Griffin Mining Ltd.
Annual Report 2012

Plain-text annual report

GM Ann Rep 12 highpics.qxd 16/4/13 14:25 Page 1 R E P O RT A N D A C C O U N T S 2 0 12 CONTENTS CHAIRMAN’S STATEMENT CAIJIAYING MINE FINANCIAL REVIEW OPERATIONS REVIEW ASSOCIATED INTERESTS DIRECTORS & SENIOR EXECUTIVES DIRECTORS’ REPORT REPORT OF THE INDEPENDENT AUDITOR CONSOLIDATED INCOME STATEMENT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED CASH FLOW STATEMENT ACCOUNTING POLICIES NOTES TO THE FINANCIAL STATEMENTS CORPORATE INFORMATION Page 4 8 13 17 23 26 30 33 34 35 36 37 38 39 46 60 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: 13667 Bermuda. Registered Office: Clarendon House, 2 Church Street, Hamilton HM11, Bermuda United Kingdom office: 60 St James's Street, London SW1A 1LE 1 GM Ann Rep 12 highpics.qxd 16/4/13 17:10 Page 2 G R I F F I N M I N I N G L I M I T E D 2 GM Ann Rep 12 highpics.qxd 16/4/13 17:10 Page 3 R E P O RT A N D A C C O U N T S 2 0 12 Caijiaying Mine - Winter 2013 3 GM Ann Rep 12 highpics.qxd 16/4/13 17:10 Page 4 G R I F F I N M I N I N G L I M I T E D CHAIRMAN’S STATEMENT It is with continuing pride that I present to you, the interest in Hebei Hua Ao Mining Industry shareholders, the Annual Report and Accounts for Company Limited (“Hebei Hua Ao”) to 88.8% and Griffin Mining Limited (“Griffin” or the extend the term of the joint venture through to “Company”) for the 2012 financial year. It has been October 2037. Subsequently, significant time was a remarkable year for your Company in spite of dedicated to restructuring site management and further decreases in metals prices, continuing global solidifying reporting procedures from the Caijiaying economic turmoil, virtually no real growth in the Mine following the diminution of Chinese western world, the continuing destruction of true involvement in the day to day management of wealth worldwide and stalled real growth in China. Hebei Hua Ao. Yet in spite of all this economic negativity, Griffin was still able to achieve a memorable year. The Company is now focused on the extensive process of increasing the mining and processing of Griffin and its subsidiaries (together the “Group”) ore at the Caijiaying Mine to 1.5 million tonnes per recorded: An operating profit of $31,174,000; profit annum. This will include an expansion of the before tax of $27,239,000; profit after tax of processing facilities, the underground development $19,707,000 and profit after non-controlling of Zone II and an expansion of the existing mining interests of $14,835,000 (a reduction of less than a operations at Zone III. These developments are all million dollars from the previous year). This all subject to the successful granting of a mining licence occurred whilst the average market price for zinc fell over Zone II, which licence area will also include the 11%, silver by 13% and lead by 10%. area between Zone II and Zone III, and which is not expected to occur prior to the end of the first Impressively, the Group achieved record throughput quarter of 2014. By that time, the boundary survey, and record zinc, lead and silver production. In summary, feasibility study and environmental impact study and in comparison with the 2011 results, there were should have all been completed and underground 13.5% more tonnes of ore mined, 11.8% more ore development work at both Zones II and III will be processed, 11.8% more zinc metal in concentrate well under way. The total upgrade is expected to produced, 31.1% more silver in concentrate produced be completed by the end of 2014. and 25.8% more lead in concentrate produced. Only gold in concentrate produced decreased by Critically for shareholders, all capital costs 19.1% as the throughput of gold bearing ore was associated with the upgrade will be funded from minimized until the various gold mineralologies of cash flow from existing operations. The Company the different orebodies were examined and forward expects to continue its extraordinary record of not planning completed to ensure extraction of the raising any new net equity for a decade and, as such, highest possible recoveries going forward. prevent any dilution to shareholders. Unfortunately, that also means a decision not to As expected, the first half of 2012 was primarily declare a dividend yet again this year. Obviously, I focused on the transaction to increase Griffin’s am well aware of a number of shareholders desire 4 GM Ann Rep 12 highpics.qxd 16/4/13 17:10 Page 5 R E P O RT A N D A C C O U N T S 2 0 12 for the Company to begin paying dividends both for speaking, becoming rarer, as any brownfields personal income requirements and the financial exploration prospect has inevitably been explored discipline such an action imposes upon long ago and greenfields exploration becomes far management. The Company has every intention to more difficult, deeper and more expensive. Hope do so when circumstances allow, however, exists that, as the equity markets remain generally shareholders short term need or desire to have cash closed to the junior mining market, a hidden gem returned to them cannot cause an under investment will be found either in junior public mining in the future growth of the Company. It seems companies or in private organisations incapable of abundantly clear that, for now, further investment raising new equity in private or public markets. in the Caijiaying Mine represents the best use of Griffin’s available resources. Having reviewed I continue to be overwhelmed by the efforts of all many potential acquisitions and having carefully the directors, staff and contractors of the Company considered the potential of Caijiaying and the future and Hebei Hua Ao in making the Caijiaying Mine market for metals, particularly zinc, it is clear that and Company bigger, better and brighter. As a further investment in the Caijiaying Mine will person well known for giving scant praise or thanks generate higher returns for the Company and its (and always pointing out what needs to be done shareholders than any new, low return/high risk faster, cheaper and better), this is my opportunity to investment elsewhere. do so on, not only my behalf, but the Company’s and the shareholders behalf. It is the people who This is even more true when considering the make any organisation and ours are some of the number and size of the major world zinc mines best. reaching the end of their economic lives and the substantial reduction in the future supply of zinc. Lastly, to the shareholders and owners of the Assuming the return of world, or at least Chinese, Company, from the largest institutional growth in the near future, then a rise in zinc prices organisations to the smallest individual, so many of should follow. Accordingly, it is expected that the whom have been with us for so many years and with further investment to increase production at the whom we now converse on a personal, almost Caijiaying Mine will result in significant returns to familial basis, we say thank you. That tenure and the Company and to its shareholders, at which time loyalty of ownership not only deserves, but the Company’s dividend policy will be reassessed. demands, respect in this instantaneous and transient world. Just know we never take it for granted and As outlined so often in the past, the Company we sincerely strive daily to repay the trust you have continues to investigate a large number of potential placed in your Company. mining ventures worldwide, pursuing any mining opportunity which shows the necessary economic Mladen Ninkov returns demanded by the Company’s shareholders. Chairman Such opportunities are rare and, geologically 11th April 2013 5 GM Ann Rep 12 highpics.qxd 16/4/13 17:11 Page 6 G R I F F I N M I N I N G L I M I T E D 6 GM Ann Rep 12 highpics.qxd 16/4/13 17:11 Page 7 R E P O RT A N D A C C O U N T S 2 0 12 Excellence Awards ceremony for outstanding employees of Hebei Hua Ao 7 GM Ann Rep 12 highpics.qxd 16/4/13 17:11 Page 8 G R I F F I N M I N I N G L I M I T E D CAIJIAYING MINE INTRODUCTION The major asset of the Company is an 88.8% interest in Hebei Hua Ao Mining Industry Company Ltd (“Hebei Hua Ao”), the owner of the mine and processing facilities located at Caijiaying in the Peoples Republic of China (the "Caijiaying Mine"). The Caijiaying Mine, together with staff Caijiaying Mine site is easily accessible by two alternative freeway systems from Beijing and a number of secondary sealed roads. The site has significant water supplies, two independent connections to the electricity grid, full connectivity to fixed and mobile telecommunications systems and broadband access for internet services. Climatic accommodation, recreational and mess facilities, is conditions are not severe with warm summers and located approximately 300 kilometres by road, cold, dry winters enabling operations at Caijiaying north-west of Beijing in Hebei Province. The to continue for 365 days a year. 8 Caijiaying Mine Location GM Ann Rep 12 highpics.qxd 16/4/13 17:11 Page 9 R E P O RT A N D A C C O U N T S 2 0 12 HISTORY Hebei Hua Ao is a contractual co-operative joint venture company entity established in 1994. Initially, Griffin held 60% of Hebei Hua Ao, through a wholly owned subsidiary, with the remaining 40% held by the predecessor entity to the Zhangjiakou Caijiaying Lead Zinc Mining Company, the shareholders of which remain the Zhangjiakou City People's Government and the Third Geological Brigade of Hebei Province. The hold the mineral rights to the area surrounding the original Hebei Hua Ao licence area and any other areas of interest in Hebei Province. Griffin, through its wholly owned UK subsidiary, Panda Resources Limited, has a 90% interest in Hebei Anglo whilst the Zhangjiakou Caijiaying Lead Zinc Mining Company holds 10%. Griffin, through Hebei Hua Ao and Hebei Anglo, has a controlling interest in mining and exploration licences over 55 square kilometres at Caijiaying. initial term of Hebei Hua Ao was 25 years and was Following extensive exploration, resource to expire in 2019. To enable the speedy return of delineation drilling, scoping study, feasibility study, capital to Griffin, which provided all the capital for financing and construction, in 2005 Griffin the development and construction of the Caijiaying successfully commissioned the Caijiaying Mine on Mine, Griffin was entitled to 100% of the profits of time and within budget, meeting its initial design the Caijiaying Mine for 3 years until the end of throughput rate of 200,000 tonnes of ore per 2008. In 2012, Griffin, through its wholly owned annum. Production rates have been steadily Hong Kong subsidiary, China Zinc Limited, increased since commissioning with processing purchased an additional 28.8% interest in Hebei rates in excess of 820,000 tonnes of ore per annum Hua Ao from the Zhangjiakou Caijiaying Lead having been achieved following the latest upgrade Zinc Mining Company such that Griffin now holds of the processing facilities. an 88.8% equity interest in Hebei Hua Ao and the Zhangjiakou Caijiaying Lead Zinc Mining Company retains an 11.2% interest.. In addition, and as part of this purchase agreement, the term of the Hebei Hua Ao joint venture was extended until October 2037. 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 the Caijiaying Mine. This allowed the full economic benefit of these metals to be obtained by the In January 2004, a second contractual joint venture Group. Previously gold, silver and lead were "lost" company, Hebei Sino Anglo Mining Development and unaccounted for in the zinc concentrate by the Company Limited ("Hebei Anglo"), was formed to Chinese smelters. 9 GM Ann Rep 12 highpics.qxd 16/4/13 17:11 Page 10 G R I F F I N M I N I N G L I M I T E D CORPORATE DEVELOPMENTS to the extension of the joint venture term and As previously outlined, on 25th June 2012, China Zinc Ltd completed agreements to purchase a 28.8% interest in Hebei Hua Ao from the Zhangjiakou Caijiaying Lead Zinc Mining Company Limited with an extension of the joint venture with the grant of a new 25 year business capitalised to non-current assets and 25% attributed to buying out the non controlling interest share of 28.8% and charged directly to reserves. This allocation has been based upon estimated future discounted cash flows from the Caijiaying Mine. licence to the 12th of October 2037, for a cash The acquisition of the majority proportion of the consideration of Rmb700 million ($110 million) non-controlling interests and extension of the joint plus expenses ("the Transaction"). The total cost of venture term has secured the long term future of the Transaction amounted to $117,459,000. the Caijiaying Mine enabling the Company to On completion of the Transaction, Griffin's interest in Hebei Hua Ao, was increased from 60% to 88.8% and the joint venture period extended to proceed with plans to significantly expand operations as soon as possible. October 2037. The pre-existing joint venture EXPLORATION REVIEW would have terminated in 2019. Mineralisation at Caijiaying is believed to be related The Zhangjiakou Caijiaying Lead Zinc Mining to a Jurassic igneous event that affected the 2.3 Company retains a 11.2% interest in Hebei Hua billion year old metamorphic basement rocks. Base Ao. In addition, following completion of the Transaction, Hebei Hua Ao's joint venture contract and articles of association were amended giving Griffin greater control over the management and operations of Hebei Hua Ao. The consideration for the Transaction was financed from Griffin's existing cash resources and from dividends due from Hebei Hua Ao. These later funds were drawn down from banking facilities in China. Under International Financial Reporting Standards, 75% of this amount has been attributed metal and gold mineralisation associated with Jurassic intrusives have replaced favourable horizons in the metamorphic rocks, most notably calcsilicates and marble. Porphyry sills and dykes intruding along faults have then cut across the sequence. On going exploration in the area surrounding the Caijiaying Mine and within Hebei Hua Ao's and Hebei Anglo's tenement boundary continues to confirm the area to be highly prospective, indicating significant potential for further base metal and gold deposits. 10 GM Ann Rep 12 highpics.qxd 16/4/13 17:14 Page 11 R E P O RT A N D A C C O U N T S 2 0 12 Hebei Hua Ao Licence Area northeast-southwest faulting. Intersections in Drilling activity continued underground at Zone III with up to 5 rigs operating during 2012. Drilling was focused on extending the known resource, both along strike and at depth. Ore tonnes were excess of 10 metres thick and 5% zinc were seen in the southern-most holes drilled into the Xiao Long orebody, proving that the mineralisation continues to the south, beyond current mine development. increased outside the previously defined resource Hebei Anglo Licence Area and a greater understanding of the ore distribution was developed. Primary targets were Fu Long North, South and down-dip, Qing Long South and down-dip, Ju Long South, Xiao Long South, Zone II North and down-dip extensions of the Inferred Resource. In 2012, exploration expenditure in the Hebei Anglo licence area was focused on preparing the tenement for the statutory relinquishment of 25% of its land area. Previously recorded soil sampling, illite crystallinity, Induced Polarisation, ground magnetic and drillhole data were analysed to define Along strike drilling of the Qing Long and Fu areas of low prospectivity for relinquishment and Long orebodies defined the northern extent of areas of high prospectivity for future work. these orebodies where the metamorphic host rocks are truncated against the younger Jurassic volcanics and sediments. Down-dip drilling of both of these orebodies intersected significant base metal mineralisation up to 200 metres below the lowest development level (1259RL). Two vertical diamond drillholes of 500.3 metres and 450.4 metres were drilled in the southwest of the tenement where the intersection of the regionally significant F45 Fault and a number of smaller subordinate faults had been interpreted from magnetic images. The aim of the drilling was Mineralisation continues to remain open below to test the depth to metamorphic basement and, if these intersections and the down-dip extension of basement was intersected, the nature of the these zones will be tested with further drilling as basement rocks and their geochemistry. Both holes mining continues deeper at Zone III. were terminated in younger, unmineralised Jurassic Extensional drilling targeting Qing Long South and Zone II North returned positive results with volcanics where it was concluded that they had passed beyond a practical mining depth. significant base metal intersections seen in both To the east of the Caijiaying Mine, several drill programs. These two areas appear to have a previously tested targets were considered complex structural relationship and may represent appropriate for relinquishment. Prior unfavourable originally a single zone of mineralisation offset by drilling and soil sample results determined that no 11 GM Ann Rep 12 highpics.qxd 16/4/13 17:14 Page 12 G R I F F I N M I N I N G L I M I T E D further work was warranted in these areas. The • All non-recyclable wastes from supporting southern side of the F45 Fault is known to have facilities are treated in an incinerator. been down-thrown in excess of 500 metres rendering basement metamorphic rocks impractical to economically explore or mine. A portion of the tenement to the south of the F45 Fault was also selected for relinquishment based on this information. Two bio-geochemical surveys were carried out on four areas within the lease during 2012. This exploration technique attempts to use the broader reach (in comparison to a traditional soil sample) of vegetation's root systems to indicate geochemical anomalies within soil by sampling and analysing the foliage. Survey results were inconclusive as the most significant anomalies recorded were obtained from areas where the greatest likelihood of contamination had been located, i.e. prior artisanal processing operations. COMMUNITY PARTICIPATION Griffin's environmental practices were rewarded twice with Hebei Hua Ao being presented with the Environmental Award at the 2010 China Mining Conference and the Mine Development Outstanding Achievement Award at the 2011 China Mining Conference. Hebei Hua Ao has provided direct water supplies to the local villagers, constructed sealed roads to the Caijiaying Mine and nearby villages, financed the construction of a local kindergarten, old peoples rest home and assisted on other infrastructure projects. Hebei Hua Ao has also assisted in the upgrade of facilities at the local township school and set up "Project Hope" to provide scholarships to local students for ongoing study at primary, secondary and tertiary levels. During 2012, Hebei Hua Ao contributed Rmb1.7 million ($270,000) to a social security fund for the local community. Griffin has invested heavily in the local community Griffin estimates that the Caijiaying Mine has and instigated best practices regarding the provided direct and indirect employment to over protection of the environment. In this regard: 1,000 Chinese nationals and minimised the • Solid and liquid wastes are not disposed of into employment of expatriate personnel. the environment; • All production water is recycled; During 2012, Hebei Hua Ao paid Rmb203.8 million ($32.5 million ) in taxes, royalties, social • Gas emissions from boilers are treated to remove security fees, fines and other duties to Chinese pollutants; governmental authorities and agencies. • Mined areas underground are back filled; • Noise and dust from operations at the Caijiaying Mine are strictly controlled; and 12 GM Ann Rep 12 highpics.qxd 16/4/13 17:14 Page 13 R E P O RT A N D A C C O U N T S 2 0 12 FINANCIAL • A record 409,596 ounces of silver in concentrate were produced, compared to 312,509 ounces in Griffin and its subsidiaries (together the 2011, a 31.1% increase; "Group") recorded: • Operating profit of $31,174,000 (2011 - $36,832,000); • Profit before tax for the year of $27,239,000 (2011 - $39,953,000); • A record 2,402 tonnes of lead in concentrate were produced, compared to 1,909 tonnes in 2011, a 25.8% increase; and • 8,322 ounces of gold in concentrate were produced, compared to 10,281 ounces in 2011, a • Profit after tax of $19,707,000 (2011 - 19.1% decrease. $27,697,000); and The average market price for zinc fell 11% in 2012 • Profit after non-controlling interests of from that in 2011. As a result, the average price per $14,835,000 (2011 - $15,815,000). Despite record throughput, base metal and silver production, revenues and operating profits in 2012 were impacted by lower metal prices. As a result of this and decreased gold production, revenues fell to $76,860,000 (2011 - $79,062,000) with profits tonne of zinc metal in concentrate received by the Group in 2012 fell by 11% to $1,374 (2011 - $1,546). The average price received for silver declined 13% to $22.80 per ounce (2011 - $26.22) and that for lead by 10% to $1,855 per tonne (2011 - $2,054). The average price received for gold increased by 4% to $1,499 per ounce (2011 - from operations of $31,174,000 (2011 - $1,438). $36,832,000). In summary, production results were as follows: • A record 789,692 tonnes of ore were mined, compared to 695,848 tonnes in 2011, a 13.5% increase; • A record 800,288 tonnes of ore were processed, compared to 715,955 tonnes in 2011, an 11.8% increase; • A record 40,581 tonnes of zinc metal in concentrate were produced, compared to 36,283 tonnes in 2011, an 11.8% increase; Costs of sales increased 9% in 2012 to $34,795,000 (2011 - $31,918,000). With throughput increasing 11.8%, some economies of scale were achieved despite increasing costs as the lower mine levels continue to be accessed. Group operating costs, including Caijiaying Mine site administration costs, rose 5.6% to $10,891,000 (2011 - $10,312,000) reflecting inflationary cost pressures in China. Profits before tax declined to $27,239,000 (2011 - $39,953,000) reflecting not just lower operating 13 GM Ann Rep 12 highpics.qxd 16/4/13 17:15 Page 14 G R I F F I N M I N I N G L I M I T E D 14 GM Ann Rep 12 highpics.qxd 16/4/13 17:16 Page 15 R E P O RT A N D A C C O U N T S 2 0 12 Surface drilling between Zones II and III - Caijiaying Mine 15 GM Ann Rep 12 highpics.qxd 16/4/13 17:16 Page 16 G R I F F I N M I N I N G L I M I T E D profits, but also interest charges not incurred in withholding tax from 10% to 5% on dividends paid prior years of $3,411,000, foreign exchange losses to certain jurisdictions outside China. of $904,000 (2011 - gains of $2,588,000) as well as lower interest receipts. The non-controlling interests’ share of Hebei Hua Ao's profits of $4,872,000 (2011 - $11,882,000) has Cash balances were utilised in 2012 in the been provided for, resulting in attributable profits Transaction to fund the acquisition of the non- to Griffin of $14,835,000 (2011 - $15,815,000). controlling interests in and extension of, the Hebei The reduction in the non-controlling interests’ Hua Ao joint venture. As a result, interest receipts reflects a reduction in profits received commensurate declined to $495,000 (2011 - $616,000). to the reduction in its equity interests from 40% to Bank loan facilities in China were drawn down in 11.2% with effect from the 25th June 2012. 2012 to fund the payment of dividends used in the Basic earnings per share in 2012 was 8.46 cents per Transaction to purchase the non controlling share (2011 - 8.96 cents) with diluted earnings per interests in and extension of the Hebei Hua Ao share of 8.36 cents in 2012 (2011 - 8.76 cents). joint venture. As a result, interest costs of $3,411,000 (2011 - nil) were incurred. During 2012, 50,000 (2011 - 5,040,000) ordinary shares in Griffin were bought back on market for With outstanding dividends due from Hebei Hua cancellation at a cost of $24,000 (2011 - Ao denominated in Renminbi being paid and used $4,977,000), thereby reducing the number of in the Transaction as part of the acquisition of the Griffin shares on issue to 175,451,830. non controlling interests in, and extension of, the Hebei Hua Ao joint venture at a time of declining values in the US dollar, foreign exchange losses of $904,000 (2011 - gains of $2,588,000) were recorded. Net cash inflow from operating activities in 2012 amounted to $32,244,000 (2011 - $43,346,000). $125,419,000 was invested in 2012, which included $117,459,000 in the Transaction to purchase the non-controlling interests in, and extend the term Griffin's 39.2% share of the losses of Spitfire Oil of, the Hebei Hua Ao joint venture. Attributable net assets per share at 31st December 2012 was 79 cents ( 2011 - 87 cents). Limited ("Spitfire") of $163,000 (2011 - $118,000) have been recognised. Income taxes of $7,532,000 (2011 - $12,256,000) have been charged. The decrease from 2011 reflects not just reduced profits subject to Chinese income tax, but also a reduction in Chinese 16 GM Ann Rep 12 highpics.qxd 16/4/13 17:16 Page 17 R E P O RT A N D A C C O U N T S 2 0 12 OPERATIONS The processing plant has performed above its During 2012, a record 789,692 tonnes of ore were mined and a record 792,653 tonnes of ore hauled. design capacity treating a record 800,288 tonnes of Detailed planning for increasing mining and the ore during 2012. Throughput was constrained by further upgrade of the processing facilities will be the safety production permit rather than mill undertaken in 2013 with the expectation of capacity, which will be increased as further completing the upgrade by the end of 2014. permitting is obtained. Further mine development work was undertaken in Average ore processed was 5.3% zinc, 0.41% lead, 2012 with the extension of the North and South 32.1 grammes per tonne silver and 0.66 grammes declines and drives to access ore below the 1300 per tonne gold to produce 40,581 tonnes of zinc, level. The south decline was developed to RL 1230 2,402 tonnes lead, 409,596 ounces silver and 8,322 (270 metres below surface portal) and the north ounces of gold, all in concentrate. Zinc, lead and decline to RL 1235 (265 metres below the surface silver metal in concentrate production not only portal). During 2012, 7,314 metres of development exceeded 2011 production, but were a record for drives and decline development were completed. Caijiaying. Gold production was below 2011 levels This enabled lower levels of the mine to be due to lower grade gold mined. Metallurgical recovery of all metals exceeded that in 2011. However, the variability of the gold grade and mineralogy in different ore lodes in Zone III has resulted in gold recoveries remaining below accessed including the larger Ju Long, Fu Long and Qi Long lodes and allowed the greater use of mechanised mining methods. Long hole stoping continues to be the predominate mining method used in Zone III. 50%. Metallurgical test work has been extensive Remote bogging continued to be used to remove and remains ongoing to increase gold grades and ore left in previously mined stopes which increased recoveries. In the interim, the mining of known the recovery of ore mined during the year. higher gold grade lodes has been avoided until increased gold recoveries can be guaranteed. Lead recoveries were increased significantly as a result of modifications made to the processing circuit. The percentage of tailings generated from the processing plant and placed underground as backfill increased to approximately 45%. Backfilling mined stopes reduced the amount of waste material going Mining rates have continued to be increased to to the tailings dams and improved ground stability meet the enhanced processing capacity with more thereby allowing more ore to be extracted through stopes opened and greater use made of mechanised the year. A dry tailings facility is currently under mining methods with faster rates of extraction. construction to further reduce the surface tailing 17 GM Ann Rep 12 highpics.qxd 16/4/13 17:18 Page 18 G R I F F I N M I N I N G L I M I T E D facility volume required in the future. Dry tailings licence, expected in the Spring of 2014. Further disposal should reduce the future capital cost of anticipatory work will also include infrastructure tailings dams, which would otherwise need to be ventilation construction and underground constructed to handle the amount of wet tailings development work to enable ore definition drilling produced by the Caijiaying Mine. to be completed. Administration procedures are well under way to The development of the Zone II deposit and lodge the final application for a mining licence over upgrade of the processing facilities are not expected Zone II and the area between Zone II and Zone III. to result in any interruption to existing operations. The submission of a geological report to the relevant Chinese authorities has been accepted by the Ministry of Land and Resources. A boundary survey, feasibility study and environmental impact study are now being prepared. Work to access Zone II from the main decline has already begun in anticipation of the granting of the new mining Development and plant upgrade costs will be funded from cash flow from existing operations with surplus cash flow directed to repaying existing Chinese banking facilities used in the Transaction to fund the acquisition of additional equity in, and the extension of, the joint venture in 2012. 18 GM Ann Rep 12 highpics.qxd 16/4/13 17:18 Page 19 R E P O RT A N D A C C O U N T S 2 0 12 JORC RESOURCE In May 2012, the latest JORC Mineral Resource Approximately 35,898 meters of extensional and Estimate for Caijiaying was produced at a zinc cut- grade control drilling were completed in 2012. A off of 1%. Tabled below is the summary of the 2012 resource update is planned to be completed by the Mineral Resource. end of 2013. Lodes Category Tonnes Metal Grade Contained Metal 2012 Mineral Resource Estimates Zinc Lead Silver Gold Zinc Lead Silver Gold ‘000t % % Grams per Tonne Grams per Tonne Tonnes Tonnes Ounces Ounces Zone III Fu, Jin, Qing, Xiao, Ju, Chang, Hong Long lodes Zone III Caijiaying Measured 4,447 5.6 0.32 30.3 Indicated 10,926 Inferred 1,146 4.84 4.78 0.26 0.28 27.03 31.37 0.76 0.73 0.46 249,000 14,000 4,331,900 109,400 529,000 28,000 9,495,000 258,000 55,000 3,000 1,156,200 17,000 Subtotal 16,519 5.04 0.28 28.21 0.72 833,000 45,000 14,983,100 384,400 Inferred 15,075 3.91 0.22 21.68 0.76 589,000 32,000 10,507,600 370,400 Subtotal Zone III 31,594 4.50 0.25 25.09 0.74 1,422,000 77,000 25,490,700 754,800 Zone II Measured - - - - All Indicated 4,056 Inferred 15,570 3.02 3.31 0.68 0.75 24.87 24.53 - 0.30 0.25 - - - - 123,000 27,000 3,242,800 39,300 516,000 117,000 12,276,700 124,200 Subtotal Zone II 19,626 3.25 0.73 24.6 0.26 639,000 144,000 15,519,500 163,500 Total 51,220 4.02 0.43 24.90 0.56 2,061,000 221,000 41,010,200 918,300 The information in this report that relates to the May 2012 Mineral Resource estimates is based on information compiled by Mr Matthew Stevens, B.Sc. (Hons) Geology, Member AIG and AusIMM. Mr Stevens was a full time employee of CSA Global Pty Ltd. Mr Stevens has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he has 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 Stevens consents to the inclusion in the report of the matters based on his information in the form and context which they appear. †Zinc-equivalent grades are based on Caijiaying economics at 05/2011, assuming a linear correlation between all commodities. Concentrates of Au=0.575g/t, Ag=18g/t and lead=0.97% correlate to an increase in value equivalent to 1% zinc above base value. 19 GM Ann Rep 12 highpics.qxd 16/4/13 17:18 Page 20 G R I F F I N M I N I N G L I M I T E D 20 GM Ann Rep 12 highpics.qxd 16/4/13 17:18 Page 21 R E P O RT A N D A C C O U N T S 2 0 12 Remote bogging - Caijiaying Mine 21 GM Ann Rep 12 highpics.qxd 16/4/13 17:18 Page 22 G R I F F I N M I N I N G L I M I T E D STRATEGIC DIRECTION Management efforts in the first half of 2012 were primarily focused on the Transaction to acquire the non controlling interests in, and extending the term of, the Hebei Hua Ao joint venture. Subsequently, a significant portion of management's efforts have been directed at reorganising and restructuring site relationships and reputation in China, many of these opportunities have inevitably been mining related within the Asian region. However, the Company is not constrained by geographic region and will pursue any mining opportunity which shows the necessary economic returns demanded by the Company’s shareholders. management and reporting procedures from the It is generally accepted that by the end of the Caijiaying Mine following the lessening of local decade 15 of the world’s larger zinc mines outside Chinese involvement in the day to day China are expected to exhaust their reserves resulting in the loss of some 1.8* million tonnes of zinc metal production with few new sources of supply becoming available. Zinc supply is expected to experience the sharpest decline in 2017. Assuming ongoing world demand, particularly from China, zinc consumption is expected to exceed mine production by 2014, an encouraging sign for the future profitability of the Caijiaying Mine. *CRU International Ltd Zinc Greenfield Mines 2012 report management of Hebei Hua Ao. Having reviewed many potential acquisitions and having carefully considered the potential of Caijiaying and the future market for metals, particularly zinc, it was concluded that further investment in the Caijiaying Mine would generate higher returns for the Company and its shareholders than any new, low return/high risk investment elsewhere. With the finalisation of the Transaction for the acquisition of the non-controlling interests in, and the extension of the term of, the Hebei Hua Ao joint venture, the Company’s aim is clearly focused on increasing throughput at Caijiaying within the next few years. The latest JORC resource estimate confirms the availability of extensive ore resources at Caijiaying for increased production over an extended period. Nevertheless, the Company continues to investigate a large number of potential mining ventures worldwide. With Griffin’s good 22 GM Ann Rep 12 highpics.qxd 16/4/13 17:18 Page 23 ASSOCIATED INTERESTS SPITFIRE OIL LTD R E P O RT A N D A C C O U N T S 2 0 12 Griffin currently holds 16,666,667 ordinary shares in As part of its ongoing monitoring of any suitable Spitfire Oil Limited ("Spitfire"), representing a 39.2% process technologies for the Salmon Gums lignite interest in the issued share capital of Spitfire. In resource, Spitfire has conducted a review of currently addition, with Mladen Ninkov and Roger Goodwin available technologies for the gasification of the being directors of both Griffin and Spitfire, this lignite. This review was undertaken by a world requires Spitfire to be treated as an associated company recognised independent consulting firm specialising of Griffin. As a result, $163,000 (2011 - $118,000) has in the processing of lignite deposits, Higman been charged to Griffin's income statement for its Consulting GmbH. It concluded that due to the high share of Spitfire's losses in the period. water and salt content and the plastic physical nature Spitfire, through its wholly owned subsidiary, Spitfire Oil Pty Ltd, was formed to pursue the production of liquid hydrocarbons, including fuels and distillates, from the Salmon Gums Lignite Deposits in Western Australia. Lignite is a low-rank form of brown coal which has properties that allow it to be converted into oil. On 4th September 2012, Spitfire Oil Pty Ltd was of the material, the Salmon Gums lignite was unlikely to be economic with existing gasification processes and current capital and operating pricing structures. In light of these conclusions, Spitfire has ceased any further work on the Salmon Gums lignite project but continues to maintain its investigation of processing technologies, particularly the many new developments to pyrolysis technology being undertaken at present granted a five year renewable retention licence for the bio fuels industry. covering the Salmon Gums lignite resource area. There are no annual exploration expenditure commitments attaching to this licence other than the prescribed licence fees. The segments of the exploration licences previously held by Spitfire Oil Pty Ltd that occurred outside the Retention Licence area were relinquished in 2012 and Surrender Reports lodged as required by the relevant regulations. Extension-of-term applications were lodged to cover the intervening period between the expiry of the exploration licences and the grant of the retention licence. The remaining exploration licences have now expired and the licence fees refunded. Following the completion of the gold exploration program over the remainder of the exploration licences that had remained untested, it was concluded that the weak results did not merit further work for gold. Spitfire continues to evaluate numerous alternative natural resources projects. Several oil and gas projects have been reviewed to date but none were found to meet the necessary economic returns demanded by Spitfire. With the continuing global financial uncertainty, there has been a noticeable deterioration in equity markets for smaller companies and more robust projects may become available for acquisition or joint venture in the future. 23 GM Ann Rep 12 highpics.qxd 16/4/13 17:19 Page 24 G R I F F I N M I N I N G L I M I T E D 24 GM Ann Rep 12 highpics.qxd 16/4/13 17:19 Page 25 R E P O RT A N D A C C O U N T S 2 0 12 Rom Pad - Caijiaying Mine 25 GM Ann Rep 12 highpics.qxd 16/4/13 17:19 Page 26 G R I F F I N M I N I N G L I M I T E D DIRECTORS Mladen Ninkov, Chairman, Australian, aged 51, Dal Brynelsen, Director, Canadian, aged 66, is holds a Masters of Law Degree from Trinity Hall, is a graduate of the University of British Columbia Cambridge and Bachelor of Laws (with Honours) in Urban Land Economics. Mr. Brynelsen has and Bachelor of Jurisprudence Degree from the been involved in the resource industry for over 30 University of Western Australia. He is the principal years. 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 Chief Executive Officer 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 69, 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 Geological Engineering from the University of President of Prudential-Bache Securities Inc. in Connecticut and an MBA from NYU Bernard New York. He also worked at Skadden Arps Slate Baruch School of Business Administration. He was Meagher & Flom in New York and Freehill the Managing Director for Global Projects and Hollingdale & Page in Australia. He has been Political Risk at AIG Global Trade and Political chairman and director of a number of both public Risk Insurance Company, a wholly owned and private mining companies. subsidiary of American International Group Inc., Roger Goodwin, Finance Director, British, based in Moscow. From 1994 to 1996 he was aged 57, 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. and a director of AIG Investment Bank (ZAO) Ltd 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 GM Ann Rep 12 highpics.qxd 16/4/13 17:19 Page 27 R E P O RT A N D A C C O U N T S 2 0 12 SENIOR EXECUTIVES William Darcey, Operations Manager Dr Bo Zhou, General Manager China, Caijiaying, Australian, aged 61, holds degrees Australian, aged 50, holds a PhD in exploration from Curtin University in mining, metallurgy, geology from Sydney University and a BSc in mineral economics and a MEngSc (mining planning economic geology from Peking University. He was and design). He has over 30 years experience in the Managing Director of Sinovus Mining Ltd, an ASX mining and mineral processing industry working in listed company with mineral interests in China. both technical and operational roles. He has worked Before that he was the General Manager for on mining project in Australia and overseas. More Guangxi Golden Tiger Mining JV, a Sino- recently he worked in the Philippines as Operations Australian JV gold company focussed in Guangxi, Director for a gold mining company. China, which is controlled by Golden Tiger Mining NL, an ASX listed company. He has also Wendy Zhang, Chief Financial Officer China, worked as the Senior Geologist for Silk Road Australian, aged 39, holds a Master of Accounting Resources (a Toronto listed company), responsible degree from Macquarie University, and is a for evaluating various gold properties in Gansu member of the Certified Practising Accountants of Province in central western China. Dr Zhou has Australia and a qualified member of the Chinese considerable experience of and has established Institute of Certified Public Accountants for 11 extensive contacts in the Chinese resources sector. years. Prior to joining Griffin she spent the previous 4 years as Financial Controller for Golden Tiger Mining's joint venture operations in China (a gold exploration and mining company listed in Australian Stock Exchange). Previously she was a Chief Accountant for Shanghai Silk Group and subsequently Ann Taylor Shanghai. 27 GM Ann Rep 12 highpics.qxd 16/4/13 17:19 Page 28 G R I F F I N M I N I N G L I M I T E D 28 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 29 R E P O RT A N D A C C O U N T S 2 0 12 Crushing Plant and Fine Ore Bin - Caijiaying Mine 29 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 30 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 financial statements of Griffin Mining Limited ("the Company") and its subsidiaries ("the Group") for the year ended 31 December 2012. FINANCIAL RESULTS The Group profit before taxation, amounted to US$27,239,000 (2011 US$39,953,000). Taxation of US$7,532,000 (2011 US$12,256,000) and non controlling interests of $4,872,000 (2011 $11,882,000) have been provided. No dividend was paid in 2012 (2011 nil). US$14,835,000 has been credited to reserves (2011 US$15,815,000). The basic earnings per share amounted to 8.46 cents (2011 8.96 cents). The attributable net asset value per share at 31 December 2012 amounted to 79 cents (2011 87 cents). With cash flows from operations being used to fund the development of the Zone II deposit and the upgrade of the processing facilities at Caijiaying and with any surplus cash flow directed to repaying existing Chinese banking facilities used to fund the acquisition of additional equity in, and the extension of, the joint venture in 2012 the directors do not recommend the payment of a dividend at this time. 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 2012 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 2012 and their immediate families in the share capital of the Company were as follows: Name At 31 December 2012 At 1 January 2012 Ordinary shares number Options over ordinary shares, number exercisable at Ordinary shares number Mladen Ninkov Dal Brynelsen Roger Goodwin William Mulligan 33,001 15,001 577,830 300,001 45 pence 20 pence 6,000,000 400,000 1,200,000 400,000 3,000,000 200,000 600,000 200,000 33,001 1 577,830 300,001 Options over ordinary shares, number exercisable at 45 pence 20 pence 6,000,000 400,000 1,200,000 400,000 3,000,000 200,000 600,000 200,000 All of the Directors’ interests detailed are beneficial. The options exercisable at 20 pence per share entitle the holder to subscribe for new ordinary shares in the Company on or before 31 October 2013. 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 28 October 2008; b. The second third of each holder’s options vested on 31 December 2009; and c. The last third of each holder’s options vested on 31 December 2010. 30 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 31 R E P O RT A N D A C C O U N T S 2 0 12 DIRECTORS’ REPORT On 4 March 2010 a new set of options (the "new options") over 10,000,000 new ordinary shares were granted to directors and key employees of the Company in order to retain and incentivise key personnel with managerial and operating experience in non-standard jurisdictions in a tight mining employment market. Each new option entitle the holder to subscribe for new ordinary shares in the Company at an exercise price of 45 pence per new ordinary share on or before 28 February 2015. The new 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 4 March 2010; b. The second third of each holder's options vested on 31 December 2010; and c. The last third of each holder's options vested on 31 December 2011. CORPORATE GOVERNANCE Although incorporated in Bermuda and therefore not obliged to comply with the code of best practice established by the UK Corporate Governance Code issued by the Financial Reporting Committee, 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. In particular, in view of the Company's size and the limited number of directors, the Company has not formally established: an audit committee; a remuneration committee; and a nominations committee. However, the non executive directors informally fulfil the roles and responsibilities normally expected of such committees. The board of directors includes a number of non executive directors who, other than their shareholding, are considered to be independent as their shareholdings are less than 0.2% of the Company's issued share capital and are free from any business or other relationship which could materially interfere with the exercise of their independent judgement. The Board meets regularly 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 regular review of commodity prices and assessment of hedging requirements AUDITOR 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 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 32 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 11th April 2013 32 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 33 R E P O RT A N D A C C O U N T S 2 0 12 REPORT OF THE INDEPENDENT AUDITOR REPORT OF THE INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF GRIFFIN MINING LIMITED We have audited the Group financial statements of Griffin Mining Limited for the year ended 31 December 2012 which comprise the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of financial position, consolidated statement of changes in equity, consolidated cash flow statement, the accounting policies and the notes 1 to 29. 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 Amendment 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 auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITOR As explained more fully in the Directors' Responsibilities Statement set out on page 28, the directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's (APB's) Ethical Standards for Auditors. 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, Caijiaying Mine, Financial Review, Operations Review, Associated Interests 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. SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting policies are appropriate to the company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all of the financial and non-financial information in the Chairman’s Statement, Caijiaying Mine, Financial Review, Operations Review, Associated Interests and Directors' Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our reports. OPINION In our opinion, the financial statements: • • give a true and fair view of the state of the Group's affairs as at 31 December 2012 and of its profit for the year then ended; have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union. Grant Thornton UK LLP Registered Auditors, Chartered Accountants London 11th April 2013 33 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 34 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 2012 (expressed in thousands US dollars) Notes 2012 $000 2011 $000 Revenue Cost of sales Gross profit Net operating expenses Profit from operations Share of losses of associated company Foreign exchange (losses)/gains Finance income Finance losses Finance costs Other income Profit before tax Income tax expense Profit after tax Attributable to non-controlling interests Attributable to equity share owners of the parent Basic earnings per share (cents) Diluted earnings per share (cents) 1 1 1 4 5 6 7 8 9 10 10 76,860 79,062 (34,795) (31,918) 42,065 47,144 (10,891) (10,312) 31,174 (163) (904) 495 - (3,411) 48 36,832 (118) 2,588 616 (14) - 49 27,239 39,953 (7,532) (12,256) 19,707 4,872 14,835 19,707 8.46 8.36 27,697 11,882 15,815 27,697 8.96 8.76 34 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 35 R E P O RT A N D A C C O U N T S 2 0 12 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2012 (expressed in thousands US dollars) Profit for the year Other comprehensive income Exchange differences on translating foreign operations Other comprehensive income for the period, net of tax Total comprehensive income for the period Attributable to non-controlling interests Attributable to equity owners of the parent 2012 $000 2011 $000 19,707 27,697 545 545 20,252 4,960 15,292 20,252 2,417 2,417 30,114 12,691 17,423 30,114 35 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 36 G R I F F I N M I N I N G L I M I T E D CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2012 (expressed in thousands US dollars) Notes ASSETS Non-current assets Property, plant and equipment Intangible assets – Exploration interests Investment in associated company Current assets Inventories Receivables and 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 Chinese statutory re-investment reserve Other reserves on acquisition of non controlling interests Foreign exchange reserve Profit and loss reserve Total equity attributable to equity holders of the parent Non-controlling interests Total equity Non-current liabilities Long-term provisions Current liabilities Taxation payable Trade and other payables Bank loans Total liabilities Total equities and liabilities Number of shares in issue 11 12 13 14 15 16 19 20 21 2012 $000 177,470 1,707 3,596 182,773 6,231 4,168 16,764 27,163 2011 $000 85,291 1,573 3,759 90,623 4,608 2,505 91,089 98,202 209,936 188,825 1,755 70,037 3,690 3,055 1,313 (29,346) 10,485 77,966 138,955 4,904 143,859 1,755 70,061 3,690 3,030 1,300 - 10,041 63,131 153,008 12,523 165,531 2,535 806 3,840 12,590 47,112 63,542 11,631 10,857 - 22,488 209,936 188,825 175,451,830 175,501,830 Attributable net asset value / total equity per share to equity holders of parent 22 $0.79 $0.87 The accounts on pages 34 to 57 were approved by the Board of Directors and signed on its behalf by: Mladen Ninkov Chairman 11th April 2013 36 Roger Goodwin Finance Director GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 37 - 1 4 7 1 5 ) 7 7 9 4 ( , - - - - 0 0 0 $ 0 0 0 $ 2 2 2 , 6 4 1 8 1 2 , 6 ) 6 8 3 6 ( , ) 6 8 3 6 ( , s t s e r e t n i s r e d l o h y t i u q e o t t n e r a p f o 0 0 0 $ 4 0 0 0 4 1 , - 1 4 - 7 1 5 ) 7 7 9 4 ( , l a t o T y t i u q e - n o N l a t o T g n i l l o r t n o c e l b a t u b i r t t a - - - - 0 0 0 $ 1 3 6 7 4 , ) 5 1 3 ( ) 5 0 8 0 1 ( , ) 6 8 3 6 ( , ) 9 1 4 4 ( , ) 5 1 3 ( 7 9 6 7 2 , 2 8 8 1 1 , 5 1 8 5 1 , 5 1 8 5 1 , - - - - - - - 0 0 0 $ 0 8 4 8 , R E P O RT A N D A C C O U N T S 2 0 12 7 1 4 2 , 9 0 8 8 0 6 1 , - 1 6 5 1 , 4 1 1 0 3 , 1 9 6 2 1 , 3 2 4 7 1 , 5 1 8 5 1 , 1 6 5 1 , 1 3 5 , 5 6 1 3 2 5 , 2 1 8 0 0 3 5 1 , 1 3 1 3 6 , 1 4 0 0 1 , 5 2 ) 4 2 ( - 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- - - - - : e m o c n i e v i s n e h e r p m o c r e h t O s n o i t a r e p o n g i e r o f g n i t a l s n a r t n o s e c n e r e f f i d e g n a h c x E r a e y e h t r o f t i f o r P e m o c n i e v i s n e h e r p m o c l a t o T 0 0 3 1 , 0 3 0 3 , 0 9 6 3 , 1 6 0 0 7 , 5 5 7 1 , 1 1 0 2 r e b m e c e D 1 3 t A - - - - - - - - 3 1 3 1 - - - - 5 2 5 2 - - - - - - - - - - - - - - - - ) 4 2 ( - - ) 4 2 ( - - - - - - - - - - - - - - t n e m t s e v n i e r u t u f r o f r e f s n a r t y r o t a l u g e R s t s e r e t n i g n i l l o r t n o c n o n f o n o i t i s i u q c A n o i t a l l e c n a c r o f s e r a h s f o e s a h c r u P s d n e d i v i d f o t c e p s e r n i s r e f s n a r T s t n e m y a p d e s a b e r a h s f o t s o C s r e n w o h t i w n o i t c a s n a r T : e m o c n i e v i s n e h e r p m o c r e h t O s n o i t a r e p o n g i e r o f g n i t a l s n a r t n o s e c n e r e f f i d e g n a h c x E e m o c n i e v i s n e h e r p m o c l a t o T r a e y e h t r o f t i f o r P t i f o r P s s o l d n a e v r e s e r e v r e s e r n g i e r o F e g n a h c x e f o n o i t i s i u q c a e v r e s e r s t n e m y a p r e h t O n o e v r e s e r e s e n h C i t n e m t s e v n i - e r e r a h S d e s a b g n i t u b i r t n o C e r a h S e r a h S s u l p r u s i m u m e r p l a t i p a c 2 1 0 2 r e b m e c e D 1 3 d e d n e r a e y e h t r o F ) s r a l l o d S U s d n a s u o h t n i d e s s e r p x e ( I Y T U Q E N I S E G N A H C F O T N E M E T A T S D E T A D I L O S N O C 9 5 8 , 3 4 1 4 0 9 , 4 5 5 9 8 3 1 , 6 6 9 7 7 , 5 8 4 0 1 , ) 6 4 3 9 2 ( , 3 1 3 1 , 5 5 0 3 , 0 9 6 3 , 7 3 0 0 7 , 5 5 7 1 , 2 1 0 2 r e b m e c e D 1 3 t A 37 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 38 G R I F F I N M I N I N G L I M I T E D CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2012 (expressed in thousands US dollars) Notes 4 5 6 7 17 11 Net cash flows from operating activities Profit before taxation Share of associated company losses Foreign exchange losses / (gains) Finance (income) Finance losses Finance costs Adjustment in respect of share based payments Depreciation, depletion and amortisation (Increase) in inventories (Increase) in receivables and other current assets (Decrease) / increase in trade and other payables Net cash inflow from operating activities Taxation paid Cash flows from investing activities Interest received Payments to extend joint venture term and acquire non controlling interests Payments to acquire – mineral interests Payments to acquire – plant and equipment Payments to acquire – office equipment Payments to acquire intangible fixed assets - exploration interests Net cash (outflow) from investing activities 5 11 11 11 12 Cash flows from financing activities Issue of ordinary share capital Purchase of shares for cancellation Interest paid Dividends paid to non controlling interests Proceeds from bank loans Net cash inflow / (outflow) from financing activities (Decrease) / increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rates Cash and cash equivalents at the end of the year Cash and cash equivalents comprise bank deposits Bank deposits 2012 $000 27,239 163 904 (495) - 3,411 25 6,762 (1,623) (1,663) (2,479) 32,244 (11,435) 495 (117,459) (4,206) (4,129) (3) (117) (125,419) - (24) (3,411) (12,561) 47,112 31,116 (73,494) 91,089 (831) 16,764 2011 $000 39,953 118 (2,588) (616) 14 - 517 5,900 (1,472) (1,226) 2,746 43,346 (1,637) 616 - (6,073) (3,605) (2) (19) (9,083) 41 (4,977) - (4,257) - (9,193) 23,433 66,450 1,206 91,089 16,764 91,089 Included within net cash flows of $73,494,000 (2011 $23,433,000) are foreign exchange losses of $904,000 (2011 gains $2,588,000) which have been treated as realised. 38 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 39 R E P O RT A N D A C C O U N T S 2 0 12 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 and as adopted by the European Union. The significant accounting policies adopted are detailed below: ACCOUNTING CONVENTION The accounts have been prepared under the historical cost convention, except for certain financial assets which are measured at fair value. CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES (a) New and amended standards adopted by the Group There were no International Financial Reporting Standards ("IFRSs") or International Reporting Interpretations Committee ("IFRIC") interpretations that are effective for the first time for the financial year beginning on or after 1st January 2012 that are expected to have a material impact on the Group. (b) At the date of authorisation of these financial statements, certain new standards, amendments and interpretations to existing standards have been published by the International Accounting Standards Board ("IASB") but are not yet effective, and have not been adopted early by the Group. Management anticipates that all of the relevant pronouncements will be adopted in the Group's accounting policies for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Group's financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Group's financial statements. 1. IFRS 9 Financial Instruments. The IASB aims to replace IAS 39 Financial Instruments: Recognition and Measurement in its entirety. IFRS 9 is being issued in phases. To date, the chapters dealing with recognition, classification, measurement and de-recognition of financial assets and liabilities have been issued. These chapters are effective for annual periods beginning 1 January 2015. Further chapters dealing with impairment methodology and hedge accounting are still being developed. The Group's management have yet to assess the impact of this new standard on the Group's consolidated financial statements. However, they do not expect to implement IFRS 9 until all of its chapters have been published and they can comprehensively assess the impact of all changes. 2. Consolidation Standards A package of consolidation standards are effective for annual periods beginning or after 1 January 2014. Information on these new standards is presented below. The Group's management have yet to assess the impact of these new and revised standards on the Group's consolidated financial statements. i. ii. IFRS 10 Consolidated Financial Statements (IFRS 10). IFRS 10 supersedes IAS 27 Consolidated and Separate Financial Statements (IAS 27) and SIC 12 Consolidation - Special Purpose Entities. It revised the definition of control together with accompanying guidance to identify an interest in a subsidiary. However, the requirements and mechanics of consolidation and the accounting for any non-controlling interests and changes in control remain the same. IFRS 11 Joint Arrangements (IFRS 11). IFRS 11 supersedes IAS 31 Interests in Joint Ventures (IAS 31). It aligns more closely the accounting by the investors with their rights and obligations relating to the joint arrangement. In addition, IAS 31's option of using proportionate consolidation for joint ventures has been eliminated. IFRS 11 now requires the use of the equity accounting method, which is currently used for investments in associates. iii. IFRS 12 Disclosure of Interests in Other Entities (IFRS 12). IFRS 12 integrates and makes consistent the disclosure requirements for various types of investments, including unconsolidated structured entities. It introduces new disclosure requirements about the risks to which an entity is exposed from its involvement with structured entities. iv. Consequential amendments to IAS 27 and IAS 28 Investments in Associates and Joint Ventures (IAS 28). IAS 27 now only deals with separate financial statements. IAS 28 brings investments in joint ventures into its scope. However, IAS 28's equity accounting methodology remains unchanged. 39 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 40 G R I F F I N M I N I N G L I M I T E D ACCOUNTING POLICIES 3. IFRS 13 Fair Value Measurement (IFRS 13). IFRS 13 does not affect which items are required to be fair-valued, but clarifies the definition of fair value and provides related guidance and enhanced disclosures about fair value measurements. It is applicable for annual periods beginning on or after 1 January 2013. The Group's management have yet to assess the impact of this new standard. 4. Amendments to IAS 1 Presentation of Financial Statements (IAS 1 Amendments). The IAS 1 Amendments require an entity to group items presented in other comprehensive income into those that, in accordance with other IFRSs: (a) will not be reclassified subsequently to profit or loss and (b) will be reclassified subsequently to profit or loss when specific conditions are met. It is applicable for annual periods beginning on or after 1 July 2012. The Group's management expects this will change the current presentation of items in other comprehensive income; however, it will not affect the measurement or recognition of such items. As far as can be determined, the directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material impact on the financial statements of the Group. The Group does not intend to apply any of these pronouncements early. Management have not assessed the impact of IFRS12 which could have a significant impact in respect of non controlling interests. GOING CONCERN The financial statements have been prepared on a going concern basis. As at 31 December 2012, Hebei Hua Ao (a subsidiary of the Company) had bank loans oustanding of $47.1 million. Since the year end $13.4 million of these facilities have been repaid and Hebei Hua Ao is finalising terms for additional facilities of some $4.8 million and expects to roll over the existing facilities for a further 12 months. Having considered the cash resources, banking facilities and forecasts, the directors do not expect any going concern issues to arise. 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 acquisition 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 statement of financial position 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. ASSOCIATES Associates are those entities over which the Group has significant influence but which are neither subsidiaries nor interests in joint ventures. Investments in associates are recognised initially at cost and subsequently accounted for using the equity method. However, any goodwill or fair value adjustment attributable to the Group's share in the associate is included in the amount recognised as investment in associates. All subsequent changes to the Group's share of interest in the equity of the associate are recognised in the Group's carrying amount of the investment. Changes resulting from the profit or loss generated by the associate are reported in "share of profits of associates" in profit or loss and therefore affect net results of the Group. These changes include subsequent depreciation, amortisation or impairment of the fair value adjustments of assets and liabilities. Items that have been recognised directly in other comprehensive income of the associate are recognised in other comprehensive income of the Group. However, when the Group's share of losses in an associate equals or exceeds its interest in the associate, 40 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 41 R E P O RT A N D A C C O U N T S 2 0 12 ACCOUNTING POLICIES including any unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. If the associate subsequently reports profits, the investor resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Amounts reported in the financial statements of associates have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. 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 both technically feasible and commercially viable 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 at least annually 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 income statement. 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 costs directly attributable to bringing the mine into 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 11). Residual values Material residual value estimates are updated as required, but at least annually whether or not the asset is re-valued. Depreciation With effect from 21st May 2012 the term of Hebei Hua Ao's joint venture business licence was extended to 12th October 2037. The pre existing business licence terminated in 2019. Prior to 21st May 2012 all costs capitalised (mineral interests, mill and mine equipment) within an area of interest were amortised over the current estimated economic reserve of the area of interest on a unit of production basis. In view of the extension of Hebei Hua Ao's business licence, thereby increasing the term of the joint venture, the economic lives of all non current tangible assets have been reassessed and depreciation rates have been revised with effect from 25th June 2012 to reflect the increased term of operations, extractable resource, and economic lives of the assets as follows: • Mine acquisition, development, licence, pre production and land use rights - on a unit of production basis • Plant and buildings - over 25 years on a straight line basis with a 10% residual value • Mechanical equipment - over 10 years on a straight line basis with a 10% residual value • All other equipment, including vehicles - over 5 years on a straight line basis with a 10% residual value Impairment A review for impairment indicators at each reporting date is undertaken. In the event of impairment indicators being identified, an impairment test is carried out to assess whether the net book value of the capitalised costs in each area of interest is covered by the discounted future cash flows 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. 41 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 42 G R I F F I N M I N I N G L I M I T E D ACCOUNTING POLICIES Impairment assessments are based upon a range of estimates and assumptions: ESTIMATE / ASSUMPTION BASIS Future production Commodity prices Exchange rates Discount rates Proven and probable 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 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 profit or loss or in other comprehensive income. Financial assets are reviewed by management individually and an assessment of whether a financial asset is impaired is made at least at each reporting date. Financial assets that are substantially past due or when objective evidence is received that a specific counterparty will default, 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. 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 statement of financial position. On initial recognition loans and receivables are recognised at fair value plus 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 profit or loss. The Group's other receivables fall into this category of financial instruments. FINANCIAL LIABILITIES The Group's financial liabilities include bank loans, trade and other payables, which are measured at amortised cost using the effective interest rate method. On initial financial liabilities 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 and associates, operate in China, the United Kingdom, and Australia. The functional and presentation currency of the parent is US dollars. 42 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 43 R E P O RT A N D A C C O U N T S 2 0 12 ACCOUNTING POLICIES 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 profit or loss. Non monetary items measured at historical cost are translated using the exchange rate at the date of the transaction. Non monetary items measured at fair value are translated using the exchange rates at the date when the fair value was determined. On consolidation the accounts of foreign operations are translated into the presentation currency of the Group at the rate of exchange ruling at the reporting date and income statement items are translated at the average rate for the year. The exchange difference arising on the retranslation of opening net assets is recognised in other comprehensive income and accumulated in the foreign exchange reserve. All other translation differences are taken to profit or loss. The balance of the foreign currency translation reserve relating to an operation that is disposed of is reclassified from equity to profit or loss 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 remuneration until such share options are exercised. "Foreign exchange reserve" represents the differences arising from translation of investments in overseas subsidiaries. "Chinese statutory re-investment reserve" represents a statutory retained earnings reserve under PRC law for future investment by Hebei Hua-Ao. "Other reserves on acquisition of non controlling interests" represents the excess of the purchase price paid to acquire non controlling interest rights over the non controlling interests in subsidiary companies. "Profit and loss reserve" represents retained profits and losses. EQUITY SETTLED SHARE BASED PAYMENTS All goods and services received in exchange for the grant of any share-based remuneration are measured at their fair values. Fair values of 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 profit or loss with a corresponding credit to "Share based payments" in the statement of financial position. 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 2012 the total expense recognised in profit or loss arising from share based transactions was $25,000 (2011: $517,000). 43 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 44 G R I F F I N M I N I N G L I M I T E D 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: • • • • • • • Impairment review assumptions, property, plant and equipment (note 11). Impairments are assessed by comparison of the cash generating unit (the Caijiaying Mine) carrying amounts against the value of future discounted cash flows expected to be derived from this unit. The value of the cash flows are estimated by direct reference to the current prevailing value of the commodities extracted. Based on current production and costs the directors have determined that the future profitability of the Group requires the market price of zinc to remain above $1,100 per tonne with gold, silver and lead prices remaining at current prevailing levels. Impairment review assumptions, exploration interests (note 12). Impairments are assessed by reference to exploration results carried out in an area of interest. Where such exploration indicates that there are no indications of mineralisation within the area of interest, provision is made for impairment in value. Impairment review assumptions, investment in associated company (note 13). Impairments are assessed by reference to the market value of the associated company and to the value of the associated company's underlying assets. This includes capitalised exploration and evaluation costs which are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Facts and circumstances considered include periods of tenure, budgeted expenditure, and exploration and evaluation results achieved. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Provision for mine closure costs (note 19) have been made in accordance with the rules and regulations of the Peoples Republic of China at a rate of Rmb0.5 per tonne of estimated resources. The expected amount of resource due to be extracted during the life of the mine is based on estimated rates of extraction which take into account reported measured, indicated and inferred levels of resource, the term of the Hebei Hua Ao joint venture and current capability of the extractive machinery currently in use at the mine. Share based payments (note 17). See aforementioned “Equity Settled Share Based Payments” Determination that investments in associates are not subsidiaries (note 13). Mladen Ninkov and Roger Griffin are non-executive directors of Spitfire Oil Ltd which, whilst not having unilateral day-to-day control of the business operations, does give Griffin significant influence over the financial and operating policy decisions of Spitfire. The directors of Griffin have considered whether this influence is such that Griffin controls Spitfire and that therefore the entity should be fully consolidated under IAS27. The Directors judgement in this regard is that as they are unable to control the business activities of Spitfire. The division of the purchase consideration for the non controlling interests and the extension of the Hebei Hua Ao joint venture period (note 11) has been determined from forecast discounted future cash flows from Caijiaying assuming current metal prices, costs, extraction and processing rates. 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 reporting date. 44 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 45 R E P O RT A N D A C C O U N T S 2 0 12 ACCOUNTING POLICIES TAXATION Current tax is the tax currently payable based on taxable profit for the year. Deferred income taxes are calculated using the liability method on temporary differences. Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. Deferred tax on temporary differences associated with shares in subsidiaries, associates and joint ventures is not provided if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the group are assessed for recognition as deferred tax assets. Deferred tax liabilities are provided in full, with no discounting. Deferred tax assets are recognised to the extent that it is probable that the underlying deductible temporary differences will be able to be offset against future taxable income. Current and deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the reporting date. Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are recognised in other comprehensive income (such as the revaluation of land) in which case the related deferred tax is also charged or credited directly to other comprehensive income or equity. SEGMENTAL REPORTING In identifying its operating segments, management generally follows the Group's service lines, which represent the main products produced by the Group. Management consider there to be only one operating segment being the operations at the Caijiaying Mine based in China. All activities of the Group are reported through management and the executive directors to the Board of directors of the Company. The measurement policies the Group uses for Segment reporting under IFRS 8 are the same as those used in its financial statements. Corporate assets which are not directly attributable to the business activities of Caijiaying Mine are not allocated to the Chinese segment but are reviewed in light of operating expenses by the region in which they occur. In the financial periods under review, this primarily applies to the Group's head office and intermediary holding companies within the Group. There have been no changes from prior periods in the measurement methods used to determine reported segment profit or loss. 45 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 46 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 operating segment, the Caijiaying zinc gold project in the People’s Republic of China. All sales and costs of sales in 2012 and 2011 were derived from the Caijiaying zinc gold project. 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 China - acquisition of non-controlling interests 2. PROFIT FROM OPERATIONS Profit from operations is stated after charging Staff costs Fair values of options granted to directors and management Average number of persons employed by the Group in the year 46 2012 $000 202,016 4,376 3,544 209,936 96,546 - 3 96,549 29,365 125,914 2012 $000 (4,929) (25) No. 367 2012 $000 2011 $000 76,860 79,062 (34,795) (31,918) (7,539) (163) (3,189) (10,891) (7,484) (32) (2,796) (10,312) 2011 $000 128,961 6,363 53,501 188,825 9,678 - 2 9,680 - 9,680 2011 $000 (4,747) (517) No. 357 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 47 R E P O RT A N D A C C O U N T S 2 0 12 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: Fees Salary Share Total Pension & Social 2012 based Security payments Fees Salary Mladen Ninkov * Dal Brynelsen Roger Goodwin William Mulligan Key personnel $000 $000 112 154 112 88 466 - 466 - - 445 - 445 775 1,220 costs $000 - - 108 - 108 - 108 $000 $000 $000 $000 15 1 3 1 20 5 25 127 155 668 89 1,039 780 1,819 99 77 99 77 352 - 352 - - 442 - 442 569 1,011 Share Total Pension & Social 2011 based Security payments costs $000 $000 $000 - - 53 - 53 - 53 310 21 62 21 414 103 517 409 98 656 98 1,261 672 1,933 No share options were exercised by the directors in the year (2011 none). *Keynes Capital, the registered business name of Keynes Investments Pty Limited as trustee for the Keynes Trust, received fees under a consultancy agreement of $1,692,000 (2011 $1,582,000), for the provision of advisory and support services to Griffin Mining Limited and its subsidiaries during the year. Mladen Ninkov is a director and employee of Keynes Investments Pty Limited. 4. SHARE OF LOSSES OF ASSOCIATED COMPANY Share of losses of Spitfire Oil Ltd Griffin has a 39.2% interest in the issued share capital of Spitfire Oil Limited. 5. FINANCE INCOME Interest on bank deposits 6. FINANCE LOSSES Losses on revaluation of zinc put options 7. FINANCE COSTS Interest payable on short term bank loans 8. OTHER INCOME Scrap and other sundry sales 2012 $000 163 2012 $000 495 2012 $000 - 2012 $000 3,411 2012 $000 48 2011 $000 118 2011 $000 616 2011 $000 (14) 2011 $000 - 2011 $000 49 47 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 48 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 9. INCOME TAX EXPENSE Profit for the year before tax Tax rate Expected tax expense: Adjustment for tax exempt items: - Income and expenses outside the PRC not subject to tax - Share of associated company losses Adjustments for timing differences: - Other Adjustments for short term timing differences: - In respect of accounting differences - Other Withholding tax on intercompany charges Taxation charge 2012 $000 27,239 25% 6,810 (1,796) 41 256 (109) 112 2,218 7,532 2011 $000 39,953 25% 9,988 (54) 30 105 273 (236) 2,150 12,256 The parent company is not resident in the United Kingdom for taxation purposes. Hebei Hua’ Ao paid income tax in the PRC at a rate of 25% in 2012 (25% in 2011) based upon the profits calculated under Chinese generally accepted accounting principals (Chinese “GAAP"). 10. 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: 2012 Earnings $000 Weighted average number of shares Per share amount (cents) Earnings $000 2011 Weighted average number of shares Per share amount (cents) 14,835 175,456,077 8.46 15,815 176,499,620 8.96 Basic earnings per share Earnings attributable to ordinary shareholders Dilutive effect of securities Options - 2,021,897 Diluted earnings per share 14,835 177,477,974 - 8.36 - 3,981,592 15,815 180,481,212 - 8.76 48 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 49 NOTES TO THE FINANCIAL STATEMENTS 11. PROPERTY, PLANT AND EQUIPMENT At 1 January 2011 net of accumulated depreciation Foreign exchange adjustments Additions during the year Rehabilitation provision Depreciation charge for the year At 31 December 2011 Foreign exchange adjustments Additions during the year Additions re extensions of joint venture period Rehabilitation provision Depreciation charge for the year At 31 December 2012 At 31 December 2010 Cost Accumulated depreciation Net carrying amount At 31 December 2011 Cost Accumulated depreciation Net carrying amount At 31 December 2012 Cost Accumulated depreciation Net carrying amount Mineral interests $000 57,759 2,821 6,073 (56) (2,752) 63,845 639 4,206 88,094 1,647 (3,817) 154,614 $000 63,408 (5,649) 57,759 72,652 (8,807) 63,845 167,405 (12,791) 154,614 R E P O RT A N D A C C O U N T S 2 0 12 Mill and mobile mine equipment $000 Office furniture and equipment Total $000 $000 19,963 1,001 3,605 - (3,140) 21,429 223 4,129 - - (2,934) 22,847 $000 24,554 (4,591) 19,963 29,463 (8,034) 21,429 33,910 (11,063) 22,847 23 - 2 - (8) 17 - 3 - - (11) 9 77,745 3,822 9,680 (56) (5,900) 85,291 862 8,338 88,094 1,647 (6,762) 177,470 $000 $000 84 (61) 23 86 (69) 17 86 (77) 9 88,046 (10,301) 77,745 102,201 (16,910) 85,291 201,401 (23,931) 177,470 Mineral interests comprise the Group's interest in the Caijiaying ore bodies including costs 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. At 31 December 2012 and 2011 there were no indications of impairment in the net book values of the capitalised cost. The office furniture and equipment disclosed above relates solely to the fixed assets of the Company and China Zinc Pty Ltd. On 25th June 2012 China Zinc Limited acquired a further 28.8% of the existing joint venture partner's interest in Hua Ao, and with effect from 21st May 2012 the term of the joint venture's business licence extended to 12th October 2037, by the outlay of $117,459,000. 75% of this amount has been attributed to the extension of the joint venture term and capitalised to non- current tangible assets and 25% attributed to buying out the minority interests and charged directly to reserves within other reserves on acquisition of non controlling interests. The allocation has been based upon estimated future discounted cash flows from the Caijiaying mine. In view of the extension of Hebei Hua Ao's business licence, thereby increasing the term of the joint venture, the rehabilitation provision and depreciation rates have been revised with effect from 25th June 2012 to reflect the increased term of operations, extractable resource, and economic lives of the assets. 49 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 50 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. INTANGIBLE ASSETS China – Zinc / gold exploration interests At 1 January 2011 Foreign exchange adjustments Additions during the year At 31 December 2011 Foreign exchange adjustments Additions during the year At 31 December 2012 $000 1,481 73 19 1,573 17 117 1,707 Intangible assets represent cost 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 profit or loss. 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 2012 no amounts had been provided or charged to the income statement in respect of the above exploration costs. 13. INVESTMENT IN ASSOCIATED COMPANY At 1 January Share of losses of Spitfire Oil Limited At 31 December 2012 $000 3,759 (163) 3,596 2011 $000 3,877 (118) 3,759 Griffin acquired 16,666,667 ordinary shares in Spitfire Oil Ltd (“Spitfire”), representing a 39.2% interest in the issued share capital of Spitfire, at 15p per share for a total cash consideration of £2,500,000 ($4,542,000) on 27 November 2008. Mladen Ninkov and Roger Goodwin are non-executive directors of Spitfire Oil Ltd, which, whilst not having unilateral day- to-day control of business, does give Griffin significant influence over the financial and operating policy decisions of Spitfire. Spitfire’s principal activity is the pursuance of the production of fuel oil and distillate from the Salmon Gums Lignite deposits in Western Australia. Summarised financial information on Spitfire Oil Limited Loss before income tax ASSETS Current assets Non-current assets Total assets LIABILITIES Current and total liabilities NET ASSETS EQUITY Issued capital Reserves Accumulated losses 50 Six months to 31 December 2012 Unaudited $000 Year to 30 June 2012 Audited $000 (188) (444) 31 December 2012 Unaudited $000 30 June 2012 Audited $000 7,471 8,633 16,104 (24) 16,080 21,499 318 (5,737) 16,080 7,609 8,679 16,288 (47) 16,241 21,499 290 (5,548) 16,241 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 51 R E P O RT A N D A C C O U N T S 2 0 12 NOTES TO THE FINANCIAL STATEMENTS Spitfire Oil Ltd reported no contingent liabilities at 31 December 2012 (30 June 2011 nil). In common with most Australian companies, Spitfire Oil Ltd’s reporting period is to 30th June. The directors have considered the carrying value of the Company's investment in Spitfire Oil Limited by reference to current market conditions, underlying assets and to projected discounted cash flow projections of Spitfire Oil Limited's principal venture. 14. INVENTORIES Underground ore stocks Surface ore stocks Concentrate ore stocks Spare parts and consumables 2012 $000 1,546 1,757 926 2,002 6,231 All inventories are expected to be sold, used or consumed within one year of the reporting date. 15. RECEIVABLES AND OTHER CURRENT ASSETS Receivables Other receivables Prepayments 2012 $000 1,906 904 1,358 4,168 2011 $000 1,051 1,652 - 1,905 4,608 2011 $000 - 849 1,656 2,505 Sales of metals in concentrate are made by way of open auction in China to Chinese smelters and agents. During the year Rmb3.3m ($527,000) was incurred in service charges with the Zhangjiakou Caijiaying Lead Zinc Mining Company, the non controlling equity holders in Hebei Hua Ao and charged to net operating expenses. Rmb58,191,000 ($9,291,000) was incurred in haulage costs with the Third Geological Brigade of the Hebei Province who have an interest in the Zhangjiakou Caijiaying Lead Zinc Mining Company and charged to cost of sales. 16. 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 Bought back in for cancellation At 31 December 2012 2011 Number $000 Number $000 1,000,000,000 10,000 1,000,000,000 10,000 175,501,830 - (50,000) 175,451,830 1,755 - - 1,755 180,408,496 133,334 (5,040,000) 175,501,830 1,804 1 (50) 1,755 During 2012 50,000 (2011: 5,040,000) ordinary shares were bought in for cancellation from the market under a buy back programme at an average price of 29.5 UK pence ($0.475) (2011: average 62.6 UK pence ($0.975) per share. 51 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 52 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 17. SHARE OPTIONS AND WARRANTS Options exercisable at 20 pence per share to 31 October 2013 Options exercisable at 45 pence per share to 28 February 2015 At 1 January (Exercised) / At 31 December (lapsed) 2012 Number Number 2012 Number 4,333,333 10,000,000 14,333,333 - - - 4,433,333 10,000,000 14,433,333 The following table shows the number and weighted average exercise price of all the unexercised share options and warrants at the year end: 2012 Number Weighted average exercise price Pence 2011 Number Weighted average exercise price Pence Outstanding at 1 January Lapsed during the year Exercised in year 14,433,333 37.5 14,700,001 - - - - (133,334) (133,334) Outstanding at 31 December 14,433,333 37.5 14,433,333 37.0 (20.0) (20.0) 37.5 The estimated value of the options exercisable at 20p up to 31 October 2013, which vest in 3 tranches of 1,666,666 each, were 4.0p, 4.2p and 4.42p. The estimated value of the options exercisable at 45p up to 28 February 2015, which vest in 3 tranches of 3,333,333 each, were 18.68p, 19.45p and 21.12p. Inputs into the Binomial valuation model were as follows: Share price Exercise price Expected volatility Risk free yield Dividend yield Options expiring 28 February 2015 Options expiring 31 October 2013 43.25p 45.0p 65% 2.84% 0% 14.0p 20.0p 60% 3.97% 4% 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 $25,000 (2011 $517,000) during the year ended 31 December 2012 relating to equity settled share option scheme transactions. 18. DIVIDENDS No dividends were paid in 2012 (2011 nil) 19. LONG-TERM PROVISION PROVISION FOR MINE CLOSURE COSTS At 1 January Transfer property plant and equipment (note 11) Foreign exchange adjustments At 31 December 52 2012 $000 806 1,647 82 2,535 2011 $000 768 (56) 94 806 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 53 R E P O RT A N D A C C O U N T S 2 0 12 NOTES TO THE FINANCIAL STATEMENTS Provision for mine closure and rehabilitation costs have been made in accordance with the laws and regulations of China at a rate of Rmb 0.5 per tonne of estimated resources. On 25th June 2012 China Zinc Limited acquired a further 28.8% of the existing joint venture partner’s interest in Hebei Hua Ao, and with effect from 21st May 2012 the term of the joint venture's business licence was extended to 12th October 2037. In view of the extension of Hebei Hua Ao's business licence, thereby increasing the term of the joint venture, the rehabilitation provision has been increased to reflect the increase in the amount of extractable ore over the period of the joint venture. 20. TRADE AND OTHER PAYABLES Trade creditors Other creditors Accruals 2012 $000 5,672 3,613 3,305 12,590 2011 $000 5,542 2,044 3,271 10,857 All amounts are short term. The carrying values of all trade and other payables are considered to be a reasonable approximation of fair value. 21. BANK LOANS Bank loans falling due within one year 2012 $000 47,112 47,112 2011 $000 - - The bank loans are repayable within one year under revolving facilities. At 31st December 2012 $13,415,000 of the amounts due at 31st December 2012 were secured on inventories held at Caijiaying. All other amounts were unsecured. The bank loans carried interest as follows: Zhangjiakou Commercial Bank (repaid February 2013) Bank of Communications Bank of China 2012 2011 $000 13,415 8,023 25,674 47,112 % 10.44 6.6 6.6 $000 - - - - % - - - - 22. 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 2012 of $138,955,000 ($153,008,000 at 31 December 2011) divided by the number of ordinary shares in issue at 31 December 2012 of 175,451,830 (175,501,830 at 31 December 2011). 23. 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. 53 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 54 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 23. RISK MANAGEMENT (CONTINUED) 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. Associates operational and financial cash flows are denominated in Australian dollars. 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 restricted and subject to the rules and regulations of foreign exchange control promulgated by the government of the PRC. Sterling bank deposits translated into United States Dollars at the closing rate are as follows: Short term bank deposits 2012 $000 1,722 2011 $000 19,535 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 + / - 10% change in the sterling exchange rate for the year ended 31 December 2012. These changes are considered to be reasonable based on observation of current market conditions for the year ended 31 December 2012. The sensitivity analysis is based upon the Group’s sterling deposits at each reporting date. If sterling had strengthened against the US Dollar by 10% (2011: 10%) this would have had the following impact: Net result for the year and on equity 2012 $000 191 If sterling had weakened against the US Dollar by 10% (2010: 10%) this would have the following impact: Net result for the year and on equity 2012 $000 (157) 2011 $000 2,171 2011 $000 (1,776) 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. With the Renminbi exchange rate linked to the value of the US dollar and with relatively small amounts held in Australian dollars, the effect on the net results and equity of changes in Renminbi and Australian dollar exchange rates are not expected to be significant. Foreign currency denominated financial assets and liabilities, translated into US Dollars at the closing rate, are as follows: 2012 Rmb $000 GBP $000 1,697 15,232 (294) (63,248) 1,403 (48,016) AusD $000 739 (1) 738 2011 Rmb $000 AusD $000 GBP $000 19,650 37,563 2,605 (154) (22,717) - 19,496 14,846 2,605 Financial assets Financial liabilities Short term exposure 54 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 55 R E P O RT A N D A C C O U N T S 2 0 12 NOTES TO THE FINANCIAL STATEMENTS 23. RISK MANAGEMENT (CONTINUED) 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 + 300% and - 100% (2011: + 300% - 100%), 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 2012 2011 Plus 300% Minus 100% Plus 300% Minus 100% $000 548 $000 (183) $000 2,177 $000 (616) Fixed and non interest bearing financial assets and liabilities are as follows: Floating interest rate $000 16,764 - 16,764 (47,112) - (47,112) (30,348) 2012 Non interest bearing $000 - 2,810 2,810 - (9,285) (9,285) (6,475) Total $000 16,764 2,810 19,574 (47,112) (9,285) (56,397) (36,823) Floating interest rate $000 2011 Non interest bearing $000 Total $000 91,089 - 91,089 - - - 91,089 - 849 849 91,089 849 91,938 - (10,857) (10,857) (10,008) - (10,857) (10,857) 81,081 Financial Assets Cash at bank Other receivables Total Financial Assets Bank Loans Trade and other payables Total Financial Liabilities Net Financial (Liabilities) / Assets Commodity risk The Group is exposed to the risk of changes in commodity prices and in particular that for zinc, gold and to a lesser extent silver and lead. The Group currently sells its metal concentrate production by way of open auctions in China. The Group did not hedge its metal production in 2012 or in 2011. The following table illustrates the sensitivity of the net results for the year and equity to a reasonably possible change in the market price of zinc, gold and silver of plus 20% and minus 20% (2011 plus 20% and minus 20%), with effect from the beginning of the year. These changes are considered reasonable based upon observation of current market conditions within which the Group operates. This sensitivity analysis is based upon the Group’s sales in each year. Net results for the year - zinc Net results for the year - gold Net results for the year - silver 2012 Plus 20% Minus 20% $000 $000 2011 Plus 20% $000 Minus 20% $000 8,025 1,871 1,401 (8,025) (1,871) (1,401) 8,245 2,218 1,229 (8,245) (2,218) (1,229) 55 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 56 G R I F F I N M I N I N G L I M I T E D 23. RISK MANAGEMENT (CONTINUED) 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. Sales are made on a cash/delivery basis and the Group 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. Liquidity and funding risk The objective of the Group in managing funding risk is to ensure that it can meet its financial obligations as and when they fall due. At the end of the year, Hebei Hua Ao, a subsidiary of the Company, had oustanding bank loans of $47.1 million under revolving loan facilities with Chinese banks. The Group manages its liquidity risk related to these loans by repaying interest as it comes due, managing cash flow from operations, staying in good standing with the counterparties of the loans and being in compliance with all covenants. Subsequent to the year end, the $13.4 million revolving loan with Zhangjiakou Commerical Bank has been repaid. The Company is in the process of finalising terms for a new facility of Rmb30 million ($4.8 million) and expects to roll over the remaining existing loans under the terms of the revolving facilities for a further 12 months as and when the loans fall due. 24. CAPITAL MANAGEMENT AND PROCEDURES The Group’s capital management objectives are: • To ensure the Group's ability to continue as a going concern; • To increase the value of the assets of the Group: and • To enhance shareholder value in the Company and returns to shareholders The achievement of these objectives is undertaken by developing existing ventures and identifying new ventures for future development. The Company will also undertake other transactions where these are deemed financially beneficial to the Company. The directors continue to monitor the capital requirements of the Group by reference to expected future cash flows. Capital for the reporting periods under review is summarised in the consolidated statement of changes in equity. 25. FINANCIAL INSTRUMENTS The Group does not enter into derivative transactions such as interest rate swaps, forward rate agreements or forward currency contracts. Funds in excess of immediate requirements are placed in US dollar, Chinese Renminbi, 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, Chinese Renminbi, 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. 56 GM Ann Rep 12 highpics.qxd 16/4/13 17:20 Page 57 R E P O RT A N D A C C O U N T S 2 0 12 26. SUBSIDIARY COMPANIES At 31 December 2012, 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 China Zinc Limited Ordinary Ordinary Hebei Hua’ Ao Mining Industry Company Ltd* Panda Resources Ltd Ordinary Hebei Sino Anglo Mining Development Company Ltd* 100% 100% 88.8%** 100% 90% Service company Australia Service and Holding company Base and precious metals mining and development Holding company Mineral exploration and development Hong Kong China England China * 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 originally provided that the foreign party (China Zinc Ltd) received 60% of the cash flows, in accordance with its share in the equity interest in the joint venture. With effect from 25th June 2012, when 28.8% of the local Chinese joint venture partner’s equity interest in Hua Ao was acquired, China Zinc Ltd receives 88.8% of the cash flows and profits of Hebei Hua Ao. On 21st May 2012 the term of the joint venture's business licence extended to 12th October 2037. 27. RELATED PARTY TRANSACTIONS At 31 December 2012 the Group had capital commitments of $333,000 (31st December 2011 $350,000). 28. CONTINGENT LIABILITIES As described in note 26, the joint venture contract establishing the Hebei Hua’ Ao Mining Industry Company Ltd provided that 100% of the cash flows and profits generated by Hebei Hua Ao in the first three years from commencement of commercial production be paid to the foreign party (China Zinc Ltd). Thereafter, being with effect from 24 July 2008, the cash flows were shared 60% by the foreign party and 40% by the Chinese party, and since 25th June 2012, 88.8% by the foreign party and 11.2% by the Chinese party in accordance with their share in the equity interest in Hebei Hua Ao. The registered capital (equity) of Hebei Hua' Ao was provided in full by China Zinc. Although all the registered capital of Hebei Hua Ao has been provided by China Zinc, in view of the unusual nature of the joint venture contract and uncertainty as to its interpretation, provision has only been made for the non controlling interests in the profits of Hebei Hua Ao with no provision made in respect of the net assets of Hebei Hua Ao. At 31 December 2012, the net assets of Hebei Hua’ Ao after distributions due amounted to $23.6m. The non- controlling share of the net assets at 31 December 2012 on a termination of Hebei Hua’ Ao could amount to $2.6m. This liability is only triggered on the early termination of the joint venture or at the end of the joint venture term when the net assets are not expected to be significant. 29. POST BALANCE SHEET EVENTS In February 2013, Hebei Hua Ao repaid bank loans from the Zhangjiakou Commercial Bank of Rmb83,600,000 ($13,415,000) and have since negotiated a further bank facility from the Bank of Communications of Rmb30,000,000 ($4,790,000). 57 GM Ann Rep 12 highpics.qxd 16/4/13 17:21 Page 58 G R I F F I N M I N I N G L I M I T E D 58 GM Ann Rep 12 highpics.qxd 16/4/13 17:23 Page 59 R E P O RT A N D A C C O U N T S 2 0 12 Senior Personnel Accommodation Block - Caijiaying Mine 59 GM Ann Rep 12 highpics.qxd 16/4/13 17:23 Page 60 G R I F F I N M I N I N G L I M I T E D CORPORATE INFORMATION London 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 Website: www.griffinmining.com Registered office: Clarendon House, 2 Church Street, Hamilton. HM11. Bermuda. China Zinc office: Level 9, 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: Panmure Gordon (UK) Limited One New Change, London. EC4M 9AF. UK. Auditors: Solicitors: Grant Thornton UK LLP Grant Thornton House, Melton Street, London. NW1 2EP. UK. DLA Piper UK LLP 20th Floor, 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 Milton Gate, 60 Chiswell Street, London. EC1Y 4AG. UK. King & Wood Malleson 9/F, Hutchison House, 10 Harcourt Road, Central, Hong Kong Bankers: HSBC Bank plc 27-32 Poultry, London. EC2P 2BX. UK The Hong Kong and Shanghai Banking Corporation Limited HSBC Main Building, 1 Queen's Road Central, Hong Kong National Westminster Bank PLC. St James’s and Piccadilly, London. W1A 2DG. UK. The Bank of Bermuda Ltd 6 Front Street, Hamilton. HM11. Bermuda. UK Registrars and Transfer Agents: Capita Registrars (Jersey) Limited 12 Castle Street, St Helier, Jersey. JE2 3RT. UK. 60 New (third) tailings storage facility under construction summer 2009 

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