mineral Resource estimates is based on, and fairly represents, information which has been compiled by Mr Stuart Hutchin, MIAG, and an employee of Mining One Pty Ltd. Mr Hutchin has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the activity that is being undertaken to qualify as a Competent Person as defined in the 2012 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’. The information in this report that relates to the Dubbo Project Ore Reserve estimate is based on, and fairly represents, information which has been compiled by Mr Ievan Ludjio MAusIMM(CP) and Mr Mark Van Leuven FAusIMM (CP), employees of Mining One Pty Ltd. Mr Ludjio and Mr Leuven have sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the activity that is being undertaken to qualify as a Competent Person as defined in the 2012 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’. The information in this report that relates to previously is extracted from the reported exploration results Company’s ASX announcements noted in the text of the announcement and are available to view on the Company’s website. The Company confirms that it is not aware of any new information or data that materially affects the information included in the original announcements and that the form and context in which the Competent Person’s findings are presented have not been materially altered. Disclaimer This report contains certain forward-looking statements and forecasts, including possible or assumed reserves and resources, production levels and rates, costs, prices, future performance or potential growth of Australian Strategic Materials Ltd, industry growth or other trend projections. Such statements are not a guarantee of future performance and involve unknown risks and uncertainties, as well as other factors which are beyond the control of Australian Strategic Materials Ltd. Actual results and developments may differ materially from those expressed or implied by these forward-looking statements depending on a variety of factors. Nothing in this report should be construed as either an offer to sell or a solicitation of an offer to buy or sell securities. This document has been prepared in accordance with the requirements of Australian securities laws, which may differ from the requirements of United States and other country securities laws. Unless otherwise indicated, all Ore Reserve and Mineral Resource estimates included or incorporated by reference in this document have been, and will be, prepared in accordance with the JORC classification system of the Australasian Institute of Mining, and Metallurgy and Australian Institute of Geosciences. 2020 Australian Strategic Materials Annual Report 2 2 2020 Australian Strategic Materials Annual Report Contents Business Review Chairman’s Message Company Projects Sustainability Financial Report Directors’ Report Auditor’s Independence Declaration Consolidated Financial Statements Notes to the Consolidated Financial Statements Directors’ Declaration Independent Auditor’s Report Additional Information Shareholder information Corporate Governance Statement Schedule of mining tenements 4 5 7 10 13 15 16 28 31 35 61 62 67 67 69 69 Company information ACN 168 368 401 Directors I J Gandel (Non-Executive Chairman) D G Woodall (Managing Director) N P Earner (Non-Executive Director) D I Chalmers (Non-Executive Director) G M Smith (Non-Executive Director) Joint Company Secretaries D Wilkins J Carter Registered office and principal place of business Ground Floor, 89 Burswood Road, Burswood WA 6100 T: 61 8 9227 5677 | F: 61 8 9227 8178 Share registry Advanced Share Registry Limited 110 Stirling Highway, Nedlands WA 6009 T: 61 8 9389 8033 | F: 61 8 9262 3723 Auditor PricewaterhouseCoopers Brookfield Place, 125 St Georges Terrace, Perth WA 6000 Securities exchange listing Australian Securities Exchange (Perth) Australian Strategic Materials Ltd shares are quoted on the Australian Securities Exchange (ASX code: ASM). Australian Strategic Materials Ltd was admitted to the Official List of ASX on 29 July and first quoted on 30 July. Internet www.asm-au.com 3 2020 Australian Strategic Materials Annual Report Business Review 4 2020 Australian Strategic Materials Annual Report Business Review / Chairman’s Message Chairman’s Message It is with great pleasure I present the inaugural Annual Report for Australian Strategic Materials Ltd (ASM), which was admitted to the ASX on 29 July 2020 after demerging from Alkane Resources Ltd (Alkane). For the past two decades, the development of the polymetallic Dubbo Project has been progressed with ASM as a subsidiary of Alkane. ASM achieved a great deal under its former parent company, having developed the project to the point where it is ready for construction, pending financing. The Dubbo Project’s proven resource of rare earths, zirconium, niobium and hafnium will underpin ASM as an emerging integrated producer of critical materials for advanced and clean technologies. With Alkane transitioning towards a primary focus on gold, the time was right for ASM to move forward independently under the expert leadership of a new executive team. Alkane shareholders voted to demerge ASM at an Extraordinary General Meeting on 16 July 2020, with ASM first listed on the ASX on 29 July 2020. The outcome has been very successful, with an overall improvement of 20 per cent in value to shareholders within a month. A significant focus for the year was in preparing for the demerger, including the selection and appointment of experienced mining executive, David Woodall, as Managing Director. We are fortunate to have gained someone of David’s considerable expertise to lead ASM towards its vision of becoming an independent, integrated, net zero carbon, “mine to metal” business. His perspective and sharp focus on driving ASM to realise this vision is leading to new opportunities and partnerships. In the past year, the other main focus of your company has been the progression towards the commercialisation of a new low-emission metallisation technology in joint venture with the South Korean company, Ziron Tech. The pilot plant, commissioned in June this year, has already demonstrated its ability to produce high-purity titanium, neodymium and praseodymium metals with up to 70 per cent energy reduction over conventional processes. Following these successful trials, ASM has now entered into a binding heads of agreement (HOA) to acquire 95 per cent of Ziron Tech, including the pilot plant and all of Ziron Tech’s patents and related intellectual property. This technology will create value for shareholders by enabling ASM to transform Dubbo Project oxides and concentrates into high-purity metals without the need for third- party processing. It also provides an opportunity to expand our business into the production of titanium metal and associated alloys. 5 2020 Australian Strategic Materials Annual Report Business Review / Chairman’s Message ASM is to acquire 95% of Ziron Tech; Managing Director David Woodall (right) with Ziron Tech’s Professor Jonghyeon Lee. In the coming year, we intend to renew our focus on securing financing to progress development of the Dubbo Project. We believe the incorporation of critical metals production into ASM’s business model will help attract one or more strategic partners to join Export Finance Australia (EFA), which has confirmed it would be pleased to be part of the financing consortium. We are also excited about our plans for a zero net carbon business. Along with our game- changing low-emission metallisation technology, we are investigating renewable energy and carbon sequestration opportunities to offset Dubbo Project plant emissions. The ASM team also continues to identify new technologies that can be leveraged to make the Dubbo Project minerals separation process more efficient – designed to improve capex and opex, as well as its carbon footprint. It has undoubtedly been a landmark year for ASM. The coming year, our first as an independently listed company, promises to be just as momentous. I am delighted to be working with our energetic Managing Director, David Woodall, and extend my sincere thanks to the teams at ASM and Alkane, our key partners in South Korea, our other strategic partners and consultants, along with our many shareholders and stakeholders for their ongoing support. I am personally looking forward to a very exciting year ahead! Ian Gandel Chairman Australian Strategic Materials Ltd 6 2020 Australian Strategic Materials Annual Report Business Review / Company Company ASM aims to become the world’s first integrated “mine to metal” producer of value-added critical materials for advanced technologies, by developing the Dubbo Project and establishing a clean metals business using an innovative new metals processing technology. About ASM Australian Strategic Materials Ltd (ASM) is an emerging integrated materials company that listed on the Australian Securities Exchange (ASX:ASM) on 30 July 2020, after demerging from Alkane Resources Ltd. The Company intends to become a “mine to metal” producer of value-added metals, oxides and materials that are critical to a diverse range of advanced and clean technologies. The foundation of ASM’s integrated materials business is its Dubbo Project, which has a proven, large in-ground resource of rare earths, zirconium, niobium and hafnium. The project is located 400 kilometres northwest of Sydney in Central Western New South Wales, Australia. On securing financing, ASM will commence construction of the Dubbo Project, for which all major approvals are in place. This will include an advanced materials processing facility that produces a suite of high- value downstream rare earth (both light and heavy), zirconium and hafnium materials, as well as ferro-niobium. ASM also intends to construct a clean metals business based on a new metallisation technology that creates metals from oxides using less energy than conventional methods. The Company is advancing this patented technology in partnership with South Korea’s Zirconium Technology Corporation (Ziron Tech). In September 2020, ASM entered into a binding heads of agreement to acquire 95 per cent of Ziron Tech. A clean metals facility based on this process will permit ASM to produce high-purity metals to customer specifications – linking ASM directly into the mine to metal value chain. As an integrated materials business, not requiring further treatment of its products via a third party, ASM is positioned to become an alternative, stable and secure source of these critical materials to meet escalating demand and decrease supply chain risks to Australian and global markets. Demerger from Alkane For the entirety of the 2020 financial year, ASM was a wholly owned subsidiary of Alkane Resources Ltd (ASX:ALK), which founded ASM in 2000 as the project holding company for the Dubbo Project. After extensive regulator consultation and implementation planning, the Alkane Board committed to the demerger and separate listing of ASM on 20 May 2020. Alkane shareholders voted to demerge at an Extraordinary General Meeting on 16 July 2020. The Company was admitted to the ASX on 29 July and first quoted on 30 July 2020 (ASX:ASM). Managing Director ASM appointed experienced mining executive David Woodall as Managing Director on 10 February 2020. 7 2020 Australian Strategic Materials Annual Report Business Review / Company Vision To be an independent, integrated “mine to metal” business supporting advanced and clean technologies manufacturing, and: • A sustainable producer of key critical metals of all products from the Dubbo Project; • Recognised as an environmentally and socially stable, secure and alternative “mine to customer” supplier of clean metals; and • An integrated carbon neutral business with minimal environmental impact. Critical materials for advanced technologies The key products that will be produced from the Dubbo Project – comprising rare earth, zirconium, niobium and hafnium materials – are all essential for new and emerging technologies that are smaller, lighter and faster. Most of these technologies would not be feasible without the efficiencies imparted by these critical materials to the final products in which they are used. Many applications are high-volume growth industries driven by converging megatrends: • Clean energy and manufacturing with reduced emissions • Clean and efficient transportation by land, sea and air • High-tech and medical products • Aerospace and manufacturing, including 3D printing of metal alloys In November 2019, the Australian Government announced new financial measures to help build the critical minerals sector, recognising the strategic importance of materials such as those to be produced by ASM. In addition to many energy and technology applications, these materials are essential for global security and defence technologies. Currently, there is a lack of supply diversity for these critical materials. Approximately 75 per cent of the world’s zirconium products and 85 per cent of high-value rare earths used in permanent magnet production (neodymium, praseodymium and dysprosium) are produced by China. Supply of hafnium, meanwhile, is limited in volume and highly dependent on a few manufacturers in the nuclear industry. Over 90 per cent of the world supply of niobium is produced in Brazil. Increased trade tensions, a nationalist focus on domestic economies and the unfortunate spread of the COVID-19 virus worldwide further highlighted weaknesses in supply chains for a multitude of products and services, including critical materials, with both production and freight disrupted. As an Australian business founded on a resource with a life of greater than 75 years, ASM represents a secure and alternative supplier of value-added clean metals and oxides, offering sustainable supply chain diversity. ASM is focused on establishing strategic offtake agreements directly with end-users to provide an integrated “mine to customer” value chain solution, with the delivery of value-added materials to customer specification. 8 2020 Australian Strategic Materials Annual Report Business Review / Company Market Conditions Niobium ASM intends to produce ferro-niobium via a joint venture with Treibacher Industrie AG (TIAG). The global steel industry is the main driver for niobium consumption, where 90 per cent of all niobium is used as ferro-niobium for high strength low alloy (HSLA) steels for the construction and automotive sectors. The market is dominated by Brazil’s Companhia Brasileira de Metalurgia e Mineração (CBMM), with approximately 85 per cent of ferro- niobium supply. The niobium market has historically been stable, but the price in recent years has been affected by fluctuations in the vanadium price, and drifted lower to finish the year at US$37/kg. (source: Asian Metal) Hafnium Current global supply of hafnium is limited to approximately 70tpa and lies in the hands of a few companies producing nuclear-grade zirconium metal. Prices for hafnium metal (max 1% Zr) remained relatively flat across the year due to limited supply, despite a downturn in aerospace markets. ASM intends to produce hafnium according to market demand. Rare Earths Rare earth permanent magnets (REPM) are the main driver for the global rare earths industry at present, accounting for 30 per cent of the market by volume – but 80 per cent by value. The market for magnet rare earths materials (neodymium, praseodymium, samarium, dysprosium and terbium) initially remained flat or slightly lower. The price for praseodymium/neodymium metal recovered towards the end of the financial year at US$50/kg, and has continued higher. The price of dysprosium metal fluctuated, and finished the year at around US$350/kg, while terbium metal increased to US$780/kg due to restricted supply, and has now increased further. ASM will produce a suite of separated rare earth oxides and metals (including neodymium, praseodymium, terbium and dysprosium). (source: Asian Metal) Zirconium Market prices for zirconium products were under pressure for most of the 2020 financial year, drifting lower due to reduced demand along supply chains worldwide. Prices for zirconium oxychloride, being the primary precursor for high-value downstream zirconium products, finished the year at around US$2,050/t FOB China. ASM will produce a range of high-purity, value-added zirconium metals and oxides, including low-hafnium zirconium metal. (source: Asian Metal) 2020 Australian Strategic Materials Annual Report 9 9 2020 Australian Strategic Materials Annual Report Business Review / Projects Projects ASM progressed further optimisation of the Dubbo Project and worked closely with the Company’s South Korean partner to successfully commission a commercial scale pilot plant of a new clean metallisation technology. Dubbo Project The Dubbo Project is a large in-ground polymetallic resource of rare earths, zirconium, niobium and hafnium. The project is wholly owned by ASM and located near the village of Toongi, 25 kilometres south of Dubbo in Central Western New South Wales. The Dubbo Project is fully approved and ready for construction, subject to financing. ASM owns 3,456 hectares of land at Toongi, encompassing the mineral deposit and land required for materials processing. All major state and federal approvals and licences are in place, along with an established process flowsheet and a solid business case. A substantial body of engineering and process development work has given ASM a high degree of confidence for project execution. In the reporting year, ASM embarked upon test work to integrate a flotation circuit into the front end of the process flow sheet, targeting reductions in capital and operating costs. The aim of this flotation circuit is to deliver an increased ore feed grade to the roast-leach and solvent extraction plant and make the process more efficient. The optimisation program is targeting a 1Mtpa comminution and flotation circuit, with a 0.5Mtpa leaching and solvent extraction plant. The completion of this study is expected by late 2020 or early 2021. Product development in the year mostly involved progressing commercialisation of a new metallisation technology via a joint venture with South Korea’s Zirconium Technology Corporation (Ziron Tech). This technology would be used in metal plants at strategic locations for producing metals from Dubbo Project products and is described in the next section of this report. ASM and its sales and marketing partners continued to engage with interested companies across the world at industry conferences and meetings regarding potential offtake agreements (with in-person events replaced by teleconferencing during the pandemic travel restrictions). Further approvals were obtained for product samples, and the positive outcomes of the metallisation activities created significant interest from a number of parties in South Korea and elsewhere. During the year, Australia’s Export Credit Agency, Export Finance Australia (EFA), confirmed it would be pleased to be part of the financing consortium for the development of the Dubbo Project (ASX announcement 5 March 2020). The Dubbo Project closely aligns to the Australian Government’s initiative to develop the “critical minerals” sector, announced in November 2019. EFA has provided a letter of support to strengthen ASM’s ongoing discussions with potential strategic investors, other government financiers and potential offtake parties. 10 2020 Australian Strategic Materials Annual Report Business Review / Projects Dubbo Project Mineral Resources and Ore Reserves As at 30 June 2020, the Mineral Resources and Ore Reserves for the Toongi deposit, which is the basis of the Dubbo Project, are the same as those stated at 30 June 2019 (Alkane Annual Report 2019). These estimates were provided by independent industry consultants Mining One Pty Ltd and are reported by ASM in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC 2012). Mineral Resources are wholly inclusive of Ore Reserves, which are based on economic parameters applied to the Mineral Resources, reflecting an initial project horizon of 20 years. Dubbo Project Mineral Resources (as at 30 June 2020) Resource Category Measured Inferred Total Tonnes (Mt) 42.81 32.37 75.18 ZrO2 (%) 1.89 1.90 1.89 HfO2 (%) 0.04 0.04 0.04 Nb2O5 (%) 0.45 0.44 0.44 Ta2O5 (%) 0.03 0.03 0.03 Y2O3 (%) 0.14 0.14 0.14 TREO* (%) 0.74 0.74 0.74 *TREO% is the sum of all rare earth oxides excluding ZrO2 , HfO2 , Nb2O3 , Ta2O5 , Y2O3 Dubbo Project Ore Reserves (as at 30 June 2020) Reserve Category Proved Total Tonnes (Mt) 18.90 18.90 ZrO2 (%) 1.85 1.85 HfO2 (%) 0.04 0.04 Nb2O5 (%) 0.440 0.440 Ta2O5 (%) 0.029 0.029 Y2O3 (%) 0.136 0.136 TREO* (%) 0.735 0.735 *TREO% is the sum of all rare earth oxides excluding ZrO2 , HfO2 , Nb2O3 , Ta2O5 , Y2O3 Governance and internal controls ASM has put governance arrangements and internal controls with respect to its estimates of Mineral Resources and Ore Reserves for the Dubbo Project, including: • oversight and approval of each annual statement by the Director – Technical; • establishment of internal procedures and controls to meet JORC Code 2012 compliance in all external reporting; • independent review of new and materially changed estimates; • annual reconciliation with internal planning to validate reserve estimates; and • Board approval of new and materially changed estimates. 11 2020 Australian Strategic Materials Annual Report Business Review / Projects Metallisation pilot plant In June 2019, ASM entered into a joint venture with South Korea’s Zirconium Technology Corporation (Ziron Tech) to progress the final stages of research and feasibility of a new clean metallisation technology developed by scientists at Chungnam National University (CNU) in Daejeon, South Korea. This involved the construction of a commercial scale pilot plant in Daejeon. The pilot plant was successfully commissioned in June 2020, after minor disruptions due to the global pandemic (Alkane ASX announcement 2 July 2020). The patented clean metallisation technology is a new process for producing high-purity metals from oxides. It has the potential to replace highly energy- intensive conventional processes, in wide use since the 1940s, with a more environmentally sustainable and cost-effective alternative. Shortly after commissioning, the pilot plant demonstrated the ability of the process to convert titanium oxide into a titanium alloy utilising up to 50 per cent less power than current industry methods (Alkane ASX announcement 28 July 2020). The plant also produced 7.6 kilograms of high- purity neodymium (99.8 per cent), which represents a higher purity than typically traded neodymium metal and validated the technology for rare earth metals (ASX announcement 30 July 2020). Work on the metal production of neodymium, praseodymium and zirconium will continue through the remainder of 2020. In September 2020, ASM entered into a binding heads of agreement to acquire 95 per cent of Ziron Tech, and will be in the position to commercialise the technology for Dubbo Project products and other metals, including titanium. 12 2020 Australian Strategic Materials Annual Report Business Review / Sustainability Sustainability ASM has embedded sustainability into every aspect of its activities, laying strong foundations for positive social, environmental and financial outcomes. The Company’s products from the Dubbo Project are essential for many advanced technologies that will help build a more sustainable future. Responsible mining and processing Since the conception of the Dubbo Project, ASM has invested in nature conservation, waste minimisation, energy efficiency, emissions reduction and, in the past year, clean metallisation technology. The Company has also expanded its vision to target a carbon-neutral operation in Australia. ASM’s partnership with Zirconium Technology Corporation (Ziron Tech) to progress feasibility of an innovative clean metallisation technology has demonstrated the technology’s ability to consume 50 per cent less power than current industry methods on a commercial scale. The reduction in energy consumption and carbon emissions promise a more environmentally friendly alternative to conventional processes. ASM also began investigating the potential for the Dubbo Project to be a true carbon-neutral operation through the establishment of large- scale renewable energy generation – such as solar and/or wind power. This would complement the power cogeneration plant that is already part of the plant’s design. Generated energy would be both used onsite and exported to the grid. The Company is also exploring the potential for carbon farming, managed by the Toongi Pastoral Company, to further offset the plant’s emissions under the Australian Government’s Emissions Reduction Fund. These initiatives will build on the sustainable elements already designed into the Dubbo Project. In the time since the project was approved in May 2015, the processing plant footprint has been reduced significantly and water usage has been halved by removing hundreds of hectares of evaporation ponds from the waste management system. 2020 Australian Strategic Materials Annual Report 13 13 2020 Australian Strategic Materials Annual Report Business Review / Sustainability Integrated agriculture and conservation ASM’s wholly-owned subsidiary, the Toongi Pastoral Company (TPC), manages the agricultural land, farm assets and biodiversity offset areas associated with the Dubbo Project – a total of approximately 3,500 hectares. This integrated approach to farming and conservation ensures effective and efficient land management. TPC manages the agricultural land (1,995Ha) as a mixed-agriculture enterprise (sheep and cattle, fodder, cereal and oil seed crops) overseen by an experienced Farm Manager. The latest farming technologies and practices are applied to ensure sustainable land management and improve water- holding capacity, biodiversity and productivity. In the 2020 financial year, TPC commenced planning to register as a carbon farming project under the Australian Government’s Emissions Reduction Fund (ERF). Under the ERF, measured increases of in-soil carbon content earn Australian carbon credit units (ACCU), with one ACCU earned for each tonne of carbon dioxide equivalent (tCO2-e) stored. Earned ACCUs could contribute to the carbon offsets for the Dubbo Project. TPC also manages the vital Dubbo Project biodiversity offset areas (1,021Ha), which are protected in perpetuity under a Conservation Property Vegetation Plan negotiated with Local Land Services. These areas are designated for the restoration and maintenance of native habitats, especially for species that are threatened and endangered. They include grassy white box woodlands, Wiradjuri cultural heritage sites and habitats for the Pink-tailed Worm-lizard, a vulnerable local species for which ASM is taking a leading role in conservation. To protect the Pink- tailed Worm-lizard populations, TPC has added 34 kilometres of fencing and oversees the conservation management plan. Another ongoing project is thinning White Cypress Pine to increase native grass cover and understory, improve biodiversity and harvest high-value oils from the white cypress pine trees. Community development ASM is an active and engaged member of the local community, particularly in the Dubbo Regional Council local government area in Central Western New South Wales, Australia. The Dubbo Project is centred on a unique ore body that will require a large and complex processing plant to unlock the value in the contained metals. This will establish a new manufacturing business in regional NSW, attracting engineers, metallurgists, chemists and tradespeople. It is likely many of these will move to Dubbo with their families as they establish a career with ASM. The facility will also provide many jobs for locals. ASM further supports community development through the establishment of permanent infrastructure, sponsorship of local events and organisations, provision of training and career opportunities, and the creation of local economic opportunities for service providers. The Company takes an active part on the Dubbo Project Community Consultative Committee and nurtures its community relationships through clear and regular communications about its activities. Products for a sustainable future ASM will supply rare earths and specialty metals that are essential for technologies that will reduce greenhouse emissions and promote sustainability across many sectors. These span a number of clean energy, transport and manufacturing applications – including permanent magnets for wind turbines and electric motors, multiple components of electric vehicles, alloys and ceramics for hydrogen fuel cells, efficient microprocessors and batteries, and robust, safe structures and that use less steel. 2020 Australian Strategic Materials Annual Report 14 14 2020 Australian Strategic Materials Annual Report Financial Report 15 2020 Australian Strategic Materials Annual Report Financial Report / Directors’ Report Directors’ Report The directors present their report, together with the financial statements, on the Consolidated Entity (referred to hereafter as the ‘Consolidated Entity’) consisting of Australian Strategic Materials Ltd (referred to hereafter as the ‘Company’ or ‘Parent entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2020. Australian Strategic Materials Ltd changed its name from Australian Zirconia Holdings Pty Ltd on 25 March 2020. Directors The following persons were directors of Australian Strategic Materials Ltd (ASM) during the whole of the financial year and up to the date of this report, unless otherwise stated: I J Gandel D G Woodall – appointed 12 February 2020 N P Earner D I Chalmers G M Smith A D Lethlean – resigned 28 July 2020 Principal activities The principal activities of the Consolidated Entity during the course of the year were mineral evaluation activities for the Dubbo Project, a large in-ground resource of zirconium, hafnium, niobium and rare earth elements. The Consolidated Entity’s subsidiaries, Australian Strategic Materials (Holdings) Limited (ASMH) continues to focus on mineral evaluation activities for the Dubbo Project and Toongi Pastoral Company Pty Ltd (TPC) continues to focus on managing the farm activities (breeding and grazing of sheep and cattle) and biodiversity offsets as part of the Dubbo Project activities. The Dubbo Project is development ready, subject to financing, with the mineral deposit and surrounding land acquired and all major state and federal approvals in place. Dividends There were no dividends paid, recommended or declared during the current or previous financial year. 16 2020 Australian Strategic Materials Annual Report Financial Report / Directors’ Report / Review of operations Review of operations The loss for the Consolidated Entity after providing for income tax amounted to $4,264,802 (30 June 2019: $3,247,582). The Dubbo Project remains construction ready, with the mineral deposit and surrounding land wholly owned, all material state and federal approvals in place, an established flowsheet and a solid business case. Alkane Resources Ltd’s (the Ultimate Parent Company) shareholders approved the demerger of the Consolidated Entity (ASM), with relevant resolutions tabled at the Extraordinary General Meeting (EGM) passed on 16 July 2020. ASM continues the execution of its integrated business plan for the Dubbo Project, which aims to deliver value-adding clean metals, and the optimisation of the June 2018 FEED Study, with flotation testwork currently being advanced with a view to inserting a flotation circuit to the Dubbo Project design, targeting lower overall capital and operating costs. During the year ASM’s investment in Rare Metals Resources Technology Corporation (RMR) completed the construction and commissioning of the commercial pilot plant in Daejeon, South Korea. The plant, designed to produce low-emission, high-purity metals, was completed on time and budget. Initially the RMR joint venture between ASM and Zirconium Technology Corporation (Ziron Tech) (a South Korean company) is focused on metal production of zirconium, titanium, and rare earths for permanent magnet alloys. The continued focus on product development has led to the execution of a binding agreement with Ziron Tech to fund the final stage of research and feasibility into a clean process for converting metal oxide, including Dubbo Project metals, to metals of a highly marketable purity. Several conditions precedent that remained outstanding at 30 June 2019 have since been satisfied, and the Joint Venture with RMR was established. The new technology should allow the Company to bypass traditional supply chains and sell products direct to the consumer. The commercial scale pilot plant was constructed and will commence production in the third quarter of 2020. Ziron Tech has received funding for the development of a low-emission, high-purity metal refining technology that can be applied to zirconium, titanium, and rare earths for permanent magnet alloys. This development is occurring in joint venture with ASM who has the exclusive rights to the commercialisation of the technology worldwide. The technology is intended to replace conventional energy-intensive metallisation processes with a more environmentally friendly, sustainable and cost-effective alternative. Chinese authorities continue their war on pollution, with smaller operations being forced to upgrade facilities or close down. This extends to the rare earths industry in China, which has been consolidated in recent years, and to ionic clay mining and processing in southern provinces which has been largely eliminated. However, the unsustainable discharge of rare earths residues from China’s Baotou operations in Inner Mongolia appears to be overlooked by authorities and western companies keen to portray an image of responsible and sustainable sourcing. China’s zirconium chemicals industry faces similar issues, where radioactive waste streams and residues contain uranium and thorium extracted from zircon raw materials. On top of this is the chronic shortage of water in northern China, affecting both rare earths and zirconium production. Risks for supply disruption of rare earths and zirconium products continue to grow, with few alternatives outside China at this time. Market prices for zirconium and rare earths remained flat or slightly lower at time of finalising the accounts, with some small companies reducing prices to reduce stocks. Zircon prices remained weak on the back of slow demand in China, while niobium and hafnium prices remained stable. 17 2020 Australian Strategic Materials Annual Report Financial Report / Directors’ Report / Significant changes in the state of affairs Significant changes in the state of affairs In June 2019 the Company executed a binding agreement with Ziron Tech to fund the final stage of research and feasibility into a clean process for converting metal oxide, including Dubbo Project metals, to metals of a highly marketable purity. Several conditions precedent that remained outstanding at 30 June 2019 were satisfied in July 2019, and an investment of US$1.2m has been made for the final stage of research which will include construction of a commercial scale equipment unit for testing. In early 2020 with the outbreak of Coronavirus Disease 2019 (“COVID-19” or “the coronavirus”) unprecedented measures put in place by the Australian Government, as well as governments across the globe, to contain the coronavirus have had a significant impact on the economy. Management continues to consider the potential implications of coronavirus, which may include delaying the construction and commissioning of the pilot modification plant for the Dubbo Project, and other Dubbo Project optimisation work in progress focused on further improving the project economics. As at the date these financial statements were authorised, Management was not aware of any material adverse effects on the financial statements as a result of the coronavirus. There were no other significant changes in the state of affairs of the Consolidated Entity during the financial year. Matters subsequent to the end of the financial year On 16 July 2020, Alkane Resources Ltd’s shareholders voted for the demerger of its critical materials business and assets (the ASM Business) from the remainder of Alkane Resource Ltd’s business at the Extraordinary General Meeting. The Consolidated Entity was demerged with its cash reserves and no bank debt. All interests in the Dubbo Project and associated assets (including land and water rights), together with the Company’s investment in South Korean metals technology company Rare Metals Resources Technology Corporation, will be owned by the Consolidated Entity following the demerger. The Consolidated Entity will have a focused Board and management team, a strategy to pursue the advancement of the “Clean Metal” metallisation technology, potential value-enhancing opportunities in relation to the Dubbo Project and will continue to be involved in off-take and financing discussions, including those already underway in relation to the Dubbo Project. Australian Strategic Materials Ltd was admitted to the Official List of Australian Securities Exchange on 29 July 2020. On 17 July 2020, the Ultimate Parent Company, Alkane Resources Ltd, and Australian Strategic Materials Ltd entered into a restructure deed as part of the demerger to capitalise $113,000,000 and forgive $4,730,991 of the related party loans to Australian Strategic Materials Ltd. No other matter or circumstance has arisen since 30 June 2020 that has significantly affected, or may significantly affect the Consolidated Entity’s operations, the results of those operations, or the Consolidated Entity’s state of affairs in future financial years. 18 2020 Australian Strategic Materials Annual Report Financial Report / Directors’ Report / Likely development and expected results of operations Likely developments and expected results of operations The demerger of the Consolidated Entity was approved by shareholders on 16 July 2020. The Consolidated Entity continues the execution of its integrated business plan for the Dubbo Project, which aims to deliver value-adding clean metals, and the optimisation of the June 2018 FEED Study, with flotation testwork currently being advanced with a view to inserting a flotation circuit to the Dubbo Project design, targeting lower overall capital and operating costs. The Consolidated Entity intends to continue evaluation activities in relation to the Dubbo Project in line with details provided in the Review of Operations. Environmental regulation The Consolidated Entity is subject to significant environmental regulation in respect of its exploration and evaluation activities. The Consolidated Entity aspires to the highest standards of environmental management and insists its entire staff and contractors maintain that standard. A significant environmental incident is considered to be one that causes a major impact or impacts to land biodiversity, ecosystem services, water resources or air, with effects lasting greater than one year. There were no significant environmental incidents reported at any of the Consolidated Entity’s operations. Information on directors Ian Jeffrey Gandel – Non-Executive Chairman LLB, BEc, FCPA, FAICD Appointed Non-Executive Chairman 18 March 2014. Mr Gandel is a successful Melbourne-based businessman with extensive experience in retail management and retail property. He has been a director of the Gandel Retail Trust and has had an involvement in the construction and leasing of Gandel shopping centres. He has previously been involved in the Priceline retail chain and the CEO chain of serviced offices. Mr Gandel has been an investor in the mining industry since 1994. Mr Gandel is currently a substantial holder in a number of publicly listed Australian companies and, through his private investment vehicles, now holds and explores tenements in his own right in Western Australia. Mr Gandel is currently Non-Executive Chairman of Alliance Resources Ltd (appointed as a director on 15 October 2003 and in June 2016 was appointed Non-Executive Chairman). He is also the Non-Executive Chairman of Octagonal Resources Ltd (appointed 10 November 2010). (This company sought delisting from the ASX in February 2016 and converted to Pty Ltd status in April 2016). Mr Gandel is Non-Executive Chairman of Alkane Resources Ltd. 19 2020 Australian Strategic Materials Annual Report Financial Report / Directors’ Report / Information on directors David Graham Woodall – Managing Director Appointed Managing Director 12 February 2020. Mr Woodall is a mining engineer with over 30 years’ experience in senior and corporate and executive roles in operations, project development and evaluations in the mineral resources industry including gold, copper, iron ore, and nickel. He has held senior positions in Australia, Fiji, Central Asia, Indonesia, China, PNG and North America. Prior to joining ASM, he was the CEO of an ASX listed Canadian-focused base metals development company. Prior to that, Mr Woodall ran his own consultancy company, was the Executive General Manager, International Operations for Newcrest Mining and was the Director of Operations for Fortescue Metals Group. Mr Woodall is a member of the Australian Institute of Mining and Metallurgy (AusIMM) and a member of the Australian Institute of Company Directors (AICD). Nicolas Paul Earner – Non-Executive Director BEng (hons) Appointed Non-Executive Director 1 September 2017. Mr Earner, Alkane Resources Ltd’s current Managing Director, is a chemical engineer and graduate of University of Queensland with over 25 years’ experience in technical and operational optimisation and management, and has held a number of executive roles in mining and processing. Mr Earner joined the Alkane Group as Chief Operations Officer in August 2013, with responsibility for the safe and efficient management of Alkane Resources Ltd’s operations at Tomingley and the Dubbo Project. Under his supervision, the successful development of Tomingley transitioned to profitable and efficient operations. His guidance also drives the engineering and metallurgical aspects of the Dubbo Project, overseeing optimisation of plant design and product and marketing development. Prior to his appointment as Alkane Resources Ltd’s Chief Operations Officer in August 2013, he spent four years at Straits Resources Ltd including two years as Executive General Manager – Operations, supervising up to 1,000 employees in open cut and underground gold mines and an underground copper mine. During the eleven years before that he had various roles at Rio Tinto Coal Australia’s Mount Thorley Warkworth coal mine and BHP/WMC Olympic Dam copper-uranium-gold operations. Mr Earner’s eight years at Olympic Dam included roles managing the Concentrator and Hydromet functions which included substantial milling, leaching and solvent extraction circuits. His other positions included Production Superintendent – Smelting, and Senior Engineer – Process Control, Instrumentation and Communications. Mr Earner is the Managing Director of Alkane Resources Ltd and a Non-Executive Director of Genesis Minerals Ltd (Genesis). 20 2020 Australian Strategic Materials Annual Report Financial Report / Directors’ Report / Information on directors David Ian Chalmers – Non-Executive Director MSc, FAusIMM, FAIG, FIMM, FSEG, MSGA, MGSA, FAICD Appointed Non-Executive Director 18 March 2014. Mr Chalmers is a geologist and graduate of the Western Australia Institute of Technology (Curtin University) and has a Master of Science degree from the University of Leicester in the United Kingdom. He has worked in the mining and exploration industry for over 50 years, during which time he has had experience in all facets of exploration and mining through feasibility and development to the production phase. Mr Chalmers was Technical Director of Alkane until his appointment as Managing Director in 2006, overseeing the Group’s minerals exploration efforts across Australia and the development and operations of the Peak Hill Gold Mine (NSW). During his time as chief executive he steered Alkane through the discovery, feasibility, construction and development of the now fully operational Tomingley Gold Operations; the discovery and ultimate sale of the McPhillamys gold deposit; the recent discovery of the gold deposits immediately south of Tomingley and the porphyry gold-copper discovery at Boda. Mr Chalmers also managed the process development and global marketing effort for the Dubbo Project, advancing it to the threshold of development. Mr Chalmers is the Technical Director of Alkane Resources Ltd. Gavin Murray Smith – Non-Executive Director B.Com, MBA, MAICD Appointed Non-Executive Director 12 December 2017. Mr Smith is an accomplished senior executive and non-executive director within multinational business environments. He has more than 35 years’ experience in information technology, business development, and general management in a wide range of industries and sectors. As Chair and President of Robert Bosch Australia, Mr Smith has led the restructuring and transformation of the local Bosch subsidiary. Mr Smith is a Non-Executive Director of Alkane Resources Ltd. Anthony Dean Lethlean – Non-Executive Director BAppSc (Geology) Appointed Non-Executive Director 15 October 2003; resigned 28 July 2020. Mr Lethlean is a geologist with over 10 years’ mining experience, including four years underground on the Golden Mile in Kalgoorlie. In later years, he has worked as a resource analyst with various stockbrokers and investment banks including CIBC World Markets. He was a founding director of Helmsec Global Capital Limited which seeded, listed and funded a number of companies in a range of commodities. He retired from the group in 2014. He is also a director of corporate advisory Rawson Lewis and a non-executive director of Alliance Resources Ltd (appointed 15 October 2003). Anthony Lethlean was director of ASM for the entire period and resigned upon the demerger being implemented. Mr Lethlean is a Non-Executive Director of Alkane Resources Ltd. 21 2020 Australian Strategic Materials Annual Report Financial Report / Directors’ Report / Information on directors Dennis Wilkins – Joint Company Secretary B.Bus, ACIS, AICD Appointed Company Secretary 29 March 2018. Mr Wilkins is the founder and principal of DWCorporate Pty Ltd, a corporate advisory firm servicing the natural resources industry. Since 1994 he has been a director of, and involved in the executive management of, several publicly listed resource companies with operations in Australia, PNG, Scandinavia and Africa. Since July 2001 Mr Wilkins has been running DWCorporate Pty Ltd, where he advises on the formation of, and capital raising for, emerging companies in the Australian resources sector. Mr Wilkins is currently a director of Key Petroleum Limited. James Carter – Joint Company Secretary Appointed joint Company Secretary 20 May 2020. Mr Carter is a CPA and Chartered Company Secretary with over 20 years’ international experience in the resources industry. He has held senior finance positions across listed resources companies since 2001. Meetings of directors The number of meetings of the Company’s Board of Directors (‘the Board’) held during the year ended 30 June 2020, and the number of meetings attended by each director were: I J Gandel D G Woodall D I Chalmers G M Smith N P Earner A D Lethlean Full Board Attended Held 4 4 4 4 4 4 4 4 4 4 4 4 Held: represents the number of meetings held during the time the director held office. ASM was admitted to the Official List of Australian Securities Exchange on 29 July 2020. During the entire financial year ASM was a subsidiary of Alkane Resources Ltd and as such there were no Board committee meetings held during the period since ASM was not admitted to the ASX until after the year end on 29 July 2020. 22 2020 Australian Strategic Materials Annual Report Financial Report / Directors’ Report / Remuneration report (audited) Remuneration report (audited) The remuneration report details the key management personnel remuneration arrangements for the Consolidated Entity, in accordance with the requirements of the Corporations Act 2001 and its regulations. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all directors. Key Management Personnel disclosed in this report Non-Executive and Executive Directors I J Gandel D G Woodall N P Earner D I Chalmers G M Smith A D Lethlean – resigned upon the demerger on 28 July 2020 Other Key Management Personnel (KMP) S Messiter Chief Operating Officer A MacDonald General Manager, Marketing There have been no other changes to directors or KMP since the end of the reporting period. Remuneration governance The Company has established a Nomination and Remuneration Committee to assist the Board in fulfilling its corporate governance responsibilities with respect to remuneration by reviewing and making appropriate recommendations to the Board on: • • • the overall remuneration strategy and framework for the Company; the operation of the incentive plans which apply to the executive team, including the appropriateness of key performance indicators and performance hurdles; and the assessment of performance and remuneration of the Executive Directors, Non-Executive Directors and other KMP. The Nomination and Remuneration Committee is a committee of the Board and at the date of this report the members were independent Non-Executive Directors and included I J Gandel, N P Earner and G M Smith. Their objective is to ensure that remuneration policies and structures are fair, competitive and aligned with the long term interests of the Company and its shareholders. The Company’s annual Corporate Governance Statement provides further information on the role of this committee, and the full statement is available at URL: www.asm-au.com.au/company/governance. 23 2020 Australian Strategic Materials Annual Report Financial Report / Directors’ Report / Remuneration report (audited).. Principles used to determine the nature and amount of remuneration The objective of the Consolidated Entity’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and it is considered to conform to the market best practice for the delivery of reward. The Board ensures that executive reward satisfies the following key criteria for good reward governance practices: • competitiveness and reasonableness • acceptability to shareholders • performance linkage / alignment of executive compensation, and • transparency. The Nomination and Remuneration Committee is responsible for determining and reviewing remuneration arrangements for its directors and executives. The performance of the Consolidated Entity depends on the quality of its directors and executives. The remuneration philosophy is to attract, motivate and retain high performance and high quality personnel. Non-Executive Directors remuneration Fees and payments to Non-Executive Directors reflect the demands and responsibilities of their role. Non- Executive Directors (NEDs) fees and payments are reviewed annually by the Nomination and Remuneration Committee. The Nomination and Remuneration Committee may, from time to time, receive advice from independent remuneration consultants to ensure Non-Executive Directors’ fees and payments are appropriate and in line with the market. The Chairman’s fees are determined independently to the fees of other Non- Executive Directors based on comparative roles in the external market. The Chairman is not present at any discussions relating to the determination of his own remuneration. Non-Executive Directors do not receive share options or other incentives. ASX listing rules require the aggregate Non-Executive Directors’ remuneration be determined periodically by a general meeting. In accordance with ASM’s Constitution, the remuneration of the Non-Executive Directors of ASM in each financial year will not exceed the maximum aggregate amount determined by ASM shareholders in general meeting from time to time. The maximum aggregate amount is currently $500,000, inclusive of superannuation and exclusive of reimbursement of expenses. This remuneration may be divided among the ASM NEDs in such proportions as they decide. The maximum aggregate remuneration amount has been set so as to enable the appointment of additional ASM NEDs if required. ASM intends to seek external advice and benchmarking data and conduct a formal review of director remuneration in or around quarter four of 2020. Executive remuneration The Consolidated Entity aims to reward executives based on their position and responsibility, with a level and mix of remuneration which has both fixed and variable components. The executive remuneration and reward framework has four components: • base pay and non-monetary benefits • short-term performance incentives • share-based payments • other remuneration such as superannuation and long service leave. The combination of these comprises the executive’s total remuneration. 24 2020 Australian Strategic Materials Annual Report Financial Report / Directors’ Report / Remuneration report (audited) Fixed remuneration, consisting of base salary, superannuation and non-monetary benefits, are reviewed annually by the Nomination and Remuneration Committee based on individual and business unit performance, the overall performance of the Consolidated Entity and comparable market remunerations. Executives may receive their fixed remuneration in the form of cash or other fringe benefits (for example motor vehicle benefits) where it does not create any additional costs to the Consolidated Entity and provides additional value to the executive. The long-term incentives (‘LTI’) include long service leave and share-based payments. Shares are awarded to executives over a period of three years based on long-term incentive measures. These include increase in shareholders value relative to the entire market and the increase compared to the Consolidated Entity’s direct competitors. The Nomination and Remuneration Committee reviewed the long-term equity-linked performance incentives specifically for executives during the year ended 30 June 2020. Use of remuneration consultants Remuneration consultants were not engaged during the financial period, however they are intended to be engaged subsequent to the demerger and listing of the ASM business. Details of remuneration Amounts of remuneration Details of the remuneration of key management personnel of the Consolidated Entity are set out in the following tables. Cash salary and fees Superannuation Annual and long service provision 2020 $ $ $ Total $ Executive Directors: D G Woodall Other Key Management Personnel: S Messiter A MacDonald 121,180 11,512 10,720 143,412 91,324 47,469 259,973 8,676 4,389 24,577 - 72,938 83,658 100,000 124,796 368,208 The Non-Executive Directors were not entitled to any payment during the financial period. Fees will be payable following the demerger of ASM in financial year ended 30 June 2021. D Woodall has been granted 3,000,000 performance rights on 17 July 2020. The performance rights will vest as ordinary shares if milestones are met and will vest at the end of the three year period in two tranches: (1) 1,800,000 Tranche 1 performance rights in relation to Total Shareholder Return; and (2) 1,200,000 Tranche 2 performance rights subject to Milestone Targets. 25 2020 Australian Strategic Materials Annual Report Financial Report / Directors’ Report / Remuneration report (audited) Service agreements Remuneration and other terms of employment for key management personnel are formalised in service agreements. Details of these agreements are as follows: Name: Title: Agreement commenced: Term of agreement: D G Woodall Managing Director 10 February 2020 Ongoing Details: Name: Title: Agreement commenced: Term of agreement: Details: Name: Title: Total fixed remuneration: $375,000 Notice period: 3 months S Messiter Chief Operating Officer 1 November 2019 Ongoing Casual Fixed rate $2,000 per day A MacDonald General Manager - Marketing Agreement commenced: 1 February 2017 Term of agreement: Ongoing Details: Total fixed remuneration: $384,900 Notice period: 3 months Contract originally with the Ultimate Parent Company, Alkane Resources Ltd. On 1 May 2020, employment was transferred to the ASM group as part of the demerger. Key management personnel have no entitlement to termination payments in the event of removal for misconduct. This concludes the remuneration report, which has been audited. 26 2020 Australian Strategic Materials Annual Report Financial Report / Directors’ Report / Indemnity and insurance of officers Indemnity and insurance of officers Alkane Resources Ltd (the Ultimate Parent Company) has entered into deeds of indemnity, access and insurance with each of the directors. These deeds remain in effect as at the date of this report. Under the Deeds, the Ultimate Parent Company indemnifies each director to the maximum extent permitted by law against legal proceedings or claims made against or incurred by the directors in connection with being a director of the Consolidated Entity, or breach by the Consolidated Entity of its obligations under the Deed. The liability insured is the indemnification of the Consolidated Entity against any legal liability to third parties arising out of any directors’ or officers’ duties in their capacity as a director or officer other than indemnification not permitted by law. No liability has arisen under this indemnity as at the date of this report. The Ultimate Parent Company has not otherwise, during or since the financial year, indemnified or agreed to indemnify an Officer of the Consolidated Entity or of any related body corporate, against a liability incurred as such by an Officer. During the year the Ultimate Parent Company has paid premiums in respect of directors’ and executive officers’ Insurance. The contracts contain prohibitions on disclosure of the amount of the premiums and the nature of the liabilities under the policies. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services There were no non-audit services provided during the financial year by the auditor. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this Directors’ Report. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors D Woodall Director 24 August 2020 27 2020 Australian Strategic Materials Annual Report Auditor’s Independence Declaration As lead auditor for the audit of Australian Strategic Materials Ltd for the year ended 30 June 2020, I Auditor’s Independence Declaration declare that to the best of my knowledge and belief, there have been: As lead auditor for the audit of Australian Strategic Materials Ltd for the year ended 30 June 2020, I no contraventions of the auditor independence requirements of the Corporations Act 2001 in (a) declare that to the best of my knowledge and belief, there have been: relation to the audit, and (b) (a) no contraventions of any applicable code of professional conduct in relation to the audit. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit, and This declaration is in respect of Australian Strategic Materials Ltd and the entities it controlled during (b) no contraventions of any applicable code of professional conduct in relation to the audit. the period. This declaration is in respect of Australian Strategic Materials Ltd and the entities it controlled during the period. Helen Bathurst Partner PricewaterhouseCoopers Helen Bathurst Partner PricewaterhouseCoopers Perth 24 August 2020 Perth 24 August 2020 PricewaterhouseCoopers, ABN 52 780 433 757 Brookfield Place, 125 St Georges Terrace, PERTH WA 6000, GPO Box D198, PERTH WA 6840 T: +61 8 9238 3000, F: +61 8 9238 3999, www.pwc.com.au PricewaterhouseCoopers, ABN 52 780 433 757 Brookfield Place, 125 St Georges Terrace, PERTH WA 6000, GPO Box D198, PERTH WA 6840 Liability limited by a scheme approved under Professional Standards Legislation. T: +61 8 9238 3000, F: +61 8 9238 3999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 28 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements Financial Statements Consolidated financial statements Consolidated statement of profit or loss and other comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Note 1. Significant accounting policies Note 2. Critical accounting judgements, estimates and assumptions Note 3. Other income Note 4. Income tax Note 5. Cash and cash equivalents Note 6. Receivables Note 7. Biological assets Note 8. Property, plant and equipment Note 9. Exploration and evaluation Note 10. Investments accounted for using the equity method Note 11. Trade and other payables Note 12. Loans from related party Note 13. Provisions Note 14. Issued capital Note 15. Reserves Note 16. Accumulated losses Note 17. Fair value measurement Note 18. Remuneration of auditors Note 19. Contingent liabilities Note 20. Commitments Note 21. Related party transactions Note 22. Parent entity information Note 23. Interests in subsidiaries Note 24. Interests in joint ventures Note 25. Events after the reporting period Note 26. Reconciliation of loss after income tax to net cash used in operating activities Note 27. Key management personnel disclosures Note 28. Operating segments Note 29. Financial risk management Note 30. Capital risk management Note 31. Earnings per share 29 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements The financial statements cover Australian Strategic Materials Ltd as a Consolidated Entity consisting of Australian Strategic Materials Ltd and the entities it controlled at the end of, or during, the year. The financial statements are presented in Australian dollars, which is Australian Strategic Materials Ltd’s functional and presentation currency. Australian Strategic Materials Ltd is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business are: Australian Strategic Materials Ltd 89 Burswood Road, Burswood, Western Australia A description of the nature of the Consolidated Entity’s operations and its principal activities are included in the Directors’ Report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of directors, on 24 August 2020. The directors have the power to amend and reissue the financial statements. 30 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Consolidated financial statements Consolidated statement of profit or loss and other comprehensive income For the year ended 30 June 2020 Revenue Other income Expenses from continuing operations Professional fees and consulting services Dubbo consumables expenses Audit fees General and administration expenses Pastoral company expenses Finance charges Exploration provided for or written off Share of loss of Rare Metals Resources Technology Corporation (RMR) Loss before income tax benefit/(expense) Consolidated Note 2020 $ 2019 $ 3 1,072,532 1,763,484 (624,190) 224,481 - (162,356) (41,077) (478,164) (11,003) 57,137 (847,755) (1,184,711) (3,584,923) (3,417,610) - (444,135) (9,609) - (4,513,186) (3,174,713) Income tax benefit/(expense) 4 248,384 (72,869) Loss after income tax benefit/(expense) for the year attributable to the owners of Australian Strategic Materials Ltd 16 (4,264,802) (3,247,582) Other comprehensive income for the year, net of tax - - Total comprehensive income for the year attributable to the owners of Australian Strategic Materials Ltd (4,264,802) (3,247,582) Basic earnings per share Diluted earnings per share 31 31 (852,960) (649,516) (852,960) (649,516) The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 31 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Consolidated financial statements Consolidated balance sheet As at 30 June 2020 Assets Current assets Cash and cash equivalents Receivables Consumables Biological assets Total current assets Non-current assets Property, plant and equipment Exploration and evaluation Investments accounted for using the equity method Receivables Biological assets Other financial assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Loans from related party Provisions Total current liabilities Non-current liabilities Loans from related party Deferred tax Provisions Total non-current liabilities Total liabilities Net (liabilities)/assets Equity Issued capital Reserves Accumulated losses Total (deficiency)/equity Consolidated Note 2020 $ 2019 $ 5 6 7 8 9 10 6 7 11 12 13 12 4 13 14 15 16 18,543,908 26,968,287 106,882 3,663 402,792 296,896 56,490 81,127 19,057,245 27,402,800 27,567,288 26,958,677 90,665,315 88,783,436 1,720,744 126,533 380,365 20,000 - - 401,928 20,000 120,480,245 116,164,041 139,537,490 143,566,841 344,034 296,801 117,730,988 11,640,878 144,807 10,860 118,219,829 11,948,539 - 77,681,310 26,043,454 25,874,708 32,707 6,660 26,076,161 103,562,678 144,295,990 115,511,217 (4,758,500) 28,055,624 1 1 11,323,987 39,873,309 (16,082,488) (11,817,686) (4,758,500) 28,055,624 The above consolidated balance sheet should be read in conjunction with the accompanying notes. 32 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Consolidated financial statements Consolidated statement of changes in equity For the year ended 30 June 2020 Consolidated Balance at 1 July 2018 Loss after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Balance at 30 June 2019 Contributed equity Capital contribution Accumulated losses Total equity $ $ $ $ 1 - - - 1 39,873,309 (8,570,104) 31,303,206 - - - (3,247,582) (3,247,582) - - (3,247,582) (3,247,582) 39,873,309 (11,817,686) 28,055,624 Consolidated Balance at 1 July 2019 Loss after income tax benefit for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Adjustment for reclassification. Note 15 Balance at 30 June 2020 Contributed equity Capital contribution Accumulated losses Total deficiency in equity $ $ $ $ 1 - - - - 1 39,873,309 (11,817,686) 28,055,624 - - - (4,264,802) (4,264,802) - - (4,264,802) (4,264,802) (28,549,322) - (28,549,322) 11,323,987 (16,082,488) (4,758,500) The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes 33 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Consolidated financial statements Consolidated statement of cash flows For the year ended 30 June 2020 Cash flows from operating activities Receipt from customers (inclusive of goods and services tax) - 96,091 Payments to suppliers (inclusive of goods and services tax) (1,293,627) (1,192,255) Consolidated Note 2020 $ 2019 $ Interest received Other income Finance costs paid (1,293,627) (1,096,164) 338,260 734,080 (657) 643,573 307,452 (20,141) Net cash used in operating activities 26 (221,944) (165,280) Cash flows from investing activities Payments for investments Payments for property, plant and equipment Payments for exploration and evaluation Payments for biological assets Proceeds from sale of biological assets Net cash used in investing activities Cash flows from financing activities (Payments for)/Proceeds from borrowings from related party Net cash (used in)/from financing activities Net (decrease)/ increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year (1,730,353) (223,078) - (67,381) (2,474,499) (6,387,480) (456,963) (195,043) 117,308 438,750 (4,767,585) (6,211,154) (3,434,850) 7,027,374 (3,434,850) 7,027,374 (8,424,379) 650,940 26,968,287 26,317,347 18,543,908 26,968,287 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 34 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 1 Note 1. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out either in the respective notes or below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). Historical cost convention The financial statements have been prepared under the historical cost convention, except for, where applicable, the revaluation of financial assets and liabilities at fair value through profit or loss, financial assets at fair value through other comprehensive income, investment properties, biological assets, certain classes of property, plant and equipment and derivative financial instruments. Going concern The Consolidated Entity had net liabilities of $4,758,500 as at 30 June 2020 (2019: net assets $28,055,624), and a working capital deficit of $99,162,584 as at 30 June 2020 (2019: surplus of $15,454,261). The net assets includes the balance of loans owing to Alkane Resources Ltd (“the Ultimate Parent Company”) of $117,730,988 (2019: $89,322,188). The loans are AUD denominated and are payable on demand with no fixed repayment date. The repayment term of the previous agreement was that the loan was payable on 22 March 2027 with the loan terms being changed to repayment on demand on 30 June 2020. Notwithstanding, the directors consider that the going concern basis of accounting is appropriate as the Ultimate Parent Company entered into a restructure deed on 17 July 2020 as part of the demerger, to capitalise $113,000,000 and forgive $4,730,991 of the loan balance. Refer note 25. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the Consolidated Entity only. Supplementary information about the Parent Entity is disclosed in note 22. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Australian Strategic Materials Ltd (‘Company’ or ‘Parent Entity’) as at 30 June 2020 and the results of all subsidiaries for the year then ended. Australian Strategic Materials Ltd and its subsidiaries together are referred to in these financial statements as the ‘Consolidated Entity’. Subsidiaries are all those entities over which the Consolidated Entity has control. The Consolidated Entity controls an entity when the Consolidated Entity is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the 35 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 1 activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Consolidated Entity. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the Consolidated Entity are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Consolidated Entity. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Where the Consolidated Entity loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non-controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The Consolidated Entity recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Foreign currency translation The financial statements are presented in Australian dollars, which is Australian Strategic Materials Ltd’s functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Other income Other income is recognised when it is received or when the right to receive payment is established. 36 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 1 Current and non-current classification Assets and liabilities are presented in the balance sheet based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the Consolidated Entity’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the Consolidated Entity’s normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Associates Associates are entities over which the Consolidated Entity has significant influence but not control or joint control. Investments in associates are accounted for using the equity method. Under the equity method, the share of the profits or losses of the associate is recognised in profit or loss and the share of the movements in equity is recognised in other comprehensive income. Investments in associates are carried in the balance sheet at cost plus post-acquisition changes in the Consolidated Entity’s share of net assets of the associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. Dividends received or receivable from associates reduce the carrying amount of the investment. When the Consolidated Entity’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured long-term receivables, the Consolidated Entity does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. The Consolidated Entity discontinues the use of the equity method upon the loss of significant influence over the associate and recognises any retained investment at its fair value. Any difference between the associate’s carrying amount, fair value of the retained investment and proceeds from disposal is recognised in profit or loss. Joint ventures A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Investments in joint ventures are accounted for using the equity method. Under the equity method, the share of the profits or losses of the joint venture is recognised in profit or loss and the share of the movements in equity is recognised in other comprehensive income. Investments in joint ventures are carried in the balance sheet at cost plus post-acquisition changes in the Consolidated Entity’s share of net assets of the joint venture. Goodwill relating to the joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. Income earned from joint venture entities reduce the carrying amount of the investment. Investments and other financial assets Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. Such assets are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on both the business model within which such assets are held and the contractual cash flow characteristics of the financial asset unless an accounting mismatch is being avoided. 37 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 1 Financial assets are derecognised when the rights to receive cash flows have expired or have been transferred and the Consolidated Entity has transferred substantially all the risks and rewards of ownership. When there is no reasonable expectation of recovering part or all of a financial asset, its carrying value is written off. Financial assets at amortised cost A financial asset is measured at amortised cost only if both of the following conditions are met: (i) it is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and (ii) the contractual terms of the financial asset represent contractual cash flows that are solely payments of principal and interest. Impairment of financial assets The Consolidated Entity recognises a loss allowance for expected credit losses on financial assets which are either measured at amortised cost or fair value through other comprehensive income. The measurement of the loss allowance depends upon the Consolidated Entity’s assessment at the end of each reporting period as to whether the financial instrument’s credit risk has increased significantly since initial recognition, based on reasonable and supportable information that is available, without undue cost or effort to obtain. Where there has not been a significant increase in exposure to credit risk since initial recognition, a 12-month expected credit loss allowance is estimated. This represents a portion of the asset’s lifetime expected credit losses that is attributable to a default event that is possible within the next 12 months. Where a financial asset has become credit impaired or where it is determined that credit risk has increased significantly, the loss allowance is based on the asset’s lifetime expected credit losses. The amount of expected credit loss recognised is measured on the basis of the probability weighted present value of anticipated cash shortfalls over the life of the instrument discounted at the original effective interest rate. For financial assets mandatorily measured at fair value through other comprehensive income, the loss allowance is recognised in other comprehensive income with a corresponding expense through profit or loss. In all other cases, the loss allowance reduces the asset’s carrying value with a corresponding expense through profit or loss. If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss. Goods and Services Tax (‘GST’) and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. 38 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 1 New or amended Accounting Standards and Interpretations adopted The Consolidated Entity has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the Consolidated Entity. The following Accounting Standards and Interpretations are most relevant to the Consolidated Entity: AASB 16 Leases The group has adopted AASB 16 Leases from 1 July 2019. The standard replaces AASB 117 Leases and for lessees eliminates the classifications of operating leases and finance leases. Except for short-term leases and leases of low-value assets, right-of-use assets and corresponding lease liabilities are recognised in the statement of financial position. The right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis, while the lease liability is reduced by an allocation of each lease payment. In the earlier periods of the lease, the expense associated with the lease under AASB 16 will be higher when compared to lease expenses under AASB 117. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. The group has elected to use the simplified transition approach as allowed under AASB 16 as well as apply the following practical expedients permitted by the standard: • • • reliance on previous assessments on whether leases are onerous; the accounting for operating leases with a remaining lease term less than 12 months as at 1 July 2019 as short-term leases; the use of hindsight in determining the lease term where the contract contains options to extend or terminate lease. The group reviewed its contracts that were in place at 1 July 2019 and determined that there are no long term operating leases. As a result, there was no impact on the current or prior financial period upon adoption of AASB 16. There are no other standards that are yet effective and that would be expected to have a material impact on the entity in its current or future reporting periods and on foreseeable future transactions. 39 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 2 Note 2. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Impairment of capitalised exploration and evaluation expenditure Exploration and evaluation costs have been capitalised on the basis that the Consolidated Entity will commence commercial production in the future, from which time the costs will be amortised in proportion to the depletion of the mineral resources. Key judgements are applied in considering costs to be capitalised which includes determining expenditures directly related to these activities and allocating overheads between those that are expensed and capitalised. In addition, costs are only capitalised that are expected to be recovered either through successful development or sale of the relevant mining interest. Factors that could impact the future commercial production at the mine include the level of reserves and resources, future technology changes, which could impact the cost of mining, future legal changes and changes in commodity prices. Where economic recoverable reserves for an area of interest have been identified, and a decision to develop has occurred, capitalised expenditure is classified as mine development. To the extent that capitalised costs are determined not to be recoverable in the future, they will be written off in the period in which the determination is made. Impairment of non-financial assets other than goodwill The Consolidated Entity assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to the Consolidated Entity and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions. 40 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 2 Income tax The Consolidated Entity is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Consolidated Entity recognises liabilities for anticipated tax audit issues based on the Consolidated Entity’s current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made. The Consolidated Entity and its Ultimate Parent Company, Alkane Resources Ltd, have implemented the tax consolidation legislation. The head entity, Alkane Resources Ltd, and the controlled entities in the tax consolidated group, account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand-alone taxpayer in its own right. Current tax liabilities (or assets) and deferred tax assets arising from unused tax losses and unused tax credits are derecognised in the Consolidated Entity’s accounts and instead recognised in the head entity’s accounts. Assets or liabilities arising under the funding agreement with the Ultimate Parent Company are recognised as amounts receivable or payable to that entity. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Alkane Resources Ltd for any current tax payable assumed and are compensated by Alkane Resources Ltd for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Alkane Resources Ltd under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. Note 3. Other income Net foreign exchange gain Interest income Lease income Pastoral company income Other income Consolidated 2020 2019 $ (2,503) 403,918 120,956 $ (2,818) 320,183 105,393 550,161 1,340,726 1,072,532 1,763,484 Interest income from financial assets at fair value through profit or loss is included in the net fair value gains/ (losses) on these assets Interest income on financial assets at amortised cost and financial assets at fair value through other comprehensive income calculated using the effective interest method is recognised in profit or loss as part of other income. 41 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 4 Note 4. Income tax Income tax (benefit)/expense Current tax Deferred tax - origination and reversal of temporary differences Aggregate income tax (benefit)/expense Deferred tax included in income tax (benefit)/expense comprises: Increase in deferred tax liabilities Numerical reconciliation of income tax (benefit)/expense and tax at the statutory rate Loss before income tax (benefit)/expense Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Non-deductible expenses Income tax (benefit)/expense Deferred tax asset Deferred tax asset comprises temporary differences attributable to: Accruals and provisions Borrowing costs Previously expensed blackhole costs Property, plant and equipment Offset against deferred tax liabilities Deferred tax asset Deferred tax liability Deferred tax liability comprises temporary differences attributable to: Prepayments Exploration Set-off of deferred tax asset Deferred tax liability Movements: Opening balance Charged to profit or loss Closing balance Consolidated 2020 $ 2019 $ (417,130) 168,746 (248,384) (1,262,733) 1,335,602 72,869 168,746 1,335,602 (4,513,186) (3,174,713) (1,353,956) (952,414) 1,105,572 1,025,283 (248,384) 72,869 66,810 36,000 12,150 35,122 (150,082) - 7,417 - 33,276 1,814 (42,507) - 2,964 26,190,572 (150,082) 2,602 25,914,613 (42,507) 26,043,454 25,874,708 25,874,708 168,746 24,539,106 1,335,602 26,043,454 25,874,708 42 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 4 Accounting policy for income tax The income tax expense or benefit for the period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: • When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or • When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. The Consolidated Entity and its Ultimate Parent Company, Alkane Resources Ltd, have implemented the tax consolidation legislation. The head entity, Alkane Resources Ltd, and the controlled entities in the tax consolidated group, account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand-alone taxpayer in its own right. Current tax liabilities (or assets) and deferred tax assets arising from unused tax losses and unused tax credits are derecognised in the Consolidated Entity’s accounts and instead recognised in the head entity’s accounts. Assets or liabilities arising under the funding agreement with the Ultimate Parent Company are recognised as amounts receivable or payable to that entity. The ASM group exited the tax sharing agreement as part of the demerger of the Consolidated Entity in July 2020. 43 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 5 Note 5. Cash and cash equivalents Current assets Cash at bank Consolidated 2020 $ 2019 $ 18,543,908 26,968,287 Accounting policy for cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short- term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Note 6. Receivables Current assets Other receivables Prepayments Non-current assets Receivable from Rare Metals Resources Technology Corporation (RMR) Consolidated 2020 $ 2019 $ 97,003 9,879 106,882 288,223 8,673 296,896 126,533 233,415 - 296,896 Accounting policy for trade and other receivables Other receivables are amounts generally arise from transactions outside the usual operating activities of the group. Collateral is not normally obtained. The non-current other receivables are due and payable within three years from the end of the reporting period. Due to the short-term nature of the current receivables, their carrying amount is considered to be the same as their fair value. For the majority of the non-current receivables, the fair values are also not significantly different to their carrying amounts. 44 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 7 Note 7. Biological assets Current assets Biological assets Non-current assets Biological assets Consolidated 2020 $ 2019 $ 402,792 81,127 380,365 783,157 401,928 483,055 Biological assets comprise of sheep and cattle owned by subsidiary Toongi Pastoral Company Pty Ltd as part of farming operations on the surrounding land to the Dubbo Project mining lease. Note 8. Property, plant and equipment Non-current assets Land and buildings - at cost Less: Accumulated depreciation Plant and equipment - at cost Less: Accumulated depreciation Capital Work in Progress Consolidated 2020 $ 2019 $ 27,060,018 (26,307) 26,456,134 (7,739) 27,033,711 26,448,395 534,273 (198,618) 527,943 (137,224) 335,655 390,719 197,922 119,563 27,567,288 26,958,677 45 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 8 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2018 Additions Transfers in/(out) Depreciation expense Balance at 30 June 2019 Additions Transfers between classes Depreciation expense Land & Buildings Plant & Equipment Work in Progress $ $ $ Total $ 26,155,078 - 300,653 (7,336) 26,448,395 - 603,885 (18,569) 188,741 - 266,860 (64,882) 390,719 - 6,330 (61,394) 603,504 83,572 (567,513) 26,947,323 83,572 - - (72,218) 119,563 688,574 (610,215) - 26,958,677 688,574 - (79,963) Balance at 30 June 2020 27,033,711 335,655 197,922 27,567,288 All property, plant and equipment is stated at historical cost less accumulated depreciation and impairment charges. Historical cost includes: • • expenditure that is directly attributable to the acquisition of items; the present value of the estimated costs of dismantling and removing the asset and restoring the site on which it is located. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Consolidated Entity and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. Land is not depreciated. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying value amount is written down immediately to its recoverable amount if the assets carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the statement of comprehensive income. Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment (excluding land) over their expected useful lives as follows: Buildings Plant and equipment 40 years 3-7 years 46 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 9 Note 9. Exploration and evaluation Opening balance Expenditure capitalised during the year Amounts provided for or written off Closing balance Consolidated 2020 $ 2019 $ 88,783,486 1,881,829 - 83,387,571 5,840,000 (444,135) 90,665,315 88,783,436 Exploration and evaluation costs are carried forward on an area of interest basis. Costs are recognised and carried forward where rights to tenure of the area of interest are current and either: • the expenditures are expected to be recouped through successful development and exploitation of the area of interest; or • activities in the area of interest have not at the reporting date, reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable resources, and active and significant exploration and evaluation activities in, or in relation to, the area of interest continuing. Exploration and evaluation assets are assessed for impairment if sufficient data exists to determine technical feasibility and commercial viability, and facts and circumstances suggest that the carrying amount exceeds the recoverable amount. For the purposes of impairment testing, exploration and evaluation assets are allocated to cash-generating units to which the exploration activity relates. The cash generating unit is not larger than the area of interest. Once the technical feasibility and commercial viability of the extraction of mineral resources in an area of interest are demonstrable, exploration and evaluation assets attributable to that area of interest are first tested for impairment and then reclassified to mine properties under development. No amortisation is charged during the exploration and evaluation phase. Recoverability of the carrying amount of the exploration and evaluation assets is dependent on successful development and commercial exploitation, or alternatively, sale of the respective areas of interest. Costs carried forward in respect of an area of interest that is abandoned are written off in the period in which the decision to abandon is made. There may exist, on the Consolidated Entity’s exploration properties, areas subject to claim under native title or containing sacred sites or sites of significance to Aboriginal people. As a result, exploration properties or areas within tenements may be subject to exploration or mining restrictions. 47 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 10 Note 10. Investments accounted for using the equity method Non-current assets Interest in Joint Venture Reconciliation Reconciliation of the carrying amounts at the beginning and end of the current and previous financial year are set out below: Opening carrying amount Additions Share of loss of Joint Venture Consolidated 2020 $ 2019 $ 1,720,744 - 1,730,353 (9,609) 1,720,744 - - - - - Through the shareholder agreement, Australian Strategic Materials (Holdings) Ltd is guaranteed 50% representation on the board of RMR and participates in all significant financial and operating decisions. The Consolidated Entity has therefore determined that it shares control with RMR over strategic financial and operating decision making, even though it only holds 10% of interest in the investee. Refer to note 24 for further information on interests in joint ventures. Note 11. Trade and other payables Current liabilities Trade and other payables Consolidated 2020 $ 2019 $ 344,034 296,801 These amounts represent liabilities for goods and services provided to the Consolidated Entity prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. 48 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 12 Note 12. Loans from related party Current liabilities Loans from related party Non-current liabilities Loans from related party Consolidated 2020 $ 2019 $ 117,730,988 11,640,878 - 77,681,310 117,730,988 89,322,188 The loans are AUD denominated and the current liability is repayable to the Ultimate Parent Company on demand and attracts no interest. The non-current liability component in the prior year was repayable by 22 March 2027. On 30 June 2020 the loan term was changed to be repayable on demand. The total non-current liability loan in 2019 represents the discounted value of $110,000,000 of the loan as at balance date. Note 13. Provisions Current liabilities Employee benefits Non-current liabilities Employee benefits Consolidated 2020 $ 2019 $ 144,807 10,860 32,707 177,514 6,660 17,520 Amounts not expected to be settled within the next 12 months The current provision for employee benefits includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since the Consolidated Entity does not have an unconditional right to defer settlement. However, based on past experience, the Consolidated Entity does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. 49 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 13 The following amounts reflect leave that is not expected to be taken within the next 12 months: Employee benefits obligation expected to be settled after 12 months Consolidated 2020 $ 21,805 2019 $ - Accounting policy for employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Note 14. Issued capital Ordinary shares - fully paid Ordinary shares 2020 Shares 5 2019 Shares 5 2020 2019 $ 1 $ 1 Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Note 15. Reserves Capital contribution Consolidated 2020 $ 2019 $ 11,323,987 39,873,309 This reserve is used to recognise the discounted value of a related party loan from the Ultimate Parent Company, Alkane Resources Ltd in accordance with AASB 9. This loan agreement was executed on 22 March 2017 for a term of ten years with no interest payable. In the current year the term of the loan was varied to become repayable on demand. As such, part of the capital contribution amount of $28,549,322 is reversed. 50 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 16 Note 16. Accumulated losses Accumulated losses at the beginning of the financial year Loss after income tax (expense)/benefit for the year Accumulated losses at the end of the financial year Note 17. Fair value measurement Accounting policy for fair value measurement Consolidated 2020 $ (11,817,686) (4,264,802) 2019 $ (8,570,104) (3,247,582) (16,082,488) (11,817,686) When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Note 18. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by PricewaterhouseCoopers, the auditor of the Company: Audit services - PricewaterhouseCoopers Audit or review of the financial statements Note 19. Contingent liabilities Consolidated 2020 $ 2019 $ 120,600 11,003 The Consolidated Entity has contingent liabilities estimated at up to $3,670,000 for the potential acquisition of parcels of land surrounding the Dubbo Project (2019: $5,650,000). The landholders have the right to require the Consolidated Entity to acquire their property when the development consent conditions for the Dubbo Project have been met. 51 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 20 Note 20. Commitments Mineral tenement leases In order to maintain current rights of tenure to exploration and mining tenements, the Consolidated Entity will be required to outlay amounts of approximately $169,359 within the next twelve months (2019: $207,741). These costs are discretionary, however if the expenditure commitments are not met then the associated exploration and mining leases may be relinquished. Capital commitments The Consolidated Entity has capital commitments estimated at $3,200,000 for the potential acquisition of parcels of land surrounding the Dubbo Project (2019: $2,980,000). The amount to be paid is based upon a multiple of market values and is subject to movement. The landholders have the right to require Australian Strategic Materials (Holdings) Limited to acquire their property as provided for under the agreement with Australian Strategic Materials (Holdings) Limited as development consent conditions have been met for the Dubbo Project. Note 21. Related party transactions Parent entity Australian Strategic Materials Ltd is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 23 Joint ventures Interests in joint ventures are set out in note 24. Key management personnel Disclosures relating to key management personnel are set out in note 27 and the remuneration report included in the Directors’ Report Transactions with related parties Nuclear IT, a director-related entity, provides information technology consulting services to the Consolidated Entity which includes the coordination of the purchase of information technology hardware and software. These terms are documented in a service level agreement and represent normal commercial terms. Receivable from related parties Refer note 6 for details. Loans to related parties Refer note 12 for details. Terms and conditions With the exception of the related part loans, all other transactions were made on normal commercial terms and conditions and at market rates. 52 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 22 Note 22. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit/(loss) after income tax Total comprehensive income Balance sheet Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Reserves Retained profits/(accumulated losses) Total equity/(deficiency) Parent 2020 $ 2019 $ (679,878) 3,596,882 (679,878) 3,596,882 Parent 2020 $ 2019 $ 112,972,484 (1) 112,972,484 115,487,003 117,730,988 2,007,641 117,730,988 111,826,602 1 11,323,981 (16,082,486) 1 - 3,660,400 (4,758,504) 3,660,401 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity had no guarantees in relation to the debts of its subsidiaries as at 30 June 2020 and 30 June 2019. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2020 and 30 June 2019. Capital commitments - Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2020 and 30 June 2019. Significant accounting policies The accounting policies of the parent entity are consistent with those of the Consolidated Entity, as disclosed in note 1, except for the following: • • Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Investments in JV are accounted for at cost, less any impairment, in the parent entity. • Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. 53 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 23 Note 23. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 1: Ownership interest Name Principal place of business / Country of incorporation 2020 % 2019 % Australian Strategic Materials (Holdings) Ltd (name changed from Australian Strategic Materials Ltd on 14 February 2020) Toongi Pastoral Company Pty Ltd Australia 100.00% 100.00% Australia 100.00% 100.00% Note 24. Interests in joint ventures Interests in joint ventures are accounted for using the equity method of accounting. Information relating to joint ventures that are material to the Consolidated Entity are set out below: Name Principal place of business / Country of incorporation 2020 % 2019 % Rare Metals Resources Technology Corporation South Korea 10.07% - Ownership interest 54 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 25 Note 25. Events after the reporting period On 16 July 2020, Alkane Resources Ltd’s shareholders voted for the demerger of its critical materials business and assets (the ASM Business) from the remainder of Alkane Resources Ltd’s business at the Extraordinary General Meeting. The Consolidated Entity was demerged with its cash reserves and no bank debt. All interests in the Dubbo Project and associated assets (including land and water rights), together with the Company’s investment in South Korean metals technology company Rare Metals Resources Technology Corporation, will be owned by the Consolidated Entity following the demerger. The Consolidated Entity will have a focused board and management team, a strategy to pursue the advancement of the “Clean Metal” metallisation technology, potential value-enhancing opportunities in relation to the Dubbo Project and will continue to be involved in offtake and financing discussions, including those already underway in relation to the Dubbo Project. Australian Strategic Materials Ltd was admitted to the Official List of Australian Securities Exchange on 29 July 2020. On 17 July 2020, the Ultimate Parent Company, Alkane Resources Ltd, and Australian Strategic Materials Ltd entered into a restructure deed as part of the demerger to capitalise $113,000,000 and forgive $4,730,991 of the related party loans to Australian Strategic Materials Ltd. No other matter or circumstance has arisen since 30 June 2020 that has significantly affected, or may significantly affect the Consolidated Entity’s operations, the results of those operations, or the Consolidated Entity’s state of affairs in future financial years. 55 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 26 Note 26. Reconciliation of loss after income tax to net cash used in operating activities Loss after income tax (expense)/benefit for the year (4,264,802) (3,247,582) Consolidated 2020 $ 2019 $ Adjustments for: Depreciation and amortisation Exploration provided for or written off Increase in employee benefits Finance charges Equity accounted movement Change in operating assets and liabilities: Decrease/(increase) in receivables Decrease in consumables Decrease/(increase) in inventory Increase/(decrease) in trade and other payables Decrease/(increase) in deferred tax liabilities Increase in other provisions Increase/(decrease) in biological assets 79,961 - - 3,584,923 9,609 72,219 444,135 7,808 3,417,610 - 220,576 - (247,276) 143,799 (248,385) 159,996 339,655 (262,711) 4,587 - (430,508) 72,869 - (243,707) Net cash used in operating activities (221,944) (165,280) Net debt reconciliation This section sets out an analysis of net debt and the movements in net debt for each of the periods presented. Cash and cash equivalents Related party borrowings - repayable within one year * Related party borrowings - repayable after one year** Net debt Consolidated 2020 $ 2019 $ 18,543,908 (117,730,988) - 26,968,287 (11,640,878) (77,681,310) (99,187,080) (62,353,901) 56 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 26 Cash Related party borrowings repayable within one year * Related party borrowings repayable after one year** Total Opening net debt Cash flows Transfers between categories Other non-cash movements 26,968,287 (8,424,379) - - (11,640,878) - (77,681,310) (28,408,800) (77,681,310) - 77,681,310 - (62,353,901) (8,424,379) - (28,408,800) Closing net debt 18,543,908 (117,730,988) - (99,187,080) * ** The related party loan is current and repayable upon demand from the Ultimate Parent Company, Alkane Resources Ltd. Refer note 12. Represents the discounted value of related party loan balance of $110,000,000 repayable 22 March 2027 (loan term in 2019). Note 27. Key management personnel disclosures Directors The following persons were directors of Australian Strategic Materials Ltd during the financial year: I J Gandel N P Earner D I Chalmers A D Lethlean G M Smith D G Woodall Compensation The aggregate compensation made to directors and other members of key management personnel of the Consolidated Entity is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Consolidated 2019 $ 2020 $ 259,973 24,577 83,658 368,208 Compensation for the directors are paid for by the Ultimate Parent Company, Alkane Resources Ltd. - - - - 57 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 28 Note 28. Operating segments Information about other business activities and operating segments are not separately reportable after the identification of reporting segments has been performed. Note 29. Financial risk management Financial risk management objectives The group’s activities expose it to a variety of financial risks: market risk (including foreign currency risk, price risk and interest rate risk), credit risk and liquidity risk. The Consolidated Entity’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Consolidated Entity. The group uses derivative financial instruments including gold forward and gold put option contracts to mitigate certain risk exposures. This note presents information about the group’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risk, and the management of capital. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. Management monitors and manages the financial risks relating to the operations of the group through regular reviews of the risks and mitigating strategies. Market risk Foreign currency risk The majority of the group’s expenditure are in Australian dollars as such the risk is not significant and is not currently required to be managed through the use of derivatives. Price risk The Consolidated Entity is currently not in production and has minimal income so there is no current requirement to mitigate commodity risk through the use of derivatives. Interest rate risk The group’s main interest rate risk arises through its cash and cash equivalents and other financial assets held within financial institutions. The group minimises this risk by utilising fixed rate instruments where appropriate. 58 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 29 Summarised market risk sensitivity analysis: Interest rate risk Impact on profit/(loss) after tax 30 June 2020 30 June 2019 +100BP $000 -100BP $000 Carrying amount $000 +100BP $000 -100BP $000 129,807 886 140 (129,807) 26,968,287 296,896 0 20,000 (886) (140) 188,778 (188,778) 140 (140) (296,801) 130,833 (130,833) 188,918 (188,918) Carrying amount $000 18,543,908 97,002 126,533 20,000 (344,034) Financial assets Cash and cash equivalents Receivables (current) * Receivables (non-current) Other financial assets Financial liabilities Trade and other payables Total increase / (decrease) in profit * The receivables balance excludes prepayments and tax balances which do not meet the definition of financial assets and liabilities. There is no exposure to foreign exchange risk or commodity price risk for the above financial assets and liabilities. Credit risk The Consolidated Entity has adopted a lifetime expected loss allowance in estimating expected credit losses to trade receivables through the use of a provisions matrix using fixed rates of credit loss provisioning. These provisions are considered representative across all customers of the Consolidated Entity based on recent sales experience, historical collection rates and forward-looking information that is available. In determining the recoverability of a trade or other receivable using the expected credit loss model, the group performs a risk analysis considering the type and age of the outstanding receivables, the creditworthiness of the counterparty, contract provisions, letter of credit and timing of payment. Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposure to customers, including outstanding receivables and committed transactions. (i) Risk management The group limits its exposure to credit risk in relation to cash and cash equivalents and other financial assets by only utilising banks and financial institutions with acceptable credit ratings. (ii) Credit quality Tax receivables and prepayments do not meet the definition of financial assets. The group assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. 59 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Notes to the consolidated financial statements / Note 29 Liquidity risk Liquidity risk is the risk that the group will not be able to meet its financial liabilities as they fall due. The group’s approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the group’s reputation. The Board of Directors monitors liquidity levels on an ongoing basis. The group’s financial liabilities generally mature within 3 months, therefore the carrying amount equals the cash flow required to settle the liability. Note 30. Capital risk management The group’s objectives when managing capital are to safeguard the ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the group may return capital to shareholders, pay dividends to shareholders, issue new shares or sell assets. Note 31. Earnings per share Loss after income tax attributable to the owners of Australian Strategic Materials Ltd Basic earnings per share Diluted earnings per share Weighted average number of ordinary shares used in calculating basic earnings per share Weighted average number of ordinary shares used in calculating diluted earnings per share Accounting policy for earnings per share Consolidated 2020 $ 2019 $ (4,264,802) (3,247,582) (852,960) (852,960) (649,516) (649,516) Number Number 5 5 5 5 Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Australian Strategic Materials Ltd, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. 60 2020 Australian Strategic Materials Annual Report Financial Report / Financial Statements / Directors’ Declaration In the directors’ opinion: • the financial statements and notes set out on pages 31 to 60 are in accordance with the Corporations Act 2001 including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2020 and of its performance for the financial year ended on that date; and • • the financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 1 to the financial statements; there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors D Woodall Director 24 August 2020 61 2020 Australian Strategic Materials Annual Report 62 2020 Australian Strategic Materials Annual Report PricewaterhouseCoopers, ABN 52 780 433 757 Brookfield Place, 125 St Georges Terrace, PERTH WA 6000, GPO Box D198, PERTH WA 6840 T: +61 8 9238 3000, F: +61 8 9238 3999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Independent auditor’s report To the members of Australian Strategic Materials Ltd Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Australian Strategic Materials Ltd (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group's financial position as at 30 June 2020 and of its financial performance for the year then ended, and (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: • the consolidated balance sheet as at 30 June 2020 • the consolidated statement of changes in equity for the year then ended • the consolidated statement of cash flows for the year then ended • the consolidated statement of profit or loss and other comprehensive income for the year then ended • the notes to the consolidated financial statements, which include a summary of significant accounting policies, and • the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 Brookfield Place, 125 St Georges Terrace, PERTH WA 6000, GPO Box D198, PERTH WA 6840 T: +61 8 9238 3000, F: +61 8 9238 3999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Independent auditor’s report To the members of Australian Strategic Materials Ltd Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Australian Strategic Materials Ltd (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group's financial position as at 30 June 2020 and of its financial performance for the year then ended, and (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: • the consolidated balance sheet as at 30 June 2020 • the consolidated statement of changes in equity for the year then ended • the consolidated statement of cash flows for the year then ended • the consolidated statement of profit or loss and other comprehensive income for the year then ended • the notes to the consolidated financial statements, which include a summary of significant accounting policies, and • the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. 63 2020 Australian Strategic Materials Annual Report Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. The principal activity of the Group during the course of the period was mineral evaluation activities for the Dubbo Project, a large in-ground resource of zirconium, hafnium, niobium and rare earth elements. Materiality Audit scope • For the purpose of our audit we used overall Group materiality of $1,395,000, which represents approximately 1% of the Group’s total assets benchmark. • We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. • We chose Group total assets because, in our view, it is the benchmark against which the performance of the Group is most commonly measured. • We selected 1% based on our professional judgement noting that it is also within the range of commonly acceptable asset related thresholds. • Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. • The accounting processes are structured around a Group finance function at its head office in Perth. 64 2020 Australian Strategic Materials Annual Report Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit Committee. Key audit matter How our audit addressed the key audit matter Carrying value of exploration and evaluation assets (Refer to note 2 and note 9 to the financial statements) The Group’s Dubbo Project is a large exploration asset that is subject to the impairment indicators assessment required by AASB 6 Exploration for and Evaluation of Mineral Resources. Due to the relative size of this balance in the consolidated balance sheet, as well as the judgemental application of AASB 6 this has been considered a key audit matter. Judgement was required by the Group to assess whether there were indicators of impairment of the capitalised exploration and evaluation assets due to the need to make estimates and assumptions about future events and circumstances, such as whether the mineral resources may be economically viable to mine in the future. We performed the following procedures: • Assessed whether the Group retained right of tenure for all of its exploration licence areas by obtaining licence status records from relevant government databases, • For a sample of additions to exploration and evaluation assets during the year inspected relevant supporting documentation, such as invoices, and compared the amounts to accounting records, • For a sample of additions to exploration and evaluation assets during the year tested the nature of the expense being capitalised and whether this is in accordance with AASB 6, and • Inquired of management and directors as to the future plans for the capitalised exploration and evaluation assets and assessed plans for future expenditure to meet minimum licence requirements. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 30 June 2020, but does not include the financial report and our auditor’s report thereon. Prior to the date of this auditor's report, the other information we obtained included the Directors' report and the Corporate directory. We expect the remaining other information to be made available to us after the date of this auditor's report. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. 65 2020 Australian Strategic Materials Annual Report If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our auditor's report. 66 2020 Australian Strategic Materials Annual ReportReport on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 23 to 26 of the directors’ report for the year ended 30 June 2020. In our opinion, the remuneration report of Australian Strategic Materials Ltd for the year ended 30 June 2020 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Helen Bathurst Perth Partner 24 August 2020 Financial Report / Additional Information Additional Information Additional information required by Australian Securities Exchange Ltd and not shown elsewhere in this report is as follows. The information is current as at 1 September 2020. Shareholder information Distribution of equity securities Analysis of numbers of equity security holders by size of holding: 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 - and over The number of equity security holders holding less than a marketable parcel of securities are: Ordinary shares Number of holders Number of shares 4,056 3,278 877 995 111 1,959,728 8,144,317 6,644,402 27,434,159 74,867,172 9,317 119,049,778 1,128 156,806 67 2020 Australian Strategic Materials Annual Report Financial Report / Additional Information Twenty largest shareholders The names of the 20 largest holders of quoted ordinary shares are: Listed ordinary shares Number of shares Percentage of ordinary shares 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 ABBOTSLEIGH PTY LTD ABBOTSLEIGH PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED CHAPELGREEN PTY LTDCITICORP NOMINEES PTY LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED ABBOTSLEIGH PTY LTD ABBOTSLEIGH PTY LTD FYVIE PTY LTD LEEFAB PTY LTD BNP PARIBAS NOMINEES PTY LTD MILFORD PARK SUPERANNUATION PTY LTD MR PATRICK JOHN MCHALE MR DAVID HANBURY EDMONDS MANDEL PTY LTD NICHOLAS EARNER KALE CAPITAL CORPORATION LTD GARRETT SMYTHE LTD S MAAS HOLDINGS PTY LIMITED JACANA GLEN PTY LTD 17,693,925 6,840,668 5,755,573 5,699,999 5,018,981 2,569,106 1,621,636 1,350,000 1,148,942 1,047,651 1,029,629 973,288 922,500 781,693 750,000 725,499 603,754 558,625 555,246 550,000 14.86 5.75 4.83 4.79 4.22 2.16 1.36 1.13 0.97 0.88 0.86 0.82 0.77 0.66 0.63 0.61 0.51 0.47 0.47 0.46 Substantial shareholders The names of substantial shareholders who have notified the Company in accordance with section 671B of the Corporations Act 2001 are: Ian Jeffrey Gandel Voting rights 56,196,715 47.21 Number of Shares 29,478,499 All ordinary shares (whether fully paid or not) carry one vote per share without restriction. 68 2020 Australian Strategic Materials Annual Report Financial Report / Additional Information Unquoted securities At 1 September 2020, the Company had the following unlisted securities on issue: Class Number of Securities Number of Holders Holder Name Number of Securities Employee Performance Rights LTI FY2020 3,000,000 1 David Woodall 3,000,000 Holders of 20% or more of the class Use of funds The Company has, during the period from admission to the Official List of the ASX on 29 July 2020 to 1 September 2020, used the funds that it had at the time of admission in a way consistent with its initial business objectives. Corporate Governance Statement The Company’s annual Corporate Governance Statement has been published and released to the ASX separately. It is available on the Company’s website at www.asm-au.com/company/governance/ Schedule of mining tenements – as at 30 June 2020 Project/Location Tenement Interest Nature of interest Dubbo, NSW EL 5548 EL 7631 ML 1724 100% 100% 100% Equity Equity Equity 69 2020 Australian Strategic Materials Annual Report 70 2020 Australian Strategic Materials Annual Report