Griffin Mining Ltd.
Annual Report 2007

Plain-text annual report

R E P O RT A N D A C C O U N T S 2 0 0 7 CONTENTS CHAIRMAN’S STATEMENT HIGHLIGHTS REVIEW OF OPERATIONS DIRECTORS AND SENIOR EXECUTIVES DIRECTORS’ REPORT REPORT OF THE INDEPENDENT AUDITOR CONSOLIDATED INCOME STATEMENT CONSOLIDATED BALANCE SHEET CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT ACCOUNTING POLICIES NOTES TO THE FINANCIAL STATEMENTS CORPORATE INFORMATION Griffin Mining Limited is a mining and investment company whose principal asset is the Caijiaying zinc-gold mine. Further information on the Company is available on the Company's web site: www.griffinmining.com. Griffin Mining Limited's shares are quoted on the Alternative Investment Market (AIM) of the London Stock Exchange (symbol GFM). Registered number: EC13667 Bermuda. Registered Office: Clarendon House, 2 Church Street, Hamilton HM11, Bermuda United Kingdom office: 60 St James's Street, London SW1A 1LE Page 4 6 8 26 30 33 34 35 36 37 38 44 56 1 G R I F F I N M I N I N G L I M I T E D 2 R E P O RT A N D A C C O U N T S 2 0 0 7 3 G R I F F I N M I N I N G L I M I T E D CHAIRMAN’S STATEMENT It gives me great pleasure to present to you, the increased production schedules. A new backfill shareholders of Griffin Mining Limited (“Griffin” plant has been completed to enable more or the “Company”), the 2007 Annual Report and efficient extraction of ore, new floatation cells Accounts. It has been yet another extraordinary have been installed to handle the increased year in the life of your company. volume of zinc and precious metals concentrates and a new crushing circuit and ball I am delighted to report that the Company made a mill will enable greater throughput to be profit before tax of $26.8 million, a remarkable generated by the Caijiaying mill. In addition, a performance considering the zinc price fell 46% new accommodation block and administrative in 2007, from $4,100 in January to $2,200 in offices have been constructed to cater for the December. Yet Griffin was generally able to additional staff required as the mine continues reproduce its 2006 net profit level and, as such, the to expand; Company has been able to maintain its dividend policy of declaring a $0.03 per share dividend for the 2007 financial year. 2007 witnessed exceptional progress in many areas of the Company’s operations and in its preparation for the future. These include: 3. A new precious metals concentrate containing gold, silver and lead was commissioned in December 2007. This will become ever more important with the increasing production of precious metals as the mine accesses higher grade material and will allow lead to be separated from the zinc concentrate for the 1. Production of ore from Zone III at Caijiaying production of a higher quality concentrate with continued to increase. Mill throughput has now a subsequently higher sale price; increased over 150% since commissioning with operations currently processing over 500,000 tonnes per annum and expected to reach 750,000 per annum following the installation of the new primary ball mill in late summer 2008. The mining operations are also expanding to cater for this new production schedule; 4. The discovery of a new mineable orebody at Zone II has far reaching consequences and added exceptional value for shareholders. Firstly, it is only 1.5 kilometres from the Caijiaying processing facilities, allowing easy haulage at minimum cost. Secondly, it provides an alternate source of ore to ease the scheduling 2. Significant effort has been expended in of mining and haulage timetables at Zone III. designing, constructing and installing the new Thirdly, and most importantly, it confirms the infrastructure needed to deal with the planned long held view that Zone II and III are, in 4 R E P O RT A N D A C C O U N T S 2 0 0 7 CHAIRMAN OF GRIFFIN MINING LIMITED, MLADEN NINKOV effect, one orebody. That prospect opens up the possibility of an additional 1.5 kilometres of mineralization. To prove this hypothesis, a new decline is being driven off the Zone III access directly to the new Zone II orebody, with the necessary underground drilling being undertaken off that drive. This is an exciting prospect for all involved; and 5. The continued accumulation of cash by the Company such that Griffin now has a cash balance exceeding $205 million with no debt. It should be noted that the Company continues to expend an inordinate amount of time on new acquisitions. These need to be able to meet the financial, political, structural, metallurgical and geological parameters required to provide the of the Company, it is now many years since I could shareholders with the returns they have come to name these individuals specifically. It is enough to expect and deserve. Needless to say, such say that the line of these exceptional people runs acquisitions are difficult to find and even more from the directors through to all our on-site difficult to consummate. It is enough to add that personnel. Our sincere thanks go out to them. the Company will continue to progress the enormous potential still untapped at Caijiaying Finally, to you the shareholders and owners of the whilst continuing to evaluate and undertake Company, I look forward to being able to deliver acquisitions which meet these set parameters. even greater and more exciting news during 2008. An organization of this size could not hope to be Mladen Ninkov successful without a team of highly skilled and Chairman dedicated individuals. With the growth in the size 30 April 2008 5 G R I F F I N M I N I N G L I M I T E D HIGHLIGHTS • Profit before tax of $26.8 million on a declining zinc price • Ore mined up 43% in 2007 to 430,891 tonnes compared to 301,168 tonnes in 2006 • Ore processed up 36% in 2007 to 409,193 tonnes compared to 301,101 tonnes in 2006 • Precious metals circuit commissioned with production and sale of a second concentrate containing lead, silver and gold • Maiden resource for Zone II announced, located just 1.5 kilometres south of the existing mine at Zone III 6 R E P O RT A N D A C C O U N T S 2 0 0 7 7 G R I F F I N M I N I N G L I M I T E D REVIEW OF OPERATIONS INTRODUCTION Griffin is a mining and investment company listed Anglo’), has a controlling interest in mining and on the Alternative Investment Market of the exploration licences over 67 square kilometres at London Stock Exchange. Its principal asset is the Caijiaying. Application has been made for further mine, processing facilities and extensive exploration exploration licences in the surrounding area. ground located at Caijiaying, Hebei Province (‘Caijiaying’) in the People’s Republic of China In 2005, Griffin successfully commissioned the (‘China’ or the ‘PRC’). mine and processing facilities at Caijiaying, on time and within budget, with an initial design The Group recorded a profit before tax for the year production rate of 200,000 tonnes of ore per of $26,762,000 (2006 $29,545,000). The financial annum. Production rates have steadily increased results for the year were impacted by the decision since commissioning with 409,193 tonnes of ore to suspend sales, but not production, of zinc being processed in 2007 to produce 21,781 tonnes concentrate in the fourth quarter as a result of of zinc metal in concentrate. unacceptably low prices offered for zinc concentrate in China caused by proposed changes to tariffs and rebates on the import and export of zinc and zinc concentrates to and from China. With production continuing at record levels, stocks of zinc concentrate had been accumulated by the end of the financial year at which point sales recommenced when better prices were offered. The Group should realise the benefit of this decision in the first half of 2008. In December 2007, production of a separate precious metals concentrate containing gold, silver and lead commenced from an integrated circuit forming part of the main processing facilities at Caijiaying. Previously, gold, silver and lead were lost to the smelters in the zinc concentrate. Considerable planning and capital expenditure has been undertaken during the year to further increase production. This work is ongoing with the installation of, inter alia; a new backfill plant, more CAIJIAYING ZINC-GOLD MINE floatation cells, a new crusher and a third ball mill as well as significant enhancement to site Griffin, through its two Chinese joint ventures, infrastructure. This should enable processing Hebei Hua Ao Mining Industry Company Limited capacity to be increased from approximately (‘Hebei Hua’ Ao’) and Hebei Sino Anglo Mining 500,000 tonnes of ore per annum at the present Development Company Limited (‘Hebei Sino time to 750,000 tonnes of ore per annum in 2009. 8 R E P O RT A N D A C C O U N T S 2 0 0 7 On-going exploration in the area surrounding the expected to be defined at Zone II, in particular, as mine at Caijiaying and within Hebei Hua’ Ao’s and underground drilling moves northwards towards Hebei Sino Anglo’s tenement boundary continues Zone III. This should provide additional ore for the to confirm the area to be highly prospective, processing facilities at Caijiaying. indicating significant potential for further economic base and precious metals mineralisation. Considerable progress was made in the past year in CAIJIAYING AREA defining a resource at Zone II at Caijiaying some 1.5 kilometres to the south of the mine at Zone III Caijiaying is located on the south-east edge of the with a maiden Mineral Resource estimate to JORC Mongolian Plateau, approximately 250 kilometres reporting standards of 5.49 million tonnes of 3.2% north-west of Beijing in Hebei Province. The site zinc, 0.6% lead, 0.3 grams per tonne gold and 24 is easily accessible, particularly since the extension grams per tonne silver. Further resources are of the freeway from Beijing through to Zhangbei, CAIJIAYING MINE LOCATION 9 G R I F F I N M I N I N G L I M I T E D by freeway and sealed road from Beijing to site. and the Chinese joint venture partners (which The site has significant water supplies and two include the Zhangjiakou City People’s independent connections to the electricity grid with Government, the Hebei Bureau of the Ministry of a third planned. The site is fully connected to fixed Land and Resources and the Third Geological line and mobile telecommunications and has Brigade) have a 40% interest. Since the beginning broadband access for internet services. Weather of commercial production commencing in mid conditions are not severe with warm summers and 2005, 100% of the net cash flows from Caijiaying cold, dry winters. Mineralisation is believed to be related to a Jurassic igneous event that affected the 2.3 billion year old metamorphic basement rocks. Base metal and gold mineralisation associated with Jurassic intrusives have replaced favourable horizons in the metamorphic rocks, most notably calc-silicates and marble. Porphyry sills and dykes intruding along faults have then cut across the sequence. LEGAL STRUCTURE have accrued to Griffin through China Zinc. That arrangement will cease to continue in July 2008 and the parties will share in the profits from that date according to their respective joint venture interests. In October 1998, Hebei Hua’ Ao was the first foreign controlled joint venture to be awarded a new exploration licence for a hard rock deposit in China when it received an exploration licence covering an area of 11.3 square kilometres in the Caijiaying area. Subsequently in March 2002, Hebei Hua’ Ao became the first foreign controlled joint venture Griffin’s initial interest in Caijiaying was obtained to be granted a mining licence over a base metals through the acquisition in 1997/98 of a 100% deposit in China when it was granted a mining interest in an Australian incorporated company licence over 1.56 square kilometres of the original China Zinc Pty Limited, and its local Chinese 11.3 square kilometre licence area at Caijiaying. subsidiary company, Hebei Hua’ Ao. The Group This is the Zone III area currently being mined at has subsequently been restructured to transfer Caijiaying. China Zinc Pty Limited’s interest to an intermediate parent company incorporated in Hong Kong, China Zinc Limited (“China Zinc”). In January 2004, a second contractual joint venture company, Hebei Sino Anglo, was formed to hold an exploration licence over 55.7 square kilometres Hebei Hua’ Ao is a contractual co-operative joint surrounding the original 11.3 square kilometre venture entity established in 1994 in which Griffin, licence area at Caijiaying and any further areas of through China Zinc, holds a 60% equity interest interest in Hebei Province. Griffin, through its 10 R E P O RT A N D A C C O U N T S 2 0 0 7 wholly owned UK subsidiary company, Panda environmental record. This was achieved whilst Resources Limited, has a 90% interest in Hebei increasing both the mining and processing rates to Sino Anglo. The other Chinese shareholders reflect record levels, with: those shareholders in Hebei Hua’ Ao. Their 10% interest remains free carried until the commissioning of a full feasibility study on any new mineral deposits found by Hebei Sino Anglo. CAIJIAYING OPERATIONAL DEVELOPMENTS 2007/08 • ore mined up 43% in 2007 to 430,891 tonnes compared to 301,168 tonnes in 2006. • ore processed up 36% in 2007 to 409,193 tonnes compared to 301,101 tonnes in 2006. It should be noted that these increases also occurred whilst the processing facilities at The Caijiaying mine operated throughout 2007 Caijiaying were being upgraded for the production without any significant accident or environmental of a precious metals concentrate and for further incident and retains an excellent safety and increases in throughput. 11 G R I F F I N M I N I N G L I M I T E D Despite a conscious decision to reduce the zinc cut to increase as the mine reaches the deeper gold off grade with the resultant drop in the head grade bearing ore zones. of the ore processed, plant recoveries have continued to improve and zinc metal in concentrate The commissioning of the precious metals circuit production increased to 21,781 tonnes in 2007 has not just added an additional revenue stream, but from 20,138 tonnes in 2006. has provided the additional benefit of removing In the autumn of 2007, changes were proposed to the lead as an impurity in the zinc concentrate. This has led to a better quality zinc concentrate being Chinese rebates on the export of zinc, and increases to produced, commanding a better price. the tariffs on the import of zinc concentrates that had the effect of reducing the demand for local zinc concentrate in China. As a result, Hebei Hua’ Ao was offered artificially low prices for its zinc concentrate in China. The view was taken that this situation was unlikely to be sustainable and Hebei Hua’ Ao suspended sales of zinc concentrate in the final quarter of 2007. As a result, 17,720 tonnes of zinc metal in concentrate were sold in 2007 compared with 20,239 in 2006, with 4,080 tonnes of zinc metal in concentrate stockpiled at 31 December 2007. Sales of zinc concentrate re-commenced in late December 2007 when zinc concentrate prices in China recovered and, since the year end, the zinc concentrate stockpiled at Caijiaying has been sold. During 2007, significant progress was made in mine development and in upgrading the processing facilities and site infrastructure to enable ore throughput and production of metals to be further increased. This work will continue into 2008. The installation of the precious metals circuit required the re-configuration of the processing facilities, which was achieved with limited interruption to processing. This involved the installation of new ceramic filters, floatation cells and other equipment. It also necessitated an extension of the buildings housing the mill and the construction of additional storage areas. With the commissioning of a precious metals circuit in December 2007 to produce a concentrate, containing gold, silver and lead, 119 tonnes of this precious metals concentrate were produced in 2007 and 90 tonnes sold containing 12.8 tonnes lead, 6,470 ounces silver and 14.8 ounces gold. Whilst current gold production is minimal, this is expected A backfill plant, utilising waste tailings from the mill, has been constructed to not only maximise the extractable amount of ore but also to minimise the amount of waste sent to the tailings dams. Although the installation of the backfill facilities will reduce waste sent to the tailings dams, and the existing tailings dams continue to be lifted to 12 R E P O RT A N D A C C O U N T S 2 0 0 7 increase capacity, a further tailings dam will be During 2007, the compressed air, pumping and required in the foreseeable future. ventilation circuits and ancillary infrastructure were With the expansion of mining operations and the continue unabated and ensure good ventilation as subsequent increased tonnage of ore hauled, a 3 bay the mine expands, particularly to lower levels. upgraded to enable underground drilling to workshop was constructed to assist the local haulage contractor in servicing its fleet thereby improving servicing and repair turn around times. In view of the further expansion to operations planned, the decision has been made to purchase underground haulage equipment, including a 20 tonne truck and matching loader, to supplement the contractor’s fleet to ensure efficiency of ore supply to the mill is continually maintained. Construction of a new, 3 stage, crushing circuit, has commenced which will increase crushing capacity to allow for the planned increase in processing capacity to 750,000 tonnes of ore per annum in 2009. To facilitate this increase in throughput, a second primary ball mill has been ordered for installation in the summer of 2008 to work in tandem with the current primary ball mill and the currently unused and smaller secondary ball mill. CAIJIAYING PROCESSING PLANT WITH NEW FLOTATION CELLS 13 G R I F F I N M I N I N G L I M I T E D 14 R E P O RT A N D A C C O U N T S 2 0 0 7 15 G R I F F I N M I N I N G L I M I T E D In view of the need to maintain and attract good become more important as time moves on and quality personnel, especially on site, at this time of should eclipse shrink stoping as the preferred mining shortages in suitably skilled staff in the mining method, as the mine continues to increase its industry, the accommodation and ancillary facilities production rate into 2008. Several drills have been were expanded and enhanced during the year. This ordered by the mining department to facilitate this has now led to ensuite accommodation for staff in expansion into up-hole benching. addition to recreational facilities which include indoor basketball, badminton, table tennis, During 2007 over 34,000 metres of underground billiards, satellite television, bar facilities and a fully infill and exploration diamond drilling was stocked gym. completed within the area of current mining MINE DEVELOPMENT Underground mine development has continued to expand in order to provide increased throughput to the expanding processing facilities. The main ‘Northern Decline’ continues to be extended to the lower levels. Following extensive sterilisation drilling, to delineate an optimal decline route, a second ‘Southern Decline’ commenced late in the year to enable more stopes to be developed and avoid pinch points in mine haulage. With the number of ore zones being developed at Caijiaying in 2007, some 7,200 metres (4,000 metres in 2006) of underground drives, rises and cross cuts were developed. activities at Zone III. This drilling significantly improved understanding of the known resources, enabling longer term mine planning to be undertaken with confidence. At Zone II, approximately 1.5 kilometres to the south of Zone III, some 6,300 metres of underground drilling has been completed from a 147 metre long underground exploration decline (‘the Fox decline’). An initial JORC resource estimate has been generated from the results of this drilling. The drilling has identified good mineralised zones consistent with Zone III. Consequently work has started on upgrading and extending the Fox decline to provide access to the ore bodies for bulk metallurgical testing and to continue exploration work. More importantly work has started on the development of a drive As planned, implementation of up-hole benching connecting Zone III and the bottom of the extended was introduced, with over 10,070 metres of long Fox decline at Zone II. This will provide a suitable hole drilling undertaken. Although that mining drilling platform in a cost effective manner for the method was new to China, it was successfully exploration of the area between Zones III and II and implemented and is enabling the mine’s production eventually provide haulage and services access when rates to be increased. This mining method will mining commences from this area. 16 R E P O RT A N D A C C O U N T S 2 0 0 7 RESOURCE ESTIMATE AND RECONCILIATION - ZONE III During 2007, approximately 34,000 metres of Tabled below is the updated JORC compliant underground diamond drilling was completed. Mineral Resource Estimate for Zone III at This drilling was focused on grade control and Caijiaying. resource development rather than deep extensional exploration drilling. Micromine 2002 Mineral Resource Estimate (Non Grade Control Drilling) Category Cut Tonnes -off Millions Zinc % Metal Grade Gold grames Silver grams per tonne per tonne Zinc million tonnes Contained Metal Gold million ounces Silver million ounces Indicated Inferred Total Indicated Inferred Total 1% 1% 1% 4% 4% 4% 40.32 34.29 74.61 13.72 4.89 18.61 4.3 2.9 3.6 7.9 8.5 8.1 0.7 0.5 0.6 0.8 0.5 0.7 20 13 17 32 31 32 1.67 0.93 2.60 1.09 0.42 1.51 0.95 0.56 1.51 0.33 0.09 0.42 29.53 18.25 47.78 13.97 4.82 18.79 FinOre 2006 Mineral Resource Estimate (Grade Control Drilling) Category Cut Tonnes -off Millions Zinc % Metal Grade Gold grames Silver grams per tonne per tonne Zinc million tonnes Contained Metal Gold million ounces Silver million ounces Measured Indicated Inferred Total 1% 1% 1% 1% 1.20 3.14 0.89 5.23 6.7 5.7 4.5 5.7 0.5 0.6 0.6 0.6 36 31 23 31 0.10 0.18 0.04 0.32 0.02 0.06 0.02 0.10 1.40 3.17 0.65 5.22 The information in this report that relates to the Mineral Resource Estimate for the 31 December 2007 grade control drilled areas is based on information compiled by Mr C Fawcett BSc (Hons),G Dip Eng, MAusIMM, of FinOre Pty Ltd. The mining depletion was carried out by Mr Timothy Blyth, Ass Dip (Geology), MAusIMM of Hebei Hua Ao Mining Industry Company Ltd. The information relating to the 2002 non grade control drilled area was compiled by Mr D Pertel of Micromine Consulting Ltd. Mr Fawcett and Mr Blyth are Members of The Australasian Institute of Mining and Metallurgy and Mr Pertel is a Member of the Australian Institute of Geoscientists. Mr Fawcett, Mr Pertel and Mr Blyth have sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which they are undertaking to qualify as Competent Persons as defined by the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC Code, 2004 edition). 17 G R I F F I N M I N I N G L I M I T E D The table on the previous page summarises the • Better understanding of the lithological controls Mineral Resource Estimate as at 31 December on the main Qing Long lode, with drilling 2007 for: confirming the positioning of the porphyry and • the grade control drilled mine area. dolerite dykes that control this orebody. • the 2002 Mineral Resource for the non grade control drilled mine area, at both a 1% and 4% cut-off grade. • The Xiao Long orebody was found to extend to the south, adding further mineable tonnes that can be mined without additional development. The aggregate resource is calculated by adding both the 2002 and 2006 resource estimates at a 1% RESOURCE ESTIMATE - ZONE II cut-off grade. Zone II is believed to represent a southerly As the mine continued to increase production, all continuation of mineralisation present in Zone III. diamond drill activity was focused on better During 2007, 6,300 metres of underground drilling defining areas of known mineralisation so that was completed from two short drill cuddies in the 2007/2008 production schedules could be prepared. exploration decline in Zone II (‘the Fox decline’). During 2007, drilling confirmed the following: This work defined two zones, which were named the Xi Long (‘Western Dragon’) and Dong Long • High gold mineralisation below the Qing Long (‘Eastern Dragon’). The most significant and Hong Long orebodies. mineralisation was found in Xi Long C lode with • Significant gold mineralisation within the Ju Long orebody, which was also found to extend to the north. Down plunge widths and grades were also found to be consistent, proving that this orebody could be relied upon for bulk tonnages in the future. • The Fu Long orebody was found to split into three individual lodes at depth. A forth lode, the Wo Long, had previously been discovered as part of the Fu Long Deeps programme. This lode continued to display strong zinc and gold values. the best intersection being 47.54 metres at 7.68% zinc, 0.61% lead and 28 grams per tonne silver (UGFOX-031A 134.01 – 181.55m). The underground and surface drilling was of a sufficient density as to provide the first Mineral Resource Estimate for Zone II. This estimate was based on ordinary Kriging and a cutoff of greater than or equal to 1% zinc. 18 Material Tonnes Zn% Pb% R E P O RT A N D A C C O U N T S 2 0 0 7 Mineral Resource Estimates for Zone II 230,000 330,000 3,430,000 3,990,000 130,000 430,000 940,000 1,500,000 1.9 1.9 3.3 3.1 2.4 2.9 3.8 3.4 0.7 0.8 0.5 0.5 0.5 0.5 0.8 0.7 Au grams per tonne Ag grams per tonne 0.3 0.2 0.3 0.3 0.2 0.3 0.4 0.4 20.0 22.7 25.7 25.1 21.2 16.7 25.5 22.6 INDICATED Oxide Transitional Fresh Total INFERRED Oxide Transitional Fresh Total TOTAL Total 5,490,000 3.2 0.6 0.3 24.4 Note: Rounding errors may occur The information in this report that relates to the Mineral Resource estimates for Zone II is based on information compiled by Mr G. Fahey of CSA Australia Pty Ltd (CSA). Mr Fahey is a Chartered professional and Member of The Australasian Institute of Mining and Metallurgy and a Member of the Australian Institute of Geoscientists. Mr Fahey has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which they are undertaking to qualify as a Competent Person as defined in the 2004 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’ (the JORC Code). Mr Fahey consents to the inclusion in the report of the matters based on his information in the form and context in which they appear. 19 G R I F F I N M I N I N G L I M I T E D EXPLORATION - AREA BETWEEN ZONES II AND III The 1,500m long area between Zones II and III has Anomaly D was considered to be a possible long been considered prospective for additional continuation of mineralisation found in Zone II and zinc deposits but drilling has proved difficult due to III. Results (shown opposite) indicate similar either local access restrictions or deep sandy grades and widths to those found along strike at overburden. In 2006, a 3-Dimensional Induced Zone III. This area is a priority for drilling in Polarization (‘3D IP’) survey was undertaken to 2008. To speed drilling and to avoid having to drill help define drill targets. The results defined six through the overlying sand, an incline will be prominent chargeability anomalies of which five developed that will link the Zone III incline with were drilled in 2007. All contained zinc the Zone II decline. Underground drilling will mineralisation with the most significant results then be used to further define the mineralisation from Anomalies D and E. present between Zone II and III. 20 R E P O RT A N D A C C O U N T S 2 0 0 7 Drill Hole No. From DDCJY-006 -60/090 DDCJY-009 -60/090 DDCJY-014 -60/090 DDCJY-015 -60/090 Anomaly D Surface Diamond Drill Hole Results To (m) 163.00 200.50 217.02 231.75 237.73 80.31 115.00 207.62 82.30 89.90 77.44 106.50 171.45 187.00 198.10 Width (m) Results (m) 173.84 203.55 218.80 235.64 241.00 84.06 125.00 211.00 84.35 93.75 93.30 111.35 177.70 193.20 201.07 10.84 3.15% Zn 3.05 1.78 3.89 3.27 3.75 10.00 3.38 2.05 3.85 7.42% Zn, 1.65g/t Au 4.50% Zn 4.62% Zn 4.02% Zn 5.38% Zn, 7.88% Pb 6.06% Zn, 0.71% Pb 12.34% Zn 29.59% Zn, 2.14% Pb, 168g/t Ag 4.57% Zn, 1.27% Pb, 50g/t Ag 15.86 3.31% Zn, 5.14% Pb, 70g/t Ag 4.85 6.25 6.20 2.97 1.76% Zn, 1.83% Pb, 44g/t Ag 4.59% Zn, 0.39% Pb, 0.74g/t Au, 33g/t Ag 2.89% Zn, 31g/t Ag 10.43% Zn, 15g/t Ag Anomaly E was tested by drill hole DDCJY-005 anomalies and a review is currently being under- and intersected two zinc-rich zones one of 2.81 taken to prioritise the targets for drilling in 2008. metres of 3.15% zinc (53.69 to 55.50m) and the other 5.90 metres of 4.53% zinc (134.20 to Surface drilling was also undertaken 200m to the 140.10 m). Additional work is warranted on all IP Northeast of Zone II in what is called the Northeast Target. Results are listed below. Northeast Target Surface Diamond Drill Hole Results Drill Hole No. From DDCJY-011 -60/090 To (m) 80.68 158.36 199.44 90.69 159.49 202.56 Width (m) Results (m) DDCJY-016 -60/109 128.00 132.40 DDCJY-021 -60/289 DDCJY-026 -60/109 160.80 180.80 222.70 91.50 103.00 176.50 191.00 229.40 97.90 116.60 10.01 7.88% Zn, 39g/t Ag 1.13 3.12 4.40 15.70 10.20 6.70 6.40 13.60 24.25% Zn, 138g/t Ag 3.01% Zn 3.17% Zn, 1.24g/t Au, 41g/t Ag 5.88% Zn, 0.23% Pb, 0.51g/t Au, 59g/t Ag 4.40% Zn 5.80% Zn 7.35% Zn 5.92% Zn 21 G R I F F I N M I N I N G L I M I T E D These results are very encouraging and indicate Applied research is being undertaken by Dr that Zone II has additional parallel basemetal lodes Zhaoshan Chang of the ARC Centre of Excellence similar to those present at Zone III. in Ore Deposits at the University of Tasmania as HEBEI SINO ANGLO EXPLORATION LICENCE AREA Prominent ground magnetic anomalies located 2.5kilometres east of Zone II at Hebaogou and 3 kilometres east of the mine near Ershili Naobao village. Drilling at Ershili Naobao, soil sampling, trenching and IP surveys were undertaken and have identified zinc anomalies which will be followed up in 2008. part of a research programme sponsored by Griffin. The purpose of this study is to understand the origin and controls of the mineralisation at Caijiaying and to apply this knowledge to the discovery of additional orebodies in the area. During 2007, analysis of Proterozoic and Jurassic rock using PIMA identified a broad illite alteration hallo surrounding the mineralised zone providing a possible vector to mineralisation. During 2008, 22 R E P O RT A N D A C C O U N T S 2 0 0 7 THE FUTURE samples from the surrounding Hebei Sino Anglo Looking forward, 2008 will be an important year in Caijiaying Exploration Licence will be analysed for the development of Caijiaying with the installation illite as a means of defining additional alteration of a second primary ball mill and crusher to take hallos that surround mineralisation. processing throughput to a rate of 750,000 tonnes of ore per annum in 2009. REGIONAL EXPLORATION The Sidougou (36km2) and Xuetangying (83km2) Zones III and II have the potential to significantly exploration licences applied for in 2005 and expand operations at Caijiaying providing more ore The development of Zone II and the areas between expected to be issued in 2007 were not granted due for the processing facilities. to the areas coming under a National Strategic Minerals Area. These areas will continue to be With the benefit of the funds raised from the applied for in 2008. placing of new shares in Griffin in 2007 and from cash flow generated from Caijiaying, Griffin is well A regional database of mineral occurrences has placed to take advantage of the opportunities now been incorporated into the Geographic being presented in the current uncertain equity and Information System which will help in targeting debt capital markets. On 22 April 2008, the new areas. Company announced an agreed takeover of Yukon Zinc corporation which controls 100% of the high grade wolverine project in the Yukon District of Canada. Whilst there is no certainty that this transaction will be successfully completed, it provides a worthwhile example of the type of acquisition the company is prepared to undertake. In essence one which will provide extraordinary returns within acceptable risk parameters for the shareholders of Griffin. 23 G R I F F I N M I N I N G L I M I T E D 24 R E P O RT A N D A C C O U N T S 2 0 0 7 25 G R I F F I N M I N I N G L I M I T E D DIRECTORS AND SENIOR EXECUTIVES DIRECTORS: Mladen Ninkov, Chairman, Australian, aged 46, Dal Brynelsen, Director, Canadian, aged 61, is holds a Masters of Law Degree from Trinity Hall, a graduate of the University of British Columbia in Cambridge and Bachelor of Laws (with Honours) Urban Land Economics. Mr. Brynelsen has been and Bachelor of Jurisprudence Degree from the involved in the resource industry for over 30 years. University of Western Australia. He is the principal He has been responsible for the discovery, of Keynes Capital. He has a mining, legal, fund development and operation of several underground management and investment banking background gold mines during his career. Mr. Brynelsen is the and is admitted as a barrister and solicitor of the President and a director of Vangold Resources Supreme Court of Western Australia. He was the Limited. Chairman and Managing Director of the Dragon Capital Funds management group, a director and William Mulligan, Director, USA, aged 64, has Head of International Corporate Finance at ANZ a BSc from Thomas Clarkson University, an MS in Grindlays Bank Plc in London and a Vice President Geological Engineering from the University of of Prudential-Bache Securities Inc. in New York. Connecticut and an MBA from NYU Bernard He also worked at Skadden Arps Slate Meagher & Baruch School of Business Administration. He is Flom in New York and Freehill Hollingdale & currently the Managing Director for Global Page in Australia. He has been chairman and Projects and Political Risk at AIG Global Trade director of a number of both public and private and Political Risk Insurance Company, a wholly mining companies. owned subsidiary of American International Group Inc., and a director of AIG Investment Bank (ZAO) Roger Goodwin, Finance Director, British, Ltd based in Moscow. From 1994 to 1996 he was aged 53, is a Chartered Accountant. He has been Executive Vice President for Corporate with the Company since 1996 having previously Development at Latin American Gold Limited. held senior positions in a number of public and private companies within the natural resources sector. He has a strong professional background, including that as a manager with KPMG, with considerable public company and corporate finance experience, and experience of emerging markets particularly in Africa, the CIS and Eastern Europe. 26 R E P O RT A N D A C C O U N T S 2 0 0 7 SENIOR EXECUTIVES: Dominic Claridge, Group Operations Manager, Timothy Blyth, Operations Manager Australian, aged 44, holds a degree in mining Caijiaying, Australian, aged 48, holds an engineering from the University of Sydney Associate Diploma in Geology from the Canberra (Australia). He has been involved in the mining Institute of Technology and has 24 continuous industry for over 20 years having worked years experience in the Australian mining industry, predominately with Australian mining companies, with the last 10 years in senior management with short interludes in South Africa and Finland. positions. Having started as an underground He has worked in a variety of operations geologist, he also has significant experience of open encompassing both underground and open cut pit mining. †Prior to joining Griffin he spent the mining, from small to medium sized mines. More previous 5 years as Operations Manager and recently he has worked in China as deputy general Project Manager for Hill 50 Gold, Harmony and manager for an underground gold operation and Perilya. Previously he was a Chief Geologist was project manager for a new gold operation in (Geology Manager) for 5 years for Sons of Gwalia Australia. and then Hill 50 Gold. Jeff Haitian Sun, General Manager China, William Zhang, Finance Manager China, aged Chinese, aged 47, is a Professor of Geology based 30, is an Australian resident and citizen of China. in Beijing. He holds a PhD and MSc in mineral He holds a Bachelor of Commerce degree from deposits from the Chinese University of University of Melbourne, and is an associate Geosciences and has undertaken postdoctoral member of the Certified Public Accountants of research in geology at the Norwegian University of Australia. He has a mining, accounting and finance Technology. Jeff has worked on a number of background having worked on a number of coal mineral projects both in China and overseas. Prior mining projects both in China and Australia, to joining Griffin he was engaged by Mundoro including; Yanzhou Coal (a coal mining company Mining Inc of Canada as a senior geologist. listed in NYSE, SEHK, SSE) and Fiserv Solutions (a financial service firm listed in NASDAQ). 27 G R I F F I N M I N I N G L I M I T E D 28 R E P O RT A N D A C C O U N T S 2 0 0 7 29 G R I F F I N M I N I N G L I M I T E D DIRECTORS’ REPORT The Directors submit their report together with the audited consolidated accounts of Griffin Mining Limited (‘the Company’) and its subsidiaries (‘the Group’) for the year ended 31 December 2007. FINANCIAL RESULTS The Group profit before taxation, amounted to US$26,762,000 (2006 – US$29,545,000). There is no taxation charge (withholding taxation of US$75,000 was charged in 2006). A maiden dividend of $5,826,000 was paid in 2007 (2006 nil). The Group profit after taxation and dividends paid amounted to US$20,936,000 (2006 – US$29,470,000) and has been credited to reserves. The earnings per share amounted to 12.08 cents (2006 – 16.02 cents). The attributable net asset value per share at 31 December 2007 amounted to 95 cents (2006 - 35 cents). The Directors declare a dividend of 3 cents per ordinary share in the Company payable on 6 June 2008. PRINCIPAL ACTIVITIES The principal activity of the Group is that of mining and exploration. A review of the Group’s operations for the year ended 31 December 2007 and the indication of likely future developments are set out on pages 8 to 23. DIRECTORS The Directors of the Company during the year were: Mladen Ninkov – Australian – Chairman Roger Goodwin – British - Finance Director Dal Brynelsen – Canadian William Mulligan – American (US) Under the bye laws of the Company, the Directors serve until re-elected at the next Annual General Meeting of the Company. Being eligible all the Directors currently in office offer themselves for re-election at the forthcoming Annual General Meeting of the Company. The beneficial interests of the Directors holding office at 31 December 2007 and their immediate families in the share capital of the Company were as follows: Name At 31 December 2007 At 1 January 2007 Ordinary shares No. Options over ordinary shares Ordinary shares No. Options over ordinary shares Exercisable at 110 pence Exercisable at 65 pence Exercisable at 65 pence Exercisable at 30 pence Mladen Ninkov Dal Brynelsen Roger Goodwin William Mulligan 33,001 1 577,830 300,001 6,000,000 400,000 1,200,000 400,000 2,000,000 200,000 575,000 200,000 33,001 1 311,163 300,001 2,000,000 200,000 575,000 200,000 6,000,000 600,000 1,700,000 600,000 The options exercisable at 65 pence per share entitle the holder to subscribe for new ordinary shares in the Company on or before the 28 February 2009 and have all vested. The options exercisable at 110 pence per share entitle the holder to subscribe for new ordinary shares in the Company on or before 28 February 2010. The options vest with each option holder in 3 separate and equal instalments as follows: a. The first third of each holder’s options vested on 31 December 2007; b. The second third of each holder’s options will vest on 31 December 2008; and c. The last third of each holder’s options will vest on 31 December 2009. 30 R E P O RT A N D A C C O U N T S 2 0 0 7 DIRECTORS’ REPORT The Options will not vest if an employee or a director resigns or leaves the Company for cause prior to the vesting event taking place. All the Options will vest immediately upon a takeover offer being made or a change in substantial control of the Company taking place prior to the Options expiring. All of the Directors’ interests detailed are beneficial. On 11 January 2007 the Company was notified of the exercise of options granted to the directors and management in March 2004 over 9,266,667 new ordinary shares in the Company at an exercise price of 30p per share to raise £2,780,000 for the Company. POST BALANCE SHEET EVENTS On 19 April 2008 Griffin signed an agreement with Yukon Zinc Corporation (“Yukon Zinc”) for the acquisition of all the issued common stock of Yukon Zinc. The agreement provides for a plan of arrangement pursuant to section 288(1) of the British Columbia Business Corporations Act, in which the Yukon Zinc shareholders will exchange their Yukon Zinc shares for ordinary shares of Griffin, on the basis of one Griffin share for each nine Yukon Zinc shares held. The plan of arrangement is subject to, inter alia, the approval of two thirds of the Yukon Zinc shareholders attending and voting at a special general meeting. Yukon Zinc has issued and outstanding 455,606,909 common shares for which Griffin will issue and exchange 50,622,990 (subject to roundings) new ordinary shares amounting to 16.2% of the enlarged share capital on an undiluted basis of 312,132,539 ordinary shares. In addition Yukon Zinc has granted stock options exercisable for 23,578,000 common shares and warrants exercisable for 76,511,618 common shares. Under the terms of the agreement, Griffin will grant options / warrants exercisable over a total of 11,121,069 new ordinary shares in exchange for the outstanding Yukon Zinc options and warrants, amounting to 3.2% of the enlarged share capital on a fully diluted basis of 338,728,608 ordinary shares. The final structure of the transaction will be determined on the basis of tax, securities and corporate law advice in order to ensure the most efficient structure for each of the parties and their respective security holders. Yukon Zinc has agreed to pay a break fee to Griffin, under certain circumstances, of C$2.5 million. Yukon Zinc has also provided Griffin with certain other customary rights, including a right to match competing offers. CORPORATE GOVERNANCE Although incorporated in Bermuda and therefore not obliged to comply with the code of best practice established by the Combined Code issued by the Committee on Corporate Governance, the Company has reviewed and broadly supports this code. The Company does not comply where compliance would not be commercially justified allowing for the practical limitations relating to the Company’s size. The Board of directors includes a number of non executive directors who, other than their shareholding, are independent and free from any business or other relationship which could materially interfere with the exercise of their independent judgement. The Board meets regularly, at least once a quarter, and is responsible for the overall strategy of the Group, its performance, management and major financial matters. All directors are subject to re-appointment annually at each annual general meeting of the Company’s shareholders. Various safeguards and checks have been instigated as part of the Company’s system of financial control. These include: • • • • • preparation of regular financial reports and management accounts preparation and review of capital and operational budgets preparation of regular operational reports prior approval of capital and other significant expenditure regular review and assessment of foreign exchange risk and requirements AUDITORS Grant Thornton UK LLP have indicated their willingness to continue in office as auditors to the Company and a resolution proposing their appointment will be put to the forthcoming Annual General Meeting. 31 G R I F F I N M I N I N G L I M I T E D DIRECTORS’ REPORT STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ACCOUNTS Bermudan company law and generally accepted best practice requires the Directors to prepare accounts for each financial year which give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period. In preparing these accounts, the Directors have: • • • • selected suitable accounting policies and applied them consistently; made judgements and estimates that are reasonable and prudent; stated whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; and prepare the financial statements on a going concern basis unless it is inappropriate to presume the Company will continue in business. In so far as the directors are aware: • • there is no relevant information of which the Company’s auditors are unaware; and the directors have taken all steps that they ought to have taken as directors to make themselves aware of relevant audit information and to establish that the auditors are aware of that information. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Bermuda Companies Act 1981 as amended. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included in the Company’s website. Legislation in Bermuda and the United Kingdom governing the preparation and dissemination of financial statements may differ from the legislation in other jurisdictions. This report was approved by the Board and signed on its behalf by: Roger Goodwin Finance Director and Company Secretary 30 April 2008 London 32 R E P O RT A N D A C C O U N T S 2 0 0 7 REPORT OF THE INDEPENDENT AUDITOR REPORT OF THE INDEPENDENT AUDITORS TO THE MEMBERS OF GRIFFIN MINING LIMITED We have audited the financial statements of Griffin Mining Limited for the year ended 31 December 2007 which comprise the consolidated income statement, the consolidated balance sheet, the statement of changes in equity, the consolidated cash flow statement, the accounting policies, and notes 1 to 23. These financial statements have been prepared under the accounting policies set out therein. This report is made solely to the Company’s members, as a body, in accordance with Section 90 of the Bermuda Companies Act 1981 as amended. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR The Directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable Bermuda law and International Financial Reporting Standards are set out in the statement of directors’ responsibilities. Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (United Kingdom and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with International Financial Reporting Standards. We also report to you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if the Company has not kept proper accounting records, or if we have not received all the information and explanations we require for our audit. We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. This other information comprises the Chairman’s Statement, Review of Operations and Directors’ Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. BASIS OF AUDIT OPINION We conducted our audit in accordance with International Standards on Auditing (United Kingdom and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. OPINION In our opinion: • the financial statements give a true and fair view in accordance with International Financial Reporting Standards of the state of the Group’s affairs at 31 December 2007 and of its profit for the year then ended; • the financial statements have been properly prepared in accordance with the provisions of the Bermudan Companies Act 1981 as amended. GRANT THORNTON UK LLP REGISTERED AUDITORS CHARTERED ACCOUNTANTS LONDON 30 April 2008 33 G R I F F I N M I N I N G L I M I T E D CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2007 (expressed in thousands US dollars) Notes Revenue Cost of sales Gross profit Net operating expenses Profit from operations Foreign exchange gains Finance income Profit before tax Income tax expense Profit after tax attributable to equity share owners for the financial year Basic earnings per share (cents) from continuing operations Diluted earnings per share (cents) from continuing operations 1 1 1 2 4 5 6 6 2007 $000 37,989 (7,768) 30,221 (10,078) 2006 $000 42,802 (8,516) 34,286 (6,142) 20,143 28,144 1,012 5,607 26,762 - 789 612 29,545 (75) 26,762 29,470 12.08 11.97 16.02 15.45 34 R E P O RT A N D A C C O U N T S 2 0 0 7 CONSOLIDATED BALANCE SHEET As at 31 December 2007 (expressed in thousands US dollars) Notes ASSETS Non-current assets Property, plant and equipment Intangible assets – Exploration interests Current assets Inventories Other current assets Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital Share premium Contributing surplus Share based payments Other reserves Foreign exchange reserve Profit and loss reserve Total equity Non-current liabilities Long-term provisions Current liabilities Trade and other payables Short term bank overdrafts Total liabilities Total equities and liabilities Number of shares in issue 7 8 9 10 11 14 15 16 2007 $000 44,381 751 45,132 4,639 4,155 199,949 208,743 253,875 2,615 196,637 3,690 4,426 579 3,109 37,106 248,162 2006 $000 32,087 842 32,929 1,104 1,064 34,081 36,249 69,178 1,841 39,166 3,690 2,553 297 479 16,432 64,458 - 384 5,047 666 5,713 253,875 4,336 - 4,720 69,178 261,509,549 184,061,064 Attributable net asset value / total equity per share 17 $0.95 $0.35 The accounts on pages 34 to 53 were approved by the Board of Directors and signed on its behalf by: Mladen Ninkov Chairman 30 April 2008 Roger Goodwin Finance Director 35 G R I F F I N M I N I N G L I M I T E D CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2007 (expressed in thousands US dollars) Share capital premium Share Contributing surplus Share based payments Other reserves Foreign Profit exchange and loss reserve reserve Total $000 $000 $000 $000 $000 $000 $000 $000 At 31 December 2005 1,838 39,040 3,690 842 Exchange differences on translating foreign operations Net income recognised directly in equity Profit for the year Total recognised income and expenses in the year Regulatory transfer for future investment Issue of share capital Cost of share based payments Movement in fair value of financial assets - - - - - 3 - - - - - - - 126 - - - - - - - - - - - - - - - - 1,711 - - - - - - 297 - - - 215 (12,740) 32,885 264 264 - - 264 264 - 29,470 29,470 264 29,470 29,734 - - - - (297) - - - 129 1,711 (1) (1) At 31 December 2006 1,841 39,166 3,690 2,553 297 479 16,432 64,458 Exchange differences on translating foreign operations Net income recognised directly to equity Profit for the year Total recognised income and expenses in the year Dividend paid Regulatory transfer for future investment Excercise of options Issue of share capital - - - - - - - - - - - - - 1,042 774 156,429 Cost of share based payments - - - - - - - - - - - - - - - - - (1,042) - 2,915 20 20 - 20 - 262 - - - 2,630 2,630 - - 2,650 2,650 26,762 26,762 2,630 26,762 29,412 - - - - - (5,826) (5,826) (262) - - - - 157,203 - 2,915 At 31 December 2007 2,615 196,637 3,690 4,426 579 3,109 37,106 248,162 36 R E P O RT A N D A C C O U N T S 2 0 0 7 CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2007 (expressed in thousands US dollars) Notes Net cash flows from operating activities Profit before taxation Foreign exchange (gains) Taxation paid Finance income Adjustment in respect of share based payments Depreciation, depletion and amortisation (Increase) / decrease in inventories (Increase) in other current assets Increase in trade and other payables Net cash inflow from operating activities Cash flows from investing activities Interest received Receipts on sale of investments Payments to acquire intangible fixed assets – exploration interests Payments to acquire plant and equipment – mineral interests Payments to acquire plant and equipment – plant and equipment Payments to acquire plant and equipment – other Dividends paid Net cash (outflow) from investing activities Cash flows from financing activities Issue of ordinary share capital Expenses paid in connection with share issue 7 4 8 7 7 7 Increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Effects of exchange rate changes Cash and cash equivalents at the end of the year Cash and cash equivalents comprise: Bank deposits Short term bank overdrafts Total 2007 $000 26,762 (1,012) - (5,607) 2,915 1,351 (3,535) (3,091) 711 18,494 5,607 - (126) (9,056) (1,854) - (5,826) (11,255) 157,211 (7) 157,204 164,443 34,081 759 199,283 199,949 (666) 199,283 2006 $000 29,545 (789) (75) (612) 1,711 890 516 (117) 811 31,880 612 63 (414) (2,829) (2,504) (9) - (5,081) 129 - 129 26,928 6,663 490 34,081 34,081 - 34,081 Included within the net cash inflows of $164,443,000 (2006 $26,928,000) are foreign exchange gains / losses of $1,012,000 (2006 losses $789,000) which have been treated as realised. 37 G R I F F I N M I N I N G L I M I T E D ACCOUNTING POLICIES BASIS OF ACCOUNTING The accounts have been prepared in accordance with applicable International Financial Reporting Standards as issued by the International Accounting Standards Board. The significant accounting policies adopted are detailed below. ACCOUNTING CONVENTION The accounts have been prepared under the historical cost convention, except for financial assets which are measured at fair value. ACCOUNTING POLICIES A new International Financial Reporting Standard, IFRS 7, ‘Financial Instruments: Disclosures’, has become mandatory for accounting periods beginning on 1 January 2007 or later. This Standard, which replaces rules previously set out in IAS 32, ‘Financial Instruments: Presentation and Disclosures’, has been applied by the Group in its 2007 consolidated financial statements. All disclosures relating to financial instruments including all comparative information have been updated to reflect the new requirements. The first time application of IFRS 7 has not resulted in any prior period adjustments to cash flows, net income or balance sheet items. ISSUED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS’S”) AND INTERPRETATIONS THAT ARE NOT YET EFFECTIVE The Group has not applied the following pronouncements: Those of which are expected to be most relevant to the Group are IFRS 8 and IAS 27 (revised). - IAS 1 Presentation of financial statements (revised) – effective 1 January 2009 - IAS 23 Borrowing Costs (revised 2007) – effective 1 January 2009 - IAS 27 (revised) Consolidated and separate financial statements – effective 1 January 2009. - Amendment to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation – effective 1 January 2009 - IFRS 2 (Amendment) Share based payment – Vesting conditions and cancellations – effective 1 January 2009 - IFRS 3 (Amendment) Business combinations – effective 1 January 2009 - IFRS 8 Operating Segments – effective 1 January 2009. The segmental information reported under the standard is that which the chief operating decision maker uses internally for evaluating the performance of operating segments and allocating resources to those segments. - IFRIC 11 (IFRS 2) Group and Treasury share transactions – effective 1 March 2007 - IFRIC 12 – Service concession arrangements – effective 1 January 2008 - IFRIC 13 Customer Loyalty Programmes – effective 1 July 2008 - IFRIC 14 (IAS 19) The limit on a defined benefit asset, minimum funding requirements and their interaction – effective 1 January 2008 The Group is evaluating the impact of the above pronouncements. The effect of the revision to IAS 27 will depend on the extent of relevant future transactions including the reduction in the Group’s interest in Hebei Hua Ao. Otherwise, the changes are not expected to be material to the Group’s earnings or to shareholders’ funds. 38 R E P O RT A N D A C C O U N T S 2 0 0 7 ACCOUNTING POLICIES CONSOLIDATION BASIS The Group accounts consolidate the accounts of the Company and all its subsidiary undertakings drawn up to 31 December each year. Subsidiaries are entities over which the group has the power to control the financial and operating policies so as to obtain benefits from its activities. The Group obtains and exercises control through voting rights. Unrealised gains on transactions between the group and its subsidiaries are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. Acquisitions of subsidiaries are dealt with by the purchase method. The purchase method involves the recognition at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary, at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary prior to acquisition. On initial recognition, the assets and liabilities of the subsidiary are included in the consolidated balance sheet at their fair values, which are also used as the bases for subsequent measurement in accordance with the Group accounting policies. Goodwill is stated after separating out identifiable intangible assets. Goodwill represents the excess of acquisition cost over the fair value of the Group’s share of the identifiable net assets of the acquired subsidiary at the date of acquisition. Under the terms of the joint venture contract establishing the Hebei Hua’ Ao Mining Industry Company Limited, the Company is entitled to 100% of the net cash flows of the subsidiary for the first three years after commencement of commercial production reverting thereafter to 60% being the Company’s share of the equity interest. No minority interest in Hebei Hua’ Ao Mining Industry Company Limited is recognised in these financial statements as Griffin Mining Limited is entitled to 100% of the cash flows for the first 3 years production commencing July 2005. No minority interest in Hebei Sino Anglo Mining Development Company Limited is recognised in these financial statements as the minority interest’s share of capital is extinguished by losses. REVENUE Revenue is measured by reference to the fair value of consideration received or receivable by the Group and comprises amounts received, net of VAT and production royalties, from sales of metal concentrates to third party customers. Sales are made on a cash on delivery / collection basis and are recognised on collection or delivery of the concentrate from the Group’s processing facilities. NON CURRENT ASSETS Intangible assets - exploration cost Expenditure on licences, concessions and exploration incurred on areas of interest by subsidiary undertakings are carried as intangible assets until such time as it is determined that there are commercially exploitable reserves within each area of interest and the necessary finance in place, at which time such costs are transferred to property, plant and equipment to be amortised over the expected productive life of the asset. The Group’s intangible assets are subject to periodic review by the Directors for impairment. Exploration, appraisal and development costs incurred in respect of each area of interest determined as unsuccessful are written off to the profit and loss account. Property, plant and equipment Mine development expenditure for the initial establishment of access to mineral reserves, together with capitalised exploration, evaluation and commissioning expenditure, and direct overhead expenses prior to commencement of commercial production are capitalised to the extent that the expenditure results in significant future benefits. Property, plant and equipment are shown at cost less depreciation and provisions for the impairment of value (see note 7). 39 G R I F F I N M I N I N G L I M I T E D ACCOUNTING POLICIES NON CURRENT ASSETS (CONTINUED) Depreciation All costs capitalised (mineral interest, mill and mine equipment) within an area of interest, are amortised over the current estimated economic reserve of the area of interest on a unit of production basis. Office equipment is depreciated over four years on a straight line basis. Impairment An impairment test is carried out at each balance sheet date to assess whether the net book value of the capitalised costs in each area of interest, together with the costs of development of undeveloped reserves, is covered by the discounted future net revenues from reserves within that area of interest. Any deficiency arising is provided for to the extent that, in the opinion of the Directors, it is considered to represent a permanent diminution in value of the related asset, and where arising, is dealt with in the income statement as additional depreciation. Impairment assessments are based upon a range of estimates and assumptions: Estimate / assumption Future production Commodity prices Exchange rates Discount rates Basis Proven and probable reserves and resource estimates together with processing capacity Forward market and longer term price estimates Current market exchange rates Cost of capital risk MINE CLOSURE COSTS Mining operations are generally required to restore mine and processing sites at the end of their lives to a condition acceptable to the relevant authorities and consistent with the Group’s environmental policies. Whilst the Group strives to maintain and where possible enhance the environment of the Group’s processing sites, provision is made for site restoration costs in the accounts in accordance with local requirements. INVENTORIES Inventories are valued at the lower of cost or net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: • • • Consumable stores and spares, at purchase costs on a first in first out basis Concentrate stockpiles at cost of direct materials, power, labour, and a proportion of site overhead Ore stockpiles at cost of direct material, power, labour contractor charges and a proportion of site overhead FINANCIAL ASSETS Financial assets, other than hedging instruments, can be divided into the following categories: • • • • loans and receivables financial assets at fair value through profit or loss available-for-sale financial assets held-to-maturity investments 40 R E P O RT A N D A C C O U N T S 2 0 0 7 ACCOUNTING POLICIES FINANCIAL ASSETS (CONTINUED) Financial assets are assigned to the different categories on initial recognition, depending on the characteristics of the instrument and its purpose. A financial instrument’s category is relevant for the way it is measured and whether resulting income and expenses are recognised in the income statement or charged directly against equity. The Group generally recognises all financial assets using settlement day accounting. An assessment of whether a financial asset is impaired is made at least at each reporting date. Financial assets that are substantially past due are also considered for impairment. All income and expense relating to financial assets are recognised in the income statement line item “finance costs” or “finance income”, respectively. Individual receivables are considered for impairment when they are past due at the balance sheet date or when objective evidence is received that a specific counterparty will default. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are classified as current assets or non current assets based on their maturity date. Loans and receivables are classified as either 'trade and other receivables’ or 'other financial assets’ in the balance sheet. On initial recognition loans and receivables are recognised at fair value net of transaction costs. They are subsequently measured at amortised cost using the effective interest method, less provision for impairment. Any change in their value is recognised in the income statements. The Group’s other receivables fall into this category of financial instruments. The Group has no financial assets at fair value through profit or loss or held-to-maturity investments. CASH FLOW HEDGE ACCOUNTING International Accounting Standard 39 requires a specific accounting treatment for derivatives that are designated as hedging instruments in cash flow hedge relationships. To qualify for hedge accounting, the hedging relationship must meet several strict conditions with respect to documentation, probability of occurrence, hedge effectiveness and reliability of measurement. All other derivative financial instruments are accounted for at fair value through profit or loss. The Group has not entered into any derivatives that may be designated as hedging instruments. FINANCIAL LIABILITIES The Group’s financial liabilities include borrowings, trade and other payables, which are measured at amortised cost using the effective interest rate method. On initial recognition loans and receivables are recognised at fair value net of transaction costs. Financial liabilities are recognised when the Group becomes a party to the contractual agreements of the instrument. All interest- related charges and, if applicable, changes in an instrument’s fair value that are reported in profit or loss are included in the income statement line items “finance costs” or “finance income”. FOREIGN CURRENCY TRANSACTIONS The accounts have been prepared in United States dollars being the local currency of Bermuda. Whilst registered in Bermuda the Company, together with its subsidiaries, operate in China, the United Kingdom, and Australia. Foreign currency transactions by Group companies are recorded in their functional currencies at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities have been translated at rates in effect at the balance sheet date. Any realised or unrealised exchange adjustments have been charged or credited to income. 41 G R I F F I N M I N I N G L I M I T E D ACCOUNTING POLICIES FOREIGN CURRENCY TRANSACTIONS (CONTINUED) On consolidation the accounts of overseas subsidiary undertakings are translated into the presentation currency of the Group at the rate of exchange ruling at the balance sheet date and profit and loss account items are translated at the average rate for the year. The exchange difference arising on the retranslation of opening net assets is classified within equity and is taken directly to the foreign exchange reserve. All other translation differences are taken to the income statement. The balance of the foreign currency translation reserve relating to an operation that is disposed of is transferred to the income statement at the time of the disposal. EQUITY Equity comprises the following: • • • • • • • “Share capital” represents the nominal value of equity shares. “Share premium” represents the excess over nominal value of the fair value of consideration received for equity shares, net of expenses of the share issue. “Contributing surplus” is a statutory reserve for the maintenance of capital under Bermuda company law and was created on a reduction in the par value of the Company’s ordinary shares on 15 March 2001. “Share based payments” represents equity-settled share-based employee remuneration until such share options are exercised. “Foreign exchange reserve” represents the differences arising from translation of investments in overseas subsidiaries. “Other reserve” represents a statutory retained earnings reserve under PRC law for future investment by Hebei Hua’ Ao. “Profit and loss reserve” represents retained profits and losses. EQUITY SETTLED SHARE BASED PAYMENTS All share-based payment arrangements granted after 7 November 2002 that had not vested prior to 1 January 2005 are recognised in the financial statements. All goods and services received in exchange for the grant of any share-based remuneration are measured at their fair values. Fair values of employee services are indirectly determined by reference to the fair value of the share options awarded. Their value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example, production upgrades). All share-based remuneration is ultimately recognised as an expense in the income statement with a corresponding credit to “Share based payments” in the balance sheet. If vesting periods or other non-market vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods if share options ultimately exercised are different to that estimated on vesting. Upon exercise of share options the proceeds received net of attributable transaction costs are credited to share capital. For the financial year ended 31 December 2007 the application of the accounting standard has resulted in a net decrease in the profit for the year of $2,915,000 (2006 $1,711,000). 42 R E P O RT A N D A C C O U N T S 2 0 0 7 ACCOUNTING POLICIES SIGNIFICANT JUDGEMENTS AND ESTIMATES In formulating accounting policies the directors are required to apply their judgement, and where necessary engage professional advisors, with regard to the following significant areas: • • • • • • Expenditure capitalised as intangible fixed assets (note 8) Expenditure capitalised as property, plant & equipment (note 7) Impairment review assumptions (note 7 and 8) Provisions for mine closure costs (note 14) Share based payments (note 12) Classification of share based payments (note 12) The directors continually monitor the basis on which their judgements are formulated. Where required they will make amendments to these judgements. Where judgements and estimates are amended between accounting periods, full disclosure of the financial implications are given within the relevant notes to the Group accounts. CASH AND CASH EQUIVALENTS Cash and cash equivalents comprise cash on hand and demand deposits, together with other short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. DIVIDENDS Dividend distributions payable to equity shareholders are included in “other short term financial liabilities” when the dividends are approved in a directors meeting prior to the balance sheet date. 43 G R I F F I N M I N I N G L I M I T E D NOTES TO THE FINANCIAL STATEMENTS 1. SEGMENTAL REPORTING The Group has one business segment, the Caijiaying zinc gold project in the Peoples Republic of China, which is its primary segment for the purposes of financial reporting. All sales and costs of sales in 2007 and 2006 were derived from the Caijiaying zinc gold project. 2007 $000 2006 $000 37,989 42,802 (7,768) (8,516) (4,735) 15 (5,358) (10,078) (3,434) (30) (2,678) (6,142) 50,207 382 18,589 69,178 5,747 - 9 5,756 2006 $000 (890) (2,071) (1,711) No. 200 REVENUES China COST OF SALES China NET OPERATING EXPENSES China Australia European Union All revenues, cost of sales, and operating expenses charged to profit relate to continuing operations. TOTAL ASSETS China Australia European Union CAPITAL EXPENDITURE China Australia European Union 2. PROFIT FROM OPERATIONS Profit from operations is stated after charging Depreciation, depletion and amortisation Staff costs Fair values of options granted to directors and management Average number of persons employed by the Group in the year 44 54,841 79 198,955 253,875 11,036 - - 11,036 2007 $000 (1,351) (2,301) (2,915) No. 200 R E P O RT A N D A C C O U N T S 2 0 0 7 NOTES TO THE FINANCIAL STATEMENTS 3. DIRECTORS’ AND KEY PERSONNEL REMUNERATION The following fees and remuneration were receivable by the Directors holding office and key personnel engaged during the year: Mladen Ninkov Dal Brynelsen Roger Goodwin William Mulligan Key personnel Fees Salary $000 45 66 45 66 222 - 222 $000 - - 365 - 365 801 1,166 Share based payments $000 1,744 116 349 116 2,325 588 2,913 Total 2007 $000 1,789 182 759 182 2,912 1,389 4,301 Fees Salary $000 - 50 - 50 100 - 100 $000 - - 281 - 281 570 851 Share based payments $000 678 67 193 67 1,005 710 1,715 Total 2006 $000 678 117 474 117 1,386 1,280 2,666 Keynes Capital, the registered business name of Keynes Investments Pty Limited as trustee for the Keynes Trust, received fees under a consultancy agreement of $932,000 (2006 $748,000), for the provision of advisory and support services to Griffin Mining Limited and its subsidiaries during the year, 60% of which fees are charged to Hebei Hua Ao. Mladen Ninkov is a director and employee of Keynes Investments Pty Limited. On 14 February 2007 the Company agreed to grant further options over 10,000,000 new ordinary shares to directors and key employees of the Company (the “New Options”). Each New Option entitles the holder to subscribe for new ordinary shares in the Company at an exercise price of 110 pence per new ordinary share on or before 28 February 2010. The New Options vest with each option holder in 3 separate and equal instalments per annum as follows: a. b. c. The first third of each holder’s New Options vested on 31 December 2007; The second third of each holder’s New Options will vest on 31 December 2008; and The last third of each holder’s New Options will vest on 31 December 2009. The New Options will not vest if an employee or a director resigns or leaves the Company for cause prior to the vesting event taking place. All the New Options will vest immediately upon a takeover offer being made or a change in substantial control of the Company taking place prior to the New Options expiring. The new options have been allocated as follows: New options granted Total number of options granted Options exercised No. No. No. Total number of options vested at 31 December 2007 No. 6,000,000 1,200,000 400,000 400,000 2,000,000 10,000,000 14,000,000 3,475,000 1,200,000 1,200,000 (6,000,000) (1,700,000) (600,000) (600,000) 4,866,667 (366,667) 24,741,667 (9,266,667) 4,000,000 975,000 333,333 333,333 2,933,334 8,575,000 Directors: Mladen Ninkov Roger Goodwin Dal Brynelsen William Mulligan Management Key Personnel Total 45 G R I F F I N M I N I N G L I M I T E D NOTES TO THE FINANCIAL STATEMENTS 4. FINANCE INCOME Interest income on bank deposits 5. INCOME TAX EXPENSE Taxation on profit on ordinary activities Overseas withholding taxation Taxation charge 2007 $000 5,607 2007 $000 - - 2006 $000 612 2006 $000 75 75 The Company ceased to be resident in the United Kingdom for taxation purposes on 14 November 2006 and at the balance sheet date was no longer within the charge to United Kingdom corporation tax. Taxation and capital losses carried at 13 November 2006 were extinguished at the point of migration. The overseas taxation shown above is withholding tax applied on outbound inter company interest payments from China. The Group benefits from a taxation holiday in China until 2008 and does not pay taxation on its trading profits until 2008. 6. EARNINGS PER SHARE The calculation of the basic earnings per share is based upon the earnings attributable to ordinary shareholders divided by the weighted average number of shares in issue during the year. The calculation of diluted earnings per share is based on the basic earnings per share on the assumed conversion of all dilutive options and other dilutive potential ordinary shares. Reconciliation of the earnings and weighted average number of shares used in the calculations are set out below: 2007 Earnings $000 Weighted average number of shares Per share amount (cents) Earnings $000 2006 Weighted average number of shares Per share amount (cents) 26,762 221,441,986 12.08 29,470 183,931,840 16.02 2,153,244 6,820,134 Basic earnings per share Earnings attributable to ordinary shareholders Dilutive effect of securities Options Diluted earnings per share 26,762 223,595,230 11.97 29,470 190,751,974 15.45 46 R E P O RT A N D A C C O U N T S 2 0 0 7 NOTES TO THE FINANCIAL STATEMENTS Mineral interests mine equipment Mill and Office furniture and equipment 7. PROPERTY, PLANT AND EQUIPMENT At 1 January 2006 net of accumulated depreciation Foreign exchange adjustments Additions during the year Depreciation charge for the year At 31 December 2006 Foreign exchange adjustments Additions during the year Transfers from exploration interests Transfers from long term provisions re mine closure costs on payment of rehabilitation bonds Depreciation charge for the year At 31 December 2007 At 1 January 2006 Cost Accumulated depreciation Net carrying amount At 31 December 2006 Cost Accumulated depreciation Net carrying amount At 31 December 2007 Cost Accumulated depreciation Net carrying amount $000 18,377 236 2,829 (222) 21,220 2,500 9,056 162 (384) (733) 31,821 $000 18,501 (124) 18,377 21,574 (354) 21,220 32,937 (1,116) 31,821 $000 8,675 329 2,504 (660) 10,848 457 1,854 - - (608) 12,551 $000 9,110 (435) 8,675 11,970 (1,122) 10,848 14,336 (1,785) 12,551 Total $000 27,070 565 5,342 (890) 32,087 2,957 10,910 162 (384) (1,351) 44,381 $000 18 - 9 (8) 19 - - - - (10) 9 $000 $000 37 (19) 18 46 (27) 19 46 (37) 9 27,648 (578) 27,070 33,590 (1,503) 32,087 47,319 (2,938) 44,381 Mineral interests comprise the Group’s interest in the Caijiaying ore bodies including fair values on acquisition, plus subsequent expenditure on licences, concessions, exploration, appraisal and construction of the Caijiaying mine including expenditure for the initial establishment of access to mineral reserves, commissioning expenditure, and direct overhead expenses prior to commencement of commercial production and together with the end of life restoration costs. The office furniture and equipment disclosed above relates solely to the fixed assets of the Company. 47 G R I F F I N M I N I N G L I M I T E D NOTES TO THE FINANCIAL STATEMENTS 8. INTANGIBLE ASSETS Exploration interests China – Zinc / gold At 1 January 2006 Foreign exchange adjustments Additions during the year At 31 December 2006 Foreign exchange adjustments Additions during the year Transfers to mineral interests At 31 December 2007 $000 419 9 414 842 (55) 126 (162) 751 Intangible assets represent fair values on acquisition, plus subsequent expenditure on licences, concessions, exploration, appraisal and development work. Where expenditure on an area of interest is determined as unsuccessful such expenditure is written off to the profit and loss account. The recoverability of these assets depends, initially, on successful appraisal activities, details of which are given in the report on operations. The outcome of such appraisal activity is uncertain. Upon economically exploitable mineral deposits being established, sufficient finance will be required to bring such discoveries into production. At 31 December 2007 no amounts had been provided or charged to the income statement in respect of the above exploration costs. 9. INVENTORIES Underground ore stocks Surface ore stocks Concentrate ore stocks Spare parts and consumables 2007 $000 1,006 223 2,869 541 4,639 2006 $000 288 397 - 419 1,104 All inventories are expected to be sold, used or consumed within one year of the balance sheet date. Inventories costing $7,768,000 were charged to the income statement in 2007 (2006 $ 8,516,000). 10. OTHER CURRENT ASSETS Other receivables Prepayments 2007 $000 1,695 2,460 4,155 2006 $000 565 499 1,064 Other receivables comprise advances to; related parties, recoverable from future share of profits (note 21); and personnel, recoverable from salaries. All current assets are short term. The carrying values of all receivables are considered to be a reasonable approximation of fair value. 48 R E P O RT A N D A C C O U N T S 2 0 0 7 NOTES TO THE FINANCIAL STATEMENTS 11. SHARE CAPITAL AUTHORISED: Ordinary shares of US$0.01 each CALLED UP ALLOTTED AND FULLY PAID: Ordinary shares of US$0.01 each At 1 January Issued during the year At 31 December 2007 2006 Number $000 Number $000 1,000,000,000 10,000 1,000,000,000 10,000 184,061,064 77,448,485 261,509,549 1,841 774 2,615 183,827,731 233,333 184,061,064 1,838 3 1,841 On 11 January 2007 9,266,667 new ordinary shares in the Company were allotted at 30 UK pence ($0. 59) per ordinary share on the exercise of options. On 1 August 2007 68,181,818 new ordinary shares in the Company were allotted at 110 UK pence ($2.22) per ordinary share for cash raising £75million ($151,770,000) for the Company. Transaction costs of $8,000 were incurred in respect of the issue of shares on 1 August 2007 and charged to share premium. 12. SHARE OPTIONS AND WARRANTS At 1 January 2007 Number Granted/ At 31 December 2007 Number (Exercised) Number Options exercisable at 30 pence per share at anytime up to 28 February 2007 3,050,000 Options exercisable at 30 pence per share from commencement of production to 28 February 2007 Options exercisable at 30 pence per share from upgrade in throughput of Caijiaying mine to 500,000 tonnes of ore per annum to 28 February 2007 Options exercisable at 65 pence per share to 28 February 2009 Options exercisable at 110 pence per share to 28 February 2010 3,050,000 3,166,667 5,475,000 - 14,741,667 (3,050,000) (3,050,000) (3,166,667) - 10,000,000 733,333 - - - 5,475,000 10,000,000 15,475,000 The following table shows the number and weighted average exercise price of all the unexercised share options and warrants at the year end: 2007 Number Weighted average exercise price 2006 Number Weighted average exercise price Outstanding at 1 January Granted during the year Exercised during the year Lapsed during the year 14,741,667 10,000,000 (9,266,667) - Outstanding at 31 December 15,475,000 43.0 110.0 30.0 - 94.1 9,500,000 5,475,000 (233,333) - 14,741,667 30.0 65.0 30.0 - 43.0 The weighted average share price of the options exercised at the date of exercise was 107.5p The estimated value of the options exercisable at 65p up to 28 February 2009, which vested in 3 tranches of 1,825,000 each, were 14.81p, 14.93p and 15.10p. All the options exercisable at 65p vested in 2006. The estimated value of the options exercisable at 110p up to 28 February 2010, which vested in 3 tranches of 3,333,333 each, were 25.19p, 25.87p and 26.52p. 49 G R I F F I N M I N I N G L I M I T E D NOTES TO THE FINANCIAL STATEMENTS 12. SHARE OPTIONS AND WARRANTS (CONTINUED) Inputs into the Binomial valuation model were as follows: Share price Exercise price Expected volatility Risk free rate Dividend yield Options expiring 28 February 2010 Options expiring 28 February 2009 Options expiring 28 February 2007 105.8p 110.0p 33% 5.1% 0% 65.75p 65.0p 30% 4.31% 0% 29.75p 30.0p 55% 4.64% 0% Expected volatility was determined by calculating the historical volatility of the Company’s share price with reference to the correlation with the zinc price and zinc price volatility over the same period. The Binomial model used assumes that the options will be exercised early when the share price exceeds the exercise price by a multiple of two. The Group recognised a total expense of $2,915,000 (2006: $1,711,000) during the year ended 31 December 2007 relating to equity settled share option scheme transactions. 13. DIVIDENDS On 6 June 2007 a maiden dividend of 3 cents per ordinary share in the Company was paid. 14. LONG-TERM PROVISIONS PROVISIONS FOR MINE CLOSURE COSTS At 1 January Transfer to mineral interests on payment of rehabilitation bond Foreign exchange adjustments At 31 December 2007 $000 384 (384) - - During 2007 the Group paid a bond under PRC regulations to be used to cover end of mine life restoration costs. 15. TRADE AND OTHER PAYABLES Trade creditors Taxation payable Accruals 2007 $000 2,995 605 1,447 5,047 2006 $000 372 - 12 384 2006 $000 602 2,036 1,698 4,336 All amounts are short term. The carrying values of all trade and other payables are considered to be a reasonable approximation of fair value. 16. SHORT TERM BANK OVERDRAFTS Short term bank overdrafts comprise an 8.52% fixed rate bank loan of Rmb5,000,000 ($666,000) repayable on 10 March 2008, which was secured by way of a floating charge over Hebei Hua’ Ao’s concentrate stocks. 17. ATTRIBUTABLE NET ASSET VALUE / TOTAL EQUITY PER SHARE The attributable net asset value / total equity per share has been calculated from the consolidated net assets / total equity of the Group at 31 December 2007 of $248,162,000 ($64,458,000 at 31 December 2006) divided by the number of ordinary shares in issue at 31 December 2007 of 261,509,549 (184,061,064 at 31 December 2006). 50 R E P O RT A N D A C C O U N T S 2 0 0 7 NOTES TO THE FINANCIAL STATEMENTS 18. RISK MANAGEMENT The Group is exposed to a variety of financial risks which result from its operating and investing activities. The Group’s risk management is coordinated by its senior management and executive directors and focuses on actively securing the Group’s short- to-medium term cash flows. Foreign Currency Risk The majority of the Group’s operational and financial cash flows are denominated in Renminbi and United States Dollars with sterling bank deposits held to cover future sterling expenditure estimates. Currently the Group does not carry out any significant operations in currencies outside the above. The Group currently does not have a foreign currency hedging policy. However, the management monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arise. In addition, the conversion of Renminbi into foreign currencies is subject to the rules and regulations of the foreign exchange control promulgated by the government of the PRC. Sterling bank deposits are translated into United States Dollars at the closing rate are as follows: Short term bank deposits 2007 $000 60,134 2006 $000 4,052 The following table illustrates the sensitivity of the net results for the year and equity in regards to the Group’s sterling deposits and the sterling US Dollar exchange rate. It assumes a + / - 9.6% change in the sterling exchange rate for the year ended 31 December 2007. These changes are considered to be reasonable based on observation of current market conditions for the year ended 31 December 2007. The sensitivity analysis is based upon the Group’s sterling deposits at each balance sheet date. If sterling had strengthened against the US Dollar by 9.6% (2006 9.6%) this would have the following impact: Net result for the year and on equity 2007 $000 6,386 If sterling had weakened against the US Dollar by 9.6% (2006 9.6%) this would have the following impact: Net result for the year and on equity 2007 $000 (5,267) 2006 $000 430 2006 $000 (355) Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be indicative of the Group’s exposure to currency risk. Interest rate risk The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s bank deposits with floating interest rates. The Group currently does not have an interest rate hedging policy. The following table illustrates the sensitivity of the net results for the year and equity to a reasonably possible change in interest rates of + 20% and - 30% (2006 +/- 20%), with effect from the beginning of the year. These changes are considered to be reasonable based on observation of current market conditions within which the Group operates. The sensitivity analysis is based upon the Group’s deposits at each balance sheet date. Net result for the year 2007 2006 Plus 20% Minus 30% Plus 20% Minus 20% $000 2,009 $000 (3,013) $000 195 $000 (195) 51 G R I F F I N M I N I N G L I M I T E D NOTES TO THE FINANCIAL STATEMENTS 18. RISK MANAGEMENT (CONTINUED) Commodity risk The Group is exposed to the risk of changes in commodity prices and in particular that for zinc, lead, gold and silver. The Group currently sells its metal concentrate production by way of open auctions in China. The Group currently does not hedge its metal production. Credit risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. The Group does not have trade receivables and does not hold collateral as security. Credit risk from balances with banks and financial institutions is managed by the Board. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counterparty. Counterparty credit limits are reviewed by the Griffin Board on a regular basis. The limits are set to minimise the concentration of risks and therefore mitigate financial loss through potential counterparty failure. No material exposure is considered to exist by virtue of the possible non performance of the counterparties to financial instruments. 19. FINANCIAL INSTRUMENTS The Group does not enter into derivative transactions such as interest rate swaps, forward rate agreements or forward currency contracts. With the exception of a fixed rate and fixed term Renminbi short term bank loan, the Group has no borrowings other than trade creditors and funds in excess of immediate requirements are placed in US dollar and sterling short term fixed and floating rate deposits. The Group has overseas subsidiaries operating in China and Australia, whose costs are denominated in local currencies. In the normal course of its operations the Group is exposed to commodity price, foreign currency and interest rate risks. The Group places funds in excess of immediate requirements in US dollar and sterling deposits with a number of banks to spread currency, interest rate and bank risk. These deposits are kept under regular review to maximise interest receivable and with reference to future expenditure and future currency requirements. Commodity prices are monitored on a regular basis to ensure the Group receives fair value for its products. 20. SUBSIDIARY COMPANIES At 31 December 2007, Griffin Mining Limited had interests in the share capital of the following principal subsidiary companies. Name Class of Share held Proportion of shares held Nature of business Country of incorporation China Zinc Pty Ltd Ordinary China Zinc Limited Ordinary 100% 100% Service company Australia Holding company Hong Kong Hebei Hua’ Ao Mining Industry Company Ltd* 100% (reducing to 60% after 3 years from commercial production)** Base and precious metals mining and development China Panda Resources Ltd Ordinary Hebei Sino Anglo Mining Development Company Ltd* 100% 90% Holding company England Mineral exploration and development China 52 R E P O RT A N D A C C O U N T S 2 0 0 7 NOTES TO THE FINANCIAL STATEMENTS 20. SUBSIDIARY COMPANIES (CONTINUED) * China Zinc Ltd, China Zinc Pty Ltd and Panda Resources Ltd are directly owned by the Company. China Zinc Ltd has a controlling interest in Hebei Hua’ Ao Mining Industry Company Ltd, see below, and Panda Resources Ltd has a 90% controlling interest in Hebei Sino Anglo Mining Development Company Ltd. ** The joint venture contract establishing the Hebei Hua’ Ao Mining Industry Company Ltd provides that 100% of the cash flows generated by the joint venture in the first three years from commencement of commercial production (commenced in the second half of 2005) be paid to the foreign party (China Zinc). Thereafter the foreign party (China Zinc) will receive 60% of the cash flows, in accordance with its share in the equity interest in the joint venture. China Zinc Limited was formed on 25th October 2007 following which China Zinc Pty Limited’s equity interest in Hebei Hua’ Ao was transferred to China Zinc Limited at book value. 21. RELATED PARTY TRANSACTIONS At 31 December 2007 Hebei Hua’ Ao Mining Industry Company Limited had advanced Rmb3,009,000 ($400,000) (31 December 2006 Rmb 3,009,000 ($384,000)) to the 3rd Geological Brigade of the Hebei Province, a partner in the local Chinese entity (the Caijiaying Lead Zinc Preparatory Committee), that holds a 40% interest in Hebei Hua’ Ao. At 31 December 2007 Hebei Hua’ Ao had advanced Rmb9,003,000 ($1,200,000) (31 December 2006 Rmb 603,000 ($77,000)) to the Caijiaying Lead Zinc Preparatory Committee. Both these loans are non-interest bearing and repayable from their future share of the profits of Hebei Hua’ Ao, commencing in 2008. 22. COMMITMENTS At 31 December 2007 the Group had capital commitments of $2,858,000. 23. POST BALANCE SHEET EVENTS On 19 April 2008 Griffin signed an agreement with Yukon Zinc Corporation (“Yukon Zinc”) for the acquisition of all the issued common stock of Yukon Zinc. The agreement provides for a plan of arrangement pursuant to section 288(1) of the British Columbia Business Corporations Act, in which the Yukon Zinc shareholders will exchange their Yukon Zinc shares for ordinary shares of Griffin, on the basis of one Griffin share for each nine Yukon Zinc shares held. The plan of arrangement is subject to, inter alia, the approval of two thirds of the Yukon Zinc shareholders attending and voting at a special general meeting. Yukon Zinc has issued and outstanding 455,606,909 common shares for which Griffin will issue and exchange 50,622,990 (subject to roundings) new ordinary shares amounting to 16.2% of the enlarged share capital on an undiluted basis of 312,132,539 ordinary shares. In addition Yukon Zinc has granted stock options exercisable for 23,578,000 common shares and warrants exercisable for 76,511,618 common shares. Under the terms of the agreement, Griffin will grant options / warrants exercisable over a total of 11,121,069 new ordinary shares in exchange for the outstanding Yukon Zinc options and warrants, amounting to 3.2% of the enlarged share capital on a fully diluted basis of 338,728,608 ordinary shares. The final structure of the transaction will be determined on the basis of tax, securities and corporate law advice in order to ensure the most efficient structure for each of the parties and their respective security holders. Yukon Zinc has agreed to pay a break fee to Griffin, under certain circumstances, of C$2.5 million. Yukon Zinc has also provided Griffin with certain other customary rights, including a right to match competing offers. 53 G R I F F I N M I N I N G L I M I T E D 54 R E P O RT A N D A C C O U N T S 2 0 0 7 55 G R I F F I N M I N I N G L I M I T E D CORPORATE INFORMATION Principal office: 6th & 7th Floors, 60 St James’s Street, London. SW1A 1LE. UK. Telephone: + 44 (0)20 7629 7772 Facsimile: + 44 (0)20 7629 7773 Email: griffin@griffinmining.com Web site: www.griffinmining.com Registered office: Clarendon House, 2 Church Street, Hamilton. HM11. Bermuda. China Zinc office: Levels 9 & 11, BGC Centre, 28 The Esplanade, Perth, WA 6000. Australia. Telephone: + 61 (0)8 9321 7143 Facsimile: + 61 (0)8 9321 7035 Directors: Mladen Ninkov (Chairman) Roger Goodwin (Finance Director) Dal Brynelsen William Mulligan Company Secretary: Roger Goodwin Nominated Adviser and Broker for AIM: Collins Stewart Limited 9th Floor, 88 Wood Street, London. EC2V 7QR. UK. Auditors: Solicitors: Grant Thornton UK LLP Grant Thornton House, Melton Street, London. NW1 2EP. UK. Mallesons Stephen Jaques Unit 2925, South Tower, Beijing Kerry Centre, 1 Guang Hua Road, Chao Yang District, Beijing 100020. PRC Conyers Dill & Pearman Clarendon House, Church Street, P.O. Box HM 666, Hamilton. HMCX. Bermuda. Addleshaw Goddard LLP 150 Aldergate Street, London. EC1A 4EJ. UK. Bankers: Anglo Irish Bank Corporation plc 31 The Parade, St Helier, Jersey. JE4 0WJ. UK. The Bank of Bermuda Ltd 6 Front Street, Hamilton. HM11. Bermuda. HSBC Bank plc 27-32 Poultry, London. EC2P 2BX. UK. National Westminster Bank PLC. St James’s and Piccadilly, London. W1A 2DG. UK. UK Registrars and Transfer Agents: Capita IRG plc 12 Castle Street, St Helier, Jersey. JE2 3RT. UK. 56 

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