Everest Re Group
Annual Report 2011

Plain-text annual report

R.E.A. HOLDINGS PLC - ANNUAL REPORT 2 0 1 1 Secretary and registered office R.E.A. Services Limited First Floor 32-36 Great Portland Street London W1W 8QX Website www.rea.co.uk Registered number 00671099 (England and Wales) Contents Officers and professional advisers Maps showing plantation areas Summary of results Key statistics Chairman’s statement Review of the group Directors Directors’ report Corporate governance Directors’ remuneration report Directors’ responsibilities Directors’ confirmation Auditors’ report (group) Consolidated income statement Consolidated balance sheet Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated cash flow statement Accounting policies (group) Notes to the consolidated financial statements Auditors’ report (company) Company balance sheet Movement in total shareholders’ funds Statement of total recognised gains and losses Accounting policies (company) Notes to the company financial statements Notice of annual general meeting 2 3 4 5 7 16 56 58 65 72 78 79 80 82 83 84 84 85 86 92 118 120 121 121 122 123 130 1 Officers and professional advisers Directors R M Robinow J C Oakley D J Blackett J M Green-Armytage J R M Keatley D H R Killick L E C Letts C L Lim Secretary and registered office R.E.A. Services Limited First Floor 32-36 Great Portland Street London W1W 8QX Stockbrokers Mirabaud Securities LLP 33 Grosvenor Place London SW1X 7HY Solicitors Ashurst LLP Broadwalk House 5 Appold Street London EC2A 2HA Auditors Deloitte LLP 2 New Street Square London EC4A 3BZ Registrars and transfer office Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU 2 Maps showing plantation areas as at 31 December 2011 KMS SKKKS KMS KKS KMS EAST EAST AN ALIMK AN KALIMANTAN ANTTA CDM CDM CDM (cid:122) (cid:122) ncalong Muara Ancalong Muar ncalong a A Tabang T abang (cid:122)g T (cid:122) BSYYB SYB n R . Sentekan R . Sentekan REAK REAK (cid:122) (cid:122) (cid:122) Kembang Janggut anggut K anggut embang J BSYYB SYB B B e e l l a a a yy y a a a nn n R R . . . M M M a a a a aa h h hh h h a a a a k k k k Bontang onB tang (cid:122) (cid:122) (cid:122) MaaMhaka Mahakam R. am R. BJP PBJ a a a a m m m R R . . (cid:122) (cid:122) ota B Kota Bangun K angun Tenggarong (cid:122)ong TTe enggar ong (cid:122) S Samarinda amarinda (cid:87) (cid:87) Balikpapan apan alikB papan ASSAR STRAIT MAKASSAR STRAIT AKM ASSAR STRAIT 10 20 30 40 50 k m 0 10 20 30 40 0 10 20 30 40 50 km 0 PHILIPPINES PHILIPPINES PHILIPPINES SIA MALAYSIA MAL SIAYAAY ingapor Singapore e SingSin (cid:122) (cid:122) Kalimantan aliman n ntan KK Kaliman aliman n ntan KK Kaliman S Samarinda amarinda amarin amarin Suma atr Sumatra Jakarta ta Jak taar INDONESIA INDONESIA Java avJa Ja (cid:87) tank farm (cid:87) tank far tank far m fully titled ar eas fully titled ar fully titled areas t ed ar eas alr edeyv allocated areas already surveyed alloca t onditional ar ea alr edeyv conditional area already surveyed c onditional ar t/air str ip airport/air strip air eady sur eady sur por ipta Da ar utai M utr a B CDM CDM PT C PT C via M andir PT Cipta Davia Mandiri i SKKKS KKS PT K PT Kartanegara Kumalasakti PT K tanegar a K umalasakti KMS KMS PT K PT Kutai Mitra Sejahtera itr PT K a S aert ejah BJP PBJ PT P PT Putra Bongan Jaya PT P ongan Ja ay REAK REAK PT REA K PT REA K altim P lan ta tions PT REA Kaltim Plantations BSYYB SYB PT S PT Sasana Yudha Bhakti udha Bhakti PT S Y asana 3 Summary of results for the year ended 31 December 2011 Revenue 2011 $’000 2010 $’000 Change % 147,758 114,039 + 30 Earnings before interest, tax, depreciation, amortisation and biological gain 1 70,818 58,394 + 21 Profit before tax Profit for the year 64,173 50,447 + 27 45,614 34,973 + 30 Profit attributable to ordinary shareholders 40,453 32,325 + 25 Cash generated by operations 2 59,854 50,210 + 19 Earnings per ordinary share (diluted) in US cents 121.0 96.8 + 25 Dividend per ordinary share in pence 3 6.5 5.5 + 18 Average exchange rates 2011 2010 2009 2008 2007 Indonesian rupiah to US dollar US dollar to pound sterling 8,790 1.61 9,078 1.55 10,356 1.56 9,757 1.84 9,166 2.01 1. See note 5 to consolidated financial statements 2. See note 36 to consolidated financial statements 3. Paid in respect of the year 4 Key statistics for the year ended 31 December 2011 Allocated area - Hectares Mature oil palm Immature oil palm (prior years) Oil palm development (current year) 2 Planned oil palm development (succeeding year) Reserve area 3 Total 20111 2010 2009 2008 2007 25,415 21,984 18,736 16,487 3,318 8,351 37,084 4,000 56,614 97,698 8,850 1,249 32,083 6,907 55,773 94,763 8,171 4,083 30,990 4,000 79,828 9,032 2,781 28,300 – 86,541 13,080 11,814 1,514 26,408 11,500 84,018 114,818 114,841 121,926 Production - Tonnes Oil palm fresh fruit bunch crop - group 607,335 518,742 490,178 450,906 393,217 Oil palm fresh fruit bunch crop - external 34,146 20,089 13,248 6,460 2,767 641,481 538,831 503,426 457,366 395,984 Crude palm oil Palm kernel Total palm products Oil extraction rate Kernel extraction rate Yields - Tonnes per mature hectare Fresh fruit bunches Crude palm oil Palm kernel Total palm products 147,455 127,256 118,357 105,597 28,822 24,614 23,740 20,846 93,229 15,660 176,277 151,870 142,097 126,443 108,889 23.0% 4.5% 23.6% 4.6% 23.5% 4.7% 23.1% 4.6% 23.5% 4.0% 23.9 23.6 26.2 27.3 29.6 5.8 1.1 6.9 5.6 1.1 6.7 6.2 1.2 7.4 6.3 1.2 7.5 7.1 1.2 8.3 1. Before implementation of proposed exchange of land areas subject to overlapping mineral rights. 2. Includes 3,350 hectares in 2011, 156 hectares in 2010, 1,393 hectares in 2009 and 889 hectares in 2008 classified as immature oil palm or oil palm development in the preceding year. 3. Includes conservation areas, roads and other infrastructure and areas available for planting and under negotiation. 5 Crude palm oil monthly average price e n n o t / $ S U 1400 1200 1000 800 600 400 200 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Share performance graph REA Ordinary FT All Share 2007 2008 2009 2010 2011 200 x e d n I 100 0 6 Chairman’s statement Introduction year. The higher net gain from changes in the fair value of biological assets reflected the further development of The “Review of the group” section of this annual report the group’s plantations, while the increased net gain gives detailed information intended to assist shareholders arising from changes in the fair value of agricultural in understanding the group's business and strategic produce inventory was the result of a build up in produce objectives. Because the review is designed to provide a stock at the end of 2011 caused by temporary reasonably complete and self-contained description of restrictions on traffic movements on the Mahakam River the group, it does, in many places, repeat what has been following the collapse of a bridge at Tenggarong. said in the reviews of the group contained in previous annual reports. This “Chairman's statement” endeavours 2011 saw a further increase in administrative expenses to be less repetitive and to provide a synopsis of the more from $10.2 million in 2010 to $16.9 million. The increase significant matters noted in the review with particular was in part the result of inflation and a lower capitalisation emphasis on developments that occurred during 2011 or rate (reflecting the increasing ratio of mature to immature are in prospect. Results areas) but higher compliance costs, particularly in discharging the group’s social obligations, a one-off cost of payments under a staff long term service scheme and the employment of additional senior management during Group profit before tax for 2011 at $64.2 million was a period of generational management transition were also some 27 per cent ahead of the $50.4 million reported for factors. 2010. At the after tax level, profit for the year for 2011 was The greater level of coal sales achieved in 2011 ($18.2 $45.6 million against $35.0 million in 2010 while profit million against $4.2 million in 2010) was a significant attributable to ordinary shareholders was $40.4 million factor in the increased revenue of $147.8 million reported against $32.3 million. Fully diluted earnings per share for 2011. Other factors were the higher average selling amounted to US 121.0 cents (2010: US 96.8 cents). prices for crude palm oil (“CPO”) and crude palm kernel oil (“CPKO”) prevailing during 2011 and increased CPO and The non cash components of operating profit were higher CPKO output. However, the changes to export duty in 2011 than in 2010 so that, with the reversal of these, introduced in August 2011 meant that revenues from operating cash flows before movements in working CPO and CPKO in the last quarter of the year were some capital showed a lesser year on year increase than $21 per tonne less than they would otherwise have been. operating profit. The aggregate increase in working Higher cost of sales, amounting to $68.1 million in 2011 capital of $8.2 million over 2011 was broadly similar to against $48.6 million in the preceding year, also reflected that of the preceding year and reflected significant the expansion of the coal activities and the increased increases in inventories and receivables offset in part by CPO and CPKO output, while local cost inflation was a an increase in payables. The increase in inventories was continuing factor. largely the result of the stock build up at end 2011 referred to above, while the increases in receivables and IFRS fair value adjustments, aggregating $11.4 million in payables were attributable to a number of factors, 2011, were significantly ahead of the aggregate including movements arising in connection with the adjustments of the $2.0 million reported in the preceding substantial capital projects in progress at end 2011. 7 Chairman’s statement continued With tax payments lower in 2011 than in 2010 (when the has involved upgrading of machinery and the installation payments included payment of a disputed tax assessment of a new boiler. Delays in the delivery of new steriliser in respect of 2008), net cash from operating activities for cages have meant that full completion of the overhaul is 2011 amounted to $33.8 million against $21.3 million for now expected for mid 2012. The capacity of the second 2010. Agricultural operations Operational matters oil mill, which was brought into production in 2006, has already been expanded to 80 tonnes per hour. The two mills are continuing to cope well with the demands of current crop levels. Construction of a third mill commenced during 2011 and is due for completion in the second half of 2012 in readiness for the expected peak The crop out-turn for 2011 amounted to 607,335 tonnes cropping months later in the year. The third mill will, like of oil palm fresh fruit bunches (“FFB”). This represented the second mill, incorporate its own kernel crushing plant. an increase of 17 per cent on the FFB crop for 2010 of 518,742 tonnes and was close to the budgeted crop for The group is continuing its effort to improve its the year of 610,957 tonnes. External purchases of FFB agricultural processes with a view to minimising costs of from smallholders and other third parties in 2011 totalled production while paying heed to its social and 34,146 tonnes (2010: 20,089 tonnes). environmental responsibilities. Previous initiatives have included measures to reduce the use of pesticides and Rainfall across the group's estates averaged 3,414 mm partial substitution of natural fertiliser for inorganic by for 2011, compared with 4,434 mm for the previous year. composting processing waste. These initiatives were After a period of comparatively low rainfall during the third extended during 2011 with the start of construction of quarter of the year, the fourth quarter was relatively wet. two methane conversion plants which are intended to This delayed crop ripening in the final months of 2011 so reduce the group’s greenhouse gas emissions and that the surpluses over budget reported earlier in the year increase its energy efficiency. This will be achieved in two were not maintained. ways: first, by reducing methane emissions from anaerobic respiration in the effluent ponds and, secondly, Processing of the group's own FFB production and the through the reduction in consumption of diesel oil and externally purchased FFB, together totalling 641,481 petrol required to run generators as the electricity that tonnes (2010: 538,831 tonnes), produced 147,455 these produce is replaced by electricity from the methane tonnes of CPO (2010: 127,256 tonnes) and 28,822 plants. The first such plant was commissioned in the first tonnes of palm kernels (2010: 24,614 tonnes) reflecting quarter of 2012 and the second plant is expected to be extraction rates of 22.99 per cent for CPO (2010: 23.62 commissioned during the second quarter. The group per cent) and 4.49 per cent for kernels (2010: 4.57 per expects to obtain carbon credits under the Clean cent). Production of CPKO amounted to 10,815 tonnes Development Mechanism for the period from completion (2010: 9,745 tonnes) with an extraction rate of 38.44 per of the plants up to 2020. cent (2010: 40.07 per cent). Good progress was made during the year with a major President of the Republic of Indonesia, for the “Best overhaul of the group’s older mill designed to restore the Company in East Kalimantan” in the provision of equal effective capacity of the mill to 80 tonnes per hour. This opportunities for female workers. The group received an award in 2011, presented by the 8 Land allocations and development and other infrastructural facilities. The directors believe that, of the 76,124 hectares of post settlement fully titled The group’s land titling made further progress during land, between 50,000 and 55,000 hectares will ultimately 2011 to the extent that the fully titled agricultural land be plantable with oil palms. The remaining land area held by the group amounted at year end (prior to allocations may in due course provide a further 10,000 implementation of the settlement arrangements referred plantable hectares. to below) to 70,584 hectares (2010: 63,263 hectares). In addition, at the year end the group held land allocations Areas planted and in the course of development as at 31 subject to completion of titling totalling some 27,000 December 2011 amounted in total to some 37,000 hectares of which some 15,000 hectares are conditional hectares. Of this total, mature plantings comprised not only upon satisfaction of the normal titling 25,415 hectares having a weighted average age of 10 requirements but also upon completion of a planned years. A further 1,234 hectares planted in 2008 was rezoning of East Kalimantan which is continuing to scheduled to come to maturity at the start of 2012. The progress slowly through the governmental authorities total of 37,000 hectares includes 2,164 hectares (of who must approve it. which 272 hectares were planted in 2008) to be relinquished upon completion of the land settlement The fully titled areas include 3,557 hectares that are the arrangement described above. subject of third party claims in respect of the rights to coal underneath such land. This hectarage, together with a Coal operations further 2,212 hectares of land allocated but not yet fully titled, is the subject of the conditional settlement The group's major concentration to-date in its embryonic agreement reached on 30 December 2011 to resolve coal mining activities has been on establishing a such claims. Under this agreement, the group will commercial level of production from the Kota Bangun relinquish the areas in question in exchange for 9,097 concession. During 2010, land compensation was hectares of fully titled nearby land held by another completed, mining and environmental management plans company of which ownership will be transferred to the settled, necessary permits for mining operations obtained group. Upon, and subject to completion of, this and arrangements for evacuating mined coal concluded. agreement, the fully titled land areas held by the group will Pre-stripping and removal of overburden (being earth and increase to 76,124 hectares, while the land allocations rock overlaying the coal) started in November 2010 and still subject to titling will reduce to 24,902 hectares. the coal seams were exposed early in 2011. Titling of the remaining land allocations may be expected In the six months to end June 2011, mining operations at to result in full titles being granted to only part of the the Kota Bangun concession produced some 20,000 allocated areas as areas the subject of conflicting land tonnes of coal. The group was aiming to build up to a claims or deemed unsuitable for oil palm cultivation may production level within 2011 of some 16,000 tonnes per be excluded. Moreover, not all of the areas in respect of month. As previously reported, however, operations were which full land use titles are issued can be planted with oil halted in the middle of 2011 following cancellation of the palms. Some fully titled land may be unsuitable for contract with the principal mining contractor who had run planting, a proportion will be set aside for conservation into financial difficulties. The group is continuing to and a further proportion is required for roads, buildings review its options for this concession. Further exploration 9 Chairman’s statement continued drilling is being carried out to determine the full extent of Social responsibility the coal resource within the concession as well as the potential of an adjacent concession over which the group In the agricultural operations, good progress was made has secured a period of exclusivity in which to complete during 2011 in completing the planting up of the plasma due diligence. Production is expected to recommence scheme areas already under development although in once an optimised mine plan has been completed. identifying additional land areas for plasma development have meant that plans for the further expansion of plasma Good progress is now being made with the further schemes have taken longer to finalise than originally investigation of the Liburdinding concession where the hoped. The plasma scheme areas planted at 31 original mining plan had to be abandoned in 2010 when December 2011 amounted to 2,623 hectares (2010: it became clear that the relatively high sulphur content of 2,131 hectares). Together, these areas are owned by 6 the coal was making it difficult to sell. The group is cooperatives with participating members from 10 local looking at blending Liburdinding coal with low sulphur villages. With allocations of additional land now under coal mined from a lower seam or purchased from third negotiation and existing allocated areas already under parties although an alternative option is simply to sell the development, a useful further increase in plasma areas Liburdinding production without blending and to accept a should be achievable during 2012. discount for the sulphur content. Additional mapping has now been completed and a drilling programme to External financing for the group supported plasma delineate more precisely the available resource is schemes initiated to-date has been agreed with a local currently in hand. This will be followed by revision of the development bank in the form of fifteen year loans existing mine plan with an evaluation of the most secured on the land and assets of the schemes and economic alternatives for selling coal from this guaranteed by the group. These facilities are designed to concession, after which it is expected that production will finance most of the initial development costs of the be resumed. schemes but will be supplemented to the extent necessary by funds advanced by the group. A first facility Deliveries of traded coal for the year to 31 December was signed in 2010 and is already being utilised. Two 2011 amounted to some 266,084 tonnes. Although further facilities were agreed during 2011 and are trading volumes grew during 2011, growth was not as expected to be available for drawing during 2012. rapid as was initially projected. Trading prospects do still appear positive and the group hopes to build up volumes The group’s conservation department (conducting its during 2012 to an average monthly sales level of activities under the name “REA Kon”) continues to expand 100,000 tonnes. Coal for traded sales is currently its database of flora and fauna found within the group’s sourced by outright purchase from third party suppliers. conservation reserves and neighbouring watercourses. In The option remains to develop long term arrangements addition, steps are being taken to educate and incentivise for meeting a proportion of the traded coal requirement by the group’s resident workforce and its dependants to mining third party owned concessions against payment of segregate domestic waste so as to permit recycling of royalties. 10 organic and plastic waste. During 2011, REA Kon ran further conservation programmes and education camps for school children as well as a field course entitled “Practical Conservation for Plantations” for a large palm oil company with plantations in Kalimantan. Revenue Finance generated by the latter training course was utilised to support the group’s charitable foundation, the Yayasan In July 2011, 15 million new preference shares were Ulin or Ironwood Foundation (“YU”). The group has issued for cash at a price of 103p per share by way of a recently established a UK registered charity, The placing to raise £15 million ($24.3 million) net of Ironwood Foundation (registered charity number expenses. This issue was followed in September 2011 by 1145410), to act as a “feeder charity” to YU so as to the issue of a further 2,004,872 new preference shares permit UK donors wishing to support YU to make by way of capitalisation of share premium account donations with the benefit of the UK tax incentives pursuant to the capitalisation issue to ordinary available for donations to UK registered charities. shareholders referred to under “Dividends” below. During 2011, the group’s principal operating subsidiary, The proceeds of the placing of new preference shares PT REA Kaltim Plantations (“REA Kaltim”), and its were applied in reducing indebtedness. Following such associated smallholders were granted accreditation by reduction, group indebtedness and related engagements the Roundtable on Sustainable Palm Oil (“RSPO”) for their at 31 December 2011 amounted to $96.0 million, made oil palm plantings and the two REA Kaltim oil mills. up of $35 million nominal of dollar notes (carrying value: Further audits for RSPO accreditation of the established $34.0 million), £34.5 million nominal of 9.5 per cent areas held by another of the group’s operating guaranteed sterling notes 2015/17 (“sterling notes”) subsidiaries took place in early 2012 and certification is (carrying value: $51.3 million), $10.8 million in respect of expected to be received shortly. Development of new the hedge of the principal amount of the sterling notes, planting areas is being carried out in accordance with the $1.5 million in respect of the KCC participating RSPO “New Plantings Procedures”. preference shares (which are classified as debt), a term loan from an Indonesian bank of $27.0 million and other As a further step in the process of RSPO accreditation of short term indebtedness comprising drawings under its operations, the group is now also seeking certification working capital lines of $2.0 million. Against this of its supply chain under the Supply Chain Certification indebtedness, at 31 December 2011 the group held cash System (“SCCS”). Separately, it plans to seek certification and cash equivalents of $30.6 million. of its biomass production under the terms of the EU Renewable Energy Directive (“International Sustainability Planned extension planting and the requirement for & Carbon Certification” or “ISCC”). This latter should investment in estate buildings and other estate plant and permit the group to export the group’s CPO to Europe at equipment that follows any expansion of the group’s a premium price for use as a sustainable bio-fuel in the planted hectarage, will involve the group in continuing production of energy. significant capital expenditure for several years to come. In addition, completion of construction of the group’s third In the coal operations, the group also remains committed oil mill and the two new methane conversion plants, to observing international standards of best together with housing and associated infrastructure, is environmental and corporate social practice. expected to involve further expenditure of some $30 million in 2012. If CPO prices remain at good levels and existing term loans are refinanced as they mature over the next six years, the directors expect that such capital expenditure can be largely funded from internal cash flow. 11 Chairman’s statement continued The directors intend that further cash advances to the decided that the listing should be accompanied by an coal operations should be limited to the amount required exchange of a proportion of existing issued ordinary to complete development of the existing coal shares of the company for preference shares, the concessions. Any expansion beyond this should be self- directors expect that any capitalisation issue of new financing. Dividends preference shares to ordinary shareholders that they might consider it appropriate to propose during 2012 would be effected in combination with such exchange rather than made separately. The fixed semi-annual dividends on the 9 per cent cumulative preference shares that fell due on 30 June Looking forward, if REA Kaltim becomes listed, it is and 31 December 2011 were duly paid. An interim expected that the planned future expansion of the dividend in respect of 2011 of 3p per ordinary share was agricultural operations will permit REA Kaltim to distribute paid in January 2012 and the directors recommend the each year around one third of its after tax profits. The payment of a final dividend in respect of 2011 of 3½ p directors then intend that the company should adopt a per ordinary share to be paid on 27 July 2012 to ordinary policy of distributing to its ordinary and preference shareholders on the register of members on 29 June shareholders a large proportion of its share of the REA 2012. The total dividend payable per ordinary share Kaltim dividends. In practice if, as is contemplated, a during 2012 in respect of 2011 will thus amount to 6½p. proportion of ordinary shares is exchanged for preference This compares with the total paid during 2011 in respect shares, this is likely to mean that, for the immediate future, of 2010 of 5½p. the company’s progressive but conservative ordinary dividend policy will simply continue but those ordinary In recent years, the group has invested heavily in the shareholders who wish to obtain a higher yield from their development of its agricultural operations. This has investment in the company will be able to do so by entailed major capital expenditure and the need to fund retaining some or all of the preference shares that they this expenditure has constrained the rates at which the will receive as a result of the partial exchange of ordinary directors have felt that they can prudently declare, or shares for preference shares. recommend the payment of, ordinary dividends. They believe that capitalisation issues of new preference Strategic direction and succession shares to ordinary shareholders provide a useful mechanism for augmenting returns to ordinary As shareholders will be aware from past annual reports, shareholders in periods in which good profits are the directors have for some time been debating how the achieved but demands on cash resources limit the scope group should in future be structured and managed. This for payment of cash dividends. In line with this thinking, a debate has been prompted by a combination of factors: capitalisation issue of 2,004,872 new preference shares the significant enlargement of the group’s operations over was made to ordinary shareholders on 29 September the past decade, the continuing growth of the Indonesian 2011 on the basis of 3 new preference shares for every economy, the progressive maturing of South East Asian 50 ordinary shares held on 28 September 2011. capital markets and the ageing of the group’s existing senior management. If the intended listing of REA Kaltim on the Jakarta Stock Exchange (as referred to below) proceeds and it is 12 The directors have now reached certain conclusions. group is able to add to its existing land holdings. They have rejected the idea which they were at one time Moreover, the directors believe that it is now possible to considering of reconstituting the group under the attract management willing to live and work in Singapore ownership of a new parent company listed on a stock and Indonesia of the calibre needed to run the group and exchange in a South East Asian financial centre. Instead, that basing senior management in the same time zone as the directors aim to amalgamate all of the group’s the group’s operations will facilitate management Indonesian plantation subsidiaries into a single sub-group, oversight and improve management effectiveness. headed by the group’s principal plantation subsidiary, PT REA Kaltim Plantations (“REA Kaltim”), to sell, to the Following the steps taken in previous years to enhance investing public in Indonesia, a minority shareholding in operational and administrative management capacity in REA Kaltim (probably 20 per cent) and to list REA Kaltim Indonesia, during 2011 the group established a small on the Jakarta Stock Exchange. This could be expected regional office in Singapore and recruited a senior to encourage coverage of the group by South East Asian executive, Mark Parry, to head this office and assume investment analysts, this being one perceived advantage overall local charge of the Indonesian operations. It is of a restructuring under a South East Asian listed parent, intended that Mr Parry will be appointed as president of but would be less expensive to arrange than such a REA Kaltim’s board of directors with the incumbent restructuring. Moreover, listing REA Kaltim in Jakarta president director moving to become chairman of the would have the particular advantage that, as a listed board of commissioners. These two officials, combined company, REA Kaltim would be treated as a local rather with REA Kaltim’s expatriate chief operating and chief than foreign company for Indonesian regulatory purposes. financial officers, establish the leadership required to proceed with the planned listing of REA Kaltim. The consequence of this proposed course of action is that the company will, for the foreseeable future, remain listed Whilst the senior executive management of REA Kaltim in the UK. However, the directors intend that the following the planned listing will be provided by a management of the group will progressively move to triumvirate of expatriates, REA Kaltim’s president Singapore and Indonesia and that the group’s London commissioner will be a senior Indonesian national. The office will, over time, be reduced to a secretariat group’s coal operations are also under the overall charge managing the company’s UK listing and liaising with of an Indonesian national. As a foreign investor in European shareholders. The existing group managing Indonesia, the group needs to remain aware that it is in director and the chairman will remain UK based and are essence a guest in Indonesia and an understanding of expected to continue in their current roles for a period at local customs and sensitivities is important. The group’s least sufficient to ensure management continuity. ability to rely on senior Indonesians to handle its interface Following their eventual retirement, it is planned that most with Indonesia is therefore a significant asset. of their responsibilities will transfer to Singapore and Indonesia. The directors are not motivated in proposing the listing of REA Kaltim on the Jakarta Stock Exchange by any The directors believe that establishing a more local profile perceived need to secure additional equity capital. Rather, for the group and facilitating local Indonesian investment the directors consider that, to the extent that cash is in the group’s plantation operations is likely to become an raised from a sale of REA Kaltim shares in Jakarta, the increasingly important factor in determining whether the existing equity capital of the company should effectively 13 Chairman’s statement continued be reduced. However, the directors also wish the group to executive directors, Messrs Green-Armytage, Keatley, take maximum advantage of the new capital that the Letts and Lim then intend to retire. This will reduce the proposed sale would raise. number of board members to four. It is then proposed to invite Mr Parry to join the board as an executive director Accordingly, if the proposed sale of REA Kaltim shares in and to appoint one new independent non-executive Jakarta proceeds, the directors are contemplating the director who has still to be selected. submission to shareholders of a proposal for the exchange of a proportion of issued ordinary shares for Prospects preference shares. Such an exchange would not only effectively reduce the equity capital of the company by The group’s own FFB crop for 2012 has been budgeted substituting preference share capital for equity but would at 682,000 tonnes with a normal budgetary assumption also mean that the net cash proceeds from the sale of of average rainfall (both as to quantum and distribution). REA Kaltim shares would remain available to the group The FFB crop to end March 2012 amounted to 136,702 and could be used to fund an accelerated expansion tonnes against the budget for the period of 167,804 programme. Operating cash flows could then be used in tonnes. The directors do not believe that any conclusions part to fund progressive repayment of existing as to the likelihood of the group achieving its budgeted indebtedness with the effect that, over time, existing debt crop for 2012 should be drawn from the shortfall as would be replaced by preference share capital. variations from year to year in the monthly phasing of Corporate governance each year’s crop are normal. External purchases of FFB during 2012 have been budgeted at some 30,000 tonnes. In its 2011 evaluation of its performance, the board concluded that it was performing effectively as currently CPO is currently trading at above $1,100 per tonne and constituted and that its effectiveness was not only not the prices of other vegetable oils have risen compromised but in fact augmented by the presence of commensurately. These historically high prices may be several long serving non-executive directors with a deep attributed to a number of factors: the demand drivers of knowledge of the plantation industry and the group’s own population growth and developing world economic affairs and, in several cases, with material holdings of the growth; increasing petroleum oil prices and, company’s shares. The board saw as its most immediate notwithstanding the high prices, continuing growth in challenge establishing the structure and direction of the consumption. World stock levels of oilseeds are not at group going forward and arranging a smooth transition to high levels and there are current concerns that hot dry a younger generation of senior executive management. weather in North and South America will limit soybean The board reconfirmed its previous conclusion that once crops in the first semester of 2012 and that this will these objectives had been substantially achieved it would prevent rebuilding of stocks to more normal levels. On be appropriate that the board itself should be reorganised. this basis, CPO prices could reasonably be expected to The steps being taken in relation to future structure and prices are maintained at or near current levels. direction are described above and it is hoped that the planned Jakarta listing of REA Kaltim can be completed While CPO and CPKO remain at current levels, the group during 2012. The four long serving independent non- will continue to enjoy excellent cash flows. With good remain firm for a while longer, particularly if petroleum oil 14 progress being made in resolving land issues, these flows should permit the group to maintain its planned extension planting programme. Moreover, if the planned Jakarta listing of REA Kaltim can be successfully concluded, it is intended to accelerate this programme. The directors also hope that the investment in the coal operations will soon begin to show a return. The directors therefore believe that the group is well set for further growth. RICHARD M ROBINOW Chairman 27 April 2012 15 Review of the group Introduction Overview This review has been prepared to provide holders of the Nature of business and resources company’s shares with information that complements the accompanying financial statements. Such information is The group is principally engaged in the cultivation of oil intended to help shareholders in understanding the palms in the province of East Kalimantan in Indonesia and group’s business and strategic objectives and thereby in the production of crude palm oil (“CPO”) and by- assist them in assessing how the directors have products. A detailed description of the group's oil palm performed their duty of promoting the success of the activities is provided under “Agricultural operations” below. company. During 2008, the directors decided to augment the This review should not be relied upon by any persons traditional agricultural operations of the group by other than shareholders or for any purposes other than developing a modest coal mining business in Indonesia. those stated. The review contains forward-looking Following this decision, the group has acquired rights in statements which have been included by the directors in respect of three coal concessions in East Kalimantan and good faith based on the information available to them up is developing an open cast coal mining operation and coal to the time of their approval of this review. Such trading activity based on these concessions. Details of statements should be treated with caution given the this diversification are provided under “Coal operations” uncertainties inherent in any prognosis regarding the below. future and the economic and business risks to which the group's operations are exposed. The group and predecessor businesses have been involved for over one hundred years in the operation of In preparing this review, the directors have complied with agricultural estates growing a variety of crops in section 417 of the Companies Act 2006. They have also developing countries in South East Asia and elsewhere. sought to follow best practice as recommended by the The group today sees itself as marrying developed world reporting statement on operating and financial reviews capital and Indonesian opportunity by offering investors published by the Accounting Standards Board but this in, and lenders to, the company the transparency of a review may not comply with that reporting standard in all company listed on a stock exchange of international respects. standing and then using capital raised by the company (or with the company’s support) to develop natural resource This review has been prepared for the group as a whole based operations in Indonesia from which the group and therefore gives emphasis to those matters that are believes that it can achieve good returns. In this significant to the company and its subsidiaries when endeavour, the group’s inheritance from its past and the taken together. The review is divided into five sections: group’s recent track record represent significant overview; agricultural operations; coal operations; intangible resources because they underpin the group’s finances; and risks and uncertainties. credibility. This assists materially in sourcing capital, in negotiating with the Indonesian authorities in relation to project development and in recruiting management of a high calibre. 16 Other resources that are important to the group are its group seeks to add to its land bank when circumstances developed base of operations, bringing with it an are conducive to its doing so. The directors intend that, if established management team familiar with Indonesian the coal operations develop, the group will similarly seek regulatory processes and social customs, a trained production cost efficiencies in those operations by workforce and the group’s land and concession rights. increasing volumes and focusing on productivity. Objectives As a financial strategy, the group aims to enhance returns to equity investors in the company by procuring that a The group’s objectives are to provide attractive overall prudent proportion of the group’s funding requirements is returns to investors in the shares and other securities of met with prior ranking capital in the form of fixed return the company from the operation and expansion of the permanent preferred capital and debt with a maturity group’s existing businesses, to foster economic progress profile appropriate to the group's projected future cash in the localities of the group's activities and to develop the flows. group's operations in accordance with best corporate social responsibility and sustainability standards. Diversification Achievement of these objectives is dependent upon, among other things, the group’s ability to generate the The group recognises that its agricultural operations, of operating profits that are needed to finance such which the total assets at 31 December 2011 represented achievement. some 90 per cent of the group’s total assets and which, in 2011, contributed almost all of the group’s profits, lie CPO and coal are primary commodities and as such must within a single locality and rely on a single crop. This be sold at prices that are determined by world supply and permits significant economies of scale but brings with it demand. Such prices fluctuate in ways that are difficult to risks. Successful development of the coal operations predict and that the group cannot control. The group’s would provide the group with some offset against such operational strategy is therefore to concentrate on risks. The directors have no plans for further minimising unit production costs with the expectation that diversification and believe that, for the foreseeable future, the lower cost producer of any primary commodity is the group’s interests will be best served by growing the better placed to weather any downturn in price than less existing operations. efficient competitor producers of the same commodity. Strategic direction and succession In the agricultural operations, the group adopts a two pronged approach in seeking production cost efficiencies. As shareholders will be aware from past annual reports, First, the group aims to capitalise on its available the directors have for some time been debating how the resources by developing the group’s land bank as rapidly group should in future be structured and managed. This as logistical, financial and regulatory constraints permit debate has been prompted by a combination of factors: with a view to utilising the group’s existing agricultural the significant enlargement of the group’s operations over management capacity to manage a larger business. the past decade, the continuing growth of the Indonesian Secondly, the group strives to manage its established economy, the progressive maturing of South East Asian agricultural operations as productively as possible. capital markets and the ageing of the group’s existing Ancillary to the first component of this approach, the senior management. 17 Review of the group continued The directors have now reached certain conclusions. group is able to add to its existing land holdings. They have rejected the idea which they were at one time Moreover, the directors believe that it is now possible to considering of reconstituting the group under the attract management willing to live and work in Singapore ownership of a new parent company listed on a stock and Indonesia of the calibre needed to run the group and exchange in a South East Asian financial centre. Instead, that basing senior management in the same time zone as the directors aim to amalgamate all of the group’s the group’s operations will facilitate management Indonesian plantation subsidiaries into a single sub-group, oversight and improve management effectiveness. headed by the group’s principal plantation subsidiary, PT REA Kaltim Plantations (“REA Kaltim”), to sell, to the Following the steps taken in previous years to enhance investing public in Indonesia, a minority shareholding in operational and administrative management capacity in REA Kaltim (probably 20 per cent) and to list REA Kaltim Indonesia, during 2011 the group established a small on the Jakarta Stock Exchange. This could be expected regional office in Singapore and recruited a senior to encourage coverage of the group by South East Asian executive, Mark Parry, to head this office and assume investment analysts, this being one perceived advantage overall local charge of the Indonesian operations. It is of a restructuring under a South East Asian listed parent, intended that Mr Parry will be appointed as president of but would be less expensive to arrange than such a REA Kaltim’s board of directors with the incumbent restructuring. Moreover, listing REA Kaltim in Jakarta president director moving to become chairman of the would have the particular advantage that, as a listed board of commissioners. These two officials, combined company, REA Kaltim would be treated as a local rather with REA Kaltim’s expatriate chief operating and chief than foreign company for Indonesian regulatory purposes. financial officers, establish the leadership required to proceed with the planned listing of REA Kaltim. The consequence of this proposed course of action is that the company will, for the foreseeable future, remain listed Whilst the senior executive management of REA Kaltim in the UK. However, the directors intend that the following the planned listing will be provided by a management of the group will progressively move to triumvirate of expatriates, REA Kaltim’s president Singapore and Indonesia and that the group’s London commissioner will be a senior Indonesian national. The office will, over time, be reduced to a secretariat group’s coal operations are also under the overall charge managing the company’s UK listing and liaising with of an Indonesian national. As a foreign investor in European shareholders. The existing group managing Indonesia, the group needs to remain aware that it is in director and the chairman will remain UK based and are essence a guest in Indonesia and an understanding of expected to continue in their current roles for a period at local customs and sensitivities is important. The group’s least sufficient to ensure management continuity. ability to rely on senior Indonesians to handle its interface Following their eventual retirement, it is planned that most with Indonesia is therefore a significant asset upon which of their responsibilities will transfer to Singapore and the group plans to build. The group also derives valuable Indonesia. local support and advice from local advisers and from the local non-controlling investors in, and local non-executive The directors believe that establishing a more local profile directors of, the company's Indonesian subsidiaries. for the group and facilitating local Indonesian investment in the group’s plantation operations is likely to become an As previously indicated, it is planned that during 2012 increasingly important factor in determining whether the (but, if possible, not until after completion of the listing of 18 REA Kaltim), the four long serving independent non- The Indonesian rupiah continued to strengthen during the executive directors, Messrs Green-Armytage, Keatley, first half of 2011, with the rate against the US dollar Letts and Lim, will retire. This will reduce the number of improving from Rp 8,991= $1 at 31 December 2010 to board members to four. It is then proposed to invite Mr Rp 8,750 = $1 during the first quarter of the year and Parry to join the board as an executive director and to further to Rp 8,500 = $1 by the end of the second appoint one new independent non-executive director who quarter. Following the economic problems in Europe, the has still to be selected. In making the latter appointment, position was partly reversed in the second half of the year the directors will have due regard to the latest guidelines with the rate at 31 December falling back to Rp 9,068 = as respects diversity and gender. Following such $1. Indonesian inflation during 2011 amounted to 4 per reconstitution of the board, the directors intend that the cent as compared with 7 per cent during the preceding board will in future be refreshed on the basis of a policy year. that length of service by independent non-executive directors be limited to nine years. The Indonesian context Indonesia is now an important world producer of CPO, accounting for close to 50 per cent of the world’s supply. Indonesian production is predicted to grow by over 1 million tonnes in 2012 to close to 26.5 million tonnes, In 2011, the Indonesian economy grew by 6.3 per cent. more than three times the 2001 production which With a ratio of debt to gross domestic product below 25 amounted to some 8.3 million tonnes. The rapid growth per cent during 2011 and foreign currency reserves in production reflects the large scale expansion of increasing to $120 billion, Indonesia is well placed to face Indonesian oil palm plantations over the last decade. the current international economic uncertainties. The Malaysia, the country’s closest rival in terms of CPO, Indonesian credit rating continued to improve during produced 18.8 million tonnes in 2011 and production is 2011 and the outlook for the economy appears positive. expected to be stable around this level during 2012. Citing improvements in the country’s balance sheet and economic performance, Standard & Poors raised the Oil palm plantations and CPO remain an important driver sovereign debt and credit ratings in April 2011 from BB for development of the economy in East Kalimantan to BB+, the highest level accorded to Indonesian which accounts for an estimated 7 per cent of Indonesia’s sovereign exposures since the 1997-1998 Asian CPO production. Various infrastructural projects are financial crisis. In addition, in December 2011, Fitch under consideration, including the development of new Ratings awarded Indonesia a BBB- investment grade roads and an international sea port. rating. Evaluation of performance In October 2011, the President, Susilo Bambang Yudhoyono, announced a long-anticipated cabinet In seeking to meet its expansion and efficiency objectives, reshuffle. There were leadership changes at twelve of the the group sets operating standards and targets for most country’s thirty-four ministries, including at the trade aspects of its activities and regularly monitors ministry where the new minister, who was formerly performance against those standards and targets. For chairman of the investment board, is expected to put many aspects of the group's activities, there is no single more emphasis on promoting domestic production. standard or target that, in isolation from other standards and targets, can be taken as providing an accurate 19 Review of the group continued continuing indicator of progress. In these cases, a The directors have deferred formalisation of performance collection of measures has to be evaluated and a indicators for the coal mining operations until such time qualitative conclusion reached. as those operations achieve economic levels of production. For the coal trading operations, the directors The directors do, however, rely in the agricultural have established the monthly volume of traded coal operations on regular reporting of certain key (measured as the tonnage of coal delivered to buyers in performance indicators that are comparable from one any given month) as an appropriate indicator of activity year to the next. These indicators for any given period levels within the coal trading operations and, on the basis comprise: (cid:129) the new extension planting area developed; this is measured as the area in hectares of land cleared and planted out or cleared and prepared for planting out during the applicable period; (cid:129) the crop of fresh fruit bunches (“FFB”) harvested; this is measured as the weight in tonnes of FFB delivered to the group's oil mills from the group’s estates during the applicable period; and (cid:129) the CPO, palm kernel and crude palm kernel oil (“CPKO”) extraction rates achieved; the first two of that the group sets a minimum estimated margin for all traded coal transactions, of the returns being achieved by those operations. Details of average monthly traded coal volumes for 2011 with comparable figures for 2010 (in both cases as sourced from the group's internal management reports) are provided under “Operating activities” in “Coal operations” below, together with the target monthly volume for 2012. Key indicators used by the directors in evaluating the group's financial performance for any given period comprise: these are measured as the percentage by weight of (cid:129) return on adjusted equity which is measured as profit CPO or palm kernels extracted from FFB processed before tax for the period less amounts attributable to and the third is measured as the percentage by preferred capital expressed as a percentage of weight of CPKO extracted from palm kernels average total equity (less preferred capital) for the crushed. period; and Of these indicators, the first provides a measure of the group's performance against its expansion objective. The second and third indicators are measures of field and mill efficiency and, as such, provide a basis for assessing the extent to which the group is achieving its objective of maximising output from its operations. Quantifications of the above indicators for 2011 and comparable quantifications for 2010 (in both cases as sourced from the group's internal management reports) are provided under “Land development” and “Crops and extraction rates” in “Agricultural operations” below, together with targets for 2012. (cid:129) net debt to total equity which is measured as borrowings and other indebtedness (other than intra group indebtedness) less cash and cash equivalents expressed as a percentage of total equity. Because of the group's material dependence on CPO prices, which have a direct impact on revenues and on periodic revaluations of biological assets, in targeting return on total equity the directors set a norm that they hope will represent an average of the annual returns achieved over a period of seven years. Percentages for the above two indicators for 2011 and comparable figures for 2010 (derived from figures 20 extracted from the audited consolidated financial The directors recognise the significance of environmental, statements of the company) are provided under “Group social and governance matters to the business of the results” and “Financing policies” in “Finances” below, group. Identification, assessment, management and together with target percentages. mitigation of the risks associated with such matters forms part of the group’s system of internal control for which the In relation to social and environmental matters, the board of the company has ultimate responsibility. The directors continue to rely principally on qualitative rather board discharges that responsibility as described in the than quantitative assessments but have now established “Corporate governance” section of this annual report. some quantitative indicators to assist evaluation of the Material risks and related policies regarding group’s performance in these areas. Accordingly the environmental, social and governance matters are qualitative commentary under “Employees”, “Community described under “Risks and uncertainties” below and development”, “Smallholders”, “Conservation” and under “Employees”, “Community development”, “Sustainable practices” in “Agricultural operations” below “Smallholders”, “Conservation” and “Sustainable practices” includes quantitative data on examination results in the in “Agricultural operations” below. The latter sections group’s primary schools, incidence of vector borne also detail the group’s successes and failures in diseases, serious accidents sustained, pollution of water environmental, social and governance areas and the courses, use of diesel oil and substitution of organic for measures taken in response to failures. Independent inorganic fertiliser. verification of the group’s performance in these areas is provided as described under “Accreditation and Consultants appointed by the group have provided a first verification” in “Agricultural operations” below. assessment of the group’s carbon footprint but it is clear that this will require considerable refinement before Agricultural operations achieving the level of accuracy that is needed for publication of such an assessment. During 2011, the Structure group worked with a committee of the Roundtable on Sustainable Palm Oil endeavouring to set industry wide All of the group's agricultural operations are located in standards for this and other key areas of carbon footprint East Kalimantan and have been established pursuant to measurement. Deriving a value for the greenhouse gas an understanding dating from 1991 whereby the East emissions associated with the development of land for Kalimantan authorities undertook to support the group in agriculture to include in such calculations presents acquiring, for its own account and in co-operation with serious challenges. This is largely due to the difficulties of local interests, substantial areas of land in East identifying appropriate baselines and methodologies for Kalimantan for planting with oil palms. measuring carbon stocks. Most agricultural land worldwide was once forested and the period and extent to The oldest planted areas, which represent the core of the which the impact on greenhouse gas emissions of its group’s operations, are owned through REA Kaltim in conversion to agricultural use should be reflected in the which a group company holds a 100 per cent economic carbon footprint of crops subsequently grown on such interest. With the REA Kaltim land areas approaching full land is as much a political as a scientific question. utilisation, over the four year period from 2005 to 2008 the company established or acquired several additional Indonesian subsidiaries, each potentially bringing with it a 21 Review of the group continued substantial allocation of land in the vicinity of the REA with the group, all applications to develop previously Kaltim estates. These additional subsidiaries comprise undeveloped land areas have to be agreed by the PT Cipta Davia Mandiri (“CDM”), PT Kartanegara Indonesian Ministry of Forestry and to go through a titling Kumalasakti (“KKS”), PT Kutai Mitra Sejahtera (“KMS”), and permit process. This process begins with the grant of PT Putra Bongan Jaya (“PBJ”) and PT Sasana Yudha a land allocation of Indonesian state land by the Bhakti (“SYB”). Each of these subsidiaries is, or on Indonesian local authority responsible for administering completion of necessary legal formalities will be, owned the land area to which the allocation relates (an “izin as to 95 per cent by group companies and 5 per cent by lokasi”). Allocations are normally valid for periods of Indonesian local investors. between one and three years but may be extended if steps have been taken to obtain full titles. Land areas After a land allocation has been obtained (either by direct The operations of REA Kaltim are located some 140 grant from the applicable local authority or by acquisition kilometres north west of Samarinda, the capital of East from the original recipient of the allocation or a previous Kalimantan, and lie either side of the Belayan river, a assignee), the progression to full title involves tributary of the Mahakam, one of the major river systems environmental and other assessments to delineate those of South East Asia. The KKS and SYB areas are areas within the allocation that are suitable for contiguous with the REA Kaltim areas so that the three development, settlement of compensation claims from areas together form a single site. All of these areas fall local communities and other necessary legal procedures within the Kutai Kartanegara district of East Kalimantan. that vary from case to case. The titling process is then The PBJ area sits some 70 kilometres to the south of the completed by a cadastral survey (during which boundary REA Kaltim areas in the West Kutai district of East markers are inserted) and the issue of a formal registered Kalimantan while the CDM and KMS areas are located in land title certificate (an “hak guna usaha” or “HGU”). close proximity of each other in the East Kutai district of Once full title has been obtained, central government and East Kalimantan less than 30 kilometres to the east of the local authority permits are required for the development of REA Kaltim areas. fully titled land. These permits are often issued in stages. At present, the REA Kaltim, SYB, KKS, CDM and KMS In the group’s experience, the land titling and permit areas are most easily accessed by river and by air process, which was never straightforward, has become although the completion in 2005 of a road bridge over the more complicated in recent years. This has followed the Mahakam at Kota Bangun may eventually improve road devolution of significant authority in relation to land access. The PBJ area is easily accessible by road. The matters from the Indonesian central government to CDM and KMS areas can be accessed from the REA Indonesian provincial and district authorities. This has Kaltim area by way of coal mining roads and a ferry. A resulted in an increase in the number of official bodies proposed bridge across the Senyiur River should improve involved in the titling process. road access to these areas by eliminating the need for the ferry. A particular complication since the end of 2009 has been a requirement to meet new Ministry of Forestry Although the 1991 understanding established a basis for regulations. Initially, these required that any company the provision of land for development by or in cooperation proposing to clear land for plantation development first 22 obtain a so-called timber cutting permit (“izin The fully titled areas held by SYB include 3,557 hectares pemanfaatan kayu” or “IPK”). As pre-requisites to the that are the subject of third party claims in respect of the issue of an IPK, the zoning of the land to be covered by rights to coal underneath such land. On 30 December the IPK had to be checked to confirm that it had been 2011, SYB entered into a conditional settlement earmarked for plantation development and the land arrangement to resolve such claims. Under this concerned then had to be surveyed by representatives of agreement, SYB has agreed to swap the 3,557 hectares the Ministry of Forestry to establish the stand of the subject of the claims for 9,097 hectares of fully titled commercial timber (if any). During 2011, the requirement land held by another company, PT Prasetia Utama (“PU”), to obtain an IPK was relaxed for land areas in respect of the whole of the issued share capital of which is to be which HGU certificates have already been obtained (this transferred to SYB. As a term of the settlement, SYB has was logical because HGU titles may only be issued in also agreed to relinquish the 2,212 hectares in respect of respect of land that has already been zoned for which it holds a land allocation still subject to completion agricultural use and therefore the Indonesian authorities of titling (being land that is also subject to overlapping should already have established that such land does not mineral rights). The PU land is located on the southern contain material quantities of commercial timber). For side of the Belayan River opposite the retained SYB such areas, the company has been advised that Ministry northern areas and is linked by a government road to the of Forestry regulations can now be met by obtaining a southern REA Kaltim areas. timber utilisation permit (“surat keterangan syah kayu bulat” or “SKSKB”) the issue of which involves a shorter Upon and subject to completion of the agreed SYB process than the issue of an IPK. settlement arrangements, the fully titled land areas held by the group will increase to 76,124 hectares, while the The group’s land titling made further progress during land allocations still subject to titling will reduce to 24,902 2011 to the extent that the fully titled agricultural land hectares. Titling of the remaining land allocations may be area held by the group amounted at year end (prior to expected to result in full titles being granted to only part implementation of the settlement arrangement referred to of the allocated areas as areas the subject of conflicting below) to 70,584 hectares, comprising 9,784 hectares land claims or deemed unsuitable for oil palm cultivation held by CDM, 7,321 hectares held by KMS, 11,602 may be excluded. Moreover, not all of the areas in respect hectares held by PBJ, 30,106 hectares held by REA of which full HGU titles are issued can be planted with oil Kaltim and 11,771 hectares held by SYB. palms. Some fully titled land may be unsuitable for planting, a proportion will be set aside for conservation In addition, at 31 December 2011, the group held land and a further proportion is required for roads, buildings allocations subject to completion of titling totalling and other infrastructural facilities. The directors believe 27,114 hectares, comprising 9,802 hectares in CDM, that of the 76,124 hectares of post SYB settlement fully 15,100, hectares in KKS and 2,212 hectares in SYB. The titled land between 50,000 and 55,000 hectares will KKS allocation is conditional not only upon satisfaction of ultimately be plantable with oil palms. The remaining land the normal titling requirements but also upon completion allocations may in due course provide a further 10,000 of a planned rezoning of East Kalimantan which is slowly plantable hectares. progressing through the governmental authorities who must approve it. The group continues to look at acquiring further areas suitable for planting with oil palms within the general 23 Review of the group continued vicinity of its existing land allocations but, with land prices carried forward for development during 2012. Including rising and increasing interest in plantation development, this 2,000 hectares, the group is aiming to plant or land is much less available than was the case in 1991 prepare for planting a total of 4,000 hectares during when the group was first established in East Kalimantan. 2012. Land development At current cost levels and CPO prices, extension planting in areas adjacent to the existing developed areas still Areas planted and in the course of development as at 31 offers the prospect of attractive returns. Accordingly, it December 2011 amounted in total to some 37,000 remains the policy of the directors that, subject to hectares. Of this total, mature plantings comprised financial and logistical constraints, the group should 25,415 hectares having a weighted average age of 10 continue its expansion and should aim over time to plant years. A further 1,234 hectares planted in 2008 was with oil palms all suitable undeveloped land available to scheduled to come to maturity at the start of 2012. The the group (other than areas set aside by the group for total of 37,000 hectares includes 2,164 hectares (of conservation). Such expansion will, however, involve a which 272 hectares was planted in 2008) to be series of discrete annual decisions as to the area to be relinquished by SYB upon completion of the SYB land planted in each forthcoming year and the rate of planting swap arrangement described under “Land areas” above. may be accelerated or scaled back in the light of Reserve land held by the group only becomes available for extension development is likely to remain dependent for development when the titling process has proceeded upon the rate at which the group can make additional land prevailing circumstances. Moreover, the group’s capacity to a point at which the group has been granted areas available for planting. development and necessary land clearing licences, and compensation agreements have been reached with local Processing and transport facilities villagers who have claims in respect of their previous use of the land. The group currently operates two oil mills in which the FFB crops harvested from the mature oil palm areas are As previously reported, the group's plans for oil palm processed into CPO and palm kernels. The first mill dates extension planting were seriously delayed in 2010 by from 1998 and the second mill was brought into hold ups in the issue of necessary permits and, in production in 2006. particular, in the issue of the IPK’s that were at that time required. The group made better progress during 2011. A major overhaul of the older mill was initiated in 2010 to A first IPK was secured in January 2011 and a second restore the effective mill capacity to 80 tonnes per hour. one in March. Thereafter, following relaxation of the IPK This overhaul involved the upgrading of machinery and requirement for land areas with HGU title, the group was the installation of a new boiler. These works were due to successful in implementing the alternative permit be completed during 2011 and, for the most part, this procedure applicable to such areas so as to secure target was achieved. However, delays in the delivery of permits to develop further land. As a result, the aggregate new steriliser cages have meant that full completion is area planted or under development increased over 2011 now projected for mid 2012. The improvements already by some 5,000 hectares against a target of 7,000 implemented were sufficient to ensure that the mill had hectares. The balance of some 2,000 hectares has been adequate capacity to achieve the throughput required of it 24 during 2011. The capacity of the second oil mill, which The directors believe that flexibility of delivery options is was brought into production in 2006, was expanded helpful to the group in its efforts to optimise the net during 2010 from 60 to 80 tonnes per hour. prices, FOB port of Samarinda, that it is able to realise for its produce. Moreover, the group’s ability itself to deliver CPO and CPKO allows the group to make sales without With the expansion of capacity and upgrading near the collection delays sometimes experienced with FOB completion, the two mills are continuing to cope well with buyers. Currently, about two-thirds of the group's CPO is the demands of current crop levels. A third mill is under sold for delivery to ports in Sabah in East Malaysia. As a construction and is due for completion in the second half result, the group’s larger barge is employed almost of 2012 in readiness for the expected peak cropping exclusively in sailing between Samarinda and Sabah. months later in the year. A trial made in 2005 established that it is both feasible The group's second oil mill incorporates, within the overall and economic to use the barge fleet to transfer CPO from facility, a palm kernel crushing plant in which palm kernels the Samarinda transhipment terminal to ships anchored are further processed to extract the CPKO that the palm offshore from the port of Samarinda. This potentially kernels contain. The processing of kernels into CPKO provides access to vessels of much greater tonnage than avoids the material logistical difficulties and cost the vessels that can be loaded within the port of associated with the transport and sale of kernels. The Samarinda (which are effectively limited to 6,000 tonnes). kernel crushing plant has a capacity of 150 tonnes of Moreover, the recent construction of bulking facilities in kernels per day which is sufficient to process current the major sea port of Balikpapan means that larger kernel output from the group’s two existing oil mills. vessels may now also be accessed by barging from the Further kernel crushing capacity will be needed in 2012 upstream oil storage tanks to Balikpapan and and the third mill now under construction will therefore transhipping there rather than in Samarinda. Access to incorporate its own kernel crushing plant. larger vessels would permit the group to ship palm products to Europe when differentials between European The group maintains a fleet of barges for transport of and South East Asian prices for CPO and CPKO make it CPO and CPKO. The fleet is used in conjunction with worthwhile to do so. This is not currently the case but the tank storage adjacent to the oil mills and a transhipment situation may change when the group becomes able to terminal owned by the group downstream of the port of deliver CPO and CPKO that has been segregated and Samarinda. The fleet now comprises one barge of 4,000 certified by internationally recognised bodies as tonnes, which the group time charters, and a number of sustainably produced. As detailed under “Accreditation smaller barges, ranging between 750 and 2,000 tonnes, and verification” below, the group is making good which are owned by the group. The smaller barges are progress towards achieving such certification. used for transporting CPO and CPKO from the upriver operations to points downstream for transfer either to the During periods of lower rainfall (which normally occur for transhipment terminal for subsequent collection by buyers short periods during the drier months of May to August of or directly to buyers’ own vessels. The 4,000 tonne barge, each year), river levels on the upper part of the Belayan which is equipped for sea voyages, is used to make become volatile and CPO and CPKO at times have to be deliveries to customers in Malaysia and other parts of transferred by road from the mills to a point some 70 Indonesia. kilometres downstream where year round loading of 25 Review of the group continued barges of up to 2,000 tonnes is possible. The group owns Rainfall across the group's estates averaged 3,414 mm a riverside site in this downstream location and is now for 2011, compared with 4,434 mm for the previous year. developing its own permanent loading facilities on the site After a period of comparatively low rainfall during the third for use during dry periods. The group is also establishing quarter of the year, the fourth quarter was relatively wet. (by obtaining licences to use third party owned roads) This delayed crop ripening in the final months of 2011 so alternative routes for the transfer of palm products to the that the surpluses over budget anticipated in the October downstream loading point during drier periods to ensure 2011 press release were not maintained. that, as volumes increase, the group can continue during such periods promptly to evacuate all palm product The group’s own FFB crop for 2012 has been budgeted output. at 682,000 tonnes with a normal budgetary assumption of average rainfall (both as to quantum and distribution). The river route downstream from the estates follows the The FFB crop to end March 2012 amounted to 136,702 Belayan river to Kota Bangun (where the Belayan joins tonnes against the budget for the period of 167,804 the Mahakam river), and then the Mahakam through tonnes. The directors do not believe that any conclusions Tenggarong, the capital of the Kutai Kartanegara regency, as to the likelihood of the group achieving its budgeted Samarinda, the East Kalimantan provincial capital, and crop for 2012 should be drawn from the first quarter ultimately through the Mahakam’s mouth into the production levels as variations from year to year in the Makassar Straits. A major bridge over the Mahakam at monthly phasing of each year’s crop are normal. External Tenggarong (a copy of the Californian Golden Gate purchases of FFB during 2012 have been budgeted at Bridge with a reported span of some 700 metres) 30,946 tonnes. collapsed on 28 November 2011 with serious loss of life. All river traffic movement past the bridge was temporarily Processing of the group's own FFB production and the suspended and this led to some build up in upstream CPO externally purchased FFB, together totalling 641,481 and CPKO stocks over the year end of 31 December tonnes (2010: 538,831 tonnes), produced 147,455 2011. Subsequently, following the lifting of restrictions tonnes of CPO (2010: 127,256 tonnes) and 28,822 on river movement, oil stocks held in the group's mill tonnes of palm kernels (2010: 24,614 tonnes) reflecting storage facilities returned to normal levels. extraction rates of 22.99 per cent for CPO (2010: 23.62 Crops and extraction rates per cent) and 4.49 per cent for kernels (2010: 4.57 per cent). Production of CPKO amounted to 10,815 tonnes (2010: 9,745 tonnes) with an extraction rate of 38.44 per FFB crops for the years from 2007 to 2011 are shown in cent (2010: 40.07 per cent). the “Key statistics” section of this annual report. The crop out-turn for 2011 amounted to 607,335 tonnes of oil Current extraction rates and the group’s target rates for palm fresh fruit bunches. This represented an increase of 2012 reflect the increasing proportion of younger crops 17 per cent on the FFB crop for 2010 of 518,742 tonnes now being processed. The group’s target extraction rates and was close to the budgeted crop for the year of for 2012 are 23.5 per cent for CPO (2011: 24.0 per 610,957 tonnes. External purchases of FFB from cent), 4.75 per cent for palm kernels (2011: 4.75 per smallholders and other third parties in 2011 totalled cent) and 39 per cent for CPKO (2011: 42 per cent). 34,146 tonnes (2010: 20,089 tonnes). 26 Markets competitor oils and this provides CPO with a natural competitive advantage within the vegetable oil and animal According to Oil World, worldwide consumption of the 17 fat complex. Within vegetable oil markets, CPO should major vegetable and animal oils and fats increased by also continue to benefit from health concerns in relation 3.49 per cent to 176.1 million tonnes in the year to 30 to trans-fatty acids. Such acids are formed when September 2011. The increased consumption was vegetable oils are artificially hardened by hydrogenation. reflected in increased world production during the same Poly-unsaturated oils, such as soybean oil, rape oil and period of 176.1 million tonnes with CPO accounting for sunflower oil, require hydrogenation before they can be 48.0 million tonnes of this (27.3 per cent of the total). used for shortening or other solid fat applications but Vegetable and animal oils and fats have conventionally CPO does not. been used principally for the production of cooking oil, In recent years, bio-fuel has become an important factor margarine and soap. Consumption of these basic in the vegetable oil and animal fat markets, not so much commodities correlates with population growth and, in because of the oil and fats that it currently consumes, less developed areas, with per capita incomes and thus although this is not insignificant, but because the size of economic growth. Demand is therefore driven by the the energy market means that bio-fuel can provide a increasing world population and economic growth in the ready outlet for large volumes of oils and fats over a short key markets of India and China. Vegetable and animal oils period when surpluses in supply depress prices to levels and fats can also be used to provide bio-fuels and, in at which bio-fuel can be produced at a cost that is particular, bio-diesel. According to Oil World, bio-fuel competitive with prevailing petroleum oil prices. There is production during the year to 31 December 2011 is a growing body of evidence that, in recent years, expected to have accounted for some 12 per cent of all vegetable oil and petroleum oil prices have moved in vegetable and animal oil and fat produced. tandem and that petroleum oil prices create a floor for vegetable and animal oil and fat prices at the level at The principal competitors of CPO are the oils from the which such oils and fats can be converted to bio-fuel at an annual oilseed crops, the most significant of which are overall cost (net of any available subsidies) that is soybean, oilseed rape and sunflower. Because these competitive with the prevailing price of petroleum oil. oilseeds are sown annually, their production can be rapidly adjusted to meet prevailing economic circumstances with The directors believe that demand for, supply of and high vegetable oil prices encouraging increased planting consequent pricing of, vegetable and animal oils and fats and low prices producing a converse effect. Accordingly, will ultimately be driven by fundamental market factors. in the absence of special factors, pricing within the However, they also recognise that normal market vegetable oil and fat complex can be expected to oscillate mechanisms can be affected by government intervention. about a mean at which adequate returns are obtained It has long been the case that some areas (such as the from growing the annual oilseed crops. EU) have provided subsidies to encourage the growing of Since the oil yield per hectare from oil palms (at between natural economics of producing oilseed crops. More four and seven tonnes) is much greater than that of the recently there have been actions by governments principal annual oilseeds (less than one tonne), CPO can attempting to reduce dependence on fossil fuels. These be produced more economically than the principal have included steps to enforce mandatory blending of oilseeds and that such subsidies have distorted the 27 Review of the group continued bio-fuel as a fixed minimum percentage of all fuels and Revenues subsidies to support the cultivation of crops capable of being used to produce bio-fuel. Concerns as to the side In 2011, approximately 37 per cent by volume of group effect of such actions in reducing food availability and in CPO sales was made to the local Indonesian market and encouraging despoliation of forest lands may limit further the balance of 63 per cent was exported. FOB prices measures to encourage the production of bio-fuel but the realised for CPO in the local market during 2011 were for directors consider it likely that measures already in place the most part broadly in line with those available in the will remain in force for some time to come. export market but, with production volumes increasing, the group wishes to ensure that it can access both A graph of CIF Rotterdam spot CPO prices for the last ten domestic and international CPO markets. Sales years, as derived from prices published by Oil World, is continued to be made to a small number of buyers with shown in the “Key statistics” section of this annual report. export sales concentrated within the South East Asian The monthly average price over the ten years has moved region and the vast majority of exports going to refineries between a high of $1,292 per tonne and a low of $330 in East Malaysia owned by one customer (a major per tonne. The monthly average price over the ten years company of international standing). as a whole has been $664 per tonne. With the CPKO price at a premium (and at times a After opening 2011 at $1,285 per tonne, CIF Rotterdam, substantial premium) to the CPO price, CPKO remained the price weakened during the year to end 2011 at an important second product for the group during 2011. $1,040 per tonne. Prices have firmed slightly in 2012 to- During 2010, the group started selling CPKO for export date and have risen to above $1,100 per tonne. as well as domestically and this practice continued in The current historically high prices of CPO and other CPKO sales by volume in 2011 against 34 per cent in 2011. As a result, exports represented 38 per cent of vegetable oils (which have appreciated commensurately) 2010. may be attributed to a number of factors: the demand drivers of population growth and developing world CPO and CPKO sales are made on contract terms that economic growth referred to above; increasing petroleum are comprehensive and standard for each of the markets oil prices and, notwithstanding the prices, continuing into which the group sells. The group therefore has no growth in consumption. World stock levels of oilseeds current need to develop its own terms of dealing with are not at high levels and there are current concerns that customers. Once the group has completed the RSPO hot dry weather in North and South America will limit supply chain certification referred to under “Accreditation soybean crops in the first semester of 2012 and that this and verification” below, it will be in a position to offer its will prevent rebuilding of stocks to more normal levels. On CPO as sustainable oil. Unfortunately, the group is not this basis, CPO prices could reasonably be expected to well placed to derive much immediate advantage from this remain firm for a while longer, particularly if petroleum oil because the group’s geographical location makes China prices are maintained at or near current levels. and India more natural destinations for its oil than Europe and it is principally the European market in which sustainable CPO commands some premium. Nevertheless, CPO production in East Kalimantan is increasing and as it increases the marketing opportunities 28 open to the group also increase. The group is therefore production for a forthcoming period of twelve months. No continuing to explore possibilities for sale of its CPO with deliveries were made against forward fixed price sales of some sustainability premium. CPO or CPKO during 2011 and the group currently has no sales outstanding on this basis. Indonesia continues to impose a sliding scale of duty on exports of CPO and CPKO but the applicable scale was The average US dollar prices per tonne realised by the modified in August 2011. The modification increased the group in respect of 2011 sales of CPO and CPKO, price at which duty first becomes payable and reduced adjusted to FOB, Samarinda, and net of export duty were, the top rate of duty from 25 per cent to 22½ per cent. As respectively, $861 (2010: $779) and $1,194 (2010: a result, the rate of duty now rises from nil per cent on $1,066). sales at prices of up to the equivalent of $750 per tonne, CIF Rotterdam, to 22½ per cent on sales at prices above Costs the equivalent of $1,250 per tonne. An unwelcome aspect of the change is that the new scale generally has The group's revenue costs principally comprise: direct increased the rates of duty payable at levels equivalent to costs of harvesting, processing and despatch; direct costs CIF Rotterdam prices of between $800 and $1,150 per of upkeep of mature areas; estate and central overheads tonne. Moreover, it remains the case that the progressive in Indonesia; the overheads of the UK head office; and nature of the duty means that the Indonesian state takes financing costs. The group’s strategy, in seeking to a large part of the benefit of increasing prices at CIF minimise unit costs of production, is to maximise yields Rotterdam levels of between $900 and $1,250 per per hectare, to seek efficiencies in overall costs and to tonne. spread central overheads over as large a cultivated hectarage as possible. As a general rule, all CPO and CPKO produced by the group is sold on the basis of prices prevailing immediately The level of rainfall in the areas of the agricultural ahead of delivery but, on occasions when market operations provides the group with some natural conditions appear favourable, the group may consider advantage in relation to crop yields. The group making forward sales at fixed prices. The fact that export endeavours to capitalise on this advantage by constantly duty is levied on prices prevailing at date of delivery, not striving to improve its agricultural practices. In particular, on prices realised, does act as a disincentive to making careful attention is given to ensuring that new oil palm forward fixed price sales since a rise in CPO prices prior areas are planted with high quality seed from proven seed to delivery of such sales will mean that the group will not gardens and that all oil palm areas receive the upkeep only forego the benefit of a higher price but may also pay and fertiliser that they need. export tax on, and at a rate calculated by reference to, a higher price than it has obtained (and in this context it Particular cost saving initiatives that have been should be noted that if CPO prices were to rise implemented by the group in recent years include significantly above $1,250 per tonne CIF Rotterdam, the measures to reduce the use of pesticides, partial current sliding scale of export duties might well be substitution of inorganic with natural fertiliser, increased extended). When making forward fixed price sales, the mechanical handling of FFB collection and transport, and group would not normally commit a volume equivalent to the establishment of an “in house” road maintenance more than 60 per cent of its projected CPO or CPKO capability. It is hoped that commissioning of the group’s 29 Review of the group continued two new methane conversion plants (described under Wherever possible, the group fills available staff positions “Sustainable practices” below) will permit further by internal promotion. The continuing expansion of the economies during 2012 by reducing the group’s agricultural operations gives the group the ability to offer consumption of diesel oil. Employees graduates the prospect of an attractive career path. Graduate intake includes graduates holding agricultural and engineering qualifications but future graduate recruitment may be broadened to include a wider The workforce in the group’s agricultural operations spectrum of graduates with the aim of providing the group continues to expand in line with the growth in the with a pool of staff qualified to manage all aspects of the operations. By the end of 2011, the workforce numbered group’s plantation activities. over 7,550 (2010: 7,400). Continued training is provided for staff at all levels. The reorganisation of the human resources department Regular programmes are constructed by, and operated initiated in 2009 was substantially completed during out of, the group's own training school. These are 2011. New management was appointed to enhance supplemented by external management development operational practices and to improve the effectiveness of courses and attendance at industry conferences. A wide the department as well as to improve productivity. Formal variety of topics is covered including health and safety, processes are in place for recruitment, particularly for key sustainability, communication skills and English language managerial positions, where psychometric testing is used courses. In 2011, in conjunction with implementation of to support the selection and hiring decisions. Exit the UK Bribery Act 2010, a training programme on work interviews are also conducted with departing staff to ethics was introduced which will be reinforced with ensure that management can address any significant continuous training for employees at all levels. A recent issues. As part of a more consistent approach to the analysis of training identified areas for improvement and management of human resources, a performance during 2012 competency based training is being management system linked to key performance indicators undertaken to address competency gaps relating to was implemented during 2011 and a new competitive specific positions. The group continues to take total remuneration structure is being phased in gradually. New quality management initiatives with the aim of further initiatives for 2012 include the development of a talent improving the effectiveness of the group’s operations. pool to facilitate effective succession planning and a review of the employee retention programme. Almost all members of the workforce and their dependants are housed in group housing in a network of Having available staff in the numbers and with the skills villages across the group estates. Group housing is and commitment that are required is vital to the group in extended as the workforce expands. All villages are its efforts to establish best practice in all aspects of its equipped with potable water and electricity and provided agricultural activities. In most years, graduates from with a range of amenity buildings including mosques, Indonesian universities are recruited to join a twelve churches, shops, schools and crèches. month training programme organised by the group's training school that provides a grounding in the technical A trust funded by the group operates a network of primary aspects of oil palm estate management. Those schools and crèches across the group's estates for over successfully completing the programme are offered 1,800 children. The group also provides support to state management positions. 30 secondary schools serving the children of the group's Kalimantan” in the provision of equal opportunities for employees. In 2011, 143 pupils from the group’s primary female workers. schools sat examinations for entry to state secondary schools and a 100 per cent pass rate was achieved Community development (2010: 90 pupils and 100 per cent). The group believes that maintenance of good relations The group runs its own health service with a residential with, and encouraging the development of, local doctor, a medical clinic on each established estate and a communities in its areas of operation is an essential central clinic. It also has partnership links with larger component of its agricultural operations. To this end, the hospitals in Samarinda and Jakarta. The estate and group provides assistance to adjacent villages in a variety central clinics are open not only to the group's employees of ways. In addition to holding formal liaison meetings and their dependants but also to members of the local with the communities, the group encourages joint social communities. The group actively supports measures to and cultural activities between its employees and local control endemic diseases and to further the education of villagers. its workforce in hygiene and similar health matters. No incidents of vector borne diseases (such as dengue fever Responsibility for day to day dealings with the local and malaria) in which infection occurred on the group’s communities is shared by three departments: community estates were reported during 2011. development, smallholder and conservation. The activities of the smallholder and conservation departments are The group has health and safety policies that are clearly dealt with under “Smallholder programmes” and communicated to all employees and are managed “Conservation” below. The community development through regular meetings on each operating unit attended department is primarily responsible for overseeing by management and employee representatives. The infrastructural and other general assistance to, and minutes from all such meetings are reviewed by senior supporting self-help projects within, the local management ultimately accountable to the group communities. The department is overseen by the group’s managing director and appropriate action is taken to head of estates and is managed by two senior members remedy any deficiencies identified. The group has of staff with three assistants. committed to strengthening, and investing further in, its occupational health and safety practices during 2012 and Infrastructural assistance provided to local villages is currently organising a series of investigations and includes the provision of generating sets, assistance with audits following one fatal accident which regrettably repairs of village roads, schools and community buildings occurred at one of the group’s mills during 2011. and drilling of tube wells to provide water for drinking and daily domestic use. Other forms of general assistance The group promotes a policy for the creation of equal and include donations to support the celebration of religious ethnically diverse employment opportunities and festivals and regular fogging for mosquitoes in the areas encourages the establishment of forums in which of the surrounding communities to reduce the incidence employees or their representatives can have free and of vector borne diseases in those communities. open dialogue with the group’s management. In 2011, the group received an award, presented by the President of Self-help projects supported by the group are intended to the Republic of Indonesia, for the “Best Company in East promote economic development in the local communities 31 Review of the group continued by encouraging the communities to take advantage of the Pemberdayaan Masyarakyat Desa” or “PPMD”. Under this readily accessible local market for produce that the scheme, each individual smallholder cultivates oil palm on proximate group workforce provides. The community his own plot, typically two hectares. The group provides development department supports the establishment of technical advice and supplies each smallholder with such projects by assisting with sale arrangements and fertilisers and chemicals on deferred terms on the basis providing financial and technical assistance. Projects that when the smallholder’s oil palm plantings reach undertaken to-date have included chicken, duck and pig maturity, all FFB produced will be sold to the group for rearing, fish farming, fruit, vegetable and rice cultivation processing and the group will, on an agreed basis, recover and bee keeping. The group encourages the formation of from the amounts payable for the FFB, the deferred village cooperatives to undertake self-help projects. This amounts owed to the group. Some 1,561 hectares of permits projects on a slightly larger scale and widens the smallholder plantings across 14 local villages have been opportunity for members of each village to participate in established following this model. In addition, the group the projects. now treats as if they were PPMD plantings a further 795 hectares of smallholder plantings originally developed In addition to the foregoing responsibilities, the under a government scheme for which the group has community development department has a particular role effectively assumed responsibility. in the titling of new agricultural land areas allocated to the group. It oversees the production by external consultants While continuing to support established smallholdings of the community needs assessment that the group now developed under the PPMD scheme, since 2009 the commissions in all new areas prior to any development of group’s efforts to procure further smallholder such areas. It explains to the local communities the development have been concentrated on encouraging the implications of oil palm development and it seeks to formation of local village cooperatives to develop oil palm identify and meet local concerns so that the free, prior and on larger areas pursuant to what are known as “plasma informed consent of local people is obtained for new schemes”. This shift in emphasis was prompted by a wish developments. Smallholder programmes to accelerate the rate of smallholder development as it became progressively clearer that the logistical constraints of dealing with a large number of individuals, each operating on a relatively small area, would inevitably The availability of the group’s oil mills to process FFB limit the rate at which the group could expand the harvested from plantings in the vicinity of the group’s smallholdings that it was supporting under the PPMD estates provides an opportunity for the local communities scheme. to further their economic progress by developing smallholdings of oil palms in areas surrounding the Under the plasma scheme model, the land areas for group's estates. The group continues to support such development are provided by or allocated to village development and has established its smallholder cooperatives but the development is managed by the department as a dedicated department to manage that group for a fee, with the advantage that development and support. production standards similar to those of the group can be established in the plasma areas. The costs of Until 2009, the group’s smallholder support was provided development are borne by the cooperatives but with to individuals pursuant to a scheme known as “Program funding from external sources provided on terms that FFB 32 produced by the cooperatives will be sold to the group secured on the land and assets of the schemes and and that the group will ensure that, out of the proceeds of guaranteed by the group. These facilities are designed to such sale, the cooperatives meet their debt service finance most of the initial development costs of the obligations in respect of the external funding. schemes but will be supplemented to the extent necessary by funds advanced by the group. A first facility Good progress was made during 2011 in completing the was signed in 2010 and is already being utilised. Two planting up of the cooperative areas already under further facilities were agreed during 2011 and are development although delays in identifying additional land expected to be available for drawing during 2012. areas for smallholder development have meant that plans for further expansion of the plasma schemes have taken Whilst the group views its support for smallholder oil palm longer to finalise than orginally hoped. The plasma plantings in the local communities adjacent to its scheme areas planted at 31 December 2011 amounted operations as part of its obligations to those communities, to 2,623 hectares (2010: 2,131 hectares). Together, the discharge of those obligations will be mutually these areas are owned by 6 cooperatives with beneficial to the communities and the group. The participating members from 10 local villages. With communities will benefit from the economic development allocations of additional land now under negotiation and generated as a result of the smallholder plantings while existing allocated areas already under development, a the group will benefit from the additional throughput in its useful further increase in smallholder areas should be oil mills that will result from the processing of FFB from achievable during 2012. the plantings. It was originally planned that cooperative members would Conservation form the core labour force for the plasma scheme developments but, with urban migration reducing village The group continues to plan the development of its numbers, the cooperative members available to work on agricultural operations on the basis of environmental the plasma schemes have proved insufficient to provide impact assessments and advice provided by independent more than a minor proportion of the workforce needed to experts. Within the areas already developed, approaching maintain and harvest the scheme plantings. The balance 18,000 hectares have been left intact as conservation of the required workforce is therefore being supplied by reserves with the aim of conserving flora and fauna and the group from its own labour force. Whilst the group enhancing the biodiversity of the landscape. The levies an appropriate charge for this service, it means that conserved areas comprise a combination of solid blocks the group must now size its labour force at a level of land having particular conservation value and corridors sufficient to operate not only its own estates but also the along the more substantial water courses to facilitate plasma schemes. The group is expanding the estate animal movements along those water courses. Areas worker housing and facilities to accommodate the identified as requiring conservation and set aside as part additional permanent workers whose recruitment this is of the planning process for each new development area necessitating. are being added to the conservation reserves as the Financing for the group supported plasma schemes initiated to-date has been agreed with a local The group’s conservation department (conducting its development bank in the form of fifteen year loans activities under the name “REA Kon”) is responsible for group expands. 33 Review of the group continued implementing the group’s conservation objectives. Led by conducted with the Indonesian Institute of Sciences and an experienced local manager with a staff of eight and Dr Maurice Kottelat, a world renowned expert in advised by an international conservation expert, the Southeast Asia fishes, had recorded a total of at least department has established a long term development 120 species of fish, and recognised a minimum of 17 plan with the following objectives: (cid:129) within the locality of the group’s agricultural operations, compiling a detailed record of the physical attributes of the landscape, of its bio- diversity resources and of the status and value of those resources in a local, national and international context; (cid:129) minimising or eliminating adverse human impacts from the group’s plantation operations on soil, water and biological communities while enhancing natural attributes; (cid:129) (cid:129) achieving biodiversity conservation through education and cooperation with local communities to promote both protection and sustainable use; and seeking conservation outcomes that provide long term benefits to species, local communities and the group. REA Kon augments its effectiveness through partnerships with local bodies and international non governmental organisations. Since commencing operations in 2008, the department has organised clear physical demarcation of all existing conservation reserves and has established a permanent database on flora and fauna that are found within the reserves and neighbouring watercourses. Extension planting by the group is planned around REA Kon inputs on conservation and the department collaborates with international universities in evaluating carbon stocks in development areas. Up to the end of 2011, REA Kon had confirmed the presence in the land reserves of a total of 61 species of mammals, 171 species of birds and 85 species of cold- blooded vertebrates (such as frogs, snakes and lizards). In addition, collaboration in studies of aquatic fauna previously unknown to science. In addition, a total of 13 species of crustacean around the Belayan River have been identified by Dr Daisy Wowor of the Indonesian Institute of Science, an independent expert conducting surveys on behalf of REA Kon. These include several new species of prawns possibly found only in Kalimantan. Camera trapping and walking surveys within the conservation reserves and adjacent estate areas have so far recorded a total 28 orang-utans of various ages. Two baby orang-utans are known to have been born on the conservation reserves during 2009, two in 2010 and a further new-born was photographed in September 2011. REA Kon is monitoring the health of the orang-utan population in the conservation reserves and has continued a process of enrichment planting in the reserves to enhance the long term availability of food resources for the orang-utans although to date the naturally available food resources appear to have been adequate. Quarterly monitoring of water quality in the main rivers of the conservation reserves on the north of the Belayan initiated in 2009 was extended to the tributaries in the conservation reserves on the south bank during 2011. Where upstream and downstream measurements have been compared, rivers within forested corridors have shown improved water quality as they flow through the estates. Monitoring of pest levels has established that pest levels on the group’s estates are relatively low against industry norms. There is indirect evidence that pests are controlled by natural predators in forested conservation reserves. A REA Kon project to promote the recycling of plastic waste has been successfully concluded with the 34 establishment of a permanent facility for shredding clean tag and release programme for threatened aquatic plastic waste, such as water bottles, into flakes. The species consumed or traded by traditional fishermen in flakes are then packed into plastic sleeves which are the wetlands around the group’s agricultural areas. YU is used as insulation in offices and houses to reduce heat assisted by a board of respected international and local loads in working and living spaces. scientific advisers. In addition to the group, donors to YU have to-date included a number of zoological and REA Kon runs a programme of conservation education conservation organisations as well as private individuals. camps for school children in which the group’s primary The group has recently established a UK registered school and local village schools participate. The camps charity, The Ironwood Foundation (registered charity are held at the REA Kon field station located within the number 1145410), to act as a “feeder charity” to YU so group’s Loa Buluh conservation reserve. “Conservation as to permit UK donors wishing to support YU to make for added value” programmes provide seedlings of rattan donations with the benefit of the UK tax incentives and fruit trees to local villages for planting in, and at the available for donations to UK registered charities. periphery of, the group’s conservation reserves. These schemes are intended to enhance sustainable use and Sustainable practices deter destruction of areas by local slash and burn farming. Demand for seedlings has been such that the REA Kon The group recognises its social obligations as respects tree nursery was expanded during 2011. pollution and energy efficiency. It operates a zero burning policy in relation to land development and, in dry periods, New initiatives undertaken by REA Kon during 2011 maintains active fire patrols in an effort to limit the risks of included a five day field course entitled “Practical accidental fires. Corridors are used to separate all Conservation for Plantations” for ten participants from a plantings from water courses and the latter are regularly large palm oil company with plantations in Kalimantan. monitored to ensure that they are not contaminated by This took place in September 2011 and involved a course leaching of fertilisers and chemicals. The group actively of technical lectures and instruction in practical field promotes integrated pest management throughout its methodologies. Revenue generated by the training operations. Wherever possible, natural predators are course was utilised to support the group’s charitable preferred to pesticides for pest control. Selective varieties foundation, the Yayasan Ulin or Ironwood Foundation of flowering plants have been planted throughout the (“YU”). This was established in 2009 to extend group’s estates to promote the population of wasps, the conservation activities into the wider Belayan river basin natural predators of bagworm and caterpillars. and beyond the immediate areas of the group’s agricultural operations where the conservation activities As noted under “Costs” above, the group has are managed by REA Kon. This wider zone includes the endeavoured in recent years to reduce its dependence on Batu Pek Water Conservation Area and a large wetland inorganic fertiliser by developing organic fertilisers. Two near Muara Ancalong to the east of the main estates. consequences have been the extensive planting of YU works with non-governmental organisations, and the composting of residues of the CPO production academic bodies, zoos and other scientists. Current process. Macuna Bracteata (of which the group was an projects include monitoring of water quality and flood early user in Indonesia) not only keeps down noxious levels, population studies of endangered species, and a weeds and fixes nitrogen but is also a prolific generator of Macuna Bracteata as a cover crop in the oil palm areas 35 Review of the group continued vegetative matter that acts as a soil improver. This electricity. This electricity is sufficient to power not only promotes oil palm growth, particularly in the immature the group’s oil mills and the kernel crushing plant but also phase. Composting of processing waste produces a to provide power to several estate villages. However, the nutrient rich compost that can be applied in the oil palm power is not sufficient for all villages and power can areas in substitution for inorganic fertiliser. anyway only be provided by this means when the mills are running. As a result, estate villages have hitherto been Composting is effected by delivering all empty fruit heavily dependent on diesel generated power and this, bunches and oil mill effluent (in the latter case after coupled with fuel used in vehicles, resulted in an treatment in effluent ponds) to a composting contractor at estimated consumption of 39 litres of diesel oil and petrol sites adjacent to the group’s oil mills. The contractor per tonne of CPO produced in 2011. takes title to these residues and manages the composting process. This takes 45 days and involves seeding the As noted under “Costs” above, during 2011 the group residues with an accelerant of micro-organisms (which commenced construction of two methane conversion the contractor supplies), mixing the residues and plants in an effort to significantly reduce the group’s macerating the mix to encourage biodegradation. The greenhouse gas emissions. This will be achieved in two contractor then sells the resultant compost back to the ways: first, by reducing methane emissions from group at an agreed price with a guaranteed minimum anaerobic respiration in the effluent ponds and, secondly, nutrient content. The area in respect of which compost through the reduction in consumption of diesel oil and substituted for inorganic fertiliser increased from 6,763 petrol required to run generators as these are substituted hectares in 2010 to 9,636 hectares in 2011 and is with electricity produced from the methane plants. Each projected to amount to close to 11,000 hectares in 2012. plant is adjacent to an existing oil mill and is based around a lagoon covered with inflatable high density polyethylene Handling arrangements are designed to ensure that no sheeting. After initial cooling, mill effluent will pass to the CPO, CPKO or oil mill effluent passes into water courses. lagoon which is equipped with a liquid agitation system There were no incidents of accidental spillage during designed to accelerate the anaerobic digestion of the 2011. Steps are being taken to educate and incentivise effluent. The methane released during the digestion the group’s resident workforce and its dependants to process will be captured within the lagoon cover, passed segregate domestic waste so as to permit recycling of through a biological scrubber and used to fuel one or organic and plastic waste. During 2011, the group more gas powered generators. Methane that is surplus to acquired a heavy duty plastic macerating unit. This is requirements for electricity generation will be flared off. used for shredding larger clean plastic containers into The digested effluent will be discharged from the lagoon flakes for onward sale and the resultant proceeds are to the existing mill effluent ponds and subsequently used to sponsor special events for the workforce and its passed to the composting process. The electricity dependants. As referred to under “Conservation” above, generated from the captured methane will be supplied to plastic water bottles are recycled through the REA Kon estate buildings, thereby reducing materially the recycling centre. requirement for diesel generated electricity. Each lagoon could have in due course a methane production capacity Fibre extracted during the milling of oil palm fruit is used sufficient to generate about 3 megawatts of power. to fuel oil mill boilers from which steam is generated. The steam is then used to drive steam turbines for generating 36 The first methane plant was scheduled to commence Kaltim oil mills. The audit for RSPO accreditation of the production in the last few weeks of 2011 but delays to established areas of SYB was originally scheduled for the the delivery of specialist equipment as a result of the end of 2011 but was delayed until January 2012. RSPO severe flooding in Thailand has meant that commissioning certification of these areas is expected to be received took place during March 2012. The second plant is shortly. Development of KMS has been carried out in expected to become operational in the middle of 2012. accordance with the RSPO “New Plantings Procedures”. The site of the third mill that is currently under construction is being laid out in a manner that will permit As a further step in the process of RSPO accreditation of the eventual construction of an additional methane its operations, the group is now seeking certification of its conversion plant to convert methane from the effluent supply chain under the Supply Chain Certification System from the third mill. (“SCCS”). Separately, it plans to seek certification of its biomass production under the terms of the EU Renewable The methane conversion plants will reduce the group’s Energy Directive (“International Sustainability & Carbon greenhouse gas emissions and thereby reduce its carbon Certification” or “ISCC”). This latter should permit the footprint. The group expects to obtain carbon credits group to export the group’s CPO to Europe at a premium under the Clean Development Mechanism for the period price for use as a sustainable bio-fuel in the production of from completion of the plants up to 2020. energy. During 2011, The Prince’s Rainforest Project (“PRP”) During 2011, the group extended its ISO 14001 acknowledged the group’s leadership in supporting PRP’s certification so as to cover the SYB operations. All of the work in Indonesia on involving private sector agriculture operations of REA Kaltim have previously been certified with efforts to reduce emissions from forest degradation as ISO 14001 compliant. and deforestation (“REDD”). Accreditation and verification periodic independent recertification. ISO 14001 and RSPO accreditations are subject to The group is a member of RSPO which has produced a Coal operations set of eight principles and 39 criteria for the sustainable production of palm oil. To obtain RSPO accreditation, Concessions and structure members are required to comply with such principles and criteria and to have their operations audited by RSPO The group holds rights in respect of three coal mining approved independent auditors. The directors believe concessions in Indonesia. These comprise the that the group's operational practices have always been Liburdinding and Muser concessions located together of a high standard but the RSPO accreditation process near Tanah Grogot in the southern part of East requires that such operational practices are embedded in Kalimantan, which were acquired in the second half of formal systems and are subject to controls that are 2008, and the Kota Bangun concession in the central part auditable. Measures to ensure that this was the case of East Kalimantan which was added in late 2009. The were completed during 2010 and, in 2011, REA Kaltim Liburdinding and Muser concessions cover areas of, and its associated smallholders were granted RSPO respectively, 1,000 hectares and 2,100 hectares and the accreditation for their oil palm plantings and the two REA Kota Bangun concession an area of 4,400 hectares. Coal 37 Review of the group continued extraction, in each case, is or will be by open cast mining. England and Wales that acts as a co-ordinating company In addition to the rights in respect of the coal mining for the group's coal operations) and five per cent by the concessions, the group holds rights in respect of a stone local partners, has been established by KCC to spearhead deposit located near to the group’s agricultural the group's coal operations. operations. These rights are treated as forming part of the group’s coal operations because stone quarrying is Pursuant to the arrangements between the group and its classified as a mining activity for Indonesian licensing local partners, KCC now has the right, following purposes and is therefore subject to the same regulatory implementation of the new mining law and subject to regime as coal mining. satisfaction of local regulatory requirements, to acquire the three concession holding companies at original cost In the past, Indonesian law restricted foreign direct on a basis that will give the group (through KCC) 95 per ownership of Indonesian companies holding mining cent ownership with the balance of five per cent concessions but a new Indonesian mining law enacted in remaining owned by the local partners. The group is December 2008 permits such ownership (subject to a preparing applications for the necessary regulatory provision that foreign controlled mining companies must approvals. In the meantime, the concession holding increase local ownership, hitherto to not less than 20 per companies are being financed by loan funding from the cent but now, following a recent further change in group and no dividends or other distributions or payments regulations, to not less than 51 per cent, over a prescribed may be paid or made by the concession holding period after such companies commence commercial companies to the local partners without the prior mining operations). agreement of KCC. Because the Liburdinding, Muser and Kota Bangun The rights held by the concession holding companies in concessions were acquired prior to publication of respect of the Liburdinding and Kota Bangun regulations implementing the new mining law, the group concessions are in the form of exploitation licences. entered into temporary arrangements with a local investor These licences are valid for terms expiring, respectively, in and members of his family (together the group's “local 2013 and 2016, but are renewable on expiry. Currently, partners”) for the acquisition of the concessions in a Muser is held on an exploration licence but it is proposed manner that did not require the group to take immediate that this will be converted into an exploitation licence control of the Indonesian companies owning the which will be for an initial term of five years and will also concessions. Pursuant to these arrangements, the be renewable on expiry. Royalties based on coal sales Liburdinding and Muser concessions are currently held by are payable at the rate of 13 per cent in respect of two companies which are wholly owned by the group's Liburdinding coal, five per cent in respect of Muser coal local partners and which in turn own the company holding and up to 13 per cent in respect of Kota Bangun coal. All the Kota Bangun concession. The Muser concession three concession holding companies will be required to holding company also holds the stone deposit. A fourth reconstitute the areas mined when coal extraction has company, PT KCC Resources Indonesia (“KCCI”) been completed. (formerly called “KCC Mining Services Indonesia”), incorporated under the Indonesian foreign investment law Pre-production geological surveys of the Liburdinding and owned 95 per cent by KCC Resources Limited and Muser concessions suggest that the concessions (“KCC”) (a subsidiary of the company incorporated in contain commercial deposits of coal accessible by open 38 cast mining and having typical gross calorific values of commercial level of production from the Kota Bangun between 5,800 and 6,200 kilocalories per kilogramme concession. During 2010, land compensation was (“kcal/kg”) air dried basis (“ADB”) in the case of completed, mining and environmental management plans Liburdinding and between 6,000 and 7,000 kcal/kg ADB settled, necessary permits for mining operations obtained in the case of Muser. Inferred coal resources have been and arrangements for evacuating mined coal concluded. estimated at 14.7 million tonnes for Liburdinding and Pre-stripping and removal of overburden (being earth and 17.6 million tonnes for Muser. At the Kota Bangun rock overlaying the coal) started in November 2010 and concession, following commencement of commercial the coal seams were exposed early in 2011. The production, calorific values have been confirmed at stripping ratio (being the amount of overburden required between 6,800 and 7,800 kcal/kg ADB, while analysis of to be removed to gain access to the coal expressed as the data from additional in-fill drilling and commercial number of bank cubic metres of overburden in situ to be operations supports an inferred coal resource estimate of removed to extract one tonne of coal) under the original at least 1.7 million tonnes. mining plan was expected to be 30 to 1. Economically mineable reserves at all three coal In the six months to end June 2011, mining operations at concessions are likely to be less, and perhaps significantly the Kota Bangun concession produced some 20,000 less, than the inferred resources. The group has tonnes of coal. The group was aiming to build up to a concentrated its continuing geological exploration on production level within 2011 of some 16,000 tonnes per better defining its immediately mineable reserves and month. As previously reported, however, operations were does not therefore yet have geological data sufficient to halted in the middle of 2011 following cancellation of the make an accurate determination of overall mineable contract with the principal mining contractor who had run reserves. into financial difficulties. The group is continuing to review its options for this concession. Further exploration The mining exploration licence in respect of the stone drilling is being carried out to determine the full extent of deposit held by the Muser concession holding company the coal resource within the concession as well as the was converted into an exploitation licence during 2011. potential of an adjacent concession over which the group This will permit the company to establish a stone quarry has secured a period of exclusivity in which to complete and to sell crushed stone to the group's agricultural due diligence. Production is expected to recommence operations (which have a considerable need for crushed once an optimised mine plan has been completed. stone and are nearby) and to third parties operating in the same vicinity. Initial sampling and drilling have Good progress is now being made with the further commenced in 2012 and preliminary assessments investigation of the Liburdinding concession where the suggest that there is a substantial deposit of high quality original mining plan had to be abandoned in 2010 when basalt. Due diligence is on-going as part of the full it became clear that the relatively high sulphur content of financial feasibility assessment of this project. the coal was making it difficult to sell. The group is Operating activities looking at blending Liburdinding coal with low sulphur coal mined from a lower seam or purchased from third parties although an alternative option is simply to sell the The group's major concentration to-date in its embryonic Liburdinding production without blending and to accept a coal mining activities has been on establishing a discount for the sulphur content. Additional mapping has 39 Review of the group continued now been completed and a drilling programme to Markets delineate more precisely the available resource is currently in hand. This will be followed by revision of the Within the Asia Pacific region, China and India are large existing mine plan with an evaluation of the most coal producers but their internal production is inadequate economic alternatives for selling coal from this to meet their energy requirements. The shortfall is made concession, after which it is expected that production will up by imports primarily from Indonesia and Australia. A be resumed. number of other Asia Pacific countries also have demand for imported coal. Because coal is bulky, economic Deliveries of traded coal for the year to 31 December availability is constrained by logistics. The directors 2011 amounted to some 266,084 tonnes (2010: 71,000 consider that this offers excellent opportunities for tonnes). Although trading volumes grew during 2011, Indonesian coal producers because Indonesia is growth was not as rapid as was initially projected. Trading geographically well located for the main Asia Pacific prospects do still appear positive and the group hopes to markets and much of its coal (particularly in East build up volumes during 2012 to an average monthly Kalimantan) is located adjacent to rivers which provide an sales level of 100,000 tonnes. Coal for traded sales is economic method of transportation. Furthermore, in currently sourced by outright purchase from third party addition to the potential of an expanding export market suppliers. The option remains to develop long term driven by increasing demand for coal generated power, arrangements for meeting a proportion of the traded coal Indonesia can expect significant growth in internal requirement by mining third party owned concessions demand as the Indonesian state electricity company against payment of royalties. implements plans to expand its generating capacity to meet the growing demand for power within Indonesia. The majority of traded sales are currently being made into the export market. The group continues to pursue the The directors believe that the published Newcastle possibility of domestic sales to the Indonesian state globalCOAL weekly index, when adjusted for differences electricity company to which one of the concession in calorific values (the index being based on coal of net holding companies has been approved as a supplier. calorific value of 6,000 kcal/kg), has over time provided a reasonable indicator of prevailing East Kalimantan coal Geological assessments of the Muser concession prices. This index opened 2011 at $129 per tonne, rose indicate that the Muser coal deposits are complex and during the first few days of January to a high of $141 and that the overburden includes rock that cannot easily be then gradually fell back over the year to $115 per tonne removed without blasting. This may pose problems, given at year end. The price firmed again during January 2012 that there are villages located in quite close proximity to but has since fallen away and currently stands at $100 the concession. Moreover, the Muser coal has a higher per tonne. Although increased inflation in China, bringing sulphur content than the Liburdinding coal. The group with it the possibility of higher Chinese interest rates, may therefore intends to defer taking any steps towards scale back Chinese growth in 2012, the current level of bringing the Muser concession into production until Asian coal demand is such that it seems likely that commercial levels of activity are being achieved by the Indonesian coal prices will remain remunerative through rest of the group’s coal operations. 2012. 40 There have been recent reports in the Jakarta press of financial statements in US dollars. The company changes to the regulations affecting coal exports. continues to prepare its individual financial statements in Measures have already been enacted that will in due sterling and in accordance with UK Generally Accepted course prevent the export of coal of lower calorific values Accounting Practice. Accordingly, the company’s and it appears that further measures are under individual financial statements are presented separately consideration that may result in the imposition of export from the consolidated financial statements. duties on coal. Given the increasing importance of coal to the Indonesian economy, the directors believe that it is The accounting policies applied under IFRS are set out in unlikely that new measures would be enacted that would the “Accounting policies (group)” section of this annual be seriously damaging to the coal mining industry but it is report. The accounting policy relating to biological assets possible that the measures will be put in place that result (comprising oil palm plantings and nurseries) is of in some additional costs being incurred in respect of coal particular importance. Such assets are not depreciated exports. Sustainable practices but are instead restated at fair value at each reporting date and the movement on valuation over the reporting period, after adjustment for additions and disposals, is taken to income. Deferred tax is provided or credited as In developing its mining activities, the group remains appropriate in respect of each such movement. committed to observing international standards of best environmental and corporate social practice. Health and As in previous years, the fair value of the biological assets safety procedures have been established to protect and at 31 December 2011 has been derived by the directors safeguard the welfare of all persons involved with the on a discounted cash flow basis by reference to the FFB mining operations and measures are designed to ensure projected to be harvested from the group's oil palms over the proper management of waste water and to provide for the full remaining productive lives of the palms and an the reinstatement, in so far as reasonably practicable, of estimated profit margin per tonne of FFB so harvested. land areas affected by mining to their original condition Such estimated unit margin is based on an average of upon completion of mining operations. In 2011, in historic FFB profit margins for the 20 years to 2011 conjunction with implementation of additional group buffered to restrict the implied annual movement in such controls introduced in conjunction with implementation of estimated unit margin to 5 per cent and to prevent any the UK Bribery Act 2010, the group commenced change in estimated unit margin that runs contrary to the development of a training programme on work ethics. trend in current margins. For this purpose, the historic This will be reinforced with continuous training for profit margin for each applicable year has been derived employees at all levels. The group seeks to ensure that either from the budgeted unit cost of FFB production and the group’s partners abide by its ethical principles. the actual historic average of CPO prices (FOB Port of Finances Samarinda and net of export duties) for such year or, for earlier years for which such detailed information is not available, an appropriate estimate of the historic profit Accounting policies margin for the year. The group reports in accordance with International This method of deriving the estimated profit margin per Financial Reporting Standards (“IFRS”) and presents its tonne of FFB harvested differs slightly from that used in 41 Review of the group continued 2010 and earlier years. For those years, the estimated assumptions can have a quite disproportionate effect on unit margin was based on current costs and an average of results. The biological assets in the group balance sheet historic CPO prices. The directors believe that matching at 31 December 2011 amounted to $244 million. An prices and costs for each year and then deriving an increase or reduction of $5 per tonne in the estimated average margin, rather than matching an average of profit margin used for the purpose of the valuation historic prices and current costs, better reflects the impact (namely $52.5 per tonne of FFB) would increase or of inflation in the valuation of the group’s biological assets reduce the valuation by approximately $26 million. than the method previously used. The discount rates used for the purposes of the biological exceeded 10 per cent of total group revenues. asset revaluation at 31 December 2011 were the same Accordingly, separate segmental reporting has been as those applied at 31 December 2010, namely 16 per provided in the notes to the accompanying consolidated cent in the case of REA Kaltim, 17½ per cent in the case financial statements for the first time. In 2011, revenue from coal sales for the first time of SYB and 19 per cent in the case of all other group companies. The directors believe that the risks of Group results successfully harvesting FFB projected to be produced from newly developed areas are greater than those of Group operating profit for 2011 amounted to $72.7 harvesting the projected FFB crops from established million and profit before tax to $64.2 million. The estates. They consider it appropriate to reflect this risk comparable figures for the preceding year were, differential by applying a discount rate of 19 per cent to respectively, $56.3 million and $50.4 million. newly established areas, reducing this to 17½ per cent as an area becomes well established and then further to The greater level of coal sales achieved in 2011 ($18.2 16 per cent when plantings in an established area million against $4.2 million in 2010) was a significant become predominantly mature. The discount rates used factor in the increased revenue of $147.8 million reported at 31 December 2011 and 31 December 2010 were for 2011 (2010: $114.0 million). Other factors were the derived accordingly. higher average selling prices for CPO and CPKO prevailing during 2011 and increased CPO and CPKO The directors recognise that the IFRS accounting policy in output. Revenues from CPO and CPKO are stated net of relation to biological assets does have theoretical merits Indonesian export duties. The changes to export duty in charging each year to income a proper measure of introduced in August 2011 (as referred to under capital consumed (so that, for example, a fair distinction is “Revenues” in “Agricultural operations” above) meant that drawn each year between the cost of the shortening life revenues from CPO and CPKO in the last quarter of the expectancy of younger plantings still capable of many year were some $21 per tonne less than they would years of cropping and that of older plantings nearing the otherwise have been. Higher cost of sales, amounting to end of their productive lives). It does, nevertheless, $68.1 million in 2011 against $48.6 million in the concern the directors that no estimate of fair value can preceding year, also reflected the expansion of the coal ever be completely accurate (particularly in a business in activities and the increased CPO and CPKO output. Cost which selling prices and costs are subject to very material inflation was a continuing factor. fluctuations). Moreover, in the case of the group’s biological assets, small differences in valuation 42 IFRS fair value adjustments, aggregating $11.4 million in The group's target long term average annual return on 2011, were significantly ahead of the aggregate adjusted equity is 20 per cent. The return achieved for adjustments of $2.0 million reported in the preceding 2011 was 28 per cent (2010: 27 per cent). year. The higher net gain from changes in the fair value of biological assets reflected the further development of Certain minor aspects of the group’s appeal against a the group’s plantations while the increased net gain disputed Indonesian assessment of tax on the profits of arising from changes in the fair value of agricultural REA Kaltim for 2006 were decided partly in the group’s produce inventory was the result of a build up in produce favour during 2011. On those aspects, the tax stock that occurred at the end of 2011 following the demanded was reduced by approximately half. The collapse of the Tenggarong bridge (as referred to under remaining substantive points that are the subject of the “Processing and transport” in “Agricultural operations” appeal have still to be decided as has the group’s appeal above). against a later Indonesian assessment in respect of tax on the profits of REA Kaltim for 2008. This latter 2011 saw a further increase in administrative expenses. assessment seeks to deny tax relief claimed in respect of These amounted to $16.9 million against $10.2 million in mark to market losses on cross currency interest rate 2010. The increase was in part the result of inflation and swaps entered into by REA Kaltim to hedge, against US a lower capitalisation rate (reflecting the increasing ratio dollars, the group’s sterling liability in respect of part of of mature to immature areas) but higher compliance the group’s outstanding 9.5 per cent guaranteed sterling costs, particularly as respects discharge of the group’s notes 2015/17. Both the 2006 and 2008 disputed tax social obligations, a one-off cost of payments under a assessments were paid in full ahead of the appeals. The staff long term service scheme and the employment of group has previously provided in full against the 2006 additional senior management staff during a period of assessment and as to $5.5 million (representing generational management transition were also factors. approximately half of the tax demanded) against the Reduced returns on cash balances and a greater use of points of dispute now resolved, both provisions have been rupiah denominated bank debt which attracts higher retained at their original levels at 31 December 2011. 2008 assessment. In view of the minor nature of the interest charges than dollar debt caused finance costs, net of investment revenues, to increase from $5.8 million Dividends in 2010 to $8.6 million. Before deduction of the interest component added to biological assets, interest payable in The fixed semi-annual dividends on the 9 per cent 2011 amounted to $14.1 million (2010: $12.4 million). cumulative preference shares that fell due on 30 June Interest cover for 2011 (measured as the ratio of and 31 December 2011 were duly paid. An interim earnings before interest, tax, depreciation and dividend in respect of 2011 of 3p per ordinary share was amortisation, and biological gain to interest payable) was paid in January 2012 and the directors recommend the 5.2 (2010: 4.8). payment of a final dividend in respect of 2011 of 3½p per ordinary share to be paid on 27 July 2012 to ordinary At the after tax level, profit for the year for 2011 was shareholders on the register of members on 29 June $45.6 million against $35.0 million in 2010 while profit 2012. The total dividend payable per ordinary share attributable to ordinary shareholders was $40.4 million during 2012 in respect of 2011 will thus amount to 6½p. against $32.3 million. Fully diluted earnings per share This compares with the total paid during 2011 in respect amounted to US 121.0 cents (2010: US 96.8 cents). of 2010 of 5½p. 43 Review of the group continued In recent years, the group has invested heavily in the proportion of ordinary shares is exchanged for preference development of its agricultural operations. This has shares, this is likely to mean that, for the immediate future, entailed major capital expenditure and the need to fund the company’s progressive but conservative ordinary this expenditure has constrained the rates at which the dividend policy will simply continue but those ordinary directors have felt that they can prudently declare, or shareholders who wish to obtain a higher yield from their recommend the payment of, ordinary dividends. They investment in the company will be able to do so by believe that capitalisation issues of new preference retaining some or all of the preference shares that they shares to ordinary shareholders provide a useful will receive as a result of the partial exchange of ordinary mechanism for augmenting returns to ordinary shares for preference shares. shareholders in periods in which good profits are achieved but demands on cash resources limit the scope Capital structure for payment of cash dividends. In line with this thinking, a capitalisation issue of 2,004,872 new preference shares The group is financed by a combination of debt and was made to ordinary shareholders on 29 September shareholder funds. Total shareholder funds less non- 2011 on the basis of 3 new preference shares for every controlling interests at 31 December 2011 amounted to 50 ordinary shares held on 28 September 2011 (2010: $300.7 million as compared with $233.5 million at 31 1,670,727 new preference shares on the basis of one December 2010. Non-controlling interests at 31 new preference share for every 20 ordinary shares held December 2011 amounted to $2.2 million (2010: $2.0 on 24 September 2010). million). If the intended listing of REA Kaltim on the Jakarta Stock In July 2011, 15 million new preference shares were Exchange (as referred to under “Succession and strategic issued for cash at a price of 103p per share by way of a direction” above) proceeds and it is decided that, as is placing to raise £15.0 million net of expenses. This issue suggested under “Financing policies” below, the listing was followed in September 2011 by the issue of a further should be accompanied by an exchange of a proportion of 2,004,872 new preference shares by way of existing issued ordinary shares of the company for capitalisation of share premium account pursuant to the preference shares, the directors expect that any capitalisation issue to ordinary shareholders referred to capitalisation issue of new preference shares to ordinary under “Dividends” above. shareholders that they might consider it appropriate to propose during 2012 would be effected in combination The proceeds of the placing of new preference shares with such exchange rather than made separately. were applied in reducing indebtedness. Following such reduction, group indebtedness and related engagements Looking forward, if REA Kaltim becomes listed, it is at 31 December 2011 amounted to $96.0 million, made expected that the future planned expansion of the up of $35 million nominal of dollar notes (carrying value: agricultural operations will permit REA Kaltim to distribute $34.0 million), £34.5 million nominal of 9.5 per cent each year around one third of its after tax profits. The guaranteed sterling notes 2015/17 (“sterling notes”) directors then intend that the company should adopt a (carrying value: $51.3 million), $10.8 million in respect of policy of distributing to its ordinary and preference the hedge of the principal amount of the sterling notes as shareholders a large proportion of its share of the REA described below, $1.5 million in respect of the KCC Kaltim dividends. In practice if, as is contemplated, a participating preference shares (which are classified as 44 debt), a term loan from an Indonesian bank of $27.0 2010 to 30 June 2014 (equivalent to $36 million for the million and other short term indebtedness comprising full period), those persons who subscribed dollar notes drawings under working capital lines of $2.0 million. and KCC participating preference shares in the combined Against this indebtedness, at 31 December 2011 the issue of those securities in February 2010, and who group held cash and cash equivalents of $30.6 million. retain their notes and shares until redeemed, will receive an overall compound return of 15 per cent per annum on The group has no material contingent indebtedness save their total investment. If the required level of earnings is that, in connection with the development of oil palm not achieved, then, except in certain limited plantings owned by village cooperatives and managed by circumstances (such as divestment of all or a significant the group, the group has, as noted under “Smallholder part of the coal operations or a change in control of the programmes” in “Agricultural operations” above, company), no dividends or other distributions will be paid guaranteed the bank borrowings of the cooperatives or made on the KCC participating preference shares and concerned, the outstanding balance of which at 31 after 31 December 2014 such shares will be converted December 2011 was equivalent to $6.0 million. into valueless deferred shares. The dollar notes are unsecured obligations of the The term loan from an Indonesian bank comprises the company and, save to the extent previously redeemed or equivalent of $27.0 million drawn by SYB from PT Bank cancelled, are repayable by three equal annual DBS Indonesia (“DBS”) under an Indonesian rupiah instalments commencing 31 December 2012. The denominated amortising loan facility of Rp 350 billion sterling notes are issued by REA Finance B.V., a wholly ($38.6 million) agreed with DBS during 2010. The loan owned subsidiary of the company, are guaranteed by the is secured on the assets of SYB and is guaranteed by the company and another wholly owned subsidiary of the company and REA Kaltim. The aggregate outstanding company, R.E.A. Services Limited (“REAS”), are secured balance of the loan at 31 December 2011 is repayable as principally on unsecured loans made by REAS to REA follows: 2014: $2.0 million; 2015: $2.0 million; and 2016 Kaltim, SYB and CDM, and, save to the extent previously and thereafter: $23 million. redeemed or cancelled, are repayable by three equal annual instalments commencing 31 December 2015. Group cash flow The group has entered into a long term sterling US dollar Group cash inflows and outflows are analysed in the debt swap to hedge against US dollars the sterling liability consolidated cash flow statement. Cash and cash for principal and interest payable in respect of the entire equivalents reduced slightly over 2011 from $36.7 million original issue of the sterling notes (but in the case of to $30.6 million. The reduction of $5.7 million (excluding interest only as respects interest payments falling due up the negative impact of $0.4 million from the effect of to 31 December 2015). exchange rate movements) represented that component of the net outflow on investing activities that was not The KCC participating preference shares provide a limited covered by the combination of net cash from operating interest in the group's coal operations such that if those activities and net cash from financing activities. operations achieve an average annual level of earnings before interest, tax, depreciation and amortisation of $8 As noted under “Group results” above, operating profit for million over the four and a half year period from 1 January 2011 amounted to $72.7 million, an increase of $16.4 45 Review of the group continued million on the $56.3 million of the preceding year. The Liquidity and financing adequacy non cash components of operating profit were higher in 2011 than in 2010 so that, with the reversal of these, As noted above, at 31 December 2011, the group held operating cash flows before movements in working cash and cash equivalents of $30.6 million. In addition, capital showed a lesser year on year increase than the group had at 31 December 2011 an undrawn balance operating profit. The aggregate increase in working of Rp 105 million ($11.6 million) under the SYB capital of $8.2 million over 2011 was broadly similar to amortising loan facility with DBS (available for drawing that of the preceding year and reflected significant until 31 December 2014) and working capital lines increases in inventories and receivables offset in part by (subject to annual renewal) equivalent to $12 million of an increase in payables. The increase in inventories was which $10 million was undrawn. During 2012, the group largely the result of the stock build up at end 2011 has arranged an additional working capital line of the referred to under “Group results” above, while the equivalent of $15 million. increases in receivables and payables were attributable to a number of factors, including movements arising in Planned extension planting and the requirement for connection with the substantial capital projects in investment in estate buildings and other estate plant and progress at end 2011. With tax payments lower in 2011 equipment that follows any expansion of the group’s than in 2010 (when the payments included payment of a planted hectarage, will involve the group in continuing disputed tax assessment in respect of 2008), net cash significant capital expenditure for several years to come. from operating activities for 2011 amounted to $33.8 In addition, completion of construction of the group’s third million against $21.3 million for 2010. oil mill and the two new methane conversion plants, together with housing and associated infrastructure, is Investing activities for 2011 involved a net outflow of expected to involve further expenditure of some $30 $51.0 million (2010: $41.8 million). This represented million in 2012. If CPO prices remain at good levels and new investment totalling $53.9 million (2010: $43.9 existing term loans are refinanced as they mature over the million), offset by inflows from interest and other items of next six years, the directors expect that such capital $2.9 million (2010: $2.1 million). The new investment expenditure can be largely funded from internal cash flow. comprised expenditure of $37.5 million (2010: $34.3 million) on further development of the group's agricultural The directors intend that further cash advances to the operations, $6.7 million (2010: $3.5 million) on land rights coal operations should be limited to the amount required and titling and $9.7 million (2010: $6.0 million) on the to complete development of the existing coal development of the coal operations. concessions. Any expansion beyond this should be self- The net cash inflow on financing activities of $11.6 million financing. (2010: $35.0 million) was made up of a net inflow from Whilst the group’s extension planting programme can an issue of new preference shares of $24.3 million always be scaled back, once areas have been planted (2010, issues of new shares and dollar notes: $29.5 with oil palms, some or all of the benefits of the million), net additions to bank debt of $9.2 million (2010: investment made in such areas will be lost if the areas are $10.2 million) and outflows in respect of dividend not maintained. Commodity markets are inherently payments and redemptions of sterling and dollar notes of, volatile and the directors believe that it is prudent for the respectively, $7.9 million and $13.9 million (2010: $5.0 group to hold some cash cushion to ensure that when million and $0.2 million). 46 new areas are planted, those areas can be brought to plantings take nearly four years from nursery planting to maturity even if CPO and CPKO prices fall sharply. maturity and then a further period of three to four years to full yield, the directors aim to structure borrowings for the The group's financing is materially dependent upon the group’s agricultural operations so that shorter term bank contracts governing the sterling and dollar notes. There debt is used only to finance working capital requirements, are no restrictions under those contracts, or otherwise, on while debt funding for the group's extension planting the use of group cash resources or existing borrowings programme is sourced from issues of medium term listed and facilities that the directors would expect materially to debt securities and borrowings from development impact the planned development of the group. Under the institutions. terms of the recently arranged working capital line and the DBS amortising loan facility, REA Kaltim and SYB are New projects within the coal operations can be brought restricted to an extent in the payment of interest on into commercial production more rapidly than new oil borrowings from, and on the payment of dividends to, palm plantings and the coal operations can therefore other group companies but the directors do not believe justify borrowing on a shorter term basis than the that the applicable covenants will affect the ability of the agricultural operations. However, the directors believe company to meet its cash obligations. that no operations of the group should allow themselves The group's oil palms fruit continuously throughout the the directors intend that the coal operations should also year and there is therefore no material seasonality in the be financed principally by issues of listed prior ranking to become wholly reliant on bank finance. Accordingly, funding requirements of the agricultural operations in capital. their ordinary course of business. It is not expected that the development of the coal operations will introduce any The directors believe that the group’s existing capital material swings in the group’s utilisation of cash for the structure is consistent with these policy objectives but funding of its routine activities. Financing policies recognise that the planned further development of the group, and the inevitable shortening of the maturity profile of the group’s current indebtedness caused by the passage of time, mean that further action will be required The directors believe that, in order to maximise returns to to ensure that the group’s capital structure continues to holders of the company's ordinary shares, a proportion of meet the objectives. the group's funding needs should be met with prior ranking capital, namely borrowings and preference share Net debt at 31 December 2011 was 32 per cent of total capital. The latter has the particular advantage that it shareholder funds against a level of 40 per cent at 31 represents relatively low risk permanent capital and to the December 2010. The directors intend at least to maintain extent that such capital is available, the directors believe the overall amount of the group’s prior ranking capital but that it is to be preferred to debt. would expect that, with growth in the net assets attributable to ordinary shareholders, prior ranking capital Insofar as the group does have borrowings, the directors will, over time, fall as a percentage of equity (used in this believe that the group’s interests are best served if the context to refer to funds attributable to ordinary borrowings are structured to fit the maturity profile of the shareholders). If debt continues over time to be replaced assets that the borrowings are financing. Since oil palm by preference capital, net debt as a percentage of 47 Review of the group continued shareholder funds may be expected to fall to an even borrows at fixed rates. A one per cent increase in the greater extent. floating rates of interest payable on the group’s floating rate borrowings at 31 December 2011 would have In consequence, the directors do not believe that the resulted in an annual cost to the group of approximately group requires further equity capital and are not motivated $290,000 (2010: $400,000). in proposing the listing of REA Kaltim on the Jakarta Stock Exchange, as referred to under “Succession and The group regards the US dollar as the functional strategic direction” above, by any perceived need to currency of most of its operations and has, until recently, secure such capital. Rather, the directors consider that, to sought to ensure that, as respects that proportion of its the extent that cash is raised from a sale of REA Kaltim investment in the group's operations that is met by shares in Jakarta, the existing equity capital of the borrowings, it has no material currency exposure against company should effectively be reduced. However, the the US dollar. Accordingly, where borrowings were directors also wish the group to take maximum advantage incurred in a currency other than the dollar, the group of the new capital that the proposed sale would raise. endeavoured to cover the resultant currency exposure by way of a debt swap or other appropriate currency hedge. Accordingly, if the proposed sale of REA Kaltim shares in The receipt by REA Kaltim during 2010 of an Indonesian Jakarta proceeds, the directors are contemplating the tax assessment seeking to disallow for tax purposes submission to shareholders of a proposal for the losses on currency hedges (as referred to in “Group exchange of a proportion of issued ordinary shares for results” above) has called into question the wisdom of this preference shares. Such an exchange would not only policy and, for the moment at least, the group has decided effectively reduce the equity capital of the company by not to hedge its rupiah borrowings. The group has never substituting preference share capital for equity but would covered, and does not intend in future to cover, the also mean that the net cash proceeds from the sale of currency exposure in respect of the component of the REA Kaltim shares would remain available to the group investment in its operations that is financed with sterling and could be used to fund an accelerated expansion denominated shareholder capital. programme. Operating cash flows could then be used in part to fund progressive repayment of existing The group's policy is to maintain a cash balance in sterling indebtedness with the effect that, over time, existing debt sufficient to meet its projected sterling expenditure for a would be replaced by preference share capital. period of between six and twelve months and a cash Other treasury policies balance in Indonesian rupiahs of up to the amount of its Indonesian rupiah borrowings but, otherwise, to keep all cash balances in US dollars. The sterling notes and the dollar notes carry interest at fixed rates of, respectively, 9.5 and 7.5 per cent per The directors are conscious of the possibly heightened annum. Interest is payable by SYB under the DBS financial risks currently prevailing in relation to the amortising term loan at a floating rate equal to Jakarta eurozone and to banks. The group has no direct Inter Bank Offered Rate plus a margin. exposures to the eurozone but would clearly be affected As a policy, the group does not hedge its exposure to could follow a financial collapse in the eurozone or other floating rates but, insofar as is commercially sensible, major economic area. The group is careful in its by any consequential impact on demand for CPO that 48 commitments and is ready to scale these back rapidly Unusually high levels of rainfall can disrupt estate should the need arise. With regard to banks, the board operations and result in harvesting delays with loss of oil endeavours to ensure that the group’s liquid funds are palm fruit or deterioration in fruit quality. Unusually low deposited in a manner likely to minimise the risk of loss. levels of rainfall that lead to a water availability below the A significant proportion of the group’s deposits are placed minimum required for the normal development of the oil with banks that are majority owned by sovereign palm may lead to a reduction in subsequent crop levels. governments. Principal risks and uncertainties Such reduction is likely to be broadly proportional to the size of the cumulative water deficit. Over a long period, crop levels should be reasonably predictable but there can be material variations from the norm in individual The group’s business involves risks and uncertainties. years. Those risks and uncertainties that the directors currently consider to be material are described below. There are or Low levels of rainfall can also disrupt and, in an extreme may be other risks and uncertainties faced by the group situation (not to date experienced by the group) could that the directors currently deem immaterial, or of which bring to a standstill the river transport upon which the they are unaware, that may have a material adverse group is critically dependent for estate supplies and the impact on the group. evacuation of CPO and CPKO. In that event, harvesting may have to be suspended and crop may be lost. Where risks are reasonably capable of mitigation, the group seeks to mitigate them. Beyond that, the directors Cultivation risks endeavour to manage the group’s finances on a basis that leaves the group with some capacity to withstand adverse As in any agricultural business, there is a risk that the impacts from identified areas of risk but such group's estate operations may be affected by pests and management cannot provide insurance against every diseases with a consequential negative impact on crop. possible eventuality. Agricultural best practice can to some extent mitigate this Agricultural operations risk but it cannot be entirely eliminated. Other operational factors Certain of the risks identified below in relation to the agricultural operations are described as risks affecting The group’s agricultural productivity is dependent upon crop. Any loss of crop or reduction in the quality of necessary inputs, including, in particular, fertiliser and fuel. harvest will reduce revenues and thus negatively impact Whilst the directors have no reason to anticipate cash flow and profitability. Climatic factors shortages in the availability of such inputs, should such shortages occur over any extended period, the group’s operations could be materially disrupted. Equally, increases in input costs are likely to reduce profit margins. Although the group's agricultural operations are located in an area of high rainfall with sunlight hours well suited to After harvesting, FFB crops become rotten if not the cultivation of oil palm, climatic conditions vary from processed within a short period. Any hiatus in FFB year to year and setbacks are possible. collection or processing may therefore lead to a loss of 49 Review of the group continued crop. The group endeavours to maintain resilience in its Produce prices palm oil mills with two mills (soon to be increased to three) operating separately and some ability within each The profitability and cash flow of the agricultural mill to switch from steam based to diesel based electricity operations depend both upon world prices of CPO and generation but such resilience would be inadequate to CPKO and upon the group's ability to sell those products compensate for any material loss of processing capacity at price levels comparable with such world prices. for anything other than a short time period. CPO and CPKO are primary commodities and as such are The group has bulk storage facilities within its main area affected by levels of world economic activity and factors of agricultural operations and at its transhipment terminal affecting the world economy, including levels of inflation downstream of the port of Samarinda. Such facilities and and interest rates. This may lead to significant price the further storage facilities afforded by the group’s fleet swings although, as noted under “Markets” in “Agricultural of barges have hitherto always proved adequate to meet operations” above, the directors believe that such swings the group’s requirements for CPO and CPKO storage. should be moderated by the fact that the annual oilseed Nevertheless, disruptions to river transport between the crops account for the major proportion of world vegetable main area of operations and the port of Samarinda (such oil production and producers of such crops can reduce or as occurred in 2011 when a bridge over the Mahakam increase their production within a relatively short time river at Tenggarong collapsed), or delays in collection of frame. CPO and CPKO from the transhipment terminal, could result in a group requirement for CPO and CPKO storage In the past, in times of very high CPO prices, the exceeding the available capacity. This would be likely to Indonesian authorities have for short periods imposed force a temporary cessation in FFB processing with a either restrictions on the export of CPO and CPKO or very resultant loss of crop. high duties on export sales of such oil. The directors believe that when such measures materially reduce the The group maintains insurance for the agricultural profitability of oil palm cultivation, they are damaging not operations to cover those risks against which the only to large plantation groups but also to the large directors consider that it is economic to insure. Certain number of smallholder farmers growing oil palm in risks (including the risk of crop loss through fire and other Indonesia and to the Indonesian economy as a whole perils potentially affecting the planted areas on the (because CPO is an important component of Indonesia's group's estates), for which insurance cover is either not US dollar earning exports). The directors are thus hopeful available or would in the opinion of the directors be that future measures affecting sales of CPO and CPKO disproportionately expensive, are not insured. These risks will not seriously diminish profit margins. are mitigated to the extent reasonably feasible by management practices but an occurrence of an adverse Above average CPO and CPKO prices during 2007 and uninsured event could have a material negative impact on the early months of 2008 and again more recently from group cash flows and profitability. 2010 to-date have not led to a re-imposition of export restrictions. Instead, the Indonesian government continues to allow the free export of CPO and CPKO but has introduced a sliding scale of duties on exports. Furthermore, the starting point for this sliding scale is set 50 at a level such that when CPO and CPKO prices fell back market perceptions as to the value of the company's in the last quarter of 2008, the rate of export duty payable securities. was reduced to nil. Environmental, social and governance practices World markets for CPO and CPKO may be distorted by the imposition of import controls or taxes in consuming The group recognises that the agricultural operations are countries. The directors believe that the imposition of both a large employer and have significant economic such controls or taxes on CPO or CPKO will normally importance for local communities in the areas of the result in greater consumption of alternative vegetable oils group’s operations. This imposes environmental, social within the area in which the controls or taxes have been and governance obligations which bring with them risks imposed and the substitution outside that area of CPO that any failure by the group to meet the standards and CPKO for other vegetable oils. Should such arbitrage expected of it may result in reputational and financial fail to occur or prove insufficient to compensate for the damage. The group seeks to mitigate such risks by market distortion created by the applicable import establishing standard procedures to ensure that it meets controls or taxes, selling prices for the group’s CPO and its obligations, monitoring performance against those CPKO could be depressed. Expansion standards and investigating thoroughly and taking action to prevent recurrence in respect of any failures identified. The group's existing agricultural operations and the The group is planning further extension planting of oil planned expansion of those operations are based on land palm. The directors hope that unplanted land held by or areas that have been previously logged and zoned by the allocated to the group will become available for planting Indonesian authorities as appropriate for agricultural ahead of the land becoming needed for development and development on the basis that, regrettable as it may be that the development programme can be funded from from an environmental viewpoint, the logging has been so available group cash resources and future operational extensive that primary forest is unlikely to regenerate. cash flows, appropriately supplemented with further debt Such land areas fall within a region that elsewhere funding or capital raised from further issues of preference includes substantial areas of unspoilt primary rain forest shares. Should, however, land or cash availability fall short inhabited by diverse flora and fauna. As such, the group, of expectations and the group be unable to secure in common with other oil palm growers in Kalimantan, alternative land or funding, the extension planting must expect scrutiny from conservation groups and could programme, upon which the continued growth of the suffer adverse consequences if its environmental policies group’s agricultural operations will in part depend, may be were to be singled out for criticism by such groups. delayed or curtailed. An environmental impact assessment and master plan Any shortfall in achieving planned extensions of the was constructed using independent environmental group's planted areas would be likely to impact negatively experts when the group first commenced agricultural the annual revaluation of the group's biological assets, the operations in East Kalimantan and this plan is updated movements arising from which are dealt with in the regularly to reflect modern practice and to take account of group's income statement. Whilst this would not affect changes in circumstances (including planned additions to the group's underlying cash flow, it could adversely affect the areas to be developed by the group). Substantial 51 Review of the group continued conservation reserves have been established in areas local villagers for the cultivation of crops. Accordingly, already developed by the group and further reserves will when taking over such areas, the group negotiates with, be added as new areas are developed. The group actively and pays compensation to, the affected parties. manages these reserves and endeavours to use them to conserve landscape level biodiversity as detailed under The negotiation of compensation payments can involve a “Conservation” in “Agricultural operations” above. considerable number of local individuals with differing views and this can cause difficulties in reaching The group is committed to sustainable development of oil agreement with all affected parties. There is also a risk palm and adopts the measures described under that, after an agreement has been completed, a party to “Sustainable practices” in “Agricultural operations” above the agreement may become disaffected with the terms to mitigate the risk of its operations causing damage to agreed or the manner in which the agreement has been the environment or to its neighbours. The group supports implemented and may seek to repudiate the agreement. the principles and criteria established by RSPO and has Such difficulties and risk have in the past caused, and are obtained RSPO accreditation for the most of its likely to continue periodically to cause, delays to the operations. Local relations extension planting programme and other disruptions. The group has to-date been successful in managing such periodic delays and disruptions so that they have not, in overall terms, materially disrupted the group's extension The agricultural operations of the group could be planting programme or operations generally, but there is a seriously disrupted if there were to be a material continuing risk that they could do so. breakdown in relations between the group and the host population in the area of the operations. The group Coal operations endeavours to mitigate this risk by liaising regularly with representatives of surrounding villages and by seeking to Operational risks improve local living standards through mutually beneficial economic and social interaction between the local villages Coal delivery volumes from the group’s own concession and the agricultural operations. In particular, the group, are dependent upon efficiency of production and this can when possible, gives priority to applications for be disrupted by external factors outside the group’s employment from members of the local population and control such as the heavy rains that are common in East supports specific initiatives (as described under Kalimantan. Failure to achieve budgeted delivery volumes “Community development” and “Smallholders” in increases unit costs and may result in operations “Agricultural operations” above) to encourage local becoming unprofitable. Whilst weather related impacts farmers and tradesmen to act as suppliers to the group, its cannot be avoided, the group will seek to mitigate such employees and their dependents and to promote risks by using experienced contractors, supervising them smallholder development of oil palm plantings. closely and taking care to ensure that they have equipment of capacity appropriate for the planned The group's agricultural operations are established in a delivery volumes. relatively remote and sparsely populated area which was for the most part unoccupied prior to the group's arrival. Traded coal delivery volumes are dependent upon However, some areas of land were previously used by supplier performance of contract obligations. The group 52 endeavours to ensure such performance by exercising Environmental practices care in the selection of suppliers and direct supervision of supplier deliveries. Open cast coal mining, as conducted on the coal concessions in which the group has invested, involves the Adverse weather conditions can disrupt land transport of removal of substantial volumes of overburden to obtain coal while heavy seas may prevent barging of coal to its access to the coal deposits. The prospective areas to be agreed point of delivery. Failure to load export shipments mined by the group do not cover a large area and the to an agreed schedule may result in demurrage claims group is committed to international standards of best (damages payable for delays) which may be material. The environmental practice and, in particular, to proper group endeavours to minimise the demurrage risk by management of waste water and reinstatement of mined establishing stockpiles, and loading barges used for areas on completion of mining operations. Nevertheless, transferring coal from shore to ship, ahead of arrival of the group could sustain reputational damage as a result ships. of environmental criticisms of the coal mining industry as a whole. Mining plans are based on geological assessments and the group seeks to ensure the accuracy of those General assessments by drilling ahead of any implementation of the plans. Nevertheless, geological assessments are Currency extrapolations based on statistical sampling and may prove inaccurate to an extent. In that event, unforeseen Because CPO, CPKO and coal are essentially US dollar extraction complications can occur and may cause cost based commodities, the group's revenues and the overruns and delays. Price risk underlying value of the group's operations are effectively US dollar denominated. Moreover, substantial proportions of the group’s borrowings and costs are US dollar denominated or hedged against or linked to the US dollar. The profitability and cash flow of the coal operations depend upon world prices of coal and the group's ability Accordingly, the principal currency risk faced by the group to sell its coal at price levels comparable with such world is that those components of group costs and funding that prices. Coal is a primary commodity and as such is arise in, or are denominated in, in Indonesian rupiah and affected by levels of world economic activity and factors sterling and, as respects group funding, are not hedged affecting the world economy, including levels of inflation against US dollar, may, if such currencies strengthen and interest rates. This may lead to significant price against the US dollar, negatively impact the group’s swings. financial position in US dollar terms. Coal is sold on the basis of its calorific value and other As respects costs and share capital, the directors aspects of its chemical composition. Supply and demand consider that this risk is inherent in the group's business for specific grades of coal and consequent pricing may and structure and the group does not therefore normally not necessarily reflect overall coal market trends and the hedge against such risk. As respects borrowings, group may be adversely affected if it is unable to supply hedging may itself give rise to risks given the contention coal within the specifications that are at any particular of the Indonesian tax authorities (as referred to under time in high demand. 53 Review of the group continued “Group results” in “Finances” above) that mark to market Agricultural land and mining rights and interests held by losses in Indonesia on hedging derivatives may not be the group are subject to the satisfaction of various deducted from chargeable profits for Indonesian tax continuing conditions, including, as respects agricultural purposes. The directors therefore believe that, pending land, conditions requiring the group to promote clarification of this issue, it is preferable for the group to smallholder developments of oil palm. accept some currency risks in respect of borrowings than to constrain the group either to borrow only in US dollars Although the group endeavours to ensure that its (which may limit the group’s ability to borrow or require it activities are conducted only on the land areas, and within to borrow on terms that are in the directors’ opinion sub- the terms of the licences, that it holds, licensing rules optimal as respects tenor, covenants or cost) or to hedge change frequently and boundaries of large land areas are all non US dollar borrowings against the US dollar. not always clearly demarcated. There is therefore always Counterparty risk a risk that the group may inadvertently, and to a limited extent, conduct operations for which it does not hold all necessary licences or operate on land as respects which Export sales of CPO, CPKO and coal are made either it does not have all necessary permits. against letters of credit or on the basis of cash against documents. However, domestic sales of CPO, CPKO and The UK Bribery Act 2010, which applies worldwide to coal may require the group to provide some credit to interests of UK companies, has created an offence of buyers and purchases of coal for trading may require the failure by a commercial organisation to prevent a bribe group to part pay ahead of delivery. The group seeks to being paid on its behalf. Such failure may be defended if limit the counterparty risk that such credit and the organisation has “adequate procedures” in place to prepayments entail by effective credit controls. Such combat bribery. The group has traditionally had strong controls include regular reviews of buyer creditworthiness controls in this area because the group operates and limits on the term and amount of credit that may be predominantly in Indonesia, which is classified as high risk extended to any one buyer and in total. by the International Transparency Corruption Perceptions Regulatory exposure Index 2010. These controls were further enhanced during 2011 to ensure compliance with the provisions of the Act. Changes in existing, and adoption of new, laws and regulations affecting the group (including, in particular, Country exposure laws and regulations relating to land tenure and mining concessions, work permits for expatriate staff and All of the group's operations are located in Indonesia. The taxation) could have a negative impact on the group’s group is therefore significantly dependent on economic activities. Many of the licences, permits and approvals and political conditions in Indonesia. In the late 1990’s, in held by the group are subject to periodic renewal. common with other parts of South East Asia, Indonesia Renewals are often subject to delays and there is always experienced severe economic turbulence and there have a risk that a renewal may be refused or made subject to been subsequent occasional instances of civil unrest, new conditions. 54 often attributed to ethnic tensions, in certain parts of Indonesia. However, during 2011 Indonesia remained stable and the Indonesian economy continued to grow. Freedom to operate in a stable and secure environment is directors consider highly unlikely), the group could lose its critical to the group and the existence of security risks in entire interest in the concessions. By order of the board R.E.A. SERVICES LIMITED Secretary 27 April 2012 Indonesia should never be ignored. However, the group has always sought to mitigate those risks and has never, since the inception of its East Kalimantan operations in 1989, been adversely affected by security problems. Although there can be no certainty as to such matters, the directors are not aware of any circumstances that would lead them to believe that, under current political conditions, any government authority would revoke the registered land titles or mining rights in which the group has invested or would impose exchange controls or otherwise seek to restrict the group's freedom to manage its operations. Miscellaneous relationships The group is materially dependent upon its staff and employees and endeavours to manage this dependence as detailed under “Employees” in “Operations” above. Relationships with shareholders in Indonesian group companies are also important to the group. The group endeavours to maintain cordial relations with its local investors by seeking their support for decisions affecting their interests and responding constructively to any concerns that they may have. Should such efforts fail and a breakdown in relations result, the group would be obliged to fall back on enforcing, in the Indonesian courts, the agreements governing its arrangements with its local partners with the uncertainties that any juridical process involves. Failure to enforce the agreements relating to the coal mining concessions in which the group holds interests could have a material negative impact on the value of the coal operations because the concessions are at the moment legally owned by the group's local partners and, if the arrangements with those partners were successfully to be repudiated (an eventuality that the 55 Directors Richard Robinow Chairman (66) John Green-Armytage Independent non-executive director (66) Mr Green-Armytage was a non-executive director from 1984 to 1994. He rejoined the board as a non-executive director in 1997 and for several years served as chairman of the audit and remuneration committees. After a career in investment banking, he moved to become managing director of a UK listed company with South East Asian involvement. He has subsequently held directorships of a number of companies in both executive and non-executive capacities, including, until May 2011, the chairmanship of AMEC PLC. John Keatley Independent non-executive director (78) Mr Keatley was a non-executive director from 1975 to 1983 and chairman from 1978 to 1983. He rejoined the board as a non-executive director in 1985 and is a member of the nomination committee. After a background in the fertiliser industry, he is now involved in a family business investing in property in the UK and overseas. David Killick, FCIS Independent non-executive director (74) Mr Killick was appointed a non-executive director in 2006. He is chairman of the nomination committee and a member of the audit and remuneration committees. After qualifying as a barrister, he became a Fellow of the Institute of Chartered Secretaries and Administrators. He worked for over 28 years for the Commonwealth Development Corporation, serving as a member of its management board from 1980 to 1994. Thereafter, he has held a number of directorships. is currently a director of Reallyenglish.com Limited. He Mr Robinow was appointed a director in 1978 and has been chairman since 1984. After early investment banking experience, he has been involved for over 35 years in the plantation industry. He is non-executive but devotes a significant proportion of his working time to the affairs of the group. He is a non-executive director of M. P. Evans Group plc, a UK plantation company of which the shares are admitted to trading on the Alternative Investment Market of the London Stock Exchange, and of two overseas listed plantations companies: Sipef NV, Belgium, and REA Vipingo Plantations Limited, Kenya. John Oakley Managing director (63) After early experience in investment banking and general management, Mr Oakley joined the group in 1983 as divisional managing director of the group's then horticultural operations. He was appointed to the main board in 1985 and subsequently oversaw group businesses involved in tea, bananas, pineapples and merchanting, transferring in the early 1990s to take charge of the day to day management of the group's then embryonic East Kalimantan agricultural operations. He was appointed managing director in January 2002. As the sole executive director, he has overall responsibility for the operations of the group. David Blackett Senior independent non-executive director (61) Mr Blackett was appointed a non-executive director in July 2008 and was subsequently appointed chairman of the audit and remuneration committees and, more recently, as a member of the nomination committee. After qualifying as a chartered accountant in Scotland, he worked for over 25 years in South East Asia, where he concluded his career as chairman of AT&T Capital Inc. Prior to joining that company, he was a director of an international investment bank with responsibility for the bank’s South East Asian operations. He is a non-executive director of South China Holdings Limited, a company listed on the Hong Kong Stock Exchange. 56 Charles Letts Independent non-executive director (93) Mr Letts was appointed a non-executive director in 1989. After serving in the British Armed Forces in World War II and thereafter in the British Foreign Office, he was a main board director of Jardine Matheson & Co. Limited for 15 years and then set up his own business. For over 40 years, he has held directorships and advisory posts in companies covering a wide range of activities in various countries, with particular emphasis on the plantation industry. His present directorships include The China Club Limited and China Investment Fund. Chan Lok Lim Independent non-executive director (70) Mr Lim was appointed a non-executive director in 2002. He has been involved for over 30 years in companies in South East Asia engaged in power generation and distribution, water and waste treatment, industrial and agro- industrial engineering (including palm oil mill design and construction) and in the plantation industry. He is chairman of SPC Power Corporation, a public company listed on the Philippines Stock Exchange, and a director of Agusan Plantations Inc, Philippines, Agumil Philippines Inc and Pan Abrasives (Private) Limited, Singapore. 57 Directors’ report The directors present their annual report on the affairs of December 2011 were duly paid. A first interim dividend the group, together with the financial statements and in respect of 2011 of 3p per share was paid on the auditors’ reports, for the year ended 31 December 2011. ordinary shares on 27 January 2012 and the board Principal activities and business review of 3½p per share be paid on 27 July 2012 to ordinary recommends that of a final dividend in respect of the year shareholders on the register of members on 29 June The group is principally engaged in the cultivation of oil 2012. Resolution 3 in the company’s notice of 2012 palms in the province of East Kalimantan in Indonesia and annual general meeting (the “Notice”) set out at the end in the production of crude palm oil (“CPO”) and by-products. of this document, which will be proposed as an ordinary In addition, the group holds rights in respect of three coal resolution, deals with the payment of this dividend. concessions in East Kalimantan and is developing an open cast coal mining operation and coal trading activity based Going concern basis on these concessions. The group's business activities, together with the factors A review of the activities and planned future development of likely to affect its future development, performance and the group, together with the principal risks and uncertainties position are described in the “Review of the group” facing the group, is provided in the accompanying section of this annual report which also provides (under “Chairman’s statement” and “Review of the group” sections the heading “Finances”) a description of the group's cash of this annual report which are incorporated by reference in flow, liquidity and financing adequacy, and treasury this “Directors’ report”. In particular, the “Review of the policies. In addition, note 22 to the consolidated financial group” includes information as to group policy and statements includes information as to the group's policy, objectives regarding the use of financial instruments. objectives and processes for managing its capital; its Information as to such policy and objectives and the risk financial risk management objectives; details of its exposures arising is also included in note 22 to the financial instruments and hedging activities; and its consolidated financial statements. exposures to credit and liquidity risks. The group does not undertake significant research and Although the group has indebtedness, substantially all of development activities. that indebtedness is medium term and the group is not materially reliant on short term borrowing facilities. Details of significant events since 31 December 2011 are Moreover, the group has considerable cash resources. As contained in note 41 to the consolidated financial a consequence, the directors believe that the group is well statements. Results and dividends The results are presented in the consolidated income statement and notes thereto. The fixed annual dividends on the 9 per cent cumulative preference shares that fell due on 30 June and 31 placed to manage its business risks successfully. After making enquiries, the directors have a reasonable expectation that the company and the group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. 58 Charitable and political donations For the reasons given under “Board of directors” in the “Corporate governance” section of this annual report During the year the group made no charitable donations (which section is incorporated by reference in this to persons ordinarily resident in the United Kingdom and Directors’ report) and as noted under “Strategic direction no political donations. The group provided support for and succession” in the “Review of the group” section of conservation activities in East Kalimantan. this annual report, the directors consider that the current Supplier payment policy composition of the board of the company should be maintained pending completion of the planned listing of PT REA Kaltim Plantations (assuming that this will be It is the company’s policy to establish appropriate achieved during 2012). The directors believe that the payment terms and conditions for dealings with suppliers board remains effective as currently constituted. The and to comply with such terms and conditions. The board therefore recommends (each affected director holding company itself does not have trade creditors. abstaining from such conclusion as it applies to himself) Directors the re-election of all of the directors offering themselves for re-election. The senior independent non-executive director and the chairman have confirmed as regards, The directors are listed in the “Directors” section of this respectively, the chairman and the other non-executive annual report which is incorporated by reference in this directors offering themselves for re-election that, “Directors’ report”. All the directors served throughout following formal performance evaluations, each such 2011. Messrs Blackett and Oakley retire at the individual's performance continues to be effective and to forthcoming annual general meeting and, being eligible, demonstrate commitment to the role assumed, including offer themselves for re-election, such retirements being in commitment of time for board and committee meetings compliance with the company’s articles of association and, where applicable, other assigned duties. providing for the rotation of directors. Messrs Robinow, Green-Armytage, Keatley, Letts and Lim retire at the Directors’ interests forthcoming annual general meeting and, being eligible, offer themselves for re-election, such retirements being in At 31 December 2011, the interests of directors compliance with the provisions of the UK Corporate (including interests of connected persons as defined in Governance Code requiring the annual re-election of non- section 96B (2) of the Financial Services and Markets Act executive directors who have served as such for more 2000 of which the company is, or ought upon reasonable than nine years. Resolutions 4 to 10 in the Notice, which enquiry to become, aware) in the 9 per cent cumulative will be proposed as ordinary resolutions, deal with the re- preference shares of £1 each and the ordinary shares of election of the above named directors. 25p each of the company were as follows: The appointment and replacement of directors is governed by the company’s articles of association and prevailing legislation, augmented by the principles laid down in the UK Corporate Governance Code which the R M Robinow D J Blackett J M Green-Armytage company seeks to apply in a manner proportionate to its J R M Keatley size as further detailed in the “Corporate governance” section of this annual report. D H R Killick L E C Letts C L Lim J C Oakley Preference shares Ordinary shares - 10,005,833 250,000 13,288 92,519 - - 90,704 680,878 30,000 21,480 108,008 - - - 442,493 59 Directors’ report continued Directors’ indemnities Control and structure of capital Qualifying third party indemnity provisions (as defined in Details of the company’s share capital and changes in section 234 of the Companies Act 2006) were in force share capital during 2011 are detailed in note 31 to the for the benefit of directors of the company and of other company’s financial statements. At 31 December 2011, members of the group throughout 2011 and remain in the preference share capital and the ordinary share force at the date of this report. capital represented, respectively, 84.1 and 15.9 per cent of the total issued share capital. Substantial shareholders The rights and obligations attaching to the ordinary and As at the date of this report, the company had received preference shares are governed by the company’s articles notifications required by The Disclosure Rules and of association and prevailing legislation. A copy of the Transparency Rules of the Financial Services Authority articles of association is available on the company’s from the following persons of voting rights held by them website at www.rea.co.uk. Rights to income and capital as shareholders through the holdings of ordinary shares are summarised in note 31 to the company’s financial indicated: Number % statements. Emba Holdings Limited 9,957,500 29.80 On a show of hands at a general meeting of the company, Prudential plc and certain subsidiaries 6,043,129 18.09 every holder of shares and every duly appointed proxy of Alcatel Bell Pensioenfonds VZW 4,167,049 12.47 a holder of shares, in each case being entitled to vote on Artemis UK Smaller Companies 1,919,400 5.74 the resolution before the meeting, shall have one vote. On In addition, the company had been notified that the above and entitled to vote on the resolution the subject of the interest of Prudential plc group of companies includes poll shall have one vote for each share held. Holders of 6,021,116 ordinary shares (18.02 per cent) in which preference shares are not entitled to vote on a resolution M&G Investment Funds 3 is also interested. proposed at a general meeting unless, at the date of a poll, every holder of shares present in person or by proxy The shares held by Emba Holdings Limited (“Emba”) are shares is more than six months in arrears or the resolution notice of the meeting, the dividend on the preference included as part of the interest of Mr R M Robinow shown under “Directors’ interests” above. By deeds dated 24 November 1998 and 10 April 2001, Emba has agreed that it will not undertake activities in conflict with those of the group and that it will deal with the group only on a basis that is appropriate between a listed company and its subsidiaries, on the one hand, and a significant shareholder in a listed company, on the other hand. is for the winding up of the company or is a resolution directly and adversely affecting any of the rights and privileges attaching to the preference shares. Deadlines for the exercise of voting rights and for the appointment of a proxy or proxies to vote in relation to any resolution to be proposed at a general meeting are governed by the company’s articles of association and prevailing legislation and will normally be as detailed in the notes accompanying the notice of the meeting at which the resolution is to be proposed. 60 There are no restrictions on the size of any holding of The 7.5 per cent dollar notes 2012/14 of the company shares in the company. Shares may be transferred either (“dollar notes”) and the 9.5 per cent guaranteed sterling through the CREST system (being the relevant system as notes 2015/17 of REA Finance B.V. (“sterling notes”) defined in the Uncertificated Securities Regulations 2001 (which are guaranteed by the company) are transferable of which CRESTCo Limited is the operator) where held in either through the CREST system where held in uncertificated form or by instrument of transfer in any uncertificated form or by instrument of transfer in any usual or common form duly executed and stamped, usual or common form duly executed in amounts and subject to provisions of the company’s articles of multiples, in the former case, of $1 and, in the latter case, association empowering the directors to refuse to register of £1,000. There is no maximum limit on the size of any any transfer of shares where the shares are not fully paid, holding in either case. the shares are to be transferred into a joint holding of more than four persons, the transfer is not appropriately Significant holdings of preference shares, dollar notes supported by evidence of the right of the transferor to and sterling notes shown by the register of members and make the transfer or the transferor is in default in registers of dollar and sterling noteholders at 31 compliance with a notice served pursuant to section 793 December 2011 were as follows: of the Companies Act 2006. The directors are not aware of any agreements between shareholders that may result in restrictions on the transfer of securities or on voting rights. No person holds securities carrying special rights with regard to control of the company and there are no arrangements in which the company co-operates by which financial rights carried by shares are held by a person other than the holder of the shares. The articles of association provide that the business of the company is to be managed by the directors and empower the directors to exercise all powers of the company, subject to the provisions of such articles (which include a provision specifically limiting the borrowing powers of the group) and prevailing legislation and subject to such directions as may be given by the company in general meeting by special resolution. The articles of association may be amended only by a special resolution of the company in general meeting and, where such amendment would modify, abrogate or vary the class rights of any class of shares, with the consent of that class given in accordance with the company’s articles of association and prevailing legislation. Preference shares Dollar notes Sterling notes ‘000 $’000 £’000 – 16,050 Bank of New York (Nominees) Limited Chase Nominees Limited HSBC Global Custody Nominee (UK) Limited 993791 Account HSBC Global Custody Nominee (UK) Limited 641898 Account KBC Securities NV Client Acct – – 4,339 – – 2,575 – – 1,785 N.C.B. Trust Limited Bearnet Acct - 12,425 Pershing Nominees Limited PSL981 Acct Rulegale Nominees Limited JAMSCLT Account Securities Services Nominees Limited 2300001 Account State Street Nominees Limited OM04 Account Vidacos Nominees Limited CLRLUX Account Morris Edward Zukerman Morris Edward Zukerman ZFT Account – 6,189 – – – – – – – – – 3,315 4,500 4,500 – – 4,367 – – 1,797 – 2,595 2,000 – – – A change of control of the company would entitle holders of the sterling notes and certain holders of the dollar notes to require repayment of the notes held by them as detailed in notes 24 and 25 to the consolidated financial statements. A change in control of the company on or 61 Directors’ report continued prior to 31 December 2014 would also entitle the holders increase the authorised share capital of the company of the redeemable participating preference shares of the (being the maximum amount of shares in the capital of company’s subsidiary KCC Resources Limited (“KCC”) to the company that the company may allot) from redemption of their shares on the next following 31 £55,250,000 to £60,250,000 by the creation of December (or, if KCC is prohibited by law from effecting 5,000,000 9 per cent cumulative preference shares of £1 such redemption, to require the company to purchase or each ranking pari passu in all respects with the existing procure the purchase of such shares). preference shares and representing 11.1 per cent of the existing authorised preference share capital. At the date of this report, there are no outstanding share options held by directors or employees. As indicated in the “Review of the group” section of this annual report, the directors believe that capitalisation Awards to senior group executives under the company’s issues of new preference shares to ordinary shareholders long term incentive plans will vest and may be encashed provide a useful mechanism for augmenting returns to within one month of a change of control as detailed under ordinary shareholders in periods in which good profits are “Long term incentive plans” in the “Directors’ achieved but demands on cash resources limit the scope remuneration report” section of this annual report. The for payment of cash dividends. The directors also believe directors are not aware of any agreements between the that, when circumstances permit, it is sensible to replace company and its directors or between any member of the group debt funding with preference capital. The proposed group and a group employee that provides for creation of additional preference shares is designed to compensation for loss of office or employment that give the company sufficient authorised but unissued occurs because of a takeover bid. preference capital to permit the directors to issue preference shares for these purposes without further Treasury shares and power to repurchase shares approval (other than shareholder authority to allot such shares, which authority will be sought at the forthcoming No shares of the company are at present held in treasury. annual general meeting as noted under “Authorities to The company’s articles of association permit the purchase by the company of its own shares subject to prevailing legislation which requires that any such purchase, if a market purchase, has been previously authorised by the company in general meeting and, if not, is made pursuant to a contract of which the terms have been authorised by a special resolution of the company in general meeting. There is no authority extant for the purchase by the company of its own shares. Increase in share capital At the forthcoming annual general meeting, a resolution will be proposed (resolution 13 set out in the Notice) to allot share capital” below). If the intended listing of PT REA Kaltim Plantations on the Jakarta Stock Exchange (as referred to in the “Review of the group” section of this annual report) proceeds and it is decided that the listing should be accompanied by an exchange of a proportion of existing issued ordinary shares of the company for preference shares, it is probable that the directors would seek specific authorisation for the arrangements then proposed and unlikely that the directors would propose any capitalisation issue of new preference shares to ordinary shareholders or placing of new preference shares for cash during 2012 outside of those arrangements. 62 Authorities to allot share capital board to make a rights issue or open offer of ordinary shares to existing ordinary shareholders without being At the annual general meeting held on 14 June 2011, obliged to comply with certain technical requirements of shareholders authorised the directors under the the Companies Act 2006 which can create problems with provisions of section 551 of the Companies Act 2006 to regard to fractions and overseas shareholders. allot ordinary shares or 9 per cent cumulative preference shares within specified limits. Replacement authorities In addition, the resolution to provide these powers are being sought at the forthcoming annual general (resolution 16 set out in the Notice) will, if passed, meeting (resolutions 14 and 15 set out in the Notice) to empower the directors to make issues of ordinary shares authorise the directors (a) to allot and to grant rights to for cash other than by way of a rights issue or open offer subscribe for, or to convert any security into, shares in the up to a maximum nominal amount of £417,681 capital of the company (other than 9 per cent cumulative (representing 5 per cent of the issued ordinary share preference shares) up to an aggregate nominal amount of capital of the company at the date of this report). The £1,896,363.75 (being all of the unissued ordinary share company has not within the three years preceding the capital of the company and representing 22.7 per cent. of date of this report issued any ordinary shares for cash, the issued ordinary share capital at the date of this relying on the annual general disapplication of statutory report), and (b) subject to the passing of resolution 13 set pre-emption rights pursuant to section 571 of the out in the Notice, to allot and to grant rights to subscribe Companies Act 2006 (or the predecessor sections of the for, or to convert any security into, 9 per cent cumulative Companies Act 1985). preference shares in the capital of the company up to an aggregate nominal amount of £5,931,447 (being the The foregoing powers (if granted) will expire on the date aggregate of the unissued preference share capital of the of the annual general meeting to be held in 2013 or on company at the date of this report and the additional 30 June 2013 (whichever is the earlier). preference share capital proposed to be created at the forthcoming annual general meeting and representing General meeting notice period 13.5 per cent of the issued preference share capital of the company at the date of this report). At the forthcoming annual general meeting, a resolution (resolution 17 set out in the Notice) will be proposed to The new authorities, if provided, will expire on the date of authorise the directors to convene a general meeting the annual general meeting to be held in 2013 or on 30 (other than an annual general meeting) on 14 clear days' June 2013 (whichever is the earlier). Save in relation to notice (subject to due compliance with requirements for the preference shares as indicated under “Increase in electronic voting). The authority will be effective until the share capital” above, the directors have no present date of the annual general meeting to be held in 2013 or intention of exercising these authorities. Authority to disapply pre-emption rights Fresh powers are also being sought at the forthcoming annual general meeting under the provisions of sections 571 and 573 of the Companies Act 2006 to enable the on 30 June 2013 (whichever is the earlier). This resolution is proposed following legislation which, notwithstanding the provisions of the company's articles of association and in the absence of specific shareholder approval of shorter notice, has increased the required notice period for general meetings of the company to 21 clear days. While the directors believe that it is sensible 63 Directors’ report continued to have the flexibility that the proposed resolution will Deloitte LLP have expressed their willingness to continue offer, to enable general meetings to be convened on in office as auditors and resolutions to re-appoint them shorter notice than 21 days, this flexibility will not be used and to authorise the directors to fix their remuneration will as a matter of routine for such meetings, but only where be proposed at the forthcoming annual general meeting. the flexibility is merited by the business of the meeting Resolutions 11 and 12 set out in the Notice, each of and is thought to be to the advantage of shareholders as which will be proposed as ordinary resolutions, relate to the re-appointment and remuneration of the auditors. By order of the board R.E.A. SERVICES LIMITED Secretary 27 April 2012 a whole. Recommendation The board considers that increasing the authorised share capital of the company by the creation of the additional preference shares proposed as detailed under “Increase in share capital”, granting the directors the authorities and powers as detailed under “Authorities to allot share capital” and “Authority to disappy pre-emption rights” and the proposal to permit general meetings (other than annual general meetings) to be held on just 14 clear days' notice as detailed under “General meeting notice periods” above are all in the best interests of the company and shareholders as a whole and accordingly the board recommends that shareholders vote in favour of the resolutions 13 to 17 as set out in the notice of the forthcoming annual general meeting. Auditors Each director of the company at the date of approval of this report has confirmed that, so far as he is aware, there is no relevant audit information of which the company's auditors are unaware; and that he has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company's auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006. 64 Corporate governance General The directors appreciate the importance of ensuring that the group’s affairs are managed effectively and with integrity and acknowledge that the principles laid down in the UK Corporate Governance Code issued in 2010 by the Financial Reporting Council (the “Code”) provide a widely endorsed model for achieving this. The Code is available from the Financial Reporting Council’s website at “www.frc.org.uk”. The directors seek to apply the Code principles in a manner proportionate to the group’s size but, as the Code permits, reserving the right, when it is appropriate to the individual circumstances of the company, not to comply with certain Code principles and to explain why. Throughout the year ended 31 December 2011, the company was in compliance with the provisions set out in the Code. Board of directors The board currently comprises one executive director and seven non-executive directors (including the chairman). Biographical information concerning each of the directors is set out in the “Directors” section of this annual report. The variety of backgrounds brought to the board by its members provides perspective and facilitates balanced and effective strategic planning and decision making for the long-term success of the company in the context of the company’s obligations and responsibilities both as the owner of a business in Indonesia and as a UK listed entity. In particular, the board believes that the skills and experience of its different members complement each other and that their knowledge is of specific relevance to the nature and geographical location of the group’s operations. The chairman and managing director (being the chief executive) have defined separate responsibilities under the overall direction of the board. The chairman has responsibility for leadership and management of the board in discharging its duties; the managing director has responsibility for the executive management of the group. Neither has unfettered powers of decision. All of the non-executive directors, with the exception of the chairman, are considered by the board to have been independent throughout the year. The directors acknowledge that some institutional investors take the view that non-executive directors who have served on the board of the company for more than nine years can never be regarded as independent and that, on this basis, four of the non-executive directors whom the board regards as independent would not be treated as such. The Code states that service by a director for more than nine years is to be taken into account by the board in assessing his independence but it is not, under the Code, determinative of independence. All of the long serving non-executive directors considered by the board to be independent are re-elected annually after endorsement of their independence by their co- directors as required by the Code and none of these directors is financially or otherwise materially dependent upon the company. The board continues to be satisfied that the independence of these long serving independent non-executive directors is not affected by their length of service. Two independent non-executive directors have served on the board of the company for less than nine years and, accordingly, the company would satisfy the Code requirement that at least two members of the board be independent non-executive directors even if all longer serving non-executive directors were treated as not independent. As noted under “Strategic direction and succession” in the “Review of the group” section of this annual report and as previously indicated, it is intended that after completion of the listing of PT REA Kaltim Plantations (planned for the last quarter of 2012) the four long serving independent non-executive directors, Messrs Letts, Lim, Green- Armytage and Keatley, will retire and one new executive director and one new independent non-executive director will be appointed, the latter appointment being made with 65 Corporate governance continued due regard to the latest guidelines as respects diversity and gender. Following such reconstitution of the board, the directors intend that the board will in future be refreshed on the basis of a policy that length of service by independent non-executive directors be limited to nine years. Under the company’s articles of association, any director who has not been appointed or re-appointed at each of the preceding two annual general meetings shall retire by rotation and may submit himself for re-election. This has the effect that each director is subject to re-election at least once every three years. In addition, in compliance with the Code, non-executive directors who have served on the board for more than nine years submit themselves for re-election every year. Further, any director appointed during the year holds office until the next annual general meeting and may then submit himself for re-election. of such other information as the board periodically decides that it should have to facilitate the discharge of its responsibilities. The board has a schedule of matters reserved for its decision which is kept under review. Such matters include strategy, material investments and financing decisions and the appointment or removal of executive directors and the company secretary. In addition, the board is responsible for ensuring that resources are adequate to meet the group’s objectives and for reviewing performance, financial controls, risk and compliance with the group’s policy and procedures with respect to bribery. The company carries appropriate insurance against legal action against its directors. The current policy was in place throughout 2011 in compliance with the Code requirement to carry such insurance. Directors’ conflicts of interest Board committees In connection with the statutory duty to avoid any situation which conflicts or may conflict with the interests of the company, the board has approved the continuance of potential conflicts notified by Messrs Robinow and Green- Armytage, each of the two directors absenting himself from the discussion in respect of himself. Such notifications relate to each of the directors’ interests as shareholders in and/or directors of companies the interests of which might conflict with those of the group but are not at present considered to conflict. No other conflicts or potential conflicts have been notified by directors. Board responsibilities The board is responsible for the proper management of the company. Quarterly operational and financial reports are issued to all directors following the end of each quarter for their review and comment. These reports are augmented by annual budgets and positional papers on matters of a non routine nature and by prompt provision 66 The board has appointed audit, nomination and remuneration committees to undertake certain of the board’s functions, with written terms of reference which are available for inspection on the company’s website and are updated as necessary. Information concerning the remuneration of directors is provided in the “Directors’ remuneration report” section of this annual report (which is “Corporate reference governance” report) together with details of the basis upon which such remuneration is determined. incorporated by this in An executive committee of the board comprising Mr R M Robinow and Mr J C Oakley has been appointed to deal with various matters of a routine or executory nature. Performance evaluation A formal internal evaluation of the performance of the board, the committees and individual directors is undertaken annually. Balance of powers, contribution to strategy, monitoring efficacy and accountability to stakeholders are reviewed by the board as a whole and the performance of the chairman is appraised by the independent non-executive directors led by the senior independent director. The appraisal process includes assessments against a detailed set of criteria covering a variety of matters from the commitment and contribution of the board in developing strategy and enforcing disciplined risk management, pursuing areas of concern, if any, and setting appropriate commercial and social responsibility objectives to the adequacy and timeliness of information made available to the board. At the performance evaluation conducted in 2011, the board concluded that it was performing effectively as currently constituted but that the constitution and composition of the board should be reviewed once a conclusion had been reached regarding the options for restructuring the group with a possible listing in South East Asia. With the decision to list the company’s subsidiary, PT REA Kaltim Plantations, on the Jakarta stock exchange now made, such review has taken place and the directors have agreed the planned board changes described under “Board of directors” above. Professional development and advice In view of their previous relevant experience and, in most cases, length of service on the board, all directors are familiar with the financial and operational characteristics of the group’s activities. Directors are required to ensure that they maintain that familiarity and keep themselves fully cognisant of the affairs of the group and matters affecting its operations, finances and obligations (including environmental, social and governance responsibilities). Whilst there are no formal training programmes, the board regularly reviews its own competences, receives periodic briefings on legal, regulatory, operational and political developments affecting the group and may arrange training on specific matters where it is thought to be required. Directors are able to seek the advice of the company secretary and, independent individually or collectively, may take professional advice at the expense of the company if necessary. Steps are taken to ensure that newly appointed directors become fully informed as to the group’s activities. Board proceedings Four meetings of the board are scheduled each year. Other board meetings are held as required to consider corporate and operational matters with all directors consulted in advance regarding significant matters for consideration. Minutes of board meetings are circulated to all directors. The executive director, unless travelling, is normally present at full board meetings but, where appropriate, telephone discussions take place between the chairman and the other non-executive directors outside the formal meetings. Committee meetings are held as and when required. All proceedings of committee meetings are reported to the full board. The attendance of individual directors at the regular and “ad hoc” board meetings held during 2011 was as follows: R M Robinow J C Oakley D J Blackett J M Green-Armytage J R M Keatley D H R Killick L E C Letts C L Lim Regular Ad hoc meeting meeting 4 4 4 4 4 4 4 3 1 1 1 1 1 1 0 0 In addition, during 2011, there were three meetings of the audit committee, two meetings of the remuneration committee and one meeting of the nomination committee. All committee meetings were attended by all of the committee members appointed at the time of each meeting. 67 Corporate governance continued Whilst all formal decisions are taken at board meetings, the directors have frequent informal discussions between themselves and with management and most decisions at board meetings reflect a consensus that has been reached ahead of the meetings. Some directors reside permanently, or for part of each year, in the Asia Pacific region and most of the UK based directors travel extensively. Since the regular board meetings are fixed to fit in with the company's budgeting and reporting cycle and ad hoc meetings normally have to be held at short notice to discuss specific matters, the company is reluctant to change meeting dates when some directors are unable to attend. Instead, when a director is unable to be at a meeting, the company ensures that he is fully briefed so that he can make his views known to other directors ahead of time and his views are reported to, and taken into account, at the meeting. Nomination committee is The nomination committee comprises Mr D H R Killick (chairman), Mr D J Blackett and Mr J R M Keatley. The submitting responsible committee recommendations for the appointment of directors for approval by In making such full board. recommendations, the committee pays due regard to the group’s open policy with respect to diversity, including gender. the for Audit committee The audit committee currently comprises Mr D J Blackett (chairman) and Mr D H R Killick both of whom are considered by the directors to have the relevant financial experience. The audit committee is responsible for: (cid:129) monitoring the integrity of the financial statements and reviewing formal announcements of financial performance and the significant reporting issues and and such judgements announcements contain; statements that 68 (cid:129) reviewing the effectiveness of the internal control functions (including the internal financial controls, the internal audit function and arrangements whereby internally raised staff concerns as to financial reporting and other relevant matters are considered); (cid:129) making recommendations to the board in relation to the appointment, reappointment and removal of the external auditors, their remuneration and terms of engagement; and (cid:129) reviewing and monitoring the independence of the external auditors and the effectiveness of the audit process. The audit committee also monitors the engagement of the auditors to perform non-audit work. During 2011, the only non-audit work undertaken by the auditors was, as in the previous year, routine compliance reporting in connection with covenant obligations applicable to certain group loans (as respects which the governing instruments require that such compliance reporting is carried out by the auditors). The audit committee considered that the nature and scope of, and remuneration payable in respect of, these engagements were such that the independence and objectivity of the auditors was not impaired. The members of the audit committee discharge their responsibilities by informal discussions between themselves, by meetings with the external auditors, the internal auditors in Indonesia and management and by consideration of reports by management, the Indonesian internal audit function and the external auditors and by holding at least three formal meetings in each year. The audit committee has recommended to the board of the company that it should seek the approval of the company's shareholders for the reappointment of the company's current auditors. That recommendation reflected an assessment of the qualifications, expertise, resources and independence of the auditors based upon reports produced by the auditors, the committee's own from the auditors and dealings with management. The committee took into account the feedback likelihood of withdrawal of the auditors from the market and noted that there were no contractual obligations to restrict the choice of external auditors. Given the current level of audit fees and the costs that a change would be likely to entail, the committee did not recommend that the company's audit be put out to tender. Relations with shareholders The “Chairman's statement” and “Review of the group” sections of the annual report, when read in conjunction with the financial statements, “Directors' report” and “Directors’ remuneration report”, are designed to present a comprehensive and understandable assessment of the The respective group's position and prospects. responsibilities of the directors and auditors in connection with the financial statements are detailed in the “Directors’ responsibilities” section of this report and in the auditors’ report. The directors endeavour to ensure that there is satisfactory dialogue, based on mutual understanding, between the company and its shareholder body. The annual report, interim communications, periodic press releases and such circular letters to shareholders as circumstances may require are intended to keep shareholders informed as to progress in the operational activities and financial affairs of the group. In addition, within imposed by considerations of confidentiality, the company engages with institutional and other major shareholders through regular meetings and other contact in order to understand their concerns. The views of shareholders are communicated to the board as a whole to ensure that the board maintains a balanced understanding of shareholder opinions and issues arising. limits the All ordinary shareholders may attend the company’s annual and other general meetings and put questions to the board. Some directors reside permanently, or for part of each year, in the Asia Pacific region and the nature of the group’s business requires that the chairman and managing director travel frequently to Indonesia. It is therefore not always feasible for all directors to attend general meetings, but those directors who are present are available to talk on an informal basis to shareholders after the meeting’s conclusion. At least twenty working days' notice is given of the annual general meeting and related papers are made available to shareholders at least twenty working days ahead of the meeting. All proxy votes are counted and full details of all proxies lodged for each resolution are reported to the meeting and made available on the company’s website as soon as practicable after the meeting. The company maintains a corporate website at “www.rea.co.uk”. This website, which was re-designed during 2011, has detailed information on, and photographs illustrating various aspects of, the group’s operations and its conservation work. The website is updated regularly and includes information on the company’s share price and the price of crude palm oil. The company’s results and other news releases issued via the London Stock Exchange’s Regulatory News Service are published on the “Investors” section of the website and, together with other relevant documentation concerning the company, are available for downloading. Internal control The board is responsible for the group’s system of internal control and for reviewing its effectiveness. Such a system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. The board has established a continuous process for identifying, evaluating and managing any significant risks which the group faces (including risks arising from environmental, social and governance matters). The board regularly reviews the process, which has been in place from the start of the year to the date of approval of 69 Corporate governance continued this report and which is in accordance with the Turnbull guidance on internal control. appropriate. This review has been reconfirmed for the purpose of this annual report. Internal audit and reporting The group’s Indonesian operations have a fully staffed in- house internal audit function supplemented where necessary by the use of external consultants. The function issues a full report on each internal audit topic and a summary of the report is issued to the audit committee. In addition, follow-up audits are undertaken to ensure that the necessary remedial action has been taken. In the opinion of the board, there is no need for an internal audit function outside Indonesia due to the limited nature of the non-Indonesian operations. The group has established a management hierarchy which is designed to delegate the day to day responsibility for specific departmental functions within each working location, including financial, operational and compliance controls and risk management, to a number of senior managers who report to the head of the Singapore regional office and the managing director. budgets and management Management reports to the board on a regular basis by way of the circulation of progress reports, management accounts. reports, Management is required to seek authority from the board in respect of any transaction outside the normal course of trading which is above an approved limit and in respect of any matter that is likely to have a material impact on the operations that the transaction concerns. At least four supervisory visits each year are undertaken to the overseas operations by the managing director and other directors make periodic visits to those operations. Reports of such visits are given to the board and reviewed by the board at the regular board meetings. In addition the head of the Singapore regional office visits the operations in Indonesia on at least a monthly basis and has a regular dialogue with the managing director and the board. The board attaches importance not only to the process established for controlling risks but also to promoting an internal culture in which all group staff are conscious of the risks arising in their particular areas of activity, are open with each other in their disclosure of such risks and combine together in seeking to mitigate risk. In particular, the board has always emphasised the importance of integrity and ethical dealing and continues to do so. Following implementation of the UK Bribery Act 2010, policies and procedures in respect of bribery have been issued for all of the group’s operations in Indonesia as well as in the UK. These include detailed guidelines and reporting the development of a comprehensive continuous training programme for all management and employees and a process for on-going monitoring and review. The group also seeks to ensure that its partners abide by its ethical principles. requirements, The board, assisted by the audit committee, regularly reviews the effectiveness of the group’s system of internal control. The board’s monitoring covers all controls, including financial, operational and compliance controls and risk management. It is based principally on reviewing reports from management (providing such information as the board requires) and considering whether significant risks are identified, evaluated, managed and controlled and whether any significant weaknesses are promptly remedied or indicate a need for more extensive monitoring. The board reviewed the systems of internal control and risk management in November 2011 (including the group’s internal audit arrangements) and concluded that these remain effective and sufficient for their purpose. The board did not identify, nor was it advised of, any failings or weaknesses which it determined to be significant. A confirmation, therefore, in respect of the necessary actions to be taken was not considered 70 Control and capital structure regarding substantial Information shareholders, significant interests in the securities of the company and other matters pertaining to the control and rights attaching to the company’s capital is provided under “Substantial shareholders” and “Control and structure of capital” in the “Directors’ report” section of this annual report. Approved by the board on 27 April 2012 RICHARD M ROBINOW Chairman 71 Directors’ remuneration report Introduction Remuneration policy This report has been prepared in accordance with The committee sets the remuneration and benefits of the Schedule 8 to the Accounting Regulations (“The Large chairman and the managing director. The latter is and Medium-sized Companies and Groups (Accounts and currently the only executive director but the committee Reports) Regulations 2008”) made pursuant to the would set the remuneration and benefits of any other Companies Act 2006 (the “Act”). The report also meets executive director who might in future be appointed. the relevant requirements of the Listing Rules of the Financial Services Authority and describes how the board The committee is also responsible for the long term has applied the principles relating to directors’ incentive arrangements for key senior executives in remuneration set out in the UK Corporate Governance Indonesia and, during 2011, was consulted on the Code issued in 2010 by the Financial Reporting Council remuneration to be paid to the person appointed to head (the “Code”). As required by the Act, a resolution to the group’s new Singapore office. approve the report will be proposed at the annual general meeting at which the accompanying financial statements In setting remuneration and benefits, the committee are laid before the company’s members. considers the achievement of each individual in attaining the objectives set for that individual (including objectives The Act requires the auditors to report to the company’s relating to corporate performance on environmental, members on certain parts of this report and to state social and governance matters as well as to overall whether in their opinion those parts of the report have corporate performance) against the prevailing business been properly prepared in accordance with the environment, the responsibilities assumed by the Accounting Regulations. The report has therefore been individual and, where the role is part time, the time divided into separate sections for audited and unaudited commitment involved. The committee draws on data of information. Unaudited information The remuneration committee the remuneration of others performing similar functions in similarly sized organisations and in similar business organisations. Account is taken of the remuneration both of senior employees of the group who are not directors and of staff across the group’s operations generally. Due allowance is made for differences in remuneration The company has established a remuneration committee applicable to different geographical locations. The whose members comprise Mr D J Blackett (chairman) committee aims to set performance related remuneration and Mr D H R Killick. on a basis that promotes the long-term success of the company while at the same time encouraging responsible The committee does not use independent consultants but behaviour in relation to environmental, social and takes into account the views of the chairman and governance matters. managing director. Neither the chairman nor the managing director plays a part in any discussion of his The key objective of the remuneration policy (which own remuneration. 72 applies for 2011 and subsequent years) is to attract, motivate, retain and fairly reward individuals of a high calibre, while ensuring that the remuneration of each individual is consistent with the best interests of the In the past, executive directors were eligible to join the company and its shareholders. In framing its policy on REA Pension Scheme. That scheme is now closed to performance related remuneration (which is payable only new members and, as explained in more detail under to executive directors), the committee follows the “Director’s pension arrangements – Mr J C Oakley” below, provisions of schedule A to the Code. Mr Oakley is no longer an active member of the scheme. The committee considers all proposals for executive the company will be based in Singapore or Indonesia. directors to hold outside directorships. Such directorships Accordingly, it is no longer the policy of the company to are normally permitted only if considered to be of value to offer pensionable remuneration to directors. Moreover, it is expected that future executive directors of the group and on terms that any remuneration payable will be accounted for to the group. Matters particularly taken into account in setting Mr Oakley’s basic salary for 2011 were the general level of Remuneration of executive directors salary increases in the group in the UK and in Indonesia (where a substantial part of Mr Oakley’s responsibilities The policy on remuneration of executive directors is that are discharged), the rate of inflation and confirmation that basic remuneration of each executive director should Mr Oakley’s salary was reasonable by comparison with comprise an annual salary and certain benefits-in-kind, the salaries of managing directors of listed companies of principally a company car. In addition, an executive a size or business similar to that of the group. Specifically director should be paid performance related bonuses. with respect to Mr Oakley’s salary for 2011, the These are to be awarded annually in arrears on a committee took account of the growth of the group’s oil discretionary basis taking into account the progress of the palm operations, development of the group’s new coal group during the relevant year and the contribution to activities and the associated increase in Mr Oakley’s progress that a director is assessed by the committee to workload, the profitability of the group and the continuing have made against specific commercial and other creation of value for shareholders. Achievements objectives for that year. Bonuses should not normally reflected in the bonus paid to Mr Oakley in 2011 (being exceed 50 per cent of salary and are paid in cash. in respect of 2010 performance) included the progress towards achieving the group’s planned expansion of its Given that the company currently has only one executive plantation business with respect, in particular, to the two director, who is long serving, and given further that the year extension planting programme (notwithstanding the business of the group is inherently long term and not delays caused by changes to the local laws regarding susceptible to influence by short term decision making, permits), the development of coal trading activities to the directors have not thought it necessary to establish a supplement the group’s coal mining operations, the longer term incentive pay arrangement for just one success of financing initiatives to reduce the group’s person. However, the criteria against which bonuses are dependence on debt and the success of environmental awarded include aspects of progress that promote the and social initiatives in the plantation operations, longer term success of the group. When, in future, new specifically with reference to ISO 14001 and Roundtable younger executive directors are appointed to the board, on Sustainable Palm Oil accreditation, further smallholder the directors will give consideration to some form of schemes and steps to improve the group’s carbon longer term incentive scheme. footprint. 73 Directors’ remuneration report continued The committee has agreed that Mr Oakley should be paid Service contracts a bonus of £112,500 during 2012 in respect of 2011. In setting this bonus, the committee noted further progress The company’s current policy on directors’ service in a number of areas. A new regional director has been contracts is that contracts should have a notice period of hired and a regional office established in Singapore, a not more than one year and a maximum termination group sustainability manager has been recruited to payment not exceeding one year’s salary. No director has provide additional focus for the group’s sustainability a service contract that is not fully compliant with this agenda, documentation and controls have been policy. implemented across the group in response to the UK Bribery Act and significant progress has been made in Mr Oakley has two service agreements whereby his producing a carbon balance model for the plantations. In working time and remuneration are shared between two the agricultural operations, production of oil palm fresh employing companies to reflect the division of his fruit bunches had increased by 17 per cent during 2011, responsibilities between different parts of the group. a good level of extension planting had been achieved over Each contract may be terminated by either party by giving the two year period to 31 December 2011, new areas for notice to the other party of not less than six months. At development have been identified and the expatriate 31 December 2011, the unexpired term under each management team had been strengthened. Against this, contract remained as six months. There are no provisions progress in the coal operations had been slower than for compensation for early termination save that Mr anticipated. Oakley would be entitled to a payment in lieu of notice if due notice had not been given. Continuing performance objectives for Mr Oakley take into consideration the company’s long term agricultural Performance graph objectives, including increased crop levels, plantings and profitability, greater returns from the coal operations and A performance graph is shown in the “Key statistics” successful management of the planned transition of section of this annual report. This compares the executive management to the group’s younger performance of the company’s ordinary shares (measured management team in Singapore and Indonesia. by total shareholder return) with that of the FTSE all share Remuneration of non-executive directors 2011. The FTSE all share index has been selected as index for the period from January 2007 to December there is no index available that is specific to the activities The remuneration of non-executive directors other than of the company. the chairman is determined by the board within the limits set by the articles of association, no director taking part in Long term incentive plans the determination of his own remuneration. The level of remuneration is determined having regard to that paid by A first long term incentive plan (the “first plan”) was comparable organisations and to the time commitments established in 2007 and a second similar plan (the expected. No non-executive director has any entitlement “second plan”) was put in place in 2009. The first and to remuneration on a basis related to performance. There second plans (together the “plans”) were designed to were no changes to non-executive remuneration during provide incentives, linked to the market price performance 2011. 74 of ordinary shares in the company, to a small number of key senior executives in Indonesia with a view to their targets relate to total shareholder return and cost per participating over the long term in value created for the tonne of crude palm oil produced. Under the first plan group. No director was eligible to participate under either there were, and under the second plan there are, plan. The first plan period commenced on 1 January threshold, target and maximum levels of performance 2007 and ended on 31 December 2010 and the second determining the extent of vesting in relation to each plan period commenced on 1 January 2009 and will end performance target. Targets were or are subject to on 31 December 2012 (the “performance periods”). adjustment at the discretion of the remuneration committee where, in the committee’s opinion, warranted Under the plans, participants were awarded potential by actual performance. entitlements over notional ordinary shares of the company. These potential entitlements then vested or will The vesting of potential entitlements and the exercise of vest to an extent that was or is dependent upon the vested entitlements is dependent upon continued achievement of targets. Vested entitlements may be employment with the group. If a participant under a plan exercised in whole or part at any time within the six years ceases employment with the group before the end of the following the date upon which they vest. On exercising a performance period applicable to that plan, his potential vested entitlement, a participant will receive a cash entitlement will lapse unless he leaves by reason of death, amount for each ordinary share over which the injury, disability, redundancy or retirement or the entitlement is exercised, equal to the excess (if any) of the remuneration committee exercises a discretion to decide market price of an ordinary share on the date of exercise that his potential entitlement should not lapse. Where the over 423.93p in the case of the first plan and 227.64p in potential entitlement does not lapse, it will vest on a basis case of the second plan, being the market prices of an that reflects achievement of performance targets up to ordinary share on the dates with effect from which the the end of the financial year last ended before the date plans were agreed after adjustment for subsequent (the “cessation date”) that the affected participant ceases variations in the share capital of the company in employment with the group (as determined by the accordance with the rules of the plans. remuneration committee) and time apportioned for the elapsed portion of the applicable performance period up Each plan provided that the vesting of a participants’ to the cessation date expressed as a fraction of the full potential entitlements to notional ordinary shares would applicable performance period. The resultant vested be determined by key performance targets with each entitlement will be exercisable for a period of twelve performance target measured on a cumulative basis over months from the cessation date. If a participant leaves the applicable performance period. Under the first plan, after the end of the applicable performance period, the for which the performance period has now ended, there participant may exercise a vested entitlement within six were three key performance targets with each target months of leaving. governing the vesting of one third of each potential entitlement. The three targets related to total shareholder In the event of a change in control of the company as a return, cost per tonne of crude palm oil produced and result of a takeover offer or similar corporate event, annual planting rate achieved. Under the second plan, for potential entitlements will vest on a basis that reflects which the performance period is continuing, there are two achievement of performance targets up to the date (the key performance targets with each target governing the “applicable date”) of change of control or other relevant vesting of one half of each potential entitlement. The two event (as determined by the remuneration committee) 75 Directors’ remuneration report continued and time apportioned for the elapsed portion of the The total amount paid to Mr Oakley in respect of 2011 applicable performance period up to the applicable date was £15,000 less than the amount to which he would expressed as a fraction of the full applicable performance normally have been entitled. The reduction of £15,000 period. Vested entitlements will be exercisable for a reflected an agreement with Mr Oakley that a benefit in period of one month following the applicable date. kind that he received in 2006 relating to a tax liability arising on a gain on exercise of share options should effectively be refunded by commensurate reductions in At 31 December 2011, entitlements to a total of 35,557 the subsequent remuneration to which Mr Oakley would notional ordinary shares had vested under the first plan otherwise become entitled from 1 January 2008. The and awards of potential entitlements over a maximum of reduction of £15,000 in 2011 means that, together with 40,679 notional ordinary shares had been made and the reductions in payments made to Mr Oakley in 2008 remained outstanding under the second plan. On the and 2009, the applicable benefit in kind has now been basis of the market price of the ordinary shares on 31 offset in full. December 2011 of 570p per share, the total gain to participants in respect of their vested entitlements would Fees paid to Mr Blackett and Mr Killick in respect of 2011 have been £53,375 and in respect of their potential included, in each case, additional remuneration of £2,500 entitlements would, if these had vested in full, have been in respect of their membership of the audit committee. £139,269. Fees payable in respect of Mr Green-Armytage, Mr Letts and Mr Lim were paid to companies in which such Audited information directors were interested. Directors’ remuneration Director’s pension arrangements - Mr J C Oakley The following table shows details of the remuneration of Mr Oakley (who was aged 63 at 31 December 2011) was individual directors holding office during the year ended until 31 July 2009 an ordinary member of the R.E.A. 31 December 2011 (with comparative totals for 2010): Pension Scheme. That Scheme is a defined benefit R M Robinow (chairman) J C Oakley D J Blackett J M Green-Armytage J R M Keatley D H R Killick L E C Letts C L Lim Salary and fees Other* 2011 Total £’000 £’000 £’000 188 300 5 114 193 414 2010 Total £’000 183 419 22 20 20 22 20 20 - - - - - - 22 20 20 22 20 20 22 20 20 22 20 20 612 119 731 726 * comprises benefits plus, in the case of Mr Oakley a bonus of £70,000, and payments in lieu of pension contributions of £56,000 (see “Director’s pension arrangements – Mr J C Oakley” below) . scheme of which details are shown in note 38 to the consolidated financial statements. Mr Oakley elected to become a pensioner member of the scheme on 31 July 2009. In recognition of Mr Oakley’s withdrawal from ordinary membership of the scheme ahead of attaining the age of 65, the company is paying Mr Oakley an amount in lieu of the pension contributions that the company would otherwise have paid to the pension scheme. The amount in lieu payable in 2011 was £56,000 (2010: £54,000). 76 Director’s pension entitlement - Mr J C Oakley Details of Mr Oakley’s annual pension entitlement and of the transfer value of that entitlement are set out below. Pension: In payment at beginning of year Increase during the year, in line with Scheme inflation £ 65,500 2,392 Increase during the year, in excess of Scheme inflation – In payment at end of year Transfer value: At beginning of year 67,892 £ 1,415,995 Contributions made by the director during the year – Increase during the year based on Scheme inflation 89,501 At end of year 1,505,496 Approved by the board on 27 April 2012 RICHARD M ROBINOW Chairman 77 Directors’ responsibilities The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. UK company law requires the directors to prepare financial statements for each financial year. The directors are required to prepare the group financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law, the directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing the parent company financial statements, the directors are required to: (cid:129) select suitable accounting policies and then apply them consistently; (cid:129) (cid:129) present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and (cid:129) make an assessment of the company's ability to continue as a going concern. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are also responsible for the maintenance (cid:129) make judgments and accounting estimates that are and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. reasonable and prudent; (cid:129) state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and (cid:129) prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. In preparing the group financial statements, International Accounting Standard 1 requires that directors: (cid:129) properly select and apply accounting policies; 78 Directors’ confirmation To the best of the knowledge of each of the directors: (cid:129) the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and (cid:129) the “Directors' report” section of this annual report including the “Chairman’s statement” and “Review of the group” sections of this annual report which the Directors' report incorporates by reference provides a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole together with a description of the principal risks and uncertainties that they face. The current directors of the company and their respective functions are set out in the “Directors” section of this annual report. By order of the board R.E.A. SERVICES LIMITED Secretary 27 April 2012 79 Auditors’ report (group) Independent auditors’ report to the members of R.E.A. Holdings plc Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts We have audited the group financial statements of R.E.A. and disclosures in the financial statements sufficient to give Holdings plc for the year ended 31 December 2011 reasonable assurance that the financial statements are free which comprise the consolidated income statement, the from material misstatement, whether caused by fraud or consolidated balance sheet, the consolidated statement error. This includes an assessment of: whether the of comprehensive income, the consolidated statement of accounting policies are appropriate to the group’s changes in equity, the consolidated cash flow statement, circumstances and have been consistently applied and the accounting policies and the related notes 1 to 44. adequately disclosed; the reasonableness of significant The financial reporting framework that has been applied accounting estimates made by the directors; and the overall in their preparation is applicable law and International presentation of the financial statements. In addition, we Financial Reporting Standards (IFRSs) as adopted by the read all the financial and non-financial information in the European Union. annual report to identify material inconsistencies with the audited financial statements. If we become aware of any This report is made solely to the company’s members, as apparent material misstatements or inconsistencies we a body, in accordance with Chapter 3 of Part 16 of the consider the implications for our report. Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s Opinion on financial statements members those matters we are required to state to them in an auditors’ report and for no other purpose. To the In our opinion the group financial statements: fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the statement of Directors’ responsibilities, the directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. (cid:129) (cid:129) (cid:129) give a true and fair view of the state of the group’s affairs as at 31 December 2011 and of its profit for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the group financial statements. 80 Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: (cid:129) (cid:129) certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Under the Listing Rules we are required to review: (cid:129) (cid:129) the directors’ statement contained within the Directors’ confirmation in relation to going concern; the part of the Corporate governance statement relating to the company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and (cid:129) certain elements of the report to shareholders by the Board on directors’ remuneration. Other matter We have reported separately on the parent company financial statements of R.E.A. Holdings plc for the year ended 31 December 2011 and on the information in the Directors’ remuneration report that is described as having been audited. Mark McIlquham ACA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditors London, England 27 April 2012 81 Consolidated income statement for the year ended 31 December 2011 Note 2011 $’000 2010 $’000 2 4 13 2 5 2, 7 8 5 9 10 35 11 147,758 4,011 (68,056) 83,713 7,375 339 (1,719) (16,959) 72,749 2,889 (11,465) 64,173 (18,559) 114,039 455 (48,581) 65,913 1,588 449 (1,455) (10,228) 56,267 1,894 (7,714) 50,447 (15,474) 45,614 34,973 40,453 5,006 155 45,614 32,325 2,360 288 34,973 121.0 cents 121.0 cents 97.0 cents 96.8 cents Revenue Net gain arising from changes in fair value of agricultural produce inventory Cost of sales Gross profit Net gain arising from changes in fair value of biological assets Other operating income Distribution costs Administrative expenses Operating profit Investment revenues Finance costs Profit before tax Tax Profit for the year Attributable to: Ordinary shareholders Preference shareholders Non-controlling interests Earnings per 25p ordinary share Basic Diluted All operations for both years are continuing 82 Consolidated balance sheet as at 31 December 2011 Non-current assets Goodwill Biological assets Property, plant and equipment Prepaid operating lease rentals Indonesian coal interests Investments Deferred tax assets Non-current receivables Total non-current assets Current assets Inventories Investments Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Current tax liabilities Bank loans US dollar notes Other loans and payables Total current liabilities Non-current liabilities Bank loans Sterling notes US dollar notes Preference shares issued by a subsidiary Hedging instruments Deferred tax liabilities Other loans and payables Total non-current liabilities Total liabilities Net assets Equity Share capital Share premium account Translation reserve Retained earnings Non-controlling interests Total equity Approved by the board on 27 April 2012 and signed on behalf of the board. RICHARD M ROBINOW Chairman Note 12 13 14 15 16 19 28 18 19 20 21 30 23 25 29 23 24 25 26 27 28 29 31 32 33 34 35 2011 $’000 12,578 244,433 102,185 23,497 28,580 1,430 4,689 1,835 2010 $’000 12,578 221,883 85,488 17,277 18,864 – 5,743 1,417 419,227 363,250 25,559 963 34,162 30,601 91,285 14,006 – 28,662 36,710 79,378 510,512 442,628 (19,895) (8,349) (2,000) (4,527) (1,353) (36,124) (27,018) (51,332) (29,414) (1,500) (16,216) (40,283) (5,680) (12,833) (8,973) (7,850) – (604) (30,260) (12,625) (55,244) (43,269) (1,500) (17,726) (41,010) (5,474) (171,443) (176,848) (207,567) (207,108) 302,945 235,520 87,939 21,771 (11,762) 202,763 300,711 2,234 302,945 60,548 24,901 (18,197) 166,228 233,480 2,040 235,520 83 Consolidated statement of comprehensive income for the year ended 31 December 2011 Profit for the year Note 2011 $’000 45,614 2010 $’000 34,973 Other comprehensive income Changes in fair value of cash flow hedges: Gains / (losses) arising during the year Reclassification adjustments for losses included in the consolidated income statement Changes in fair value of hedged instrument Reclassification adjustments for gains included in the consolidated income statement Exchange differences on translation of foreign operations Tax relating to components of other comprehensive income 9 1,700 894 2,594 (303) (611) 4,102 (329) 5,453 (4,117) – (4,117) 1,825 – 3,733 (4,944) (3,503) Total comprehensive income for the year 51,067 31,470 Attributable to: Ordinary shareholders Preference shareholders Non-controlling interests 45,867 5,006 194 51,067 28,779 2,360 331 31,470 Consolidated statement of changes in equity for the year ended 31 December 2011 Share Translation reserve (note 33) $’000 Share capital (note 31) $’000 43,188 At 1 January 2010 – Total comprehensive (loss) / income – Share based payment - deferred tax credit Issue of new ordinary shares 329 Issue of new preference shares (cash) 14,389 2,642 Issue of new preference shares (scrip) – Dividends to preference shareholders – Dividends to ordinary shareholders – Changes in non-controlling interests premium (note 32) $’000 27,297 – – 246 – (2,642) – – – Retained earnings (note 34) $’000 (13,630) 136,499 34,685 – – – – (2,360) (2,596) – (3,546) (1,021) – – – – – – Non- controlling interests (note 35) $’000 1,314 331 – – – – – – 395 Sub total $’000 193,354 31,139 (1,021) 575 14,389 – (2,360) (2,596) – 60,548 At 31 December 2010 – Prior year reclassification Total comprehensive income – Issue of new preference shares (cash) 24,248 3,143 Issue of new preference shares (scrip) – Dividends to preference shareholders – Dividends to ordinary shareholders 24,901 – – 13 (3,143) – – (18,197) 166,228 (1,021) 45,459 – – (5,006) (2,897) 1,021 5,414 – – – – 233,480 – 50,873 24,261 – (5,006) (2,897) 2,040 – 194 – – – – Total equity $’000 194,668 31,470 (1,021) 575 14,389 – (2,360) (2,596) 395 235,520 – 51,067 24,261 – (5,006) (2,897) At 31 December 2011 87,939 21,771 (11,762) 202,763 300,711 2,234 302,945 84 Consolidated cash flow statement for the year ended 31 December 2011 Net cash from operating activities 36 33,776 21,292 Note 2011 $’000 2010 $’000 Investing activities Interest received Proceeds from disposal of property, plant and equipment Purchases of property, plant and equipment Expenditure on biological assets Expenditure on prepaid operating lease rentals Investment in Indonesian coal interests Net cash used in investing activities Financing activities Preference dividends paid Ordinary dividends paid Repayment of borrowings Repayment of obligations under finance leases Proceeds of issue of ordinary shares Proceeds of issue of preference shares Proceeds of issue of preference shares by a subsidiary Issue of US dollar notes, net of expenses Redemption of US dollar notes Redemption of sterling notes Sterling note reconstruction expenses New bank borrowings drawn Changes in non-controlling interests in subsidiaries Net cash from financing activities Cash and cash equivalents Net (decrease) / increase in cash and cash equivalents 37 Cash and cash equivalents at beginning of year Effect of exchange rate changes 2,889 11 (19,487) (18,001) (6,729) (9,717) 1,894 158 (18,504) (15,824) (3,505) (6,005) (51,034) (41,786) (5,006) (2,897) (13,469) – – 24,260 – – (10,000) (3,949) – 22,649 – 11,588 (2,360) (2,597) (1,500) (64) 575 14,389 1,500 13,071 – – (180) 11,743 395 34,972 (5,670) 36,710 (439) 14,478 22,050 182 Cash and cash equivalents at end of year 21 30,601 36,710 85 Accounting policies (group) General information R.E.A. Holdings plc is a company incorporated in the United Kingdom under the Companies Act 2006 with registration number 00671099. The company’s registered office is at First Floor, 32-36 Great Portland Street, London W1X 8QX. Details of the group's principal activities are provided in the “Directors’ report”. Basis of accounting The consolidated financial statements set out on pages 82 to 117 are prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the EU as at the date of approval of the financial statements and therefore comply with Article 4 of the EU IAS Regulation. The statements are prepared under the historical cost convention except where otherwise stated in the accounting policies. For the reasons given under “Going concern basis” in the “Directors’ report”, the financial statements have been prepared on the going concern basis. Functional and presentational currency The consolidated financial statements of the group are presented in US dollars, which is considered to be the currency of the primary economic environment in which the group operates. References to “$” or “dollar” in these financial statements are to the lawful currency of the United States of America. Adoption of new and revised standards Interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”) and brought into effect for the latest reporting period have not led to any changes in the group’s accounting policies. At the date of authorisation of these financial statements, the following standards and interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU): IFRS 9: “Financial instruments: classification and measurement” Improvements ot IFRSs (May 2010) IAS 12 (amended): “Income taxes” IFRS 10: “Consolidated financial statements” (cid:129) (cid:129) (cid:129) (cid:129) 86 (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) IFRS 11: “Joint arrangements” IFRS 12: “Disclosure on interests in other entities” IFRS 13: “Fair value measurement” Amendments to IAS 27 and IAS 28 reflecting the changes form the new IFRS 10 and IFRS 11 above IAS 19 (amended): “Employee benefits” IAS 32 (amended): “Financial instruments: presentation - offsetting financial assets and financial liabilities” IFRS7 (amended): “Financial instruments: disclosures” IFRIC 20: “Stripping costs in the productionj phase of a surface mine” The adoption of IFRS 9 which the group plans to adopt for the year beginning on 1 January 2013 will impact both the measurement and disclosures of financial instruments. The size of the impact from such adoption has not yet been estimated. The adoption of IFRS 10 may alter the composition of those subsidiary companies which are included in the consolidated financial statements of the company. The directors do not expect that the adoption of the other standards listed above will have a material impact on the financial statements of the group in future periods. Basis of consolidation The consolidated financial statements consolidate the financial statements of the company and its subsidiary companies (as listed in note (i) to the company’s individual financial statements) made up to 31 December of each year. The acquisition method of accounting is adopted with assets and liabilities valued at fair values at the date of acquisition. The interest of non-controlling shareholders is stated at the non- controlling shareholders’ proportion of the fair values of the assets and liabilities recognised. The share of total comprehensive income is attributed to the owners of the parent and to non-controlling interests even if this results in the non- controlling interests having a deficit balance. Results of subsidiaries acquired or disposed of are included in the consolidated income statement from the effective date of acquisition or to the effective date of disposal. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies into line with those used by the group. On acquisition, any excess of the fair value of the consideration given over the fair value of identifiable net assets acquired is recognised as goodwill. Any deficiency in consideration given against the fair value of the identifiable net assets acquired is credited to profit or loss in the consolidated income statement in the period of acquisition. Interest income is accrued on a time basis by reference to the principal outstanding and at the effective interest rate applicable (which is the rate that exactly discounts estimated future cash receipts, through the expected life of the financial asset, to that asset’s net carrying amount). Dividend income is recognised when the shareholders’ rights to receive payment have been established. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Leasing Goodwill Goodwill is recognised as an asset on the basis described under “Basis of consolidation” above and once recognised is tested for impairment at least annually. Any impairment is debited immediately as a loss in the consolidated income statement and is not subsequently reversed. On disposal of a subsidiary, the attributable amount of any goodwill is included in the determination of the profit or loss on disposal. For the purpose of impairment testing, goodwill is allocated to each of the group's cash generating units expected to benefit from the synergies of the combination. Cash generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. Goodwill arising between 1 January 1998 and the date of transition to IFRS is retained at the previous UK Generally Accepted Accounting Practice amount subject to testing for impairment at that date. Goodwill written off to reserves prior to 1 January 1998, in accordance with the accounting standards then in force, has not been reinstated and is not included in determining any subsequent profit or loss on disposal. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable in respect of goods and services provided in the normal course of business, net of VAT and other sales related taxes. Sales of goods are recognised when the significant risks and rewards of ownership of the goods are transferred to the buyer and include contracted sales in respect of which the contracted goods are available for collection by the buyer in the accounting period. Income from services is accrued on a time basis by reference to the rate of fee agreed for the provision of services. Assets held under finance leases and other similar contracts are recognised as assets of the group at their fair values or, if lower, at the present values of minimum lease payments (for each asset, determined at the inception of the lease) and are depreciated over the shorter of the lease terms and their useful lives. The corresponding liabilities are included in the balance sheet as finance lease obligations. Lease payments are apportioned between finance charges and a reduction in the lease obligation to produce a constant rate of interest on the balance of the capital repayments outstanding. Hire purchase transactions are dealt with similarly, except that assets are depreciated over their useful lives. Finance and hire purchase charges are charged directly against income. Rental payments under operating leases are charged to income on a straight-line basis over the term of the relevant lease. Foreign currencies Transactions in foreign currencies are recorded at the rates of exchange ruling at the dates of the transactions. At each balance sheet date, assets and liabilities denominated in foreign currencies are retranslated at the rates of exchange prevailing at that date except that non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the retranslation of other items that are subject to retranslation, are included in the net profit or loss for the period, except for exchange differences arising on non-monetary assets and liabilities, including foreign currency loans, which, to the extent that such loans relate to investment in overseas operations or hedge the group’s investment in such operations, are recognised directly in equity. For consolidation purposes, the assets and liabilities of any group entity with a functional currency other than the US dollar 87 Accounting policies (group) continued are translated at the exchange rate at the balance sheet date. Income and expenses are translated at the average rate for the period unless exchange rates fluctuate significantly. Exchange differences arising are classified as equity and transferred to the group’s translation reserve. Such exchange differences are recognised as income or expenses in the period in which the entity is sold. Goodwill and fair value adjustments arising on the acquisition of an entity with a functional currency other than the US dollar are treated as assets and liabilities of that entity and are translated at the closing rate of exchange. Borrowing costs Borrowing costs incurred in financing construction or installation of qualifying property, plant or equipment are added to the cost of the qualifying asset, until such time as the construction or installation is substantially complete and the asset is ready for its intended use. Borrowing costs incurred in financing the planting of extensions to the developed agricultural area are treated as expenditure relating to biological assets until such extensions reach maturity. All other borrowing costs are recognised in the consolidated income statement of the period in which they are incurred. Operating profit Operating profit is stated after any gain or loss arising from changes in the fair value of biological assets (net of expenditure relating to those assets up to the point of maturity) but before investment income and finance costs. Pensions and other post employment benefits United Kingdom Certain existing and former UK employees of the group are members of a defined benefit scheme. The estimated regular cost of providing for benefits under this scheme is calculated so that it represents a substantially level percentage of current and future pensionable payroll and is charged as an expense as it is incurred. Amounts payable to recover actuarial losses, which are assessed at each actuarial valuation, are payable over a recovery period agreed with the scheme trustees. Provision is made for the present value of future amounts payable by the group to cover its share of such losses. The provision is reassessed at each accounting date, with the difference on reassessment being charged or credited to the consolidated income statement in addition to the adjusted regular cost for the period. Indonesia In accordance with local labour law, the group's employees in Indonesia are entitled to lump sum payments on retirement. These obligations are unfunded and provision is made annually on the basis of a periodic assessment by independent actuaries. Actuarial gains and losses not recognised at the balance sheet date are amortised to income over the expected average remianing lives of the participating employees. Any increase or decrease in the provision, including adjusted actuarial gains and losses, is recognised in the consolidated statement of income, net of amounts added to biological assets. Taxation The tax expense represents the sum of tax currently payable and deferred tax. Tax currently payable represents amounts expected to be paid (or recovered) based on the taxable profit for the period using the tax rates and laws that have been enacted or substantially enacted at the balance sheet date. Deferred tax is calculated on the balance sheet liability method on a non-discounted basis on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding fiscal balances used in the computation of taxable profits (temporary differences). Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. A deferred tax asset or liability is not recognised in respect of a temporary difference that arises from goodwill or from the initial recognition of other assets or liabilities in a transaction which affects neither the profit for tax purposes nor the accounting profit. Deferred tax is calculated at the tax rates that are expected to apply in the periods when deferred tax liabilities are settled or deferred tax assets are realised. Deferred tax is charged or credited in the consolidated income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. 88 Biological assets Biological assets comprise oil palm trees and nurseries, in the former case from initial preparation of land and planting of seedlings through to the end of productive life of the trees and in the latter case from planting of seed through to field transplanting of seedlings. Biological assets do not include the land upon which the trees and nurseries are planted, or the buildings, equipment, infrastructure and other facilities used in the upkeep of the planted areas and harvesting of crops. Up to 31 December 2006 biological assets included plantation infrastructure, which includes such assets as roads, bridges and culverts. With effect from 1 January 2007 new expenditure on such assets is included in property, plant and equipment. The biological process commences with the initial preparation of land and planting of seedlings and ceases with the delivery of crop in the form of fresh fruit bunches (“FFB”) to the manufacturing process in which crude palm oil and palm kernel are extracted from the FFB. Biological assets are revalued at each accounting date on a discounted cash flow basis by reference to the FFB expected to be harvested over the full remaining productive life of the trees, applying a standard pre-tax profit margin and then deriving the present value of the resultant profit stream. For this purpose, the standard pre-tax profit margin is taken to be the average of the historic pre-tax profit margins for the 20 years ending with the year of the valuation subject to buffering of year to year changes, such that the change in the standard pre-tax margin does not exceed 5 per cent and any change in the standard pre tax margin that runs contrary to the trend in current margins is ignored. The historic pre-tax profit margin for each year represents the transfer value of FFB less standard production costs (including an allowance for overheads and a recovery charge in respect of buildings and plant and machinery). FFB transfer value is derived from the average price of crude palm oil FOB Samarinda (itself based on the CIF Rotterdam price less transport costs and export duty) over the relevant year, less processing costs. Assets which are not yet mature at the accounting date, and hence are not producing FFB, are valued on a similar basis but with the discounted value of the estimated cost to complete planting and to maintain the assets to maturity being deducted from the discounted FFB value. All expenditure on the biological assets up to maturity, including interest, is treated as an addition to the biological assets. Expenditure to maturity includes an allocation of overheads to the point that trees are brought into productive cropping. Such overheads include general charges and the costs of the Indonesian head office (including in both cases personnel local fees) together with costs (including costs and depreciation) arising from the use of agricultural buildings, plantation infrastructure and vehicles. The variation in the value of the biological assets in each accounting period, after allowing for additions to the biological assets in the period, is charged or credited to profit or loss as appropriate, with no depreciation being provided on such assets. Property, plant and equipment All property, plant and equipment (including, with effect from 1 January 2007, additions to plantation infrastructure) is carried at original cost less any accumulated depreciation and any accumulated impairment losses. Depreciation is computed using the straight line method so as to write off the cost of assets, other than property and plant under construction, over the estimated useful lives of the assets as follows: buildings - 20 years; plant and machinery - 5 to 16 years. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the terms of the relevant leases. The gain or loss on the disposal or retirement of an asset is determined as the difference between the sales proceeds, less costs of disposal, and the carrying amount of the asset and is recognised in the consolidated income statement. Prepaid operating lease rentals Payments to acquire leasehold interests in land are treated as prepaid operating lease rentals and amortised over the periods of the leases. Impairment of tangible and excluding goodwill intangible assets At each balance sheet date, the group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that any asset has suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, 89 Accounting policies (group) continued the group estimates the recoverable amount of the cash- generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. The recoverable amount of an asset (or cash-generating unit) is the higher of fair value less costs to sell and value in use. In assessing value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and those risks specific to the asset (or cash- generating unit) for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash- generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where, with respect to assets other than goodwill, an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Recognition and derecognition of instruments financial Financial assets and liabilities are recognised in the group’s financial statements when the group becomes a party to the contractual provisions of the relative constituent instruments. Financial assets are derecognised only when the contractual rights to the cash flows from the assets expire or if the group transfers substantially all the risks and rewards of ownership to another party. Financial liabilities are derecognised when the group’s obligations are discharged, cancelled or have expired. Non-derivative financial assets The group’s non-derivative financial assets comprise loans and receivables (including Indonesian coal interests), and cash and cash equivalents. The group does not hold any financial assets designated as held at ‘fair value through profit and loss’ (“FVTPL”) or ‘available-for-sale’ financial assets. Loans and receivables Trade receivables, loans and other receivables in respect of which payments are fixed or determinable and which are not quoted in an active market are classified as loans and receivables. Indonesian coal interests are also classified as loans and receivables. Indonesian coal interests are measured at amortised cost. All other loans and receivables held by the group are non interest bearing and are stated at their nominal amount. All loans and receivables are reduced by appropriate allowances for irrecoverable amounts. Inventories Cash and cash equivalents Inventories of agricultural produce harvested from the biological assets are stated at fair value at the point of harvest of the FFB from which the produce derives plus costs incurred in the processing of such FFB (including direct labour costs and overheads that have been incurred in bringing such inventories to their present location and condition) or at net realisable value if lower. Inventories of engineering and other items are valued at the lower of cost, on the weighted average method, or net realisable value. For these purposes, net realisable value represents the estimated selling price (having regard to any outstanding contracts for forward sales of produce) less all estimated costs of processing and costs incurred in marketing, selling and distribution. Cash and cash equivalents comprise cash in hand, demand deposits and other short-term highly liquid investments that have a maturity of not more than three months from the date of acquisition and are readily convertible to a known amount of cash and, being subject to an insignificant risk of changes in value, are stated at their nominal amounts. Held-to-maturity investments Debentures and shares with fixed and determinable payments and fixed maturity dates that are intended to be held to maturity are classified as held-to-maturity investments, and are measured at amortised cost using the effective interest 90 method, less any impairment, with revenue recognised on an effective yield basis. instrument (either as a cash flow hedge or a fair value hedge), in which case the timing of the recognition in profit or loss depends on the nature of the hedge relationship. Non-derivative financial liabilities The group’s non-derivative financial liabilities comprise redeemable instruments, bank borrowings, finance leases and trade payables. The group does not hold any financial liabilities classified as held for trading or designated as held at FVTPL. A derivative is presented as a non-current asset or non-current liability if the remaining maturity of the instrument is more than 12 months and the derivative is not expected to be realised or settled within 12 months. Other derivatives are presented as current assets or liabilities. Note issues, bank borrowings and finance leases Cash flow hedges issues and instruments (comprising note Redeemable redeemable preference shares of a subsidiary of the company), bank borrowings and finance leases are classified in accordance with the substance of the relative contractual arrangements. Finance costs are charged to income on an accruals basis, using the effective interest method, and comprise, with respect to redeemable instruments, the coupon payable together with the amortisation of issuance costs (which include any premiums payable or expected by the directors to be payable on settlement or redemption) and, with respect to bank borrowings and finance leases, the contractual rate of interest together with the amortisation of costs associated with the negotiation of, and compliance with, the contractual terms and conditions. Redeemable instruments are recorded in the accounts at their expected redemption value net of the relative unamortised balances of issuance costs. Bank borrowings and finance leases are recorded at the amounts of the proceeds received less subsequent repayments with the relative unamortised balance of costs treated as non- current receivables. Trade payables All trade payables owed by the group are non interest bearing and are stated at their nominal value. Derivative financial instruments The group enters into derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risk; further details are disclosed in note 22. Derivatives are initially recognised at fair value at the date of the contract and remeasured to their fair value at the balance sheet date. The resulting gain or loss is recognised immediately in profit or loss unless the derivative is designated and qualifies as a hedging Changes in the fair value of derivatives which are designated and qualify as cash flow hedges are deferred in equity to the extent attributable to the components of the derivatives that are effective hedges and as such offset the exchange fluctuations relating to the principal amount of the liability or asset being hedged. Other gains or losses arising are recognised immediately in profit or loss, and are included as ‘other gains and losses’ in the consolidated income statement. Hedge accounting is discontinued when the group revokes the hedging relationship or the hedging instrument expires, is sold, terminated, or exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at discontinuance remains in equity. Fair value hedges The group does not hold any derivatives designated and qualifying as fair value hedges. Equity instruments Instruments are classified as equity instruments if the substance of the relative contractual arrangements evidences a residual interest in the assets of the group after deducting all of its liabilities. Equity instruments issued by the company are recorded at the proceeds received, net of direct issue costs not charged to income. The preference shares of the company are regarded as equity instruments. Share-based payments The group has applied the transitional provisions of IFRS 2 “Share-based payments” which provide certain exemptions for grants of equity instruments prior to 7 November 2002. 91 Notes to the consolidated financial statements 1. Critical accounting judgements and key sources of estimation uncertainty In the application of the group’s accounting policies, which are set out in the “Accounting policies (group)” section of this annual report, the directors are required to make judgements, estimates and assumptions. Such judgements, estimates and assumptions are based on historical experience and other factors that are considered to be relevant. Actual values of assets and amounts of liabilities may differ from estimates. The judgements, estimates and assumptions are reviewed on a regular basis. Revisions to estimates are recognised in the period in which the estimates are revised. Critical judgements in applying the group’s accounting policies The following are critical judgements not being judgements involving estimations (which are dealt with below) that the directors have made in the process of applying the group’s accounting policies. Biological assets IAS 41 “Agriculture” requires the determination of the fair value of biological assets. In the absence of an active market for such assets, similar in condition and location to those owned by the group, management must select an appropriate methodology to be used, together with suitable metrics, for determining fair value. The directors have applied a discounted cash flow method and have selected a discount rate that, in their opinion, reflects an appropriate rate of return on investment taking into account the cyclicity of commodity markets (see note 13). Capitalisation of interest and other costs As described under “Biological assets” in “Accounting policies (group)”, all expenditure on biological assets up to maturity, including interest, is treated as an addition to such assets. The directors have determined that normally such capitalisation will cease at the end of the third financial year following the year in which land clearing commenced. At this point, plantings should produce a commercial harvest and accordingly be treated as having been brought into use for the purposes of IAS16 “Property plant and equipment” and of IAS 23 “Borrowing costs”. However, crop yields at this point may vary depending on the time of year that land clearing commenced and on climatic conditions thereafter. In specific cases, the directors may elect to extend the period of capitalisation by a further year. Derivatives As described in note 22, the directors use their judgement in selecting appropriate valuation techniques for financial instruments not quoted in an active market. For derivative financial instruments, assumptions are made based on quoted market rates adjusted for the specific features of the instruments. Key sources of estimation uncertainty The key sources of estimation uncertainty at the balance sheet date, which have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. Biological assets Because of the inherent uncertainty associated with the valuation methodology used in determining the fair value of the group’s biological assets, and in particular the volatility of prices for the group’s agricultural produce and the absence of a liquid market for Indonesian oil palm plantations, the carrying value of the biological assets may differ from their realisable value (see note 13). 92 1. Critical accounting judgements and key sources of estimation uncertainty - continued Income taxes The group is subject to income taxes in various jurisdictions. Significant judgement is required in estimating the group’s liability to both current and deferred tax having regard to the uncertainties relating to the availability of tax losses and to the future periods in which timing differences are likely to reverse as well as uncertainty regarding recoverability of tax paid against disputed items in assessments of tax on an Indonesian group company. 2. Revenue Sales of goods Revenue from services Other operating income Investment revenue Total revenue 2011 $’000 147,523 235 147,758 339 2,889 150,986 2010 $’000 113,805 234 114,039 449 1,894 116,382 In 2011, two customers accounted for respectively 51 per cent and 13 per cent of the group’s sales of agricultural goods (2010: two customers, 57 per cent and 17 per cent). As stated in note 22 “Credit risk”, substantially all sales of goods are made on the basis of cash against documents or letters of credit and accordingly the directors do not consider that these sales result in a concentration of credit risk to the group. The crop of oil palm fresh fruit bunches for 2011 amounted to 607,335 tonnes (2010: 518,742 tonnes). The fair value of the crop of fresh fruit bunches was $90,906,000 (2010: $65,344,000), based on the price formula determined by the Indonesian government for purchases of fresh fruit bunches from smallholders (see note 13). 3. Segment information In the table below, the group’s sales of goods are analysed by geographical destination and the carrying amounts of net assets is analysed by geographical area of asset location. Sales by geographical destination: Indonesia Rest of Asia Carrying amount of net assets by geographical area of asset location: UK, Continental Europe and Singapore Indonesia 2011 $’m 53.2 94.3 147.5 44.6 258.3 302.9 2010 $’m 47.0 66.8 113.8 23.8 211.7 235.5 The group has three reportable segments under IFRS 8. These comprise two operating segments, cultivation of oil palms and coal operations, and a head office segment comprising the activities of the parent company and its UK, European and Singaporean subsidiaries. The accounting policies of the reportable segments are the same as the group’s accounting policies set out on pages 86 to 91. Segment profit is the operating profit or loss earned by each segment before investment revenues, finance costs and taxation. This is the measure by which the group’s chief executive assesses segment performance. The resolution of competing rights over certain plantation areas referred to in note 42 concern assets in the group’s segment ‘cultivation of oil palms’. 93 Notes to the consolidated financial statements continued 3. Segment information - continued Year to 31 December 2011 Revenue Gross profit Net gain from changes in fair value of biological assets Other operating income Distribution costs Administrative expenses Operating profit / (loss) Investment revenues Finance costs Profit before taxation Taxation Profit for the year Plantations $’000 129,542 Coal $’000 18,216 Head office $’000 – Total $’000 147,758 82,218 7,375 339 (1,719) (10,756) 77,457 1,495 – – – (1,158) 337 – – – – (5,045) (5,045) 83,713 7,375 339 (1,719) (16,959) 72,749 2,889 (11,465) 64,173 (18,559) 45,614 510,512 207,567 5,444 63,037 Consolidated total assets Consolidated total liabilities Depreciation charged to consolidated income statement Additions to non-current assets 453,384 113,379 5,385 51,686 36,403 2,341 7 9,721 20,725 91,847 52 1,630 Year to 31 December 2010 Revenue Plantations $’000 109,866 Coal $’000 4,171 Head office $’000 2 Total $’000 114,039 Gross profit Net gain from changes in fair value of biological assets Other operating income Distribution costs Administrative expenses Operating profit / (loss) Investment revenues Finance costs Profit before taxation Taxation Profit for the year 65,612 1,588 449 (1,455) (5,914) 60,280 300 – – – (310) (10) 1 – – – (4,004) (4,003) Consolidated total assets Consolidated total liabilities Depreciation charged to consolidated income statement Additions to non-current assets 391,833 102,834 3,667 40,623 23,434 778 6 6,087 27,361 103,496 41 13 65,913 1,588 449 (1,455) (10,228) 56,267 1,894 (7,714) 50,447 (15,474) 34,973 442,628 207,108 3,714 46,723 94 4. Agricultural produce inventory movement The net gain arising from changes in fair value of agricultural produce inventory represents the movement in the fair value of that inventory less the amount of the movement in such inventory at historic cost (which is included in cost of sales). 5. Profit before tax Salient items charged / (credited) in arrriving at profit before tax Administrative expenses (see below) Movement in inventories (at historic cost) Operating lease rentals Depreciation of property, plant and equipment Amortisation of prepaid operating lease rentals Administrative expenses Net foreign exchange losses / (gains) Release of provision for UK pension (see note 38) Loss on disposal of fixed assets Indonesian operations Head office Amounts payable to the company’s auditors 2011 $’000 2010 $’000 16,959 (5,943) 405 5,292 152 519 (253) 408 11,445 4,840 16,959 10,228 588 339 3,630 84 (74) (225) – 6,254 4,273 10,228 The amount payable to Deloitte LLP for the audit of the company’s financial statements was $124,000 (2010: $126,000). Amounts payable to Deloitte LLP for the audit of accounts of associates of the company pursuant to legislation were $16,000 (2010: $16,000). Amounts payable to Deloitte LLP for other services were $3,000 (2010: $7,000) for the provision of certificates of group compliance with covenants under certain debt instruments (being certificates that those instruments require to be provided by the company’s auditors). Amounts payable to associates of Deloitte LLP for the audit of subsidiaries’ financial statements were $24,000 (2010: amount payable to an associate for the audit of a subsidiary was $16,000). Earnings before interest, tax, depreciation and amortisation and net biological gain Operating profit Depreciation and amortisation Net biological gain 2011 $’000 2010 $’000 72,749 5,444 (7,375) 70,818 56,267 3,715 (1,588) 58,394 95 Notes to the consolidated financial statements continued 6. Staff costs, including directors Average number of employees (including executive directors): Agricultural - permanent Agricultural - temporary Head office Their aggregate remuneration comprised: Wages and salaries Social security costs Pension costs 7. Investment revenues Interest on bank deposits Other interest income 8. Finance costs Interest on bank loans and overdrafts Interest on US dollar notes Interest on sterling notes Interest on obligations under finance leases Reclassification from translation reserve in equity Other finance charges Amount included as additions to biological assets 2011 Number 2010 Number 4,668 2,850 7 7,525 4,135 2,315 7 6,457 $’000 $’000 23,651 893 423 24,967 19,538 754 293 20,585 2011 $’000 507 2,382 2,889 2011 $’000 2,510 3,671 5,679 – 283 1,942 2010 $’000 257 1,637 1,894 2010 $’000 974 3,883 5,666 1 – 1,910 14,085 (2,620) 11,465 12,434 (4,720) 7,714 The reclassification from equity arises from the early repurchase for cancellation of £2.46 million of 9.5 per cent guaranteed sterling notes 2015/17 (see note 24) which was hedged by a cross currency interest swap (see note 27). Deferred tax previously provided in respect of this amount has also been reclassified to income (see note 9). Amounts included as additions to biological assets arose on borrowings applicable to the Indonesian operations and reflected a capitalisation rate of 20.9 per cent (2010: 39.7 per cent); there is no directly related tax relief. 96 9. Tax Current tax: UK corporation tax Foreign tax Total current tax Deferred tax: Current year Total tax 2011 $’000 – 14,634 14,634 2010 $’000 1,042 12,817 13,859 3,925 1,615 18,559 15,474 Taxation is provided at the rates prevailing for the relevant jurisdiction. For Indonesia, the current and deferred taxation provision is based on a tax rate of 25 per cent (2010: 25 per cent) and for the United Kingdom, the taxation provision reflects a corporation tax rate of 26.5 per cent (2010: 28 per cent) and a deferred tax rate of 26 per cent (2010: 28 per cent). The tax charge for the year can be reconciled to the profit per the consolidated income statement as follows: Profit before tax Notional tax at the UK standard rate of 26.5 per cent (2010: 28 per cent) Tax effect of the following items: Expenses not deductible in determining taxable profit Non taxable income Overseas tax rates below UK standard rate Overseas withholding taxes, net of relief Tax effect of change in rate on UK net deferred tax assets Additional tax provisions 2011 $’000 64,173 2010 $’000 50,447 17,006 14,125 532 (135) (793) 1,947 41 (39) 560 (123) (1,588) 1,855 – 645 Tax expense at effective tax rate for the year 18,559 15,474 In addition to the amount charged to the income statement, the following amounts relating to tax have been recognised directly in other comprehensive income: Tax relating to cash flow hedges: Current Deferred Reclassification to income statement (see note 8) 286 (73) 213 116 329 4,883 (394) 4,489 – 4,489 97 Notes to the consolidated financial statements continued 10. Dividends Amounts recognised as distributions to equity holders: Preference dividends of 9p per share Ordinary dividends of 5.5p per share (2010: 4.5p) 2011 $’000 5,006 2,897 7,903 2010 $’000 2,360 2,596 4,956 An interim dividend of 3p per ordinary share in respect of the year ended 31 December 2011 was paid on 27 January 2012. In accordance with IAS10 “Events after the reporting period”, this dividend, amounting in aggregate to $1,562,000 has not been included in the 2011 financial statements. 11. Earnings per share Earnings for the purpose of basic and diluted earnings per share * * being net profit attributable to ordinary shareholders Weighted average number of ordinary shares for the purpose of basic earnings per share Effect of dilutive potential ordinary shares Weighted average number of ordinary shares for the purpose of diluted earnings per share 12. Goodwill Beginning of year End of year 2011 $’000 40,453 ‘000 33,415 – 33,415 2011 $’000 12,578 12,578 2010 $’000 32,325 ‘000 33,343 66 33,409 2010 $’000 12,578 12,578 The goodwill of $12,578,000 arose from the acquisition by the company in 2006 of a non-controlling interest in the issued ordinary share capital of Makassar Investments Limited, the parent company of PT REA Kaltim Plantations, for a consideration of $19 million. The goodwill is reviewed for impairment as explained under “Goodwill” in “Accounting policies (group)”. The recoverable amount of the goodwill is based upon value in use of the oil palm business in Indonesia, which is regarded as the cash generating unit to which the goodwill relates. Value in use is assessed by revaluing the biological assets of the oil palm business on the basis of the principles applied in determining their fair value as detailed in note 13 but utilising a standard unit profit margin calculated by reference to a five year average of historic profit margins rather than the longer term average assumed in determining fair value. The directors consider this to be an appropriate method for determining value in use as it maintains consistency of methodology between estimations of value in use and the IAS 41 valuation. 98 13. Biological assets Beginning of year Reclassification from infrastructure (see note 14) Additions to planted area and costs to maturity including finance costs (see note 8) Transfers (to) / from property, plant and equipment (see note 14) Transfers to non-current receivables Transfers to current receivables Net biological gain End of year Net biological gain comprises: Fair value of crops harvested during the year (see note 2) Gain arising from movement in fair value attributable to other physical changes Gain arising from movement in fair value attributable to price changes 2011 $’000 221,883 – 15,502 (76) (3) (248) 7,375 244,433 (90,906) 87,186 11,095 7,375 2010 $’000 204,087 1,076 15,028 772 (227) (441) 1,588 221,883 (65,344) 66,932 – 1,588 The nature of the group’s biological assets and the basis of determination of their fair value is explained under “Biological assets” in “Accounting policies (group)”. Critical judgements in relation to these matters are detailed in note 1. The fair value determination assumed a discount rate of 16 per cent in the case of PT REA Kaltim Plantations (“REA Kaltim”), 17.5 per cent in the case of PT Sasana Yudha Bhakti (“SYB”) and 19 per cent in the case of all other group companies (2010: 16 per cent in the case of REA Kaltim, 17.5 per cent in the case of SYB and 19 per cent in the case of all other group companies) and a standard unit margin of $52.50 per tonne of oil palm fresh fruit bunches (“FFB”). (2010: standard unit margin of $50.00 per tonne of FFB). The fair valuation of the group’s biological assets as at 31 December 2011 determined on the basis of the methodology utilised as at 31 December 2010 would have amounted to $232 million. The valuation of the group’s biological assets would have been reduced by $13,600,000 (2010: $12,560,000) if the crops projected for the purposes of the valuation had been reduced by 5 per cent; by $12,890,000 (2010: $12,000,000) if the discount rates assumed had been increased by 1 per cent and by $25,880,000 (2010: $25,100,000) if the assumed unit profit margin per tonne of oil palm FFB had been reduced by $5. As a general rule, all palm products produced by the group are sold at prices prevailing immediately prior to delivery but on occasions, when market conditions appear favourable, the group makes forward sales at fixed prices. When making such sales, the group would not normally commit more than 60 per cent of its projected production for a forthcoming period of twelve months. At 31 December 2011, the group had no outstanding forward sale contracts at fixed prices (2010: none). At 31 December 2011, the group had outstanding forward sales of 6,000 tonnes per month for the eleven month period to November 2012, on terms that the sales price of each delivery be determined immediately ahead of delivery by reference to prevailing open market prices (31 December 2010: 6,000 tonnes per month for the five month period to 31 May 2011). At the balance sheet date, biological assets of $64,349,000 (2010: $215,700,000) had been charged as security for bank loans (see note 23) but there were otherwise no restrictions on titles to the biological assets (2010: none). Expenditure approved by the directors for the development of immature areas in 2012 amounts to $47,000,000 (2010: $33,000,000). 99 Notes to the consolidated financial statements continued 14. Property, plant and equipment Buildings and structures Plant, Construction in progress Total Cost: At 1 January 2010 Reclassification as biological assets (see note 13) Additions Exchange differences Disposals Transfers (see note 13) At 31 December 2010 Additions Exchange differences Disposals Transfers (see note 13) At 31 December 2011 Accumulated depreciation: At 1 January 2010 Charge for year Exchange differences Eliminated on disposals At 31 December 2010 Charge for year Exchange differences Eliminated on disposals At 31 December 2011 Carrying amount: End of year Beginning of year equipment and vehicles $’000 37,410 – 2,075 (16) (237) 232 39,464 1,747 (17) (234) 7,193 48,153 12,397 2,599 (10) (155) 14,831 3,379 (12) (159) 18,039 $’000 45,707 (1,076) 7,655 – – 1,532 53,818 3,329 – (76) 2,035 59,106 2,862 1,511 – – 4,373 2,047 – (11) 6,409 $‘000 $‘000 4,400 – 9,546 – – (2,536) 11,410 17,116 – – (9,152) 87,517 (1,076) 19,276 (16) (237) (772) 104,692 22,192 (17) (310) 76 19,374 126,633 – – – – – – – – – 15,259 4,110 (10) (155) 19,204 5,426 (12) (170) 24,448 52,697 49,445 30,114 24,633 19,374 11,410 102,185 85,488 The depreciation charge for the year includes $135,000 (2010: $374,000) which has been capitalised as part of the additions to biological assets. At the balance sheet date, the book value of finance leases included in property, plant and equipment was $nil (2010: $nil). At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to $37,849,000 (2010: $1,367,000). 100 15. Prepaid operating lease rentals Cost: Beginning of year Additions End of year Accumulated depreciation: Beginning of year Charge for year End of year Carrying amount: End of year Beginning of year 2011 $‘000 18,532 6,729 25,261 1,255 509 1,764 2010 $‘000 15,027 3,505 18,532 910 345 1,255 23,497 17,277 17,277 14,117 The depreciation charge for the year includes $357,000 (2010: $261,000) which has been capitalised as part of the additions to biological assets. At 31 December 2011, land title certificates had been obtained in respect of areas covering 70,584 hectares (2010: 63,263 hectares). 16. Indonesian coal interests The balance of $28,580,000 (2010: $18,864,000) comprises interest bearing loans made to two Indonesian companies that, directly and through a further Indonesian company, own rights in respect of certain coal concessions in East Kalimantan Indonesia, together with related balances; such loans are repayable not later than 2020. Pursuant to the arrangements between the group and its local partners, KCC Resources Limited (“KCC”) now has the right, following implementation of the new mining law and subject to satisfaction of local regulatory requirements, to acquire the three concession holding companies at original cost on a basis that will give the group (through KCC) 95 per cent ownership with the balance of five per cent remaining owned by the local partners. The group is preparing applications for the necessary regulatory approvals. In the meantime, the concession holding companies are being financed by loan funding from the group and no dividends or other distributions or payments may be paid or made by the concession holding companies to the local partners without the prior agreement of KCC. The directors do not consider that any provision for impairment of the Indonesian coal interests is required. 17. Subsidiaries A list of the principal subsidiaries, including the name, country of incorporation and proportion of ownership is given in note (i) to the company’s individual financial statements. 18. Inventories Agricultural produce Engineering and other operating inventory 2011 $’000 16,169 9,390 25,559 2010 $’000 6,231 7,775 14,006 101 Notes to the consolidated financial statements continued 19. Investments Shares (non-current assets) Redeemable notes (current assets) 2011 $’000 1,430 963 2,393 2010 $’000 – – – The investments are categorised as held-to-maturity and are carried at amortised cost. The shares comprise 1,430,500 redeemable participating preference shares of $10 each issued by KCC Resources Limited as described in note 26. The redeemable notes comprise $1 million nominal of the 7.5 per cent dollar notes 2012/14 issued by the company, as described in note 25. The fair value of these investments is set out in note 22 under the heading 'Fair value of financial instruments'. 20. Trade and other receivables Due from sale of goods Prepayments and advance payments Advance payment of taxation Deposits and other receivables 2011 $’000 2,507 11,380 13,226 7,049 34,162 2010 $’000 5,064 5,216 12,695 5,687 28,662 Sales of goods are normally made on a cash against documents basis with an average credit period (which takes account of customer deposits as disclosed in note 30) of 4 days (2010: 9 days). The directors consider that the carrying amount of trade and other receivables approximates their fair value. 21. Cash and cash equivalents Cash and cash equivalents comprise cash held by the group, short-term bank deposits with a maturity of less than three months or less and a UK government security with a maturity of less than three months. Cash balances amounting to $nil (2010: $4.0 million) are subject to a charge in favour of the trustee for the 9.5 per cent guaranteed sterling notes 2015/17 issued by a subsidiary (see note 24). The Moody’s prime rating of short term bank deposits amounting to $24.2 million is set out in note 22 under the heading ‘Credit risk’. 22. Financial instruments Capital risk management The group manages as capital its debt, which includes the borrowings and redeemable preference shares of a subsidiary disclosed in notes 23 to 26, cash and cash equivalents and equity attributable to shareholders of the parent, comprising issued ordinary and preference share capital, reserves and retained earnings as disclosed in notes 31 to 34. The group is not subject to externally imposed capital requirements. The directors’ policy in regard to the capital structure of the group is to seek to enhance returns to holders of the company's ordinary shares by meeting a proportion of the group's funding needs with prior ranking capital and to constitute that capital as a mix of preference share capital and borrowings from banks, development institutions and the public debt market, in proportions which suit, and as respects borrowings have a maturity profile which suits, the assets that such capital is financing. In so doing, the directors regard the company’s preference share capital as permanent capital and then seek to structure the group's borrowings so that shorter term bank debt is used only to finance working capital requirements while debt funding for the group's development programme is sourced from issues of medium term listed debt securities and borrowings from development institutions. 102 22. Financial instruments - continued Net debt to equity ratio Net debt, equity and the net debt to equity ratio at the balance sheet date were as follows: Debt and related engagements * Cash and cash equivalents Net debt and related engagements * being the book value of long and short term borrowings as detailed in the table below under “Fair value of financial instruments”. Equity (including non-controlling interests) Net debt to equity ratio Significant accounting policies 2011 $’000 126,588 (30,601) 95,987 2010 $’000 132,056 (36,710) 95,346 302,945 31.7% 235,520 40.5% Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial instrument are disclosed in the “Accounting policies (group)” section of this annual report. Categories of financial instruments Non-derivative financial assets as at 31 December 2011 comprised loans, investments and receivables (including Indonesian coal interests) and cash and cash equivalents amounting to $67,127,000 (2010: $66,293,000). Non-derivative financial liabilities as at 31 December 2011 comprised liabilities at amortised cost amounting to $123,694,000 (2010: $118,424,000). Derivative financial instruments at 31 December 2011 comprised instruments in designated hedge accounting relationships at fair value amounting to a liability of $15,321,000 (2010: a liability of $17,726,000) and instruments not in designated hedge accounting relationships at fair value accounting to a liability of $895,000 (2010: $nil). As explained in note 16, conditional arrangements exist for the group to acquire at historic cost the shares in the Indonesian companies owning rights over certain coal concessions. The directors have attributed a fair value of zero to these rights in view of the prior claims of loans to the concession owning companies and the present stage of the operations. Financial risk management objectives The group manages the financial risks relating to its operations through internal reports which permit the degree and magnitude of such risks to be assessed. These risks include market risk, credit risk and liquidity risk. The group seeks to reduce risk by using, where appropriate, derivative financial instruments to hedge risk exposures. The use of derivative financial instruments is governed by group policies set by the board of directors of the company. The board also sets policies on foreign exchange risk, interest rate risk, credit risk, the use of non-derivative financial instruments, and the investment of excess liquidity. Compliance with policies and exposure limits is reviewed on a continuous basis. The group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. 103 Notes to the consolidated financial statements continued 22. Financial instruments - continued Market risk The financial market risks to which the group is primarily exposed are those arising from changes in interest rates and foreign currency exchange rates. The group’s policy as regards interest rates is to borrow whenever possible at fixed interest rates, but where borrowings are raised at floating rates the directors would not normally seek to hedge such exposure. The sterling notes and the US dollar notes carry interest at fixed rates of, respectively, 9.5 and 7.5 per cent per annum. In addition, the company’s preference shares carry an entitlement to a fixed annual dividend of 9 pence per share. Interest is payable on drawings under an Indonesian rupiah term loan facility at 3.5 per cent (2010: 3.5 per cent) above the Jakarta Inter Bank Offer Rate. In addition, the interest rate formula includes an allowance for the bankers’ cost of funds. Interest is payable on drawings under US dollar short-term facilities at floating rates varying between 6.9 per cent and 8 per cent (2010: 9 per cent). A one per cent increase in interest applied to those financial instruments shown in the table below entitled “Fair value of financial instruments” as held at 31 December 2011 which carry interest at floating rates would have resulted over a period of one year in a pre- tax profit (and equity) increase of approximately $16,000 (2010: pre-tax profit (and equity) increase of $162,000). The group regards the US dollar as the functional currency of most of its operations and has, until recently, sought to ensure that, as respects that proportion of its investment in the operations that is met by borrowings, it has no material currency exposure against the US dollar. Accordingly, where borrowings were incurred in a currency other than the US dollar, the group endeavoured to cover the resultant currency exposure by way of a debt swap or other appropriate currency hedge. The receipt by a subsidiary of the company during 2010 of an Indonesian tax assessment seeking to disallow for tax purposes losses on currency hedges has called into question this policy and, for the immediate future, the group has not hedged its Indonesian rupiah borrowings. The group does not cover the currency exposure in respect of the component of the investment in its operations that is financed with pounds sterling denominated equity. The group's policy is to maintain limited balances in pounds sterling sufficient to meet its projected sterling expenditure for a period of up to twelve months and a balance in Indonesian rupiahs up to the aggregate amount drawn in that currency under local bank facilities but, otherwise, to keep all cash balances in US dollars. The group does not normally otherwise hedge its revenues and costs arising in currencies other than the US dollar. At the balance sheet date, the group had non US dollar monetary items denominated in pounds sterling and Indonesian rupiah. A 5 per cent strengthening of the pound sterling against the US dollar would have resulted in a gain dealt with in the consolidated income statement and equity of $421,000 on the net sterling denominated non-derivative monetary items (excluding the sterling notes which are hedged) (2010: gain of $157,000). A 5 per cent strengthening of the Indonesian rupiah against the US dollar would have resulted in a loss dealt with in the consolidated income statement and equity of $1,151,000 on the net Indonesian rupiah denominated, non- derivative monetary items (2010: gain of $373,000). Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the group. The directors consider that the group is not exposed to any major concentrations of credit risk. At 31 December 2011, 67 per cent of bank deposits were held with banks with a Moody’s prime rating of P1, 28 per cent with a bank with a Moody’s prime rating of P3 and the balance with banks with no Moody’s prime rating. Substantially all sales of goods are made on the basis of cash against documents or letters of credit. At the balance sheet date, no trade receivables were past their due dates, nor were any impaired; accordingly no bad debt provisions were required. The maximum credit risk exposures in respect of the group’s financial assets at 31 December 2011 and 31 December 2010 equal the amounts reported under the corresponding balance sheet headings. 104 22. Financial instruments - continued Liquidity risk Ultimate responsibility for liquidity risk management rests with the board of directors of the company, which has established an appropriate framework for the management of the group’s short, medium and long-term funding and liquidity requirements. Within this framework, the board continuously monitors forecast and actual cash flows and endeavours to maintain adequate liquidity in the form of cash reserves and borrowing facilities while matching the maturity profiles of financial assets and liabilities. Undrawn facilities available to the group at balance sheet date are disclosed in note 23. The board reviews the cash forecasting models for the operation of the plantations and compares these with the forecast outflows for debt obligations and projected capital expenditure programmes for the plantations, applying sensitivities to take into account perceived major uncertainties. In their review, the directors place the greatest emphasis on the cash flow of the first two years. Non-derivative financial instruments The following tables detail the contractual maturity of the group’s non-derivative financial liabilities. The tables have been drawn up based on the undiscounted amounts of the group’s financial liabilities based on the earliest dates on which the group can be required to discharge those liabilities. The table includes liabilities for both principal and interest. 2011 Bank loans US dollar notes Sterling notes KCC preference shares (see note 26) Trade and other payables, and customer deposits 2010 Bank loans US dollar notes Sterling notes KCC preference shares (see note 26) Trade and other payables, and customer deposits Weighted average interest rate % 11.3 9.1 10.4 % 8.6 8.6 10.4 Under 1 year $’000 4,988 7,625 5,080 – 10,997 28,690 $’000 9,106 3,375 5,481 – 7,115 25,077 Between 1 and 2 years $’000 2,797 17,250 5,070 – – Over 2 years $’000 30,223 16,125 69,118 1,500 – Total $’000 38,008 41,000 79,268 1,500 10,997 25,117 116,966 170,773 $’000 3,708 18,375 5,467 – – 27,550 $’000 12,773 33,375 79,659 1,500 – $’000 25,587 55,125 90,607 1,500 7,115 127,307 179,934 At 31 December 2011, the group’s non-derivative financial assets (other than receivables) comprised cash and deposits of $30,601,000 (2010: $36,710,000) carrying a weighted average interest rate of 2.3 per cent (2010: 0.9 per cent) all having a maturity of under one year, and Indonesian coal interests of $28,580,000 (2010: $18,864,000) details of which are given in note 16. Derivative financial instruments The following table details the amounts due in respect of the group’s derivative financial instruments. These arise under the cross currency interest rate swaps (“CCIRS”) described in note 27. The cash flows are settled gross and, therefore, the table takes no account of sterling receipts under the CCIRS. 105 Notes to the consolidated financial statements continued 22. Financial instruments - continued At 31 December 2011 At 31 December 2010 Fair value of financial instruments Under 1 year $’000 7,296 7,177 Between 1 and 2 years $’000 7,197 7,296 Over 2 years $’000 82,936 90,133 Total $’000 97,429 104,606 The table below provides an analysis of the book values and fair values of financial instruments, excluding receivables and trade payables and Indonesian coal interests, as at the balance sheet date. All financial instruments are classified as level 1 in the fair value hierarchy prescribed by IFRS 7 “Financial instruments: disclosures” other than the cross currency interest rate swaps and the preference shares issued by a subsidiary that are classified as levels 2 and 3 respectively. No reclassifications between levels in the fair value hierarchy were made during 2011 (2010: none). Cash and deposits + Bank debt - within one year + Bank debt - after more than one year + Preference shares issued by a subsidiary US dollar notes o Sterling notes o Cross currency interest rate swaps - hedge against principal liabilities Net debt and related engagements Cross currency interest rate swaps - hedge against interest liabilities Cross currency interest rate swaps - hedge against interest liabilities +bearing interest at floating rates o bearing interest at fixed rates 2011 Book value $’000 30,601 (2,000) (27,018) (1,500) (33,941) (51,332) (10,797) (95,987) (4,524) (895) 2011 Fair value $’000 30,601 (2,000) (27,018) (1,500) (35,000) (56,094) (10,797) (101,808) (4,524) (895) 2010 Book value $’000 36,710 (7,850) (12,625) (1,500) (43,269) (55,244) (11,568) (95,346) (6,158) – 2010 Fair value $’000 36,710 (7,850) (12,625) (1,500) (42,750) (60,827) (11,568) (100,410) (6,158) – (101,406) (107,227) (101,504) (106,568) The fair values of cash and deposits and bank debt approximate their carrying values since these carry interest at current market rates. The fair values of the US dollar notes and sterling notes are based on the latest prices at which those notes were traded prior to the balance sheet dates. The fair value of the preference shares issued by a subsidiary has been estimated by the directors on the basis of their assessment of the probability of the shares becoming redeemable on 31 December 2014 in accordance with their terms and of the redemption value then applicable discounted for the period from the balance sheet date to 31 December 2014. The fair value of the CCIRS has been derived by a discounted cash flow analysis using quoted foreign forward exchange rates and yield curves derived from quoted interest rates with maturities corresponding to the applicable cash flows. The valuation of the CCIRS at 31 December 2011 at fair value resulted in a loss of $16,216,000 (2010: loss of $17,726,000) . The movement in 2011 of $1,510,000, net of related tax relief, has been dealt with as follows: a loss of $190,000 has been included in finance charges in the consolidated income statement and a gain of $1,700,000 has been taken directly to equity (2010: loss of $4,117,000 net of tax relief taken directly to equity). A 50 basis points movement in the spread between the assumed yield curves for pounds sterling and the US dollar would increase or decrease the valuation by approximately $1,607,000 (2010: $2,173,000). 106 23. Bank loans Bank loans The bank loans are repayable as follows: On demand or within one year Between one and two years After two years Amount due for settlement within 12 months (shown under current liabilities) Amount due for settlement after 12 months 2010 $‘000 29,018 2,000 – 27,018 29,018 2,000 27,018 29,018 2009 $‘000 20,475 7,850 2,700 9,925 20,475 7,850 12,625 20,475 All bank loans are denominated in either US dollars or Indonesian rupiahs and are at floating rates, thus exposing the group to interest rate risk. The weighted average interest rate in 2011 was 11.3 per cent (2010: 7.3 per cent). Bank loans of $nil (2010: $13,469,000) were secured on substantially the whole of the assets and undertaking of PT REA Kaltim Plantations (“REA Kaltim”), and were fully repaid in 2011. Bank loans of $27,018,000 (2010: $6,006,000) are secured on the land, plantations, property, plant and equipment owned by PT Sasana Yudha Bhakti (“SYB”), having an aggregate book value of $91 million (2010: $70 million), and are the subject of an unsecured guarantee by the company and REA Kaltim. The banks are entitled to have recourse to their security on usual banking terms. At the balance sheet date, the group had undrawn US dollar denominated bank facilities of $10 million (2010: $2 million) and undrawn Indonesian rupiah denominated facilities of $11.6 million (2010: $32.9 million). 24. Sterling notes The sterling notes comprise £34.54 million (2010: £37 million) nominal of 9.5 per cent guaranteed sterling notes 2015/17 issued by the company’s subsidiary, REA Finance B.V. (“REAF”). On 12 July 2011, REAF completed the purchase for cancellation of £2.46 million of sterling notes. Unless previously redeemed or purchased and cancelled by the issuer, the sterling notes are repayable in three equal instalments commencing on 31 December 2015. The repayment obligation in respect of the sterling notes of £34.54 million ($53 million) is hedged by forward foreign exchange contracts for the purchase of £37 million and for the sale of $68.6 million and is carried in the balance sheet net of the unamortised balance of the note issuance costs. The gain or loss on the ineffective portion of these contracts is reflected in finance costs in the consolidated income statement. If a person or group of persons acting in concert obtains the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting of the company, each holder of sterling notes has the right to require that the notes held by such holder be repaid at 101 per cent of par, plus any interest accrued thereon up to the date of completion of the repayment. 25. US dollar notes The US dollar notes comprise US$35 million (2010: $45 million) nominal of 7.5 per cent dollar notes 2012/14 of the company, and are stated net of the unamortised balance of the note issuance costs. Save to the extent previously redeemed or purchased and cancelled by the company, the US dollar notes are redeemable in three equal annual instalments commencing on 31 December 2012. $10 million nominal of US dollar notes were purchased for cancellation during the year at par, plus accrued interest (2010: $nil). 107 Notes to the consolidated financial statements continued 25. US dollar notes - continued Pursuant to a supplemental rights agreement dated 23 January 2006 between the company and the holders of $9 million (2010: $19 million) nominal of US dollar notes, the latter have the right, exercisable under certain limited circumstances, to require the company to purchase the US dollar notes held by them at a price equal to the aggregate of the nominal amount of the notes being purchased and any interest accrued thereon up to the date of completion of the purchase. Such circumstances include a material disposal of assets by the group or a person or group of persons acting in concert obtaining the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting of the company. Pursuant to a placing agreement dated 28 January 2010 under which the company placed $15 million nominal of US dollar notes and the company’s subsidiary, KCC Resources Limited, issued to placees 150,000 redeemable participating preference shares in the capital of KCC (“KCC preference shares”), the company granted to each placee a non-assignable option, exercisable on the occurrence of any one of certain events and on a basis relating to the number of KCC preference shares retained by the placee at the date of such occurrence, to require the company to purchase or procure the purchase of the US dollar notes acquired by the placee in the placing at a price equal to the aggregate of the nominal value of such notes and any interest accrued thereon up to the date of completion of the purchase. Such events include the disposal of a significant part of the group’s coal business or a person or group of persons acting in concert obtaining the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting of the company. 26. Preference shares issued by a subsidiary On 11 February 2010 150,000 redeemable participating preference shares of $10 each were issued by KCC Resources Limited (“KCC preference shares”), a subsidiary undertaking of the company, fully paid, by way of a placing at par. The KCC preference shares provide a limited participation in the coal interests of the company such that if those interests achieve an average annual level of earnings before interest, tax, depreciation and amortisation of $8 million over the four and a half year period from 1 January 2010 to 30 June 2014 (equivalent to $36 million for the full period), those persons who subscribed 7.5 per cent dollar notes 2012/14 of the company and KCC preference shares in a combined issue of those securities pursuant to a placing agreement dated 28 January 2010, and who retain their notes and shares until redeemed, will receive an overall compound return of 15 per cent per annum on their total investment. If the required level of earnings is not achieved, then, except in certain limited circumstances (such as divestment of all or a significant part of the coal interests or a change in control of the company), no dividends or other distributions will be paid or made on the KCC preference shares and after 31 December 2014 such shares will be converted into valueless deferred shares. The company’s investment in the KCC preference shares is disclosed note 19. 27. Hedging instruments At both 31 December 2011 and 31 December 2010, the group had outstanding three contracts for the forward purchase of £37 million and sale of $68.6 million maturing in 2015 pursuant to the cross currency interest rate swaps (“CCIRS”) entered into by the group to hedge the foreign currency exposure of the group arising from the interest and principal repayment obligations of its 9.5 per cent guaranteed sterling notes 2015/17 (“sterling notes”). Either party to the CCIRS had or has the option to terminate the CCIRS as to £22 million on 14 February 2012 (not exercised), as to £8 million on 30 September 2013 and as to £7 million on any of 24 October 2013, 2014 and 2015 on the basis that, upon such termination, the CCIRS will be closed out at prevailing market value calculated by reference to mid market interest and sterling US dollar exchange rates with no adjustment for specific credit risk. Until 12 July 2011, the hedges were effective in hedging the related sterling interest payment obligations on the sterling notes up to and including 31 December 2015 and in providing the £37 million required to meet the principal repayment obligations. On 12 July 2011, the group purchased for cancellation £2.46 million nominal of sterling notes and reclassified from equity to consolidated income statement the loss at that date on a corresponding amount of the CCIRS. The fair value of the CCIRS has been described in note 22. 108 28. Deferred tax The following are the major deferred tax liabilities and assets recognised by the group and the movements thereon during the year and preceding year: Deferred tax assets / (liabilities) At 1 January 2010 (Charge) / credit to income for the year Credit / (charge) to equity for the year Exchange differences ** Unutilised loss on exercise At 31 December 2010 (Charge) / credit to income for the year Effect of change in tax rate Charge to equity for the year Exchange differences ** Property, plant and equipment $’000 (20,380) (2,733) – 443 – (22,670) (1,816) (1) – 4,060 Biological assets $’000 (16,637) (894) – 253 – (17,278) (2,260) – – – At 31 December 2011 (20,427) (19,538) Deferred tax assets Deferred tax liabilities At 31 December 2011 Deferred tax assets Deferred tax liabilities 247 (20,674) – (19,538) (20,427) (19,538) 287 (22,957) – (17,278) Income/ Share based payments expenses* $’000 $’000 1,373 472 175 1,982 (1,021) 394 (239) 935 (288) – 3,783 (587) – (271) (160) 2,765 2,836 (71) 2,765 4,558 (775) 3,783 – – – – – – – – – – – – Tax losses $’000 731 (145) – 24 288 898 760 (21) – (31) 1,606 1,606 – 1,606 898 – 898 Total $’000 (34,441) (1,615) (627) 1,416 – (35,267) (3,903) (22) (271) 3,869 (35,594) 4,689 (40,283) (35,594) 5,743 (41,010) (35,267) At 31 December 2010 * ** forming part of the exchange differences on translation of foreign operations. (22,670) (17,278) includes income, gains or expenses recognised for reporting purposes, but not yet charged to or allowed for tax. At the balance sheet date, the group had unused tax losses of $6.4 million (2010: $3.5 million) available to be applied against future profits. A deferred tax asset of $1,606,000 (2010: $898,000) has been recognised in respect of these losses. At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised was $11,869,000 (2010: $9,600,000). No liability has been recognised in respect of these differences because the group is in a position to control the reversal of the temporary differences and it is probable that such differences will not significantly reverse in the foreseeable future. The deferred tax asset in respect of Indonesian tax losses assumes that losses for tax purposes incurred by the operating companies in Indonesia may be carried forward for five years. 109 Notes to the consolidated financial statements continued 29. Other loans and payables Retirement benefit obligations (see note 38): UK Indonesia Other The amounts are repayable as follows: On demand or within one year (shown under current liabilities) In the second year In the third to fifth years inclusive After five years Amount due for settlement after 12 months Amounts of liabilities by currency: Sterling US dollar Indonesian rupiah 2011 $’000 2,230 4,260 543 7,033 2010 $’000 2,493 2,779 806 6,078 1,353 604 1,316 2,524 1,840 5,680 663 1,773 3,038 5,474 7,033 6,078 2,469 304 4,260 7,033 2,932 367 2,779 6,078 Further details of the retirement benefit obligations are set out in note 38. The directors estimate that the fair value of retirement benefit obligations and of other loans and payables approximates their carrying value. 30. Trade and other payables Trade purchases and ongoing costs Customer deposits Other tax and social security Accruals Other payables The average credit period taken on trade payables is 38 days (2010: 26 days). The directors estimate that the fair value of trade payables approximates their carrying value. 31. Share capital Authorised (in pounds sterling): 45,000,000 - 9 per cent cumulative preference shares of £1 each (2010: 27,500,000) 41,000,000 - ordinary shares of 25p each (2009: 41,000,000) 2011 $’000 7,013 3,695 2,982 5,694 511 2010 $’000 3,900 2,096 3,046 3,021 770 19,895 12,833 2011 £’000 45,000 10,250 55,250 2010 £’000 27,500 10,250 37,750 110 31. Share capital - continued Issued and fully paid (in US dollars): 44,068,553 - 9 per cent cumulative preference shares of £1 each (2010: 27,063,681) 33,414,545 - ordinary shares of 25p each (2010: 33,414,545) 2011 2010 $’000 73,381 14,558 87,939 $’000 45,990 14,558 60,548 The preference shares entitle the holders thereof to payment, out of the profits of the company available for distribution and resolved to be distributed, of a fixed cumulative preferential dividend of 9 per cent per annum on the nominal value of the shares and to repayment, on a winding up of the company, of the amount paid up on the preference shares and any arrears of the fixed dividend in priority to any distribution on the ordinary shares. Subject to the rights of the holders of preference shares, holders of ordinary shares are entitled to share equally with each other in any dividend paid on the ordinary share capital and, on a winding up of the company, in any surplus assets available for distribution among the members. Changes in share capital: (cid:129) (cid:129) (cid:129) on 14 June 2011, the authorised share capital of the company was increased from £37,750,000 to £55,250,000 by the creation of 17,500,000 new 9 per cent cumulative preference shares. on 19 July 2011, 15,000,000 9 per cent cumulative preference shares were issued, fully paid, by way of a placing at 103p per share. on 29 September 2011, 2,004,872 9 per cent cumulative preference shares were issued, credited as fully paid, to ordinary shareholders by way of capitalisation of share premium account. 32. Share premium account At 1 January 2010 Issue of new ordinary shares Issue of new preference shares (scrip) At 31 December 2010 Issue of new preference shares (cash and scrip) At 31 December 2011 33. Translation reserve At 1 January 2010 Change in fair value of cash flow hedge Exchange differences on translation of foreign operations Taxation for the year Attributable to non-controlling interests At 31 December 2010 Prior year reclassification (note 34) Change in fair value of cash flow hedge Exchange differences on translation of foreign operations Other movements in the year Taxation for the year Attributable to non-controlling interests At 31 December 2011 $’000 27,297 246 (2,642) 24,901 (3,130) 21,771 Total $’000 (13,630) (4,117) 5,558 (5,965) (43) (18,197) 1,021 1,700 3,799 283 (329) (39) (11,762) 111 Hedging reserve $’000 (3,231) (4,117) 1,825 (4,944) 16 (10,451) – 1,700 (303) 283 (329) 1 (9,099) Other reserve $’000 (10,399) – 3,733 (1,021) (59) (7,746) 1,021 – 4,102 – – (40) (2,663) Notes to the consolidated financial statements continued 34. Retained earnings Beginning of year Prior year reclassification (note 33) Profit for the year Ordinary dividend paid End of year 35. Non-controlling interests Beginning of year Share of profit for the year Share of items taken directly to equity Exchange translation differences Subscription to share capital of new subsidiary End of year 36. Reconciliation of operating profit to operating cash flows Operating profit Depreciation of property, plant and equipment Increase in fair value of agricultural produce inventory Amortisation of prepaid operating lease rentals Amortisation of sterling and US dollar note issue expenses Biological gain Loss / (gain) on disposal of property, plant and equipment Operating cash flows before movements in working capital (Increase) / decrease in inventories (excluding fair value movements) Increase in receivables Increase in payables Exchange translation differences Cash generated by operations Taxes paid Interest paid Net cash from operating activities 2011 $’000 166,228 (1,021) 40,453 (2,897) 2010 $’000 136,499 – 32,325 (2,596) 202,763 166,228 2011 $’000 2,040 155 (1) 40 – 2,234 2011 $’000 72,749 5,292 (4,011) 152 1,012 (7,375) 419 68,238 (7,661) (9,028) 8,490 (185) 59,854 (15,176) (10,902) 2010 $’000 1,314 288 (28) 71 395 2,040 2010 $’000 56,267 4,110 (455) 345 793 (1,588) (52) 59,420 180 (10,278) 486 402 50,210 (21,134) (7,784) 33,776 21,292 No additions to property, plant and equipment during the year were financed by new finance leases (2010: $nil). 112 37. Movement in net borrowings Change in net borrowings resulting from cash flows: (Decrease) / increase in cash and cash equivalents Net increase in borrowings Issue of US dollar notes, net of amortisation of issue expenses Redemption of US dollar notes, net of amortisation of issue expenses Redemption of sterling notes, net of amortisation of issue expenses Sterling note reconstruction expenses less amortisation Proceeds of issue of preference shares by a subsidiary Lease repayments Currency translation differences Net borrowings at beginning of year Net borrowings at end of year 38. Retirement benefit obligations United Kingdom 2010 $’000 2010 $’000 (5,670) (9,180) (14,850) – 9,328 3,609 – – – (1,913) 501 (83,778) 14,478 (10,243) 4,235 (13,579) – – (104) (1,500) 64 (10,884) 1,981 (74,875) (85,190) (83,778) The company is the principal employer of the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating employer. The Scheme is a multi-employer contributory defined benefit scheme with assets held in a trustee-administered fund, which has participating employers outside the group. The Scheme is closed to new members. As the Scheme is a multi-employer scheme, in which the employer is unable to identify its share of the underlying assets and liabilities (because there is no segregation of the assets) and does not prepare valuations on an IAS19 basis, the group accounts for the Scheme as if it were a defined contribution scheme. A non-IAS 19 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2008. This method was adopted in the previous valuation as at 31 December 2005, as it was considered the appropriate method of calculating future service benefits as the Scheme is closed to new members. At 31 December 2008 the Scheme had an overall shortfall in assets (deficit), when measured against the Scheme’s technical provisions, of £3,850,000. The technical provisions were calculated using assumptions of an investment return of 5.85 per cent pre-retirement and 4.92 per cent post-retirement, an annual increase in pensionable salaries of 3.75 per cent and an annual increase in present and future pensions of 3.0 per cent. The rate of increase in the retail price index was assumed to be 3.0 per cent. It was further assumed that both non-retired and retired members’ mortality would reflect PNA00 Ic YOB tables, with males at min 0.75 per cent 110 per cent and females at min 0.5 per cent 110 per cent and that members would take the maximum cash sums permitted from 1 January 2009. Had the Scheme been valued at 31 December 2008 using the projected unit method and the same assumptions, the overall deficit would have been similar. The Scheme has agreed a statement of funding principles with the principal employer and has also agreed a schedule of contributions with participating employers covering normal contributions which are payable at a rate calculated to cover future service benefits under the Scheme. The Scheme has also agreed a recovery plan with participating employers which sets out the basis for recovery of the deficit shown by the 31 December 2008 valuation through the payment of quarterly additional contributions over the period from 1 January 2010 to 30 September 2018 after taking account of the additional contributions paid in 2009 under the 31 December 2005 valuation. 113 Notes to the consolidated financial statements continued 38. Retirement benefit obligations - continued The normal contributions paid by the group in 2011 were £16,000 - $26,000 (2010: £15,000 - $24,000) and represented 23.4 per cent (2010: 23.4 per cent) of pensionable salaries. The additional contribution applicable to the group for 2011 was £225,000 - $362,000 (2010: £219,000 - $339,000). Under the valuation as at 31 December 2008 the normal contributions will continue at the rate of 23.4 per cent of pensionable salaries and the additional contribution will rise to £231,000 - $359,000 for 2012 and thereafter by 2.7 per cent per annum. A provision of £1,435,000 - $2,230,000 (2010: £1,592,000 - $2,493,000) for these additional contributions adjusted for the time value of money has been recognised under retirement benefit obligations (see note 29) with an equal charge to income, net of related tax relief. To the extent that the group makes additional contribution to the scheme, a relevant portion of such provision is credited to income. During the year, $253,000 has been credited to income (2010: $225,000) (see note 5). The next actuarial valuation which is to be made as at 31 December 2011 is currently in hand. The company has a contingent liability for additional contributions payable by other (non-group) employers in the Scheme; such liability will only arise if other (non-group) employers do not pay their contributions. There is no expectation of this at the present time, and, therefore, no provision has been made. Indonesia In accordance with Indonesian labour laws, group employees in Indonesia are entitled to lump sum payments on retirement at the age of 55 years. The group makes a provision for such payments in its financial statements but does not fund these with any third party or set aside assets to meet the entitlements. The provision was assessed at each balance sheet date by an independent actuary using the projected unit method. The principal assumptions used were as follows: 2011 7.1% 7% TM 1-11 55 10 2010 9% 7% TM 1-11 55 10 2011 $’000 2,779 849 285 725 (71) (307) 4,260 2010 $’000 1,781 594 216 380 90 (282) 2,779 Discount rate Salary increases per annum Mortality table (Indonesia) Retirement age (years) Disability rate (% of the mortality table) The movement in the provision for employee service entitlements was as follows: Balance at 1 January Current service cost Interest expense Actuarial loss Exchange Paid during the year Balance at 31 December 114 38. Retirement benefit obligations - continued The amounts recognised in adminstrative expenses in the consolidated income statement were as follows: Current service cost Interest expense Actuarial loss Amount included as additions to biological assets 2011 $’000 849 285 725 1,859 (337) 1,522 2010 $’000 594 216 380 1,190 (425) 765 Unrecognised actuarial losses at 31 December 2011 amounted to $448,000 (2010: $317,000). The movement in the present value of the employee service entitlements (including such unrecognised actuarial losses) were as follows: Balance at 1 January Current service cost Interest expense Actuarial loss Exchange Paid during the year Balance at 31 December (see note 29) Estimated benefit payments in 2012 are $885,000 (2011: $206,000). 39. Related party transactions 2011 $’000 3,096 849 285 856 (71) (307) 4,708 2010 $’000 1,987 594 216 481 100 (282) 3,096 Transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the company and its subsidiaries are dealt with in the company’s individual financial statements. The remuneration of the directors, who are the key management personnel of the group, is set out below in aggregate for each of the categories specified in IAS 24 “Related party disclosures”. Further information about the remuneration of, and fees paid in respect of services provided by, individual directors is provided in the audited part of the “Directors’ remuneration report”. Short term benefits Post employment benefits Other long term benefits Termination benefits Share based payments 2011 $’000 1,315 – – – – 1,315 2010 $’000 1,252 – – – – 1,252 115 Notes to the consolidated financial statements continued 40. Rates of exchange Indonesia rupiah to US dollar US dollar to pound sterling 41. Events after the reporting period 2011 Closing 2011 Average 2010 Closing 2010 Average 9,046 1.554 8,790 1.61 8,991 1.566 9,078 1.55 An interim dividend of 3p per ordinary share in respect of the year ended 31 December 2011 was paid on 27 January 2012. In accordance with IAS10 “Events after the reporting period” this dividend, amounting in aggregate to $1,562,000, has not been reflected in these financial statements. 42. Resolution of competing rights over certain plantation areas The fully titled land areas held by PT Sasana Yudha Bhakti (“SYB”), a plantation subsidiary of the company, include 3,557 hectares that are the subject of third party claims in respect of the rights to coal underneath such land. On 30 December 2011, SYB entered into a conditional settlement arrangement to resolve such claims. Under this agreement, SYB has agreed to swap the 3,557 hectares the subject of the claims for 9,097 hectares of fully titled land held by another company, PT Prasetia Utama (“PU”), the whole of the issued share capital of which is to be transferred to SYB. As a term of the settlement, SYB has also agreed to relinquish the 2,212 hectares in respect of which it holds a land allocation still subject to completion of titling (being land that is also subject to overlapping mineral rights). The book value of the assets to be relinquished by SYB amounted as at 31 December 2011 to $13.9 million, comprising prepaid operating lease rentals of $2.9 million and biological assets of $11.0 million. The arrangements are conditional, inter alia, upon the consent of the holders of the 9.5 per cent guaranteed sterling notes 2015/17 (see note 24) which was obtained on 14 March 2012. 43. Contingent liabilities Guarantee given by a subsidiary company In furtherance of Indonesian government policy which requires the owners of oil palm plantations to develop smallholder plantations, during 2009 PT REA Kaltim Plantations (“REA Kaltim”), a wholly owned subsidiary of the company, entered into an agreement with Koperasi Perkebunan Kahad Bersatu (the “cooperative”) to develop and manage 1,500 hectares of land owned by the cooperative as an oil palm plantation. To assist with the funding of such development, the cooperative concluded on 14 October 2009 a long term loan agreement with Bank Pembangunan Daerah Kalimantan Timur (“Bank BPD”), a regional development bank, under which the cooperative may borrow up to Indonesian rupiah 86.6 billion ($9.6 million) with amounts borrowed repayable over 15 years and secured on the land to be developed (“the bank facility”). REA Kaltim has guaranteed the obligations of the cooperative as to payments of principal and interest under the bank facility and, in addition, has committed to lend to the cooperative any further funds required to complete the agreed development. REA Kaltim is entitled to a charge over the development when the bank facility has been repaid in full. On maturity of the development, the cooperative is required to sell all crops from the development to REA Kaltim and to permit repayment of indebtedness to Bank BPD and REA Kaltim out of the sales proceeds. As at 31 December 2011 the outstanding balance owing by the cooperative to Bank BPD amounted to Indonesian rupiah 54 billion ($5,963,000) (2010: Indonesian rupiah 42 billion - $4,759,000) and the outstanding balance owing by the cooperative to REA Kaltim amounted to Indonesian rupiah 2.1 billion ($232,000) (2010: the balance owing by REA Kaltim to the cooperative amounted to Indonesian rupiah 3.0 billion - $314,000). 116 44. Operating lease commitments The group leases office premises under operating leases in London, Jakarta and Samarinda. These leases, which are renewable, run for periods of between 1 month and 60 months, and do not include contingent rentals, or options to purchase the properties. The future minimum lease payments under operating leases are as follows: Within one year In the second to fifth year inclusive After five years 2011 $’000 93 508 – 601 2010 $’000 304 23 – 327 117 Auditors’ report (company) Independent auditors’ report to the members of R.E.A. Holdings plc Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts We have audited the parent company financial statements and disclosures in the financial statements sufficient to of R.E.A. Holdings plc for the year ended 31 December give reasonable assurance that the financial statements 2011 which comprise the balance sheet, the movement in are free from material misstatement, whether caused by total shareholders’ funds, the statement of total fraud or error. This includes an assessment of: whether recognised gains and losses, the accounting policies and the accounting policies are appropriate to the parent the related notes (i) to (xiii). The financial reporting company’s circumstances and have been consistently framework that has been applied in their preparation is applied and adequately disclosed; the reasonableness of applicable law and United Kingdom Accounting significant accounting estimates made by the directors; Standards (United Kingdom Generally Accepted and the overall presentation of the financial statements. Accounting Practice). In addition, we read all the financial and non-financial information in the annual report to identify material This report is made solely to the company’s members, as inconsistencies with the audited financial statements. If a body, in accordance with Chapter 3 of Part 16 of the we become aware of any apparent material Companies Act 2006. Our audit work has been misstatements or inconsistencies we consider the undertaken so that we might state to the company’s implications for our report. members those matters we are required to state to them in an auditors’ report and for no other purpose. To the Opinion on financial statements fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company In our opinion the parent company financial statements: and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the statement of Directors’ responsibilities, the directors are responsible for the preparation of the parent company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the parent company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing (cid:129) (cid:129) (cid:129) give a true and fair view of the state of the parent company’s affairs as at 31 December 2011; have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by Companies Act 2006 the Practices Board’s Ethical Standards for Auditors. In our opinion: (cid:129) the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and 118 (cid:129) the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the parent company financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: (cid:129) adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or (cid:129) the parent company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or (cid:129) (cid:129) certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the group financial statements of R.E.A. Holdings plc for the year ended 31 December 2011. Mark McIlquham ACA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditors London, England 27 April 2012 119 Company balance sheet as at 31 December 2011 Fixed and non-current assets Investments Deferred tax asset Current assets Debtors Cash Total current assets Creditors: amounts falling due within one year Net current liabilities Total assets less current liabilities Creditors: amounts falling due after more than one year Borrowings Net assets Capital and reserves Share capital Share premium account Profit and loss account Total shareholders’ funds Approved by the board on 27 April 2012 and signed on behalf of the board. RICHARD M ROBINOW Chairman Note 2011 £’000 2010 £’000 (i) (ii) (iii) (iv) 130,678 223 121,591 – 130,901 121,591 5,957 6,122 12,079 (14,465) 3,196 12,417 15,613 (18,534) (2,386) (2,921) 128,515 118,670 (v) (56,532) (65,389) 71,983 53,281 (vi) (vii) (vii) 52,422 11,148 8,413 71,983 35,417 13,146 4,718 53,281 120 Movement in total shareholders’ funds for the year ended 31 December 2011 Total recognised gains for the year Dividends to preference shareholders Dividends to ordinary shareholders Issue of new preference shares by way of placing Issue of new ordinary shares by way of exercise of options Issue costs of ordinary shares, preference shares and debt securities Movement on exchange reserves Shareholders' funds at beginning of year Shareholders' funds at end of year 2011 £’000 2010 £’000 8,734 (3,201) (1,838) 15,450 – (443) – 18,702 53,281 71,983 4,297 (1,689) (1,486) 9,000 368 – (181) 10,309 42,972 53,281 Statement of total recognised gains and losses for the year ended 31 December 2011 Profit for the year Share based payment - deferred tax (charge) 2011 £’000 8,734 – 8,734 2010 £’000 5,148 (851) 4,297 121 Accounting policies (company) Accounting convention Taxation Separate financial statements of R.E.A. Holdings plc (the “company”) are required by the Companies Act 2006; as permitted by that act they have been prepared in accordance with generally accepted accounting practice in the United Kingdom (“UK GAAP”). The principal accounting policies have been applied consistently and are unchanged from the previous year. The accompanying financial statements have been prepared under the historical cost convention. By virtue of section 408 of the Companies Act 2006, the company is exempted from presenting a profit and loss account. Equally, no cash flow statement has been prepared, as permitted by FRS 1 (revised 1996) “Cash flow statements”. Current tax including UK corporation tax and foreign tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantially enacted by the balance sheet date. Deferred tax is calculated on the liability method. Deferred tax is provided on a non discounted basis on timing and other differences which are expected to reverse, at the rate of tax likely to be in force at the time of reversal. Deferred tax is not provided on timing differences which, in the opinion of the directors, will probably not reverse. Deferred tax assets are only recognised to the extent that it is regarded as more likely than not that there will be suitable taxable profits from which the future reversal of timing differences can be deducted. Investments Leases No assets are held under finance leases. Rentals under operating leases are charged to profit and loss account on a straight-line basis over the lease term. The company’s investments in its subsidiaries are stated at cost less any provision for impairment. Impairment provisions are charged to the profit and loss account. Dividends paid by subsidiaries are credited to the company's profit and loss account. Foreign exchange Transactions in foreign currencies are recorded at the rates of exchange at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date. Differences arising on the translation of foreign currency borrowings have been offset against those arising on an equivalent amount of investment in the equity of, or loans to, foreign subsidiaries and taken to reserves, net of any related taxation. All other exchange differences are included in the profit and loss account. 122 Notes to the company financial statements (i) Investments Shares in subsidiaries Loans to subsidiaries The movements were as follows: Beginning of year Additions to shares in and loans to subsidiaries Exchange translation difference arising on foreign currency hedge End of year 2011 £’000 58,004 72,674 2010 £’000 57,374 64,217 130,678 121,591 Shares £’000 57,374 885 (255) 58,004 Loans £’000 64,217 8,333 124 72,674 Shares in subsidiaries include an investment in KCC Resources Limited’s redeemable participating preference shares of $10 each. 143,050 of these shares were purchased from the original placees during June and July 2011 at a price of $11.07 per share, amounting to $1,583,730 (£979,985). The interest premium was written off in the profit and loss account. The principal subsidiaries at the year end, together with their countries of incorporation, are listed below. Details of UK dormant subsidiaries and UK subsidiary sub-holding companies are not shown. Subsidiary Activity Makassar Investments Limited (Jersey) PT Cipta Davia Mandiri (Indonesia) PT Kartanegara Kumala Sakti (Indonesia) PT KCC Mining Services (Indonesia) PT Kutai Mitra Sejahtera (Indonesia) PT Putra Bongan Jaya (Indonesia) PT REA Kaltim Plantations (Indonesia) PT Sasana Yudha Bhakti (Indonesia) KCC Resources Limited KCC Resources Limited REA Finance B.V. (Netherlands) R.E.A. Services Limited (England and Wales) REA Services Private Limited (Singapore) Sub holding company Plantation agriculture Plantation agriculture Coal operations Plantation agriculture Plantation agriculture Plantation agriculture Plantation agriculture Group finance Group finance Group finance Group services Group services Class of shares Percentage owned Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Preference Ordinary Ordinary Ordinary 100 95 95 95 95 95 100 95 100 95 100 100 100 The entire shareholdings in Makassar Investments Limited, R.E.A. Services Limited, REA Finance B.V. and REA Services Private Limited are held directly by the company. All other shareholdings are held by subsidiaries. 123 Notes to the company financial statements continued (ii) Deferred tax asset and provision for liabilities and charges Deferred tax: Beginning of year Net amount (credited) / debited to profit and loss account Net amount debited to reserves End of year Included in provisions for liabilities and charges Included in non-current assets Net deferred tax asset at end of year The provision for deferred tax is made up as follows: Timing differences Tax losses available Undiscounted deferred tax 2011 £’000 – (223) – (223) – 223 223 – 223 223 2010 £’000 (912) 131 781 – – – – – – – At the balance sheet date, the company had unused tax losses available to be applied against future profits amounting to £860,000 (2010: £nil). A deferred tax asset of £223,000 (2010: £nil) has been recognised in respect of these losses. 2011 £’000 – 5,921 4 32 5,957 2011 £’000 2,913 11,431 22 99 14,465 2010 £’000 – 3,180 9 7 3,196 2010 £’000 – 18,272 73 189 18,534 (iii) Debtors Trade debtors Amount owing by group undertakings Other debtors Prepayments and accrued income (iv) Creditors: amounts falling due within one year US dollar notes Amount owing to group undertakings Other creditors Accruals 124 (v) Creditors: amounts falling due after more than one year US dollar notes Amount owing to group undertaking Amounts due between two and five years Amounts due after five years 2011 £’000 19,057 37,475 56,532 44,040 12,492 56,532 2010 £’000 27,914 37,475 65,389 40,247 25,142 65,389 The US dollar notes comprise US$35 million (2010: US$45 million) nominal of 7.5 per cent dollar notes 2012/14 issued by the company (“US dollar notes”) and are stated net of the unamortised balance of the issuance costs. Save to the extent previously redeemed or purchased and cancelled by the company, the US dollar notes are redeemable in three equal annual instalments commencing on 31 December 2012. $10 million nominal of US dollar notes were purchased for cancellation during the year at par, plus accrued interest (2010: $nil). As disclosed in note (viii), the US dollar notes are designated as a hedge against the exchange translation exposure in respect of an equivalent amount of the company’s investment in subsidiaries whose functional currency is the US dollar. Pursuant to a supplemental rights agreement dated 23 January 2006 between the company and holders of $9 million (2010: $19 million) nominal of US dollar notes issued at that date, those holders have the right, exercisable under certain limited circumstances, to require the company to purchase the US dollar notes held by them at a price equal to the aggregate of the nominal amount of the notes being purchased and any interest accrued thereon up to the date of completion of the purchase. Such circumstances include a material disposal of assets by the group or a person or group of persons acting in concert obtaining the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting of the company. Pursuant to a placing agreement dated 28 January 2010 under which the company placed $15 million nominal of US dollar notes and the company’s subsidiary, KCC Resources Limited, issued to placees 150,000 redeemable participating preference shares in the capital of KCC (“KCC preference shares”), the company granted to each placee a non-assignable option, exercisable on the occurrence of any one of certain events and on a basis relating to the number of KCC preference shares retained by the placee at the date of such occurrence, to require the company to purchase or procure the purchase of the US dollar notes acquired by the placee in the placing at a price equal to the aggregate of the nominal value of such notes and any interest accrued thereon up to the date of completion of the purchase. Such events include the disposal of a significant part of the group’s coal business or a person or group of persons acting in concert obtaining the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting of the company. 125 Notes to the company financial statements continued (vi) Share capital Authorised: 45,000,000 - 9 per cent cumulative preference shares of £1 each (2010: 27,500,000) 41,000,000 - ordinary shares of 25p each (2010: 41,000,000) Called-up and fully paid: 44,068,553 - 9 per cent cumulative preference shares of £1 each (2010: 27,063,681) 33,414,545 - ordinary shares of 25p each (2010: 33,414,545) 2011 £’000 45,000 10,250 55,250 44,069 8,353 52,422 2010 £’000 27,500 10,250 37,750 27,064 8,353 35,417 The preference shares entitle the holders thereof to payment, out of the profits of the company available for distribution and resolved to be distributed, of a fixed cumulative preferential dividend of 9 per cent per annum on the nominal value of the shares and to repayment, on a winding up of the company, of the amount paid up on the preference shares and any arrears of the fixed dividend in priority to any distribution on the ordinary shares. Subject to the rights of the holders of preference shares, holders of ordinary shares are entitled to share equally with each other in any dividend paid on the ordinary share capital and, on a winding up of the company, in any surplus assets available for distribution among the members. Changes in share capital: (cid:129) (cid:129) (cid:129) on 14 June 2011, the authorised share capital of the company was increased from £37,750,000 to £55,250,000 by the creation of 17,500,000 new 9 per cent cumulative preference shares. on 19 July 2011, 15,000,000 9 per cent cumulative preference shares were issued, fully paid, by way of a placing at 103p per share. on 29 September 2011, 2,004,872 9 per cent cumulative preference shares were issued, credited as fully paid, to ordinary shareholders by way of capitalisation of share premium account. (vii) Movement in reserves Beginning of year Recognised gains for the year Dividends to preference shareholders Dividends to ordinary shareholders Issue of preference shares (scrip) Issue of preference shares (cash) Costs of issues End of year Share premium account £’000 13,146 – – – (2,005) 450 (443) 11,148 Profit and loss account £’000 4,718 8,734 (3,201) (1,838) – – – 8,413 As permitted by section 408 of the Companies Act 2006, a separate profit and loss account dealing with the results of the company has not been presented. The profit before dividends recognised in the company's profit and loss account for the year is £8,734,000 (2010: profit £5,148,000) - see statement of total recognised gains and losses. 126 (viii) Financial instruments and risks Financial instruments The company’s financial instruments comprise borrowings, cash and liquid resources and in addition certain debtors and trade creditors that arise from its operations. The main purpose of these financial instruments is to raise finance for, and facilitate the conduct of, the company’s operations. The table below provides an analysis of the book and fair values of financial instruments excluding debtors and creditors at balance sheet date. Cash and deposits US dollar notes Net debt 2011 Book value £’000 6,122 (21,970) 2011 Fair value £’000 6,122 (21,970) 2010 Book value £’000 12,417 (27,914) 2010 Fair value £’000 12,417 (27,304) (15,848) (15,848) (15,497) (14,887) The fair value of the US dollar notes reflects the last price at which transactions in those notes were effected prior to 31 December 2011 (2010: 31 December 2010). Risks The main risks arising from the company’s financial instruments are liquidity risk, interest rate risk and foreign currency risk. The board reviews and agrees policies for managing each of these risks. These policies have remained unchanged since the beginning of the year. It is, and was throughout the year, the company’s policy that no trading in financial instruments be undertaken. The company finances its operations through a mixture of share capital, retained profits, borrowings in US dollars at fixed rates and credit from suppliers. At 31 December 2011, the company had outstanding US$35 million (2010: $45 million) of 7.5 per cent dollar notes 2012/14. In accordance with a decision of the board of the company at the time of issue of the first tranche of these notes, such notes are treated as a currency hedge against the company’s long term loans to subsidiaries (which are denominated in US dollars) and the additional investment in Makassar Investments Limited that was acquired during 2006 for a consideration of US$19 million. The company’s policy towards currency risk is not to cover the long-term exposure in respect of its investment in subsidiaries (whose operations are mainly conducted in US dollars) to the extent that this exposure relates to the component of investment that is financed with sterling denominated shareholders’ funds. A limited degree of interest rate risk is accepted. A substantial proportion of the company’s financial instruments at 31 December 2011 carried interest at fixed rates and, on the basis of the company’s analysis, it is estimated that a rise of one percentage point in all interest rates would give rise to an increase of approximately £61,000 (2010: £124,000) in the company’s interest revenues in its profit and loss account. (ix) Pensions The company is the principal employer in the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating employer. The Scheme, which has participating employers outside the R.E.A. Holdings plc group, is a multi-employer contributory defined benefit scheme with assets held in a trustee-administered fund. The Scheme is closed to new members. As the Scheme is a multi-employer scheme, in which the employer is unable to identify its share of the underlying assets and liabilities (because there is no segregation of the assets) and does not prepare valuations on an FRS 17 “Retirement Benefits” basis, the company accounts for the Scheme as if it were a defined contribution scheme. 127 Notes to the company financial statements continued (ix) Pensions - continued A non-FRS 17 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2008. This was considered to be the most appropriate method of calculating contributions to cover future service benefits as the Scheme is closed to new entrants. Had the Scheme been valued at 31 December 2008 using the projected unit method and the same assumptions, the overall deficit would have been similar. The principal actuarial assumptions adopted in this valuation were an annual investment return of 5.85 per cent pre- retirement and 4.92 per cent post-retirement, an annual increase in pensionable salaries of 3.75 per cent and an annual increase in present and future pensions of 3.0 per cent. The rate of increase in the retail price index was assumed to be 3.0 per cent. It was further assumed that both non-retired and retired members’ mortality would reflect PNA00 Ic YOB tables, with males at min 0.75 per cent 110 per cent and females at min 0.5 per cent 110 per cent. The valuation at 31 December 2008 showed an overall shortfall in assets (deficit), when measured against the Scheme’s technical provisions, of £3,850,000. This is applicable to all participants and is being funded by additional deficit funding contributions by participating employers over the period to 30 September 2018, as agreed with the Scheme trustee. The next actuarial valuation which is to be made as at 31 December 2011 is currently in hand. The subsidiary company that is a participating employer and other participating employers in the scheme have entered into an agreement with the Scheme to make special contributions to the Scheme to cover the deficit shown by the 31 December 2008 valuation. The company made no payments to the Scheme in 2011 (2010: £nil). The company has a contingent liability for special contributions payable by other participating employers in the Scheme; such liability will only arise if such other participating employers do not pay their contributions. There is no expectation of this at the present time and, therefore, no provision has been made by the company. (x) Related party transactions Aggregate directors’ remuneration: Salaries and fees Benefits Annual bonus 2011 £’000 2010 £’000 613 48 70 731 584 77 65 726 During 2011 and 2010, there were service arrangements with companies connected with certain directors as detailed under “Directors’ remuneration” in the “Directors’ remuneration report”, the costs of which are included in the table above. (xi) Rates of exchange See note 40 to the consolidated financial statements. (xii) Contingent liabilities and commitments Sterling notes The company has guaranteed the obligations for both principal and interest relating to the outstanding £35 million (2010: £37 million) 9.5 per cent guaranteed sterling notes 2015/17 issued by REA Finance B.V.. The directors consider the risk of loss to the company from this guarantee to be remote. 128 (xii) Contingent liabilities and commitments - continued Bank borrowings The company has given, in the ordinary course of business, guarantees in support of the subsidiary company borrowings from, and other contracts with, banks (including cross currency interest rate swaps) amounting in aggregate to £29 million (2010: £24 million). The directors consider the risk of loss to the company from these guarantees to be remote. Pension liability The company’s contingent liability for pension contributions is disclosed in note (ix) above. Operating leases The company has an annual commitment under a non-cancellable operating lease of £105,000 (2010: £102,000). The commitment expires after 5 years. The lease does not contain any contingent rentals or an option to purchase the property. (xiii) Post balance sheet event A first interim dividend of 3p per ordinary share in respect of the year ended 31 December 2011 was paid on 27 January 2012. In accordance with IAS10 “Events after the reporting period” this dividend, amounting in aggregate to £1,002,000, has not been reflected in these financial statements. 129 Notice of annual general meeting This notice is important and requires your immediate attention. If you are in any doubt as to what action to take, you should consult your stockbroker, solicitor, accountant or other appropriate independent professional adviser authorised under the Financial Services and Markets Act 2000 if you are resident in the United Kingdom or, if you are not so resident, another appropriately authorised independent adviser. If you have sold or otherwise transferred all your ordinary shares in R.E.A. Holdings plc, please forward this document and the accompanying form of proxy to the person through whom the sale or transfer was effected, for transmission to the purchaser or transferee. Notice is hereby given that the fifty-second annual general meeting of R.E.A. Holdings plc will be held at the London office of Ashurst LLP at Broadwalk House, 5 Appold Street, London EC2A 2HA on 12 June 2012 at 10.00 am to consider and, if thought fit, to pass the following resolutions. Resolutions 16 and 17 will be proposed as special resolutions; all other resolutions will be proposed as ordinary resolutions. 6 To re-elect as a director Mr D J Blackett, who, having been a director at each of the two preceding annual general meetings and who was not re-appointed by the company in general meeting at or since either of such meetings, retires in accordance with the articles of association and submits himself for re-election. 7 To re-elect as a director Mr J M Green-Armytage, who, having been a non- executive director for more than nine years, retires as required by the UK Corporate Governance Code and submits himself for re-election. 8 To re-elect as a director Mr J R M Keatley, who, having been a non-executive director for more than nine years, retires as required by UK Corporate Governance Code and submits himself for re-election. 9 To re-elect as a director Mr L E C Letts, who, having been a non-executive director for more than nine years, retires as required by the UK Corporate Governance Code and submits himself for re-election. 1 To receive the company's annual accounts for the financial year ended 31 December 2011, together with the directors' report, the directors' remuneration report and the auditors' report. 10 To re-elect as a director Mr C L Lim, who, having been a non- executive director for more than nine years, retires as required by the UK Corporate Governance Code and submits himself for re-election. 2 To approve the directors' remuneration report for the financial year ended 31 December 2011. 3 To declare a final dividend in respect of the year ended 31 December 2011 of 3½p per ordinary share to be paid on 27 July 2012 to ordinary shareholders on the register of members at the close of business on 29 June 2012. 4 To re-elect as a director Mr R M Robinow, who, having been a non-executive director for more than nine years, retires as required by the UK Corporate Governance Code and submits himself for re-election. 5 To re-elect as a director Mr J C Oakley, who, having been a director at each of the two preceding annual general meetings and who was not re-appointed by the company in general meeting at or since either of such meetings, retires in accordance with the articles of association and submits himself for re-election. 11 To re-appoint Deloitte LLP, chartered accountants, as auditors of the company to hold office until the conclusion of the next annual general meeting of the company at which accounts are laid before the meeting. 12 To authorise the directors to fix the remuneration of the auditors. 13 That the authorised share capital of the company (being the maximum amount of shares in the capital of the company that the company may allot) be and is hereby increased from £55,250,000 to £60,250,000 by the creation of 5,000,000 9 per cent cumulative preference shares of £1 each ranking pari passu in all respects with the existing 9 per cent cumulative preference shares of £1 each in the capital of the company. 14 That the directors be and are hereby generally and unconditionally authorised for the purposes of section 551 of the Companies Act 2006 (the “Act”) to exercise all the 130 powers of the company to allot, and to grant rights to subscribe for or to convert any security into, shares in the capital of the company (other than 9 per cent cumulative preference shares) up to an aggregate nominal amount (within the meaning of sub-sections (3) and (6) of section 551 of the Act) of £1,896,363.75; such authorisation to expire at the conclusion of the next annual general meeting of the company (or, if earlier, on 30 June 2013), save that the company may before such expiry make any offer or agreement which would or might require shares to be allotted, or rights to be granted, after such expiry and the directors may allot shares, or grant rights to subscribe for or to convert any security into shares, in pursuance of any such offer or agreement as if the authorisations conferred hereby had not expired. 15 That the directors be and are hereby generally and unconditionally authorised for the purposes of section 551 of the Companies Act 2006 (the “Act”) to exercise all the powers of the company to allot, and to grant rights to subscribe for or to convert any security into, 9 per cent cumulative preference shares in the capital of the company (“preference shares”) up to an aggregate nominal amount (within the meaning of sub-sections (3) and (6) of section 551 of the Act) of: (a) £931,447; or (b) subject to the passing of resolution 13 set out in the notice of the 2012 annual general meeting of the company £5,931,447, such authorisation to expire at the conclusion of the next annual general meeting of the company (or, if earlier, on 30 June 2013), save that the company may before such expiry make any offer or agreement which would or might require preference shares to be allotted or rights to be granted, after such expiry and the directors may allot preference shares, or grant rights to subscribe for or to convert any security into preference shares, in pursuance of any such offer or agreement as if the authorisations conferred hereby had not expired. 16 That, subject to the passing of resolution 14 set out in the notice of the 2012 annual general meeting of the company (the “2012 Notice”), the directors be and are hereby given power: (a) for the purposes of section 570 of the Companies Act 2006 (the “Act”), to allot equity securities (as defined in sub-section (1) of section 560 of the Act) of the company for cash pursuant to the authorisation conferred by resolution 14 set out in the 2012 Notice; and (b) for the purposes of section 573 of the Act, to sell ordinary shares (as defined in sub-section (1) of section 560 of the Act) in the capital of the company held by the company as treasury shares for cash as if section 561 of the Act did not apply to the allotment or sale, provided that such powers shall be limited: (i) to the allotment of equity securities for cash in connection with a rights issue or open offer in favour of holders of ordinary shares and to the sale of treasury shares by way of an invitation made by way of rights to holders of ordinary shares, in each case in proportion (as nearly as practicable) to the respective numbers of ordinary shares held by them on the record date for participation in the rights issue, open offer or invitation (and holders of any other class of equity securities entitled to participate therein or, if the directors consider it necessary, as permitted by the rights of those securities) but subject in each case to such exclusions or other arrangements as the directors may consider necessary or appropriate to deal with fractional entitlements, treasury shares (other than treasury shares being sold), record dates or legal, regulatory or practical difficulties which may arise under the laws of any territory or the requirements of any regulatory body or stock exchange in any territory whatsoever; and (ii) otherwise than as specified at paragraph (i) of this resolution, to the allotment of equity securities and the sale of treasury shares up to an aggregate nominal amount (calculated, in the case of the grant of rights to subscribe for, or convert any security into, shares in the capital of the company, in accordance with sub-section (6) of section 551 of the Act) of £417,681 and shall expire at the conclusion of the next annual general meeting of the company (or, if earlier, on 30 June 2013), save that the company may before such expiry make any offer or agreement which would or might require equity securities to be allotted, or treasury shares to be sold, after such expiry and the directors may allot equity securities or sell treasury shares, in pursuance of any such offer or agreement as if the power conferred hereby had not expired. 131 Notice of annual general meeting continued 17 That a general meeting of the company other than an annual general meeting may be called on not less than 14 clear days' notice. By order of the board R.E.A. SERVICES LIMITED Secretary 27 April 2012 Registered office: First Floor 32 – 36 Great Portland Street London W1W 8QX is appointed to exercise the rights attached to (a) different share(s) held by the holder. A proxy need not be a member of the company. A form of proxy for the meeting is enclosed. To be valid, forms of proxy and other written instruments appointing a proxy must be received by post or by hand (during normal business hours only) by the company’s registrars, Capita Registrars, at PXS, 34 Beckenham Road, Beckenham BR3 4TU by no later than 10.00 am on 10 June 2012. Alternatively, appointment of a proxy may be submitted electronically by using either Capita Registrars' share portal service at www.capitashareportal.com (and so that the appointment is received by the service by no later than 10.00 am on 10 June 2012) or the CREST electronic proxy appointment service as described below. Shareholders who have not already registered for Registered in England and Wales no: 00671099 Capita Registrars' share portal service may do so by registering as Notes The sections of the accompanying Directors' report entitled “Results and dividends”, “Directors”, “Increase in share capital”, “Authorities to allot share capital”, “Authority to disapply pre-emption rights”, “General meeting notice period” and “Recommendation” contain information regarding, and recommendations by the board of the company as to voting on, resolutions 3 to 10 and 13 to 17 set out above in this notice of the 2012 annual general meeting of the company (the “2012 Notice”). a new user at www.capitashareportal.com and giving the investor code shown on the enclosed proxy form (as also shown on their share certificate). Completion of a form of proxy, or other written instrument appointing a proxy, or any appointment of a proxy submitted electronically, will not preclude a holder of ordinary shares from attending and voting in person at the annual general meeting if such holder wishes to do so. CREST members may register the appointment of a proxy or proxies for the annual general meeting and any adjournment(s) thereof through the CREST electronic proxy appointment service by using the procedures described in the CREST Manual (available via www.euroclear.com/CREST) subject to the company’s articles of association. CREST personal members or other CREST sponsored members, and those CREST members who have The company specifies that in order to have the right to attend and appointed (a) voting service provider(s), should refer to their vote at the annual general meeting (and also for the purpose of CREST sponsor or voting service provider(s), who will be able to determining how many votes a person entitled to attend and vote take the appropriate action on their behalf. may cast), a person must be entered on the register of members of the company at 6.00 pm on 10 June 2012 or, in the event of any In order for a proxy appointment or instruction regarding a proxy adjournment, at 6.00 pm on the date which is two days before the appointment made or given using the CREST service to be valid, day of the adjourned meeting. Changes to entries on the register the appropriate CREST message (a “CREST proxy instruction”) of members after this time shall be disregarded in determining the must be properly authenticated in accordance with the rights of any person to attend or vote at the meeting. specifications of Euroclear UK and Ireland Limited (“Euroclear”) and must contain the required information as described in the Only holders of ordinary shares are entitled to attend and vote at CREST Manual (available via www.euroclear.com/CREST). The the annual general meeting. A holder of ordinary shares may CREST proxy instruction, regardless of whether it constitutes a appoint another person as that holder’s proxy to exercise all or any proxy appointment or an instruction to amend a previous proxy of the holder’s rights to attend, speak and vote at the annual general meeting. A holder of ordinary shares may appoint more appointment, must, in order to be valid be transmitted so as to be received by the company’s registrars (ID: RA10) by 10.00 am on 10 than one proxy in relation to the meeting provided that each proxy June 2012. For this purpose, the time of receipt will be taken to be 132 the time (as determined by the time stamp applied to the message (c) it is undesirable in the interests of the company or the good by the CREST applications host) from which the company’s order of the meeting that the question be answered. registrars are able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. The company may treat as Copies of the executive director’s service agreement and letters invalid a CREST proxy instruction in the circumstances set out in setting out the terms and conditions of appointment of non- Regulation 35(5)(a) of the Uncertificated Securities Regulations executive directors are available for inspection at the company's 2001. registered office during normal business hours from the date of this 2012 Notice until the close of the annual general meeting CREST members and, where applicable, their CREST sponsors or (Saturdays, Sundays and public holidays excepted) and will be voting service provider(s) should note that Euroclear does not make available for inspection at the place of the annual general meeting available special procedures in CREST for particular messages. for at least 15 minutes prior to and during the meeting. Normal system timings and limitations will therefore apply in relation to the input of CREST proxy instructions. It is the responsibility of the CREST member concerned to take (or, if the A copy of this 2012 Notice, and other information required by section 311A of the Companies Act 2006, may be found on the CREST member is a CREST personal member or sponsored company's website www.rea.co.uk. member or has appointed (a) voting service provider(s), to procure that such member’s CREST sponsor or voting service provider(s) Under section 527 of the Companies Act 2006, members meeting take(s)) such action as shall be necessary to ensure that a the threshold requirements set out in that section have the right to message is transmitted by means of the CREST system by any require the company to publish on a website (in accordance with particular time. In this connection, CREST members and, where section 528 of the Companies Act 2006) a statement setting out applicable, their CREST sponsors or voting service provider(s) are any matter that the members propose to raise at the relevant referred, in particular, to those sections of the CREST Manual annual general meeting relating to (i) the audit of the company's concerning practical limitations of the CREST system and timings. annual accounts that are to be laid before the annual general meeting (including the auditor’s report and the conduct of the The rights of members in relation to the appointment of proxies audit); or (ii) any circumstance connected with an auditor of the described above do not apply to persons nominated under section company having ceased to hold office since the last annual general 146 of the Companies Act 2006 to enjoy information rights meeting of the company. The company may not require the (“nominated persons”) but a nominated person may have a right, members requesting any such website publication to pay its under an agreement with the member by whom such person was expenses in complying with section 527 or section 528 of the nominated, to be appointed (or to have someone else appointed) as Companies Act 2006. Where the company is required to place a a proxy for the annual general meeting. If a nominated person has statement on a website under section 527 of the Companies Act no such right or does not wish to exercise it, such person may have 2006, it must forward the statement to the company's auditors by a right, under such an agreement, to give instructions to the not later than the time when it makes the statement available on member as to the exercise of voting rights. the website. The business which may be dealt with at the annual general meeting includes any statement that the company has Any corporation which is a member can appoint one or more been required under section 527 of the Companies Act 2006 to corporate representatives who may exercise on its behalf all of its publish on a website. powers as a member provided that they do not do so in relation to the same shares. As at the date of this 2012 Notice, the issued share capital of the company comprises 33,414,545 ordinary shares and 44,068,553 Any member attending the annual general meeting has the right to 9 per cent cumulative preference shares. Only holders of ordinary ask questions. The company must cause to be answered any such shares (and their proxies) are entitled to attend and vote at the question relating to the business being dealt with at the meeting annual general meeting. Accordingly, the voting rights attaching to but no such answer need be given if (a) to do so would interfere shares of the company exercisable in respect of each of the unduly with the preparation for the meeting or involve the disclosure of confidential information, (b) the answer has already resolutions to be proposed at the annual general meeting total 33,414,545 as at the date of this 2012 Notice. been given on a website in the form of an answer to a question, or 133 Notice of annual general meeting continued Shareholders may not use any electronic address (within the meaning of sub-section 4 of section 333 of the Companies Act 2006) provided in this 2012 Notice (or any other related document including the form of proxy) to communicate with the company for any purposes other than those expressly stated. Under section 338 and section 338A of the Companies Act 2006, members meeting the threshold requirements in those sections have the right to require the company (i) to give, to members of the company entitled to receive notice of the annual general meeting, notice of a resolution which may properly be moved and is intended to be moved at the meeting and/or (ii) to include in the business to be dealt with at the meeting any matter (other than a proposed resolution) which may be properly included in the business. A resolution may properly be moved or a matter may properly be included in the business unless (a) (in the case of a resolution only) it would, if passed, be ineffective (whether by reason of inconsistency with any enactment or the company’s constitution or otherwise), (b) it is defamatory of any person, or (c) it is frivolous or vexatious. Such a request may be in hard copy form or electronic form, must identify the resolution of which notice is to be given or the matter to be included in the business, must be authorised by the person or persons making it, must be received by the company not later than the date 6 clear weeks before the meeting, and (in the case of a matter to be included in the business only) must be accompanied by a statement setting out the grounds for the request.. 134 This annual report is produced in an environmentally responsible manner – including the sourcing of materials. The paper in this report is Chorus Silk which is Forestry Stewardship Council (FSC), Mixed Sources, certified. This annual report was printed in the UK by Royle Print Limited, a carbon- neutral printing company. It was originated, printed and bound on one production site and only required electric transportation between processes. Under the framework of ISO 14001 Royle Print takes a structured approach to measure, improve and audit its environmental status on an on-going basis. The main areas targeted for continual reduction arise from use of solvents, energy consumption and waste generation. Royle Print is also Forest Stewardship Council (FSC) chain-of-custody certified. When you have finished with this report, please remove the cover and dispose of the text in your recycled paper waste. 

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