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
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.
.
.
M
M
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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.