Griffin Mining Ltd.
Annual Report 2013

Plain-text annual report

CONTENTS CHAIRMAN’S STATEMENT OVERVIEW CAIJIAYING INTRODUCTION DEVELOPMENT GEOLOGY JORC RESOURCE EXPLORATION OPERATIONS COMMUNITY INVESTMENT & PARTNERSHIP FINANCIAL STRATEGIC REVIEW 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 R E P O RT A N D A C C O U N T S 2 0 13 Page 4 10 11 11 11 12 12 14 16 17 20 24 28 29 30 34 35 36 37 38 39 40 47 61 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 G R I F F I N M I N I N G L I M I T E D 2 R E P O RT A N D A C C O U N T S 2 0 13 Caijiaying Mine, Winter 2013 3 G R I F F I N M I N I N G L I M I T E D CHAIRMAN’S STATEMENT I present to you, the shareholders and owners of Profitability was affected by a 15.2% increase in the Griffin Mining Limited (“Griffin” or the cost of sales, mainly due to increased treatment “Company”), the Annual Report and Accounts of charges, and decreased metal prices. In 2013, the the Company for the 2013 financial and calendar average price per tonne of zinc metal in concentrate year. For those of you who have known me too received by the Group fell by 5.2%, for silver by long, you will know that I am a long-time, 26.3%, for lead by 12.0% and for gold by 17.7%. passionate, Chelsea FC supporter and, in many ways, the performance of Griffin resembles Chelsea FC’s 2013/2014 season. A Champions League semi-final and a top 3 Premier League spot are admirable results but the time honoured quote comes to mind “Close, but no cigar.” Similarly, a company is judged by continually improving One of the most significant events during 2013 was the release of the latest JORC resource estimate for the Caijiaying Mine. It confirmed a total resource of 49.4 million tonnes of ore containing 2 million tonnes of zinc, 212,000 tonnes of lead, 37.9 million ounces of silver and 825,000 ounces of gold. financial results and although the Company’s The extensive and defined ore resources at the operations performed extraordinarily well, the new Caijiaying Mine, together with the extension of the JORC resource was world class, the upgrade and term of the Hebei Hua Ao joint venture to 2037, mining licence approvals continued to progress and provided the confidence and time to expand the certain operating records were broken, the current mining and processing capabilities to catch continuing slump in the price of the commodities the expected upturn in the zinc price cycle and mined produced a diminished financial result, albeit provide the maximum return to shareholders. the Company produced its 9th year of continued profitability. With this in mind, the Caijiaying Mine is now in the active construction stage of increasing the Griffin and its subsidiaries (together the “Group”) mining and processing of ore to 1.5 million tonnes recorded an operating profit of $20,293,000 in per annum. Significant progress continues to be 2013, profit before tax of $14,827,000, profit after made in the application for a new mining licence at tax of $9,756,000 and profit after non-controlling Zone II and the area between Zone II and Zone III. interests of $8,157,000. Impressively, record amounts of ore were mined, hauled and processed in 2013 and a record 11,468 ounces of gold in concentrate were produced, a 37.8% increase on the previous year and a record for the Caijiaying Mine. Although delayed due to the change in Chinese central government leadership and administrative changes ensuing from that change, the mining licence is expected to be granted by the Autumn of 2014. 4 R E P O RT A N D A C C O U N T S 2 0 13 In the interim, the detailed upgrade plans have which were already pregnant with 47 offspring, been completed and the lead contractor appointed. establishing a sizeable initial herd of 217 cattle for Tenders for the large capital machinery, with long the creation of a dairy and cattle farm. To date, the lead times to delivery, have been granted. Ground venture has been an outstanding success and it is work for the upgrade has commenced with the planned to purchase another 183 cows by June next foundation earthworks ceremony having taken year to complete the programme and finalise a new place, with all appropriate Chinese government industry for the local population. officials present, on the 8th of April 2014. All above ground, new, expanded facilities, including ball mills, floatation tanks and a new power sub- station, should be installed during the summer months ready for completion by the 31st October 2014 to enable winter work to continue indoors and underground. Development work has commenced to access the Zone II area underground from both the rehabilitation of the Fox decline and from the main Zone III decline. It should not be thought, however, that the Company’s only focus is the expansion of the Caijiaying Mine. Exploration continues unabated both underground and on the land holdings north, south, east and west of the current operations. Furthermore, the Company remains totally committed to searching, investigating, analysing and negotiating the acquisition of low cost, base or precious metals mining projects that have the potential to be brought into long term, economic The total upgrade is expected to be completed by production for a capital cost that provides a the end of 2014. It is hoped that throughput will substantial and justifiable return on equity to slowly be expanded towards the equivalent of 1.5 shareholders. Such projects are rare and getting million tonnes of ore per annum in 2015. rarer. Nevertheless, a considerable number of Of course, Griffin, through Hebei Hua Ao, continues to be a responsible and vital member of the Caijiaying community. In addition to all the previous and ongoing community programmes, in 2013 a new initiative was begun to create a long term industry which would provide a more sustainable annual income for villagers less reliant projects and ventures have been reviewed and investigated during the past year. None as yet have been successfully consummated, mainly due to the discovery of negative findings during due diligence or an insufficient return calculated for the risk shareholders would need to accept in funding the project to production. on the seasonality of crops grown in the short In terms of the Company’s current operations and summer months. Consequently, Hebei Hua Ao possible future acquisitions, the strategy being purchased for the Caijiaying village area, 170 cows, pursued is supported by the projected outlook for 5 G R I F F I N M I N I N G L I M I T E D CHAIRMAN’S STATEMENT CONTINUED the world zinc price. 2014/2015 is expected to see As is normally the case, we often fail to world demand for zinc exceed supply by 400,000 acknowledge those who are nearest, dearest and tonnes, continuing for the foreseeable future. work hardest for the Company. Bo Zhou, our Demand is expected to expand 4.5% – 5.5% to 13.6 Chief Representative in China, is one of the pillars million tons this year whilst supply is being this Company is built on and to fail to acknowledge substantially affected by a limited number of small his outstanding services would be simply unjust. new mines in the planning stage and a series of very large mine closures including Glencore Xstrata’s Perseverance and Brunswick mines, Vedanta’s Lisheen operation and MMG’s Century Zinc mine. This can only be positive for the world zinc price. The Company lost the services of Bill Mulligan due to retirement this year and his advice, stature and wit will be sorely missed. Such a man could only be replaced by someone like Rupert Crowe who I have described in earlier reports as the “Champion In terms of the perennial question of dividends, the of Caijiaying”. His experience, enthusiasm and Company continues to follow the advice of the common sense is a boon for the Company. Chairman and CEO of one of its largest shareholders, Larry Fink of Blackrock who, in an open letter to UK listed companies, urged firms to resist influence by shareholder short term pressures and not make short term dividends a priority over long term strategic goals but to invest in capital expenditure to boost long term growth. Needless Adam Usdan, one of our major shareholders, finally agreed to become a director this year after being our foundation shareholder and only increasing his shareholding through the long years. His loyalty has been unwavering and his appointment another coup for the Company. to say, when the growth phase of the Company Dal Brynelsen remains the vital wise mining legend comes to an end, then dividends are an absolute on who’s support I constantly call. Lastly, and as an legitimate use of excess shareholders funds. example of the tireless and self sacrificing service The Company is delighted to welcome a totally new management team on site headed by our new Operations manager, Mr Maoheng Zhang, supported by CSA Global in Perth. To date, his new on-site team have met all of our expectations and everyone is excited by what lies ahead. They have our total support. Our thanks also go to all one man can provide, the Company gives it gratitude to Roger Goodwin who, through extremely serious illness and gruelling therapy, continued not only to work, but attended the office at the break of dawn every day and continued to travel to Caijiaying. Such service deserves all of our sincere thanks and respect. at Caijiaying staff and contractors, for their untiring Lastly, and believe me when I say, most efforts to make Caijiaying the world class mine it importantly, thank you to you, the shareholders and seemed destined to become. owners of the Company. Without your patience, 6 R E P O RT A N D A C C O U N T S 2 0 13 support and long loyalty, Caijiaying would have remained an undiscovered world class orebody, buried under some Mongolian sands, next to a small village in north-western China. Instead it now has the real chance to be a significant, long term, polymetallic mine generating exceptional returns for its shareholders. And in the words of Mel Gibson’s William Wallace in Braveheart, “And I go to make sure that they have it”. Mladen Ninkov Chairman 12th May 2014 7 G R I F F I N M I N I N G L I M I T E D 8 R E P O RT A N D A C C O U N T S 2 0 13 Mladen Ninkov (Chairman) at the earth turning ceremony for the plant upgrade at Caijiaying 9 G R I F F I N M I N I N G L I M I T E D OVERVIEW Griffin Mining Limited (‘Griffin’ or ‘the The Company also owns 90% of Hebei Sino Anglo Company’) is a mining and investment company, Mining Development Company Limited (“Hebei incorporated in Bermuda, whose shares are quoted Anglo”), which controls 41.5 square kilometres of on the Alternative Investment Market of the exploration licences immediately surrounding the London Stock Exchange. Caijiaying Mine. The major asset of the Company is an 88.8% The Company continues to expand and develop the interest in Hebei Hua Ao Mining Industry Caijiaying Mine whilst aggressively analysing Company Ltd (‘Hebei Hua Ao’), the holder of 11.3 further potential acquisitions of mining projects, square kilometres of mining and exploration preferably in base metals, that are capable of being licences and the owner of the mine and processing brought into production and satisfy historically facilities at Caijiaying in the Peoples Republic of preset economic returns to shareholders. China (the “Caijiaying Mine”). 10 Caijiaying Mine Location CAIJIAYING INTRODUCTION The Caijiaying Mine is an operating zinc, gold, silver and lead mine (together with the Camp comprising staff accommodation, recreational and mess facilities) located approximately 300 kilometres by road, north-west of Beijing in Hebei Province. The Caijiaying Mine site is easily accessible by two alternative freeway systems from Beijing and a R E P O RT A N D A C C O U N T S 2 0 13 through its wholly owned Hong Kong subsidiary China Zinc Limited, purchased an additional 28.8% interest in Hebei Hua Ao from the Zhangjiakou Guoxin Enterprise Management and Service Center in 2012. Griffin now holds an 88.8% equity interest in Hebei Hua Ao and the Zhangjiakou Guoxin Enterprise Management and Service Center retains an 11.2% interest. In addition, and as part of this purchase agreement, number of secondary sealed roads. The site has the term of the Hebei Hua Ao joint venture was significant water supplies, two independent extended until October 2037. connections to the electricity grid, full connectivity to fixed and mobile tele-communications systems and broadband access for internet services. Climatic conditions are not severe with warm summers and cold, dry winters enabling operations at Caijiaying to continue for 365 days a year. DEVELOPMENT In January 2004, a second contractual joint venture company, Hebei Anglo, was formed to 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 Guoxin Enterprise Management Hebei Hua Ao is a contractual co-operative joint and Service Center holds 10%. Griffin, through venture company entity established in 1994. Hebei Hua Ao and Hebei Anglo, has a controlling Initially, Griffin held 60% of Hebei Hua Ao interest in mining and exploration licences over (through a wholly owned subsidiary) with the approximately 53 square kilometres at Caijiaying. remaining 40% held by the Zhangjiakou Guoxin Enterprise Management and Service Center (the previously named 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. Following extensive exploration, resource delineation drilling, a number of scoping studies, feasibility study, financing and construction, Griffin successfully commissioned the Caijiaying Mine on time and within budget in 2005. The initial design production throughput rate of 200,000 tonnes of ore per annum has steadily The initial term of Hebei Hua Ao was 25 years and increased since commissioning with processing was due to expire in 2019. In light of the continuing rates in excess of 840,000 tonnes of ore per annum increase in the resources base and production having been achieved following the upgrade of the profile of the Caijiaying Mine, the Company, processing facilities in 2010. 11 G R I F F I N M I N I N G L I M I T E D In December 2007, production of a separate Jurassic intrusives have replaced favourable precious metals concentrate containing gold, silver horizons in the metamorphic rocks, most notably and lead, commenced from an integrated circuit calcsilicates and marble. Porphyry sills and dykes forming part of the main processing facilities at the intruding along faults have then cut across the Caijiaying Mine. This allowed the full economic sequence. benefit of these metals to be obtained by the Group. Previously gold, silver and lead were "lost", unaccounted and unpaid for in the zinc concentrate sold to the Chinese metals traders and smelters. Ongoing 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, The Company is now in the process of increasing indicating significant potential for further base the mining and processing of ore at the Caijiaying metal and gold deposits. Mine to 1.5 million tonnes per annum. This will include a doubling of the already expanded JORC RESOURCE processing facilities, a new power sub-station, a new In October 2013, the latest JORC Mineral crushing circuit, the underground development of Resource Estimate for the Caijiaying Mine was Zone II and an expansion of the existing mining produced at a zinc cutoff of 1%, the highlights of operations at Zone III. These developments are all which are outlined below: subject to the successful granting of a new mining licence over Zone II, which will also include the area between Zone II and Zone III. This is not • A 215% increase in Measured Resources for the current mining area of Zone III. expected to occur prior to the end of the third • 74% of the Zone III resource was placed in the quarter of 2014. By that time, the boundary survey, Measured & Indicated Categories. feasibility study and environmental impact study should have all been completed and underground development work at both Zones II and III well • Zone III resource of 29.8 million tonnes @ 4.7% Zinc, 0.2% Lead, 23.4 g/t Silver & 0.7 g/t Gold. under way. The total upgrade is expected to be • Total Resource of 49.4 million tonnes @ 4.1% completed by the end of 2014. Zinc, 0.4% Lead, 23.9 g/t Silver & 0.5 g/t Gold. GEOLOGY • Total contained metal of: Mineralisation at Caijiaying is believed to be related * 2 million tonnes of Zinc to a Jurassic igneous event that affected the 2.3 * 212,000 tonnes of Lead billion year old metamorphic basement rocks. Base * 37.9 million ounces of Silver metal and gold mineralisation associated with * 825,000 ounces of Gold 12 R E P O RT A N D A C C O U N T S 2 0 13 The success of the infill and extension drilling the Company has undertaken a major review of the program, along with on-going mine development, data collection and management processes, grade has allowed for the reinterpretation and upgrade of control, mine planning and mine reconciliation to the Zone III Mineral Resource. A significant optimise production at Caijiaying. This work will portion of the Mineral Resource was confirmed in also allow the Company to adapt its plans to take the higher Measured and Indicated categories and advantage of a predicted future increase in the zinc this material will underpin mining operations for price due to pending market supply/demand issues. many years to come. Drilling is continuing and further drilling access is being provided by new underground mine development. The updated 2013 Mineral Resource estimate is reported at a zinc cut-off grade of 1%. No update was undertaken on the Zone II mineralisation. Griffin continues to work on a revised resource The revised Caijiaying Mine resources are model for mine planning purposes. In addition, summarised below. Caijiaying Zone III Remaining Mineral Resources June 2013 Grade Tonnage Reported above a Cut off Grade of 1% Zn Tonnes (Mt) 14.0 8.1 7.7 29.8 Zn (%) 5.0 4.5 4.2 4.7 Pb (%) 0.3 0.2 0.2 0.2 Ag (g/t) 26.6 22.5 18.5 23.4 Au (g/t) 0.8 0.7 0.5 0.7 Zn Metal (t) 701,000 362,000 323,000 1,386,000 Pb Metal (t) 42,000 14,000 12,000 68,000 Ag Metal (Oz) Au Metal (Oz) 11,986,000 5,835,000 4,560,000 22,381,000 359,000 173,000 129,000 661,000 Caijiaying Zone II Remaining Mineral Resources May 2012 Grade Tonnage Reported above a Cut off Grade of 1% Zn Tonnes (Mt) - 4.1 15.6 19.6 Zn (%) - 3.0 3.3 3.3 Pb (%) - 0.7 0.8 0.7 Ag (g/t) - 24.9 24.5 24.6 Au (g/t) - 0.3 0.3 0.3 Zn Metal (t) - 123,000 516,000 Pb Metal (t) - 27,000 Ag Metal (Oz) - 3,243,000 117,000 12,277,000 638,000 144,000 15,520,000 Au Metal (Oz) - 39,000 124,000 164,000 Caijiaying Combined Global Remaining Mineral Resource Grade Tonnage Reported above a Cut off Grade of 1% Zn Tonnes (Mt) 14.0 12.1 23.2 49.4 Zn (%) 5.0 4.0 3.6 4.1 Pb (%) 0.3 0.3 0.6 0.4 Ag (g/t) 26.6 23.3 22.5 23.9 Au (g/t) 0.8 0.5 0.3 0.5 Zn Metal (t) 701,000 485,000 839,000 Pb Metal (t) 42,000 41,000 Ag Metal (Oz) Au Metal (Oz) 11,986,000 9,078,000 359,000 212,000 253,000 825,000 129,000 16,837,000 2,024,000 212,000 37,901,000 Category Measured Indicated Inferred Sub-Total Category Measured Indicated Inferred Sub-Total Category Measured Indicated Inferred Total Note: Zone II Mineral Resource includes 1.49 million tonnes at 3.09% zinc oxide material. The Caijiaying Deposit is a polymetallic (Zn, Au, Pb, Ag), multi-generational deposit hosted within deformed amphibolitic and calc-silicate gneisses and schists with minor marble. The Mineral Resource estimate is based on 2,470 underground diamond drill holes and 579 surface drill holes at Caijiaying. The underground drilling was carried out using nominal fan patterns of 20m by 20m, grading to a 40m by 40m pattern at depth. Resource wireframes were interpreted by CSA Global Pty Ltd ("CSA") in consultation with Griffin geologists. The resource outlines were based on mineralisation envelopes prepared on cross-sections using a nominal 1% Zn cut-off grade. 13 G R I F F I N M I N I N G L I M I T E D EXPLORATION Hebei Hua Ao Mining & Exploration Licence Area Drilling activity continued underground at Zone III with up to 5 rigs operating during 2013. A total Hebei Anglo Exploration Licence area The major exploration activity in 2013 outside the Caijiaying Mine was a diamond drilling program at the Magpie Zone, an exploration target located between Zone V and the F45 regional controlling of 392 holes were drilled for some 36,769 metres. fault. Drilling was focused on increasing the Mineral Resources, both along strike and at depth. Primary targets were north, south and depth extensions of Fu Long; south and depth extensions of Qing Long; south extensions of Ju Long; north extensions to Zone II and infill in the areas of Inferred Mineral Resources which underlie Zone III. Extension drilling of the Fu Long, Qing Long and Ju Long lodes intersected significant base metal mineralisation up to 200 metres below the lowest development level. Drilling is regularly extending below the 1000RL level, a vertical distance of 500 metres below the level of the mine portal. Mineralisation remains open below the deepest intersections and the down-dip extension of the zones will be tested with further drilling as mining continues deeper at Zone III. The Magpie Zone was chosen as an exploration target after the recognition of a major underground fault, the Grasshopper Fault, in the Zone III mine. This fault has a close spatial relationship with base metal mineralisation on the western side of Zone III and Zone II. A similarly orientated fault has been recognised immediately to the west of Zone V and the area south of this is therefore considered prospective based on the analogous setting to that of Zone III and Zone II to the east. A total of 2,978 metres were drilled in eight holes at the Magpie Zone targeting base metal and gold mineralisation of a similar style to that at Zone III. The drilling intersected high-grade zinc and lead mineralisation in structurally-controlled, high- angled, veins. Gold mineralisation was also intersected, however, the massive, replacement- style mineralisation seen in Zone III was not found. Extensional drilling targeting Qing Long South The veins are similar to the style of mineralisation and Zone II North returned positive results with seen in Zone V located immediately to the north. significant base metal intersections seen in both drill programs. These two areas appear to have a 2014 Exploration complex structural relationship and may represent originally a single zone of mineralisation offset by northeast-southwest faulting. During 2014, exploration activities will focus on Zone III, Zone II, the corridor between Zone III and Zone II and regional targets within the exploration licences. 14 R E P O RT A N D A C C O U N T S 2 0 13 At Zone III, additional underground exploration completed in 2014 and will substantially improve will be completed in an attempt to continue to ventilation and access for near-mine exploration increase the size of the Mineral Resources. drilling activities. Particular attention will be paid to further definition of gold rich mineralisation which appears to be increasing with depth. Several of the zinc- gold lodes at Zone III remain open either along strike or at depth or both and these will be scheduled for further drilling. Regional exploration will concentrate on the possible northern extension of the Zone III orebody (to the north of Caijiaying Village). This area is considered very prospective as the Zone III mineralisation remains open to the north and the area has not been tested by drilling. The depth to A major underground drilling program is being metamorphic basement deepens to the north and planned to further define and understand the additional ground geophysical surveys may be mineralisation in the Zone II - Zone III corridor. undertaken to assist with structural interpretation, Drilling will focus both on zinc rich areas and gold targeting and to give an indication of depth of rich/zinc poor areas. The underground drive cover. If priority targets are identified and target providing access to this area, linking the Fox depths are considered reasonable, exploration decline with the main decline, is expected to be drilling will follow. Caijiaying Mine Exploration Area 15 G R I F F I N M I N I N G L I M I T E D OPERATIONS stopes opened and greater use being made of mechanised mining methods with faster rates of The processing plant has performed above the design capacity treating a record 838,431 tonnes of extraction. ore during 2013. Throughput was constrained by During 2013, a record 877,803 tonnes of ore were the safety production permit rather than mill mined and a record 914,919 tonnes of ore hauled, capacity. In order to maximise the amount of extractable ore, mining was restricted to the upper levels of the Caijiaying Mine throughout 2013. This resulted grading 4.93% zinc. By the 31st December 2013, 129,000 tonnes of ore were stockpiled at surface to be processed during the Chinese Spring Festival when mining is traditionally suspended. in the grade of ore processed falling to 4.9% zinc, Further development work was undertaken during 0.25% lead, 0.78 ounces per tonne silver whilst 2013 with 317 metres of capital development drives gold increased to 0.03 ounces per tonne. With and 467 meters of exploration drives completed. In improved recoveries 39,724 tonnes of zinc, 1,553 addition, 283 metres of driving towards the Zone II tonnes of lead, 323,808 ounces silver and 11,468 area was undertaken and the main "south" and ounces of gold in concentrate were produced. Zinc "north" declines were further extended by 117 in concentrate production was in line with 2012. metres. During 2013, 7,132 metres of operational Lead and silver in concentrate production was and development drives were completed. This has lower than in the previous year. Gold production enabled the lower levels of the mine to be accessed. not only exceeded 2012 production, but was a Long hole stoping continues to be the predominate record for the Caijiaying Mine. mining method. The metallurgical recovery of all metals exceeded Remote bogging continued to be used to remove that achieved in 2012. The complexity of the gold ore left in previously mined stopes and increased mineralogy often made recovering more than 50% the recovery of ore from stopes mined during the of the gold in situ difficult. Metallurgical work is year. ongoing to increase gold recoveries with recoveries of up to 60% achieved in early 2014. Additional flotation cells have recently been installed which seem to have had a positive impact on further increasing gold recoveries. 50% of the tailings were backfilled into the mine in 2013, thereby not only reducing the amount of tailings facilities required at surface, but also improving the stability of the Caijiaying Mine. In July 2013, a Dry Tailings facility was commissioned Mining rates have continued to be increased to at the Caijiaying Mine further reducing the volume meet the enhanced processing capacity with more of tailings going to the surface tailings facilities. 16 R E P O RT A N D A C C O U N T S 2 0 13 COMMUNITY INVESTMENT & PARTNERSHIP In 2013, Griffin, through Hebei Hua Ao, instituted Griffin, through Hebei Hua Ao, has invested heavily in the local community and instigated best practices regarding the protection of the environment. In this regard: a programme to create a long term industry for the Caijiaying local village, in particular, to provide a more sustainable annual income less reliant on the seasonality of crops grown in the short summer months. To that end, Hebei Hua Ao purchased 170 • Solid and liquid wastes are not disposed of into cows, which were already pregnant with 47 the environment; • All production water is recycled; offspring, creating a sizeable initial herd of 217 cattle for the creation of a dairy and cattle farm. To date, the venture has been an outstanding success • Gas emissions from boilers are treated to remove and it is planned to purchase another 183 cows by pollutants; • Mined areas underground are back filled; • Noise and dust from operations at the Caijiaying Mine are strictly controlled; and • All non-recyclable wastes from supporting facilities are treated in an incinerator. June next year to complete the programme and finalise a new industry for the local population. 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 2013, Hebei Hua Ao contributed over Rmb3 million ($490,000) to the Griffin's environmental practices were rewarded local community. 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, an old peoples rest home and assisted on other infrastructure projects. Griffin estimates that the Caijiaying Mine has provided direct and indirect employment to over 1,000 Chinese nationals and minimised the employment of expatriate personnel. During 2013, Hebei Hua Ao paid Rmb 126.2 million ($20.7 million) in taxes, royalties, social security fees, fines and other duties to Chinese governmental authorities and agencies. 17 G R I F F I N M I N I N G L I M I T E D 18 R E P O RT A N D A C C O U N T S 2 0 13 Cows donated by Hebei Hua Ao for the establishment of sustainable cattle and dairy operations at Caijiaying 19 G R I F F I N M I N I N G L I M I T E D FINANCIAL Griffin Mining Limited (the ‘Company’) and its • A record 838,431 tonnes of ore were processed, subsidiaries (together the ‘Group’) recorded; compared to 800,288 tonnes in 2012, a 4.8% • Operating profit of $20,293,000 in 2013 increase; (2012: $31,174,000); • A record 11,468 ounces of gold in concentrate • Profit before tax of $14,827,000 in 2013 (2012: $27,239,000); were produced, compared to 8,322 ounces in 2012, a 37.8% increase; • Profit after tax of $9,756,000 in 2013 • 39,724 tonnes of zinc metal in concentrate were (2012: $19,707,000); and produced, compared to 40,581 tonnes in 2012; • Profit after non-controlling interests of $8,157,000 in 2013 (2012: $14,835,000) • 323,808 ounces of silver in concentrate were produced, compared to 409,596 ounces in 2012; Record amounts of ore were mined, hauled and and processed in 2013. With the upper mine levels being mined to maximise the extractable amount of ore, grades were lower resulting in lower zinc, lead • 1,553 tonnes of lead in concentrate were produced, compared to 2,402 tonnes in 2012. and silver production in 2013. Gold grades and In 2013, the average market price for zinc fell 2% recoveries have improved such that record gold from that in 2012. With increased treatment production was achieved in 2013. Revenues were further impacted by lower prices for all metals. As a result revenues in 2013 fell to $71,071,000 (2012: $76,860,000). Whilst processing costs and administration costs have been contained, mining and haulage costs have risen with increased production and further mine development. With lower revenues and increased costs, profits from operations fell to $20,293,000 in 2013 (2012: $31,174,000). In summary, production in 2013 was as follows: charges, the average price per tonne of zinc metal in concentrate received by the Group in 2013 fell by 5.2% to $1,302 (2012: $1,374). The average price received for silver declined 26.3% to $16.8 per ounce (2012: $22.8), for lead by 12.0% to $1,633 per tonne (2012: $1,855), and for gold by 17.7% to $1,233 per ounce (2012: $1,499). Cost of sales have increased 15.2% in 2013 to $40,078,000 (2012: $34,795,000). A significant amount of this cost increase may be attributed to increased amounts of ore being mined, hauled and processed. Further cost increases resulted from mine development with lower mine levels being • A record 877,803 tonnes of ore were mined, accessed and increased contractor rates for mining compared to 789,692 tonnes in 2012, a 11.3% and haulage. increase; 20 R E P O RT A N D A C C O U N T S 2 0 13 Group operating costs in 2013 of $10,700,000 were 3,900,000 ordinary shares were issued on the in line with that in 2012 of $10,891,000, despite exercise of options by directors and management in inflationary cost increases in China. 2013 bringing the number of Griffin shares on Profits before tax declined to $14,827,000 (2012: issue to 179,091,830. $27,239,000) reflecting not only lower operating Net cash inflow from operating activities in 2013 profits but also increased interest charges of amounted to $27,997,000 (2012: $32,244,000). $3,651,000 (2012: $3,414,000) arising from the new $7,347,000 was invested in 2013, (2012: dry tailings facility at Caijiaying and the loss of $125,419,000 including $117,459,000 to purchase $2,229,000 on the disposal of Griffin’s interest in the Chinese non controlling interests and extend Spitfire Oil Limited at the end of 2013. The the Hebei Hua Ao joint venture term). Attributable net assets per share at 31st December 2013 was 84 cents (2012: 79 cents). Group benefited from interest receipts of $145,000 (2012: $495,000), foreign exchange gains of $107,000 (2012: losses of $904,000) and other income of $162,000 (2012: $48,000). Income taxes of $5,071,000 (2012: $7,532,000) were charged. This includes a deferred taxation provision of $297,000 (2012: nil). The non controlling interests share of Hebei Hua Ao's profits of $1,599,000 (2012: $4,872,000) were provided, resulting in attributable profits to Griffin of $8,157,000 (2012: $14,835,00). The reduction in non controlling interests reflects not only a reduction in profits but also a reduction in the non controlling party’s equity interest from 40% to 11.2% with effect from the 25th June 2012. Basic earnings per share in 2013 was 4.63 cents (2012: 8.46 cents) with diluted earnings per share of 4.63 cents in (2012: 8.36 cents). During 2013, 260,000 (2012: 50,000) ordinary shares were bought back in the market for cancellation at a cost of $119,000 (2012: $24,000). 21 G R I F F I N M I N I N G L I M I T E D 22 R E P O RT A N D A C C O U N T S 2 0 13 Caijiaying Mine, Zinc concentrate stockpiles 23 G R I F F I N M I N I N G L I M I T E D STRATEGIC REVIEW CAIJIAYING The latest JORC resource estimate confirms the availability of extensive ore resources at Caijiaying for increased production over an extended period. With the extension of the term of the Hebei Hua Ao joint venture to 2037, sufficient time now exists to expand the current mining and processing Development work has commenced to access the Zone II area underground from both the rehabilitation of the Fox decline and from the main Zone III decline. This process is expected to be completed by the end of 2014 and will provide access to the zone II orebody and further resource definition drilling areas. capabilities at the Caijiaying Mine to provide the It is hoped that throughput will slowly be expanded maximum return on capital to shareholders. towards the equivalent of 1.5 million tonnes of ore Progress continues to be made by Hebei Hua Ao in its application for a new mining licence at Zone II and the area between Zone II and Zone III together with all other associated permits to allow per annum in 2015. ACQUISITIONS an expanded production profile to be instituted at The Company's strategy is to continue to further the Caijiaying Mine. Detailed plans have been develop the Caijiaying Mine area and to further completed and a lead contractor appointed for the acquire low cost, base metals mining projects that further upgrade of the processing facilities at have the potential to be brought into long term, Caijiaying to increase capacity to 1.5 million tonnes economic production for a capital cost that per annum. Tenders for the large capital machinery provides a substantial and justifiable return on with long lead times to delivery have been granted. equity to shareholders. Ground work for the upgrade has commenced with Management efforts have been directed at the foundation earthworks ceremony having taken investigating potential ventures in China, Asia, place with all appropriate Chinese government Central Asia and elsewhere where management officials present on the 8th of April 2014. All above have extensive knowledge and contacts. ground upgrade facilities are expected to be completed by the 31st October 2014 to enable winter work to continue. Additional plant and equipment, including ball mill, floatation tanks and a new power sub-station will need to be installed during the summer months which will result in significant interruption to production in July and August of 2014. A considerable number of projects and ventures have been reviewed and investigated during the past year, but none as yet have been successfully consummated due to negative findings during due diligence or an insufficient return calculated for the risk shareholders would need to accept in funding the project to production. 24 R E P O RT A N D A C C O U N T S 2 0 13 ZINC Both of the above strategic directions pursued by the Company are bolstered by the current outlook for the world zinc price. In the third quarter of 2013, world demand for zinc exceeded supply. Zinc stockpiles at the London Metals Exchange (the ‘LME’) along with warrants held over zinc metal at the Shanghai Futures Exchange (SHFE) have fallen since June 2013. Zinc metal stockpiles and on warrant at the LME fell from 1.1Mt at the end of June to 0.8Mt in April 2014. As this trend became more evident a noticeable positive reaction has LME. Barclays Plc forecast a price of $2,400 in a 26th March report. Zinc averaged $2,025 this year. Use of the metal is expected to expand 4.5% to 13.6 million tons this year, while refinery output is expected to increase 4.4% to 13.5 million tons, the Zinc Study Group said in a 2nd April report. Deutsche Bank AG sees a gap of 400,000 tons, forecasting demand growth at 5.4%, up from 4% last year. China is expected to use 7% more zinc this year, according to Barclays. The nation now accounts for 44% of the world total compared with 16% in 2000, the Zinc Study Group estimates. been seen in the zinc price. SPITFIRE OIL LIMITED Production of refined zinc in China, India, Peru and Korea has been strong in 2013 as growing momentum in the global recovery drives consumption in the world’s two largest economies, China and the United States. On the supply side, At the beginning of 2013, following a strategic review of the Group's activities and future direction, the directors determined that Griffin's 39.2% interest in Spitfire Oil Limited ("Spitfire") was peripheral to the Group's activities and should a limited number of new mines and a series of mine be realised. closures (e.g. Glencore Xstrata’s Perseverance and Brunswick mines, Vedanta’s Lisheen operation and MMG’s Century Zinc mine in Australia) are likely to result in demand outstripping supply for a substantial number of years. This bodes well for the price of zinc and the profitability of zinc producers in the future. A number of prominent investment banks have The original purchase of 16,666,667 ordinary shares in Spitfire had been an opportunistic acquisition with a view to diversifying the Group's activities. Following Spitfire's decision to suspend development of the Salmon Gums lignite deposits due to the uneconomic nature of the estimated return on capital outlayed, the Griffin directors concluded that additional value could not be realised in the near made predictions in respect of the zinc price. term from Griffin's investment in Spitfire. Morgan Stanley stated in an 8th of April report that annual average cash prices on the LME may climb 13 percent to $2,331 in 2015 from $2,066 in 2014, more than the other five industrial metals on the On the 30th December 2013, Spitfire purchased Griffin's total interest in Spitfire by acquiring 16,666,667 Spitfire shares for 5 pence per share. 25 G R I F F I N M I N I N G L I M I T E D 26 R E P O RT A N D A C C O U N T S 2 0 13 Mladen Ninkov (Chairman) with the Caijiaying management team and major contractors 27 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 53, involved in the resource industry for over 30 years. He holds a Masters of Law Degree from Trinity Hall, has been responsible for the discovery, development Cambridge University and a Bachelor of Laws (with and operation of several underground gold mines Honours) and Bachelor of Jurisprudence Degree during his career. Mr. Brynelsen is the President and from the University of Western Australia. He is the a director of Vangold Resources Limited. principal of Keynes Capital. He has a mining, legal, fund management and investment banking Rupert Crowe, Dirctor, Australian aged 64, is background and is admitted as a barrister and a graduate geologist from Trinity College Dublin. solicitor of the Supreme Court of Western Australia. He was the founding chairman and managing He was the Chairman and Managing Director of the director of CSA Global Pty Ltd, a mining Dragon Capital Funds management group, a consultancy company founded in Ireland in 1983 director and Head of International Corporate and now headquartered in Australia. He is a Finance at ANZ Grindlays Bank Plc in London and specialist in zinc-lead exploration and was involved a Vice President of Prudential-Bache Securities Inc. as a principal in the discovery and development of in New York. He also worked at Skadden Arps Slate several notable mines. He has served on the board Meagher & Flom in New York and Freehill of four public companies listed in Dublin, London, Hollingdale & Page in Australia. He has been Vancouver and Australia. He is currently a non- chairman and director of a number of both public executive director of CSA Global Pty Ltd and and private Mining and Oil & Gas companies. Spitfire Oil Ltd. Roger Goodwin, Finance Director, British, Adam Usdan, Director, (appointed 19 March aged 59, Finance Director, British, aged 59, is a 2014), USA, aged 52, is the President of Trellus Chartered Accountant. He has been with the Management Company LLC, an equity hedge fund Company since 1996 having previously held senior based in the U.S. Mr Usdan founded Trellus positions in a number of public and private Management in January 1994 and has been in the companies within the natural resources sector. He investment advisory industry for over 25 years. Mr has a strong professional background, including Usdan began his investment career in 1987 at that as a manager with KPMG, with considerable Odyssey Partners, where he was responsible for public company and corporate finance experience, managing long/short U.S. equity (small to mid-cap) and experience of emerging markets. pools of capital. Mr Usdan holds an MBA from the Kellogg Graduate School of Management at Dal Brynelsen, Director, Canadian, aged 67, is Northwestern University with majors in Finance, a graduate of the University of British Columbia in Marketing, and Accounting, and a BA in English Urban Land Economics. Mr. Brynelsen has been from Wesleyan University. 28 R E P O RT A N D A C C O U N T S 2 0 13 SENIOR EXECUTIVES Maoheng Zhang, Operations Manager Dr Bo Zhou, General Manager China, Caijiaying, Australian, aged 50, has a PhD in Australian, aged 51, holds a PhD in exploration mining engineering from the University of New geology from Sydney University and a BSc in South Wales. Dr Zhang has vast experience in economic geology from Peking University. He was operating numerous mining operations in Australia Managing Director of Sinovus Mining Ltd, an and Asia, including China, where he was the General Australian Stock Exchange listed company with Manager and Board Director of Guizhou Jinfeng mineral interests in China. Prior to that, he was Mining Limited for Sino Gold and then Eldorado the General Manager for Guangxi Golden Tiger Gold and Australia, where he was the mining Mining JV, a Sino-Australian JV gold company manager of the Darlot Gold Mine for Barrick Gold focussed on Guangxi, China, controlled by Golden of Australia. He also has extensive experience of Tiger Mining NL. He has also worked as the providing mining and engineering services to a Senior Geologist for Silk Road Resources (a number mines. Toronto Stock Exchange listed company) responsible for evaluating various gold properties Wendy Zhang, Chief Financial Officer Hebei in Gansu Province in central western China. Dr Hua Ao, Australian, aged 40, holds a Master of Zhou has considerable experience of, and has Accounting degree from Macquarie University, a established extensive contacts in, the Chinese member of the Certified Practising Accountant of resources sector. Australia and a qualified member of the Chinese Institute of Certified Public Accountant for 11 years. Prior to joining Griffin she spent the previous 4 years as Financial Controller for the Australian Stock Exchange listed Golden Tiger Mining’s joint venture operations in China. Previously she was Chief Accountant for a Shanghai Silk Group and subsequently Ann Taylor Shanghai. 29 G R I F F I N M I N I N G L I M I T E D DIRECTORS’ REPORT The Directors submit their report together with the audited consolidated financial statements of Griffin Mining Limited ("the Company") and its subsidiaries ("the Group") for the year ended 31st December 2013. FINANCIAL RESULTS The Group profit before taxation, amounted to US$14,827,000 (2012 US$27,239,000). Taxation of US$5,071,000 (2012 US$7,532,000) and non controlling interests of $1,599,000 (2012 $4,872,000) have been provided. No dividend was paid in 2013 (2012 nil). US$8,157,000 has been credited to reserves (2012 US$14,835,000). The basic earnings per share amounted to 4.63 cents (2012 8.46 cents). The attributable net asset value per share at 31st December 2013 amounted to 84 cents (2012 79 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 31st December 2013 and the indication of likely future developments are set out on pages 10 to 25. DIRECTORS The Directors of the Company during the year were: Mladen Ninkov – Australian – Chairman Roger Goodwin – British – Finance Director Dal Brynelsen – Canadian Rupert Crowe - Australian/ Irish - appointed 11th September 2013 William Mulligan - American (US) - resigned 31st December 2013 Adam Usdan was appointed a director on 19th March 2014. 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 31st December 2013 and their immediate families in the share capital of the Company were as follows: Name At 31st December 2013 At 1st January 2013 or date of appointment Ordinary shares number Options over ordinary shares, number exercisable at 45 pence Mladen Ninkov Dal Brynelsen Rupert Crowe Roger Goodwin 33,001 215,001 1 877,830 6,000,000 400,000 - 1,200,000 All of the Directors’ interests detailed are beneficial. Ordinary shares number 33,001 1 1 577,830 Options over ordinary shares, number exercisable at 20 pence 45 pence 6,000,000 400,000 - 1,200,000 3,000,000 200,000 - 600,000 The options exercisable at 45 pence per share 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 28th February 2015. The options have all now vested. 30 R E P O RT A N D A C C O U N T S 2 0 13 DIRECTORS’ REPORT On 31st October 2013 options granted to the directors and management in October 2008 over 4,400,000 new ordinary shares in the Company at an exercise price of 20p per share were exercised. The Company was informed by persons exercising options over 500,000 of these shares that they intended to sell those ordinary shares. In order to maintain an orderly market in the Company's shares, the Company agreed to buy out the options over these shares at the difference between the exercise price and the mid market value of the Company's shares at close of business on 31st October 2013 of 34.5p. The options were exercised by, and the new Ordinary shares issued as follows: Number of Options held Number of Options Exercised Non Directors 3,000,000 3,000,000 Roger Goodwin (Director) Dal Brynelsen (Director) William Mulligan (Director) Other management 600,000 200,000 200,000 400,000 600,000 200,000 200,000 400,000 Total 4,400,000 4,400,000 Number of Options bought out - 300,000 - - 200,000 500,000 Number of shares retained 3,000,000 300,000 200,000 200,000 200,000 3,900,000 On 13th February 2014 a new set of options (the "new options") over 5,000,000 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 option will entitle the holder to subscribe for new ordinary shares in the Company at an exercise price of £0.40 per share on or before 31st December 2018. The options will not vest until 31st December 2014 with one third vesting then, followed by one third on 31st December 2015 and one third on 31st December 2016. The options will not vest if the option holder resigns or leaves the Company for cause prior to the vesting event taking place. All the options will vest immediately upon; a takeover offer being made; or a change in control of the Company; or fundamental change in the business of the Company taking place prior to the options expiring. The options have been granted as follows: Options over number new ordinary shares in the Company Directors: Mladen Ninkov (Chairman) Roger Goodwin (Finance Director) Other management Total 3,500,000 500,000 1,000,000 5,000,000 31 G R I F F I N M I N I N G L I M I T E D DIRECTORS’ REPORT REMUNERATION POLICY The remuneration of all executive and non-executive directors, officers and senior employees of the Group is determined by the board of directors. The Company is committed to remunerating senior executives in a manner that is market-competitive and consistent with "Best Practice" including the interests of shareholders. Remuneration packages are based on fixed and variable components, determined by the executives' position, experience and performance, and may be satisfied via cash or equity. Non-executive directors are remunerated at a level that is consistent with market and industry standards. The cash remuneration of non-executive directors consists only of directors' fees and no retirement benefits are payable. The Group's remuneration policy has been based on industry practice rather than Group performance and takes into account the risk and liabilities assumed by the directors and executives as a result of their involvement in the speculative activities undertaken by the Group. Directors and executives are fairly compensated for the extensive work they undertake. No performance based bonuses were issued during the reporting year. 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. 32 R E P O RT A N D A C C O U N T S 2 0 13 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 12th May 2014 33 G R I F F I N M I N I N G L I M I T E D REPORT OF THE INDEPENDENT AUDITOR INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF GRIFFIN MINING LIMITED We have audited the Group financial statements (the financial statements) of Griffin Mining Limited for the year ended 31st December 2013 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 related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the Company’s members, as a body, in accordance with Section 90(2) of the Bermuda Companies Act 1981. 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 Statement of Directors’ Responsibilities in respect of the accounts set out on page 33, the directors are responsible for the preparation of the Group financial statements which give a true and fair view. Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. 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 the financial and non-financial information in the Chairman’s statement, financial review, JORC Resource, Strategic Review and Directors report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. OPINION ON THE FINANCIAL STATEMENTS In our opinion, the financial statements give a true and fair view of the state of the Group’s affairs as at 31st December 2013 and of its profit for the year then ended in accordance with IFRSs as adopted by the European Union. Grant Thornton UK LLP Statutory Auditor London 12th May 2014 34 R E P O RT A N D A C C O U N T S 2 0 13 CONSOLIDATED INCOME STATEMENT For the year ended 31st December 2013 (expressed in thousands US dollars) Notes 2013 $000 2012 $000 Revenue Cost of sales Gross profit Net operating expenses Profit from operations Share of losses of associated company Loss on disposal of interest in associated company Foreign exchange gains / (losses) Finance income 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 71,071 76,860 (40,078) (34,795) 30,993 42,065 (10,700) (10,891) 20,293 - (2,229) 107 145 (3,651) 162 14,827 (5,071) 9,756 1,599 8,157 9,756 4.63 4.63 31,174 (163) - (904) 495 (3,411) 48 27,239 (7,532) 19,707 4,872 14,835 19,707 8.46 8.36 35 G R I F F I N M I N I N G L I M I T E D CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31st December 2013 (expressed in thousands US dollars) Profit for the year Other comprehensive income that will be reclassified to profit and loss 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 2013 $000 9,756 841 841 10,597 1,683 8,914 10,597 2012 $000 19,707 545 545 20,252 4,960 15,292 20,252 36 R E P O RT A N D A C C O U N T S 2 0 13 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31st December 2013 (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 Deferred taxation Finance lease Current liabilities Taxation payable Trade and other payables Finance Lease Bank loans Total liabilities 12 13 14 15 16 17 20 21 22 23 22 24 2013 $000 193,444 1,852 - 195,296 7,981 4,214 26,278 38,473 2012 Restated $000 177,470 1,707 3,596 182,773 6,231 4,168 16,764 27,163 233,769 209,936 1,791 71,339 3,690 2,748 1,683 (29,346) 11,212 84,614 147,731 3,004 150,735 2,591 1,646 12,012 16,249 2,878 14,215 487 49,205 66,785 1,755 70,037 3,690 3,055 1,313 (29,346) 10,485 76,797 137,786 4,757 142,543 2,535 1,316 - 3,851 3,840 12,590 - 47,112 63,542 Total equities and liabilities 233,769 209,936 Attributable net asset per share to equity holders of parent 25 $0.84 $0.79 The accounts on pages 35 to 60 were approved by the Board of Directors and signed on its behalf by: Mladen Ninkov Chairman 12th May 2014 Roger Goodwin Finance Director 37 G R I F F I N M I N I N G L I M I T E D 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 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 s t s e r e t n i g n i l l o r t n o c - n o n t i f o r P s s o l d n a e v r e s e R n g i e r o F e v r e s e R 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 3 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 38 0 0 0 $ 0 0 0 $ 0 0 0 $ 0 0 0 $ 0 0 0 $ 0 0 0 $ 7 0 7 9 1 , 2 7 8 4 , 5 3 8 4 1 , 5 3 8 4 1 , 5 4 5 8 8 7 5 4 - 2 5 2 0 2 , 0 6 9 4 , 2 9 2 5 1 , 5 3 8 4 1 , 5 2 ) 4 2 ( - - ) 1 6 5 2 1 ( , ) 1 6 5 2 1 ( , - 5 2 ) 4 2 ( ) 4 6 3 9 2 ( , ) 8 1 ( 5 1 2 4 6 1 , 6 7 3 2 1 , 9 3 8 1 5 1 , ) 6 4 3 9 2 ( , ) 4 2 9 1 4 ( , ) 9 7 5 2 1 ( , ) 5 4 3 9 2 ( , - - - - - ) 6 1 3 1 ( , ) 7 4 1 ( ) 9 6 1 1 ( , ) 9 6 1 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 , 2 6 9 1 6 , 1 4 0 0 1 , - - - - - - 4 4 4 4 4 4 - - - - - - ) 6 4 3 9 2 ( , ) 6 4 3 9 2 ( , - - - - ) 9 1 1 ( 7 6 2 1 , - ) 7 1 1 ( - - - - - - ) 9 1 1 ( 7 6 2 1 , - ) 7 1 1 ( ) 6 3 4 3 ( , ) 6 3 4 3 ( , - 6 5 7 9 , 9 9 5 1 , ) 5 0 4 2 ( , ) 6 3 4 3 ( , 1 3 0 1 , 7 5 1 8 , - - - - - ) 0 4 3 ( ) 0 4 3 ( 7 5 1 8 , - - - - - - - - 1 4 8 4 8 7 5 7 - 7 2 7 7 9 5 0 1 , 3 8 6 1 , 4 1 9 8 , 7 5 1 8 , 7 2 7 - - - - - - - - - - 3 4 5 2 4 1 , 7 5 7 4 , 6 8 7 7 3 1 , 7 9 7 6 7 , 5 8 4 0 1 , ) 6 4 3 , 9 2 ( 0 0 0 $ 0 0 3 , 1 - 0 0 3 , 1 - - - - - - 3 1 3 1 0 4 3 3 1 3 , 1 - - - - - - 0 4 3 0 3 0 3 0 0 0 $ 0 0 0 $ 0 0 0 $ 0 0 0 $ 0 3 0 , 3 0 9 6 , 3 1 6 0 , 0 7 5 5 7 , 1 1 1 0 2 y r a u n a J t s 1 t A - - - - ) 1 1 e t o n ( t n e m t s u d a j d o i r e p r o i r P 0 3 0 , 3 0 9 6 , 3 1 6 0 , 0 7 5 5 7 , 1 d e t a t s e r 1 1 0 2 y r a u n a J t s 1 t A - - - 5 2 5 2 - - - - - - - - - - - - - - ) 4 2 ( ) 4 2 ( - - - - - - - - - - - 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 5 5 0 , 3 0 9 6 , 3 7 3 0 , 0 7 5 5 7 , 1 ) d e t a t s e r ( 2 1 0 2 r e b m e c e D t s 1 3 t A - - - ) 0 9 1 ( ) 7 1 1 ( - ) 7 0 3 ( - - - - - - - - - - - - - ) 6 1 1 ( 8 2 2 1 , 0 9 1 - - - ) 3 ( 9 3 - - - 2 0 3 1 , 6 3 - - - - - - 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 n o i t p o f o e s i c r e x e n o s e r a h s f o e u s s I 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 n o i t p o e s a h c r u p e r a h s f o t u o y u B 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 n o i t p o f o e s i c r e x e n o r e f 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 s r e n w o h t i w n o i t c a s n a r T 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 5 3 7 0 5 1 , 4 0 0 3 , 1 3 7 7 4 1 , 4 1 6 4 8 , 2 1 2 1 1 , ) 6 4 3 , 9 2 ( 3 8 6 , 1 8 4 7 , 2 0 9 6 , 3 9 3 3 , 1 7 1 9 7 , 1 3 1 0 2 r e b m e c e D t s 1 3 t A R E P O RT A N D A C C O U N T S 2 0 13 CONSOLIDATED CASH FLOW STATEMENT For the year ended 31st December 2013 (expressed in thousands US dollars) Notes 4 6 7 18 12 6 12 12 12 12 13 22 Net cash flows from operating activities Profit before taxation Share of associated company losses Loss on disposal of interest in associated company Foreign exchange (gains) / losses Finance (income) Finance costs Adjustment in respect of share based payments Depreciation, depletion and amortisation (Increase) in inventories Decrease / (increase) in receivables and other current assets Increase / (decrease) 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 Cash flows from financing activities Issue of ordinary share capital on exercise of options Purchase of shares for cancellation Interest paid Finance Lease Dividends paid to non controlling interests Proceeds from bank loans Repayment of bank loans Net cash outflow from financing activities Increase / (decrease) 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 2013 $000 14,827 - 2,229 (107) (145) 3,651 - 7,184 (1,750) 563 1,545 27,997 2012 $000 27,239 163 - 904 (495) 3,411 25 6,762 (1,623) (1,663) (2,479) 32,244 (5,692) (11,435) 145 - (4,883) (2,499) - (110) (7,347) 1,150 (119) (3,651) (354) (3,436) 15,508 (13,415) (4,317) 10,641 16,764 (1,127) 26,278 495 (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 26,278 16,764 Included within net cash flows of $10,641,000 (2012 $73,494,000) are foreign exchange gains of $107,000 (2012 losses $904,000) which have been treated as realised. 39 G R I F F I N M I N I N G L I M I T E D ACCOUNTING POLICIES BASIS OF ACCOUNTING The accounts have been prepared in accordance with applicable International Financial Reporting Standards as issued by the International Accounting Standards Board 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 International Financial Reporting Standard ("IFRS") 13 became effective on 1st January 2013. IFRS 13 Fair Value Measurement 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 does not consider that this has a significant impact on the Group. 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 1st July 2012. There were no other 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 2013 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, however this has yet to be adopted by the European Union. 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 on or after 1st 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 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. 40 R E P O RT A N D A C C O U N T S 2 0 13 ACCOUNTING POLICIES II 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. III 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. 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 will only be on disclosure, in respect of non controlling interests. GOING CONCERN The financial statements have been prepared on a going concern basis. As at 31st December 2013, Hebei Hua Ao (a subsidiary of the Company) had bank loans outstanding of $49,205,000. Having previously rolled over each of the bank facilities Hebei Hua Ao expects to roll over the existing facilities for a further 12 months. Having considered the cash resources, banking facilities and forecasts for the remainder of the Hebei Hua Ao joint venture term, 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 31st 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 acquisition 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. Acquisition costs are expensed as incurred. Non controlling interests, presented as part of equity, represent the portion of a subsidiary’s profit or loss and net assets that is not held by the Group. The Group attributes total comprehensive income or loss of subsidiaries between the owners of the parent and the non-controlling interests based upon their respective ownership interests. 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. Acquired investments in associates are also subject to purchase method accounting. 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. 41 G R I F F I N M I N I N G L I M I T E D ACCOUNTING POLICIES 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, 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 which are 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 12). Residual values Material residual value estimates are updated as required, but at least annually whether or not the asset is re-valued. Depreciation On 21st May 2012 the term of Hebei Hua Ao's joint venture business licence was extended to 12th October 2037 effective from 25th June 2012. The pre existing business licence terminated in 2019. Prior to 25th June 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: 1. Mine acquisition, development, licence, pre production and land use rights - on a unit of production 2. Plant and buildings - over 25 years on a straight line basis with a 10% residual value 3. Dry tailings facility held under finance lease- over 15 years on a straight line basis with no residual value 4. Mechanical equipment - over 10 years on a straight line basis with a 10% residual value 5. All other equipment, including vehicles - over 5 years on a straight line basis with a 10% residual value 42 R E P O RT A N D A C C O U N T S 2 0 13 ACCOUNTING POLICIES 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. 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 reserves and resource estimates together with processing capacity Forward market and longer term price estimates Current market exchange rates Cost of capital risk MINE CLOSURE COSTS Mining operations are generally required to restore mine and processing sites at the end of their lives to a condition acceptable to the relevant authorities and consistent with the Group's environmental policies. Whilst the Group strives to maintain and where possible enhance the environment of the Group's processing sites, provision is made for site restoration costs in the accounts in accordance with local requirements. INVENTORIES Inventories are valued at the lower of cost or net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: • • • Consumable stores and spares, at purchase costs on a first in first out basis Concentrate stockpiles at cost of direct materials, power, labour, and a proportion of site overhead Ore stockpiles at cost of direct material, power, labour contractor charges and a proportion of site overhead FINANCIAL ASSETS Financial assets held by the Group are 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. 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', ‘cash’, 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 recognition 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". 43 G R I F F I N M I N I N G L I M I T E D ACCOUNTING POLICIES FOREIGN CURRENCY TRANSACTIONS 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. 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 statement of financial position 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 overseas subsidiary undertakings 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 15th 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 31st December 2013 the total expense recognised in profit or loss arising from share based transactions was $Nil (2012: $25,000). 44 R E P O RT A N D A C C O U N T S 2 0 13 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 12). 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 $1,300 per tonne with gold, silver and lead prices remaining at current prevailing levels. Impairment review assumptions, exploration interests (note 13). 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. Provision for mine closure costs (note 20) 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. Determination that investments in associates are not subsidiaries (note 14). Mladen Ninkov, Roger Goodwin and Rupert Crowe, who was appointed a director of Griffin on 11th September 2013, are non-executive directors of Spitfire Oil Ltd, resulting in Griffin gaining effective control of Spitfire from 11th September 2013. At the beginning of 2013 the directors of Griffin resolved to dispose of Griffin's interest in Spitfire Oil Limited and on 30th December 2013 Spitfire Oil Limited bought back Griffin's equity interest in Spitfire Oil Ltd. The results of Spitfire Oil Limited from date of effective control to date of disposal of Griffin's interest are not considered material to the Group requiring consolidation of Spitfire Oil Limited's results for the period. The division of the purchase consideration for the non controlling interests and the extension of the Hebei Hua Ao joint venture period (note 12) has been determined from forecast discounted future cash flows from Caijiaying assuming current metal prices, costs, extraction and processing rates. The determination of the value of Finance Leased Asset, and attributable Finance Lease Interest is assessed from future expected utilisation of the asset, assuming half of all tailings will be treated by the asset and the Group’s inherent rate of interest on bank loans in China. 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. 45 G R I F F I N M I N I N G L I M I T E D 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 the 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 with production of zinc concentrate, and lead concentrate with associated precious metals credits. 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. LEASED ASSETS Finance leases The economic ownership of a leased asset is transferred to the lessee if the lessee bears substantially all the risks and rewards of ownership of the leased asset. Where the Group is a lessee in this type of arrangement, the related asset is recognised at the inception of the lease at the fair value of the leased asset or, if lower, the present value of the lease payments plus incidental payments, if any. A corresponding amount is recognised as a finance lease liability. See accounting policy on non-current assets and depreciation and note 12 for the depreciation methods and useful lives for assets held under finance leases. The interest element of lease payments is charged to profit or loss, as finance costs over the period of the lease. 46 R E P O RT A N D A C C O U N T S 2 0 13 NOTES TO THE FINANCIAL STATEMENTS 1. SEGMENTAL REPORTING The Group has one business segment, the Caijiaying zinc gold mine in the People's Republic of China. All sales and costs of sales in 2013 and 2012 were derived from the Caijiaying zinc gold mine. REVENUES China Zinc concentrate Lead concentrate with gold and silver credits 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 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 2013 $000 227,337 633 5,799 233,769 7,492 - 7,492 - 7,492 2013 $000 (3,796) - No. 368 2013 $000 71,071 50,141 20,930 71,071 2012 $000 76,860 52,047 24,813 76,860 (40,078) (34,795) (7,374) (44) (3,282) (10,700) (7,539) (163) (3,189) (10,891) 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 47 G R I F F I N M I N I N G L I M I T E D NOTES TO THE FINANCIAL STATEMENTS 3. DIRECTORS’ AND KEY MANAGEMENT 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 2013 & Social based Security payments Fees Salary Share Total Pension & Social based 2012 Security payments Mladen Ninkov * Dal Brynelsen Rupert Crowe** Roger Goodwin William Mulligan Key personnel $000 $000 114 202 28 114 87 545 - 545 - - - 473 - 473 1,271 1,744 costs $000 - - - 129 - 129 - 129 $000 $000 $000 $000 - - - - - - - 114 202 28 716 87 1,147 1,271 2,418 112 154 - 112 88 466 - 466 - - - 445 - 445 775 1,220 costs $000 - - - 108 - 108 - 108 $000 $000 15 1 - 3 1 20 5 25 127 155 - 668 89 1,039 780 1,819 Rupert Crowe was appointed on 11th September 2013 and William Mulligan resigned on 31st December 2013. *Keynes Capital, the registered business name of Keynes Investments Pty Limited as trustee for the Keynes Trust, received fees under a consultancy agreement of $1,864,000 (2012 $1,692,000), 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. **CSA Global Pty Ltd (“CSA Global”) provides exploration services to the Group. Rupert Crowe is a director and shareholder of CSA Global Pty Ltd. CSA Global received fees of $153,746 in relation to services performed for the Group. On 31st October 2013 options granted to the directors and management in October 2008 over 4,400,000 new ordinary shares in the Company at an exercise price of 20p per share were exercised. The Company was informed by persons exercising options over 500,000 of these shares that they intended to sell those ordinary shares. In order to maintain an orderly market in the Company's shares, the Company agreed to buy out the options over these shares at the difference between the exercise price and the mid market value of the Company's shares at close of business on 31st October 2013 of 34.5p. The Options were exercised by, and the new ordinary shares issued as follows: Number of Options held Number of Options Number of Options bought out Exercised Number of Shares retained Non Directors 3,000,000 3,000,000 Roger Goodwin (Director) Dal Brynelsen (Director) William Mulligan (Director) Other management Total 600,000 200,000 200,000 400,000 600,000 200,000 200,000 400,000 4,400,000 4,400,000 No share options were exercised by the directors in 2012 - 300,000 - - 200,000 500,000 3,000,000 300,000 200,000 200,000 200,000 3,900,000 48 R E P O RT A N D A C C O U N T S 2 0 13 NOTES TO THE FINANCIAL STATEMENTS 4. SHARE OF LOSSES OF ASSOCIATED COMPANY Share of losses of Spitfire Oil Ltd 2013 $000 - 2012 $000 163 In January 2013 the directors of the Company determined to dispose of Griffin's 39.2% interest in the issued share capital of Spitfire Oil Limited ("Spitfire"). On 30th December 2013 Spitfire purchased Griffin's interest in 16,666,667 Spitfire shares for 5 UK pence per share. Rupert Crowe, a director of Spitfire, was appointed a director of the Company on 11th September 2013 which, with Mladen Ninkov and Roger Goodwin both serving as directors of Griffin and Spitfire, gave Griffin effective control of Spitfire. The results of Spitfire from the date of effective control on 11th September 2013 to date of disposal on 30th December 2013 are not considered material to the Group requiring consolidation of Spitfire's results in that period. Griffin’s share of the financial losses in 2013 to date of disposal were $79,000. Summarised financial information on Spitfire Oil Limited Loss before income tax Six months to 31st December 2013 Unaudited $000 112 Year to 30th June 2013 Audited $000 277 5. LOSS ON DISPOSAL OF INTEREST IN ASSOCIATED COMPANY Loss on disposal of 39.2% interest in Spitfire Oil Limited 6. FINANCE INCOME Interest on bank deposits 7. FINANCE COSTS Interest payable on short term bank loans Finance lease interest 8. OTHER INCOME Scrap and sundry other sales 2013 $000 2,229 2013 $000 145 2013 $000 3,297 354 3,651 2013 $000 162 2012 $000 - 2012 $000 495 2012 $000 3,411 - 3,411 2012 $000 48 49 G R I F F I N M I N I N G L I M I T E D NOTES TO THE FINANCIAL STATEMENTS 9. INCOME TAX EXPENSE Profit for the year before tax Expected tax expense at a standard rate of PRC income tax of 25% (2012 25%) Adjustment for tax exempt items: - Income and expenses outside the PRC not subject to tax - Share of associated company losses Adjustments for temporary differences: - Other Adjustments for short term temporary differences: - In respect of accounting differences - Other Withholding tax on intercompany dividends and charges Current taxation expense Deferred taxation expense Origination and reversal of temporary differences Total tax expense 2013 $000 14,827 3,707 1,042 - 2012 $000 27,239 6,810 (1,796) 41 93 256 (589) 167 354 4,774 297 297 5,071 (109) 112 2,218 7,532 - - 7,532 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 2013 (25% in 2012) 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: 2013 Earnings $000 Weighted average number of shares Per share amount (cents) Earnings $000 2012 Weighted average number of shares Per share amount (cents) 8,157 176,015,707 4.63 14,835 175,456,077 8.46 Basic earnings per share Earnings attributable to ordinary shareholders Dilutive effect of securities Options - - Diluted earnings per share 8,157 176,015,707 - 4.63 - 2,021,897 14,835 177,477,974 - 8.36 50 R E P O RT A N D A C C O U N T S 2 0 13 NOTES TO THE FINANCIAL STATEMENTS 11. PRIOR PERIOD ADJUSTMENT $1,316,000 has been charged to profit and loss reserve, and deferred taxation in respect of financial periods to 31st December 2010. A third statement of financial position has not been presented as this does not impact the profits or losses for the years ended 31st December 2011 or 2012, and the impact of this is reflected in the statement of changes in equity and in note 21. The Statement of Financial Position at 31st December 2012 has been restated to reflect this. This charge relates to deferred taxation at 25% on accelerated depreciation for Chinese tax purposes during which time Hebei Hua Ao enjoyed advantageous tax rates in the PRC tax. 12. PROPERTY, PLANT AND EQUIPMENT At 1st January 2012 Foreign exchange adjustments Additions during the year Additions re extensions of joint venture period Rehabilitation provision Depreciation charge for the year At 31st December 2012 Foreign exchange adjustments Additions during the year Additions under finance lease Transfer rehabilitation deposit Depreciation charge for the year At 31st December 2013 At 31st December 2011 Cost Accumulated depreciation Net carrying amount At 31st December 2012 Cost Accumulated depreciation Net carrying amount At 31st December 2013 Cost Accumulated depreciation Net carrying amount Mineral interests $000 63,845 639 4,206 88,094 1,647 (3,817) 154,614 1,494 4,883 - 758 (4,397) 157,352 72,652 (8,807) 63,845 167,405 (12,791) 154,614 174,810 (17,458) 157,352 Mill and mobile mine equipment $000 Office furniture and equipment Total $000 $000 21,429 223 4,129 - - (2,934) 22,847 645 2,499 12,879 - (2,782) 36,088 29,463 (8,034) 21,429 33,910 (11,063) 22,847 50,209 (14,121) 36,088 17 - 3 - - (11) 9 - - - - (5) 4 86 (69) 17 86 (77) 9 86 (82) 4 85,291 862 8,338 88,094 1,647 (6,762) 177,470 2,139 7,382 12,879 758 (7,184) 193,444 102,201 (16,910) 85,291 201,401 (23,931) 177,470 225,105 (31,661) 193,444 Mineral interests comprise the Group's interest in the Caijiaying ore bodies including cost 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 31st December 2013 and 2012 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. During 2013 plant and equipment with a deemed value of $12,879,000 were acquired under a finance lease, upon which depreciation of $429,000 has been provided. At 31st December 2013 the net carrying amount of this equipment was $12,451,000. 51 G R I F F I N M I N I N G L I M I T E D NOTES TO THE FINANCIAL STATEMENTS 12. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) 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 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. 13. INTANGIBLE ASSETS China – Zinc / gold exploration interests At 1st January 2012 Foreign exchange adjustments Additions during the year At 31st December 2012 Foreign exchange adjustments Additions during the year At 31st December 2013 $000 1,573 17 117 1,707 35 110 1,852 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 31st December 2013 no amounts had been provided or charged to the income statement in respect of the above exploration costs (2012 - nil). 14. INVESTMENT IN ASSOCIATED COMPANY At 1st January Share of losses of Spitfire Oil Limited Transfer on sale (note 5) At 31st December 2013 $000 3,596 - (3,596) - 2012 $000 3,759 (163) - 3,596 Griffin acquired 16,666,667 ordinary shares in Spitfire Oil Limited ("Spitfire"), representing a 39.2% interest in the issued share capital of Spitfire, at UK 15p per share for a total cash consideration of £2,500,000 ($4,542,000) on 27th November 2008. In January 2013 the directors of the Company determined to dispose of Griffin 39.2% interest in the issued share capital of Spitfire. On 30th December 2013 Spitfire purchased Griffin's interest in 16,666,667 Spitfire shares for UK 5p per share equating to $1,367,000. See note 5. 52 NOTES TO THE FINANCIAL STATEMENTS R E P O RT A N D A C C O U N T S 2 0 13 15. INVENTORIES Underground ore stocks Surface ore stocks Concentrate ore stocks Spare parts and consumables 2013 $000 1,550 4,489 1 1,941 7,981 All inventories are expected to be sold, used or consumed within one year of the reporting date. 16. RECEIVABLES AND OTHER CURRENT ASSETS Receivables Amounts due on disposal of interest in Spitfire Oil Ltd (Note 14) Advance to Zhangjiakou Guoxin Enterprise Management and Service Center Other Receivables Prepayments 2013 $000 258 1,367 1,431 253 905 4,214 2012 $000 1,546 1,757 926 2,002 6,231 2012 $000 1,906 - - 904 1,358 4,168 Sales of metals in concentrate are made by way of open auction in China to Chinese smelters and agents. During the year Rmb2,913,000 ($472,000) (2012 Rmb3,000,000 ($527,000)) was incurred in service charges with Zhangjiakou Guoxin Enterprise Management and Service Center (formerly the Zhangjiakou Caijiaying Lead Zinc Mining Company), the non controlling equity holders in Hebei Hua Ao and Rmb53,355,000 ($8,655,000) (2012 - 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. 17. SHARE CAPITAL AUTHORISED: Ordinary shares of US$0.01 each CALLED UP ALLOTTED AND FULLY PAID: Ordinary shares of US$0.01 each At 1st January Issued during the year Bought back in for cancellation At 31st December 2013 2012 Number $000 Number $000 1,000,000,000 10,000 1,000,000,000 10,000 175,451,830 3,900,000 (260,000) 1,755 39 (3) 179,091,830 1,791 175,501,830 - (50,000) 175,451,830 1,755 - - 1,755 During 2013 260,000 (2012 50,000) ordinary shares were bought in for cancellation from the market under a buy back programme at an average price of 29.5 UK pence ($0.445) (2012 average 29.5 UK pence ($0.475) per share). On 31st October 2013 options granted to the directors and management in October 2008 over 4,400,000 new ordinary shares in the Company at an exercise price of 20p per share were exercised. The Company was informed by persons exercising options over 500,000 of these shares that they intended to sell those ordinary shares. In order to maintain an orderly market in the Company's shares, the Company agreed to buy out the options over these shares at the difference between the exercise price and the mid market value of the Company's shares at close of business on 31st October 2013 of 34.5p. As a result 3,900,000 new ordinary shares in the Company were issued on the exercise of options exercisable at 20p per share. 53 G R I F F I N M I N I N G L I M I T E D NOTES TO THE FINANCIAL STATEMENTS 18. SHARE OPTIONS AND WARRANTS At 1st January (Exercised) / At 31st December 2013 Number (lapsed) Number 2013 Number Options exercisable at 20 pence per share to 31st October 2013 Options exercisable at 45 pence per share to 28th February 2015 4,333,333 10,000,000 14,333,333 (4,433,333) - (4,433,333) - 10,000,000 10,000,000 The following table shows the number and weighted average exercise price of all the unexercised share options and warrants at the year end: 2013 Number Weighted average exercise price Pence 2012 Number Weighted average exercise price Pence Outstanding at 1st January Lapsed during the year Exercised in year Outstanding at 31st December 14,433,333 (33,333) (4,400,000) 10,000,000 37.5 (20.0) (20.0) 45.0 14,433,333 - - 14,433,333 37.5 - - 37.5 The estimated value of the options exercisable at 45p up to 28th 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 28th February 2015 Options expiring 31st 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 $Nil (2012 $25,000) during the year ended 31st December relating to equity settled share option scheme transactions. 19. DIVIDENDS No dividends were paid in 2013 (2012 nil). 20. LONG-TERM PROVISION PROVISION FOR MINE CLOSURE COSTS At 1st January Transfer property plant and equipment (note 12) Foreign exchange adjustments At 31st December 54 2013 $000 2,535 - 56 2,591 2012 $000 806 1,647 82 2,535 R E P O RT A N D A C C O U N T S 2 0 13 NOTES TO THE FINANCIAL STATEMENTS 20. LONG-TERM PROVISION (CONTINUED) During 2007 the Group paid two bonds under PRC regulations totalling $766,000 to be used to cover end of mine life restoration costs. 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. 21. DEFERRED TAXATION At 1st January Prior period adjustment At 1st January restated Foreign exchange adjustments Charge for the year At 31st December 2013 $000 1,316 - 1,316 33 297 1,646 2012 $000 - 1,316 1,316 - - 1,316 Deferred taxation is provided in full on temporary differences under the liability method using a tax rate of 25%. The deferred taxation provision arises on accelerated depreciation in the PRC deductable for taxation purposes. 22. FINANCE LEASE Amounts falling due in more than one year Amounts falling due within one year 2013 $000 12,012 487 12,499 2012 $000 - - - Under the terms of an agreement Hebei Hua Ao pays Rmb21.32 per wet tonne treated by a dry tailings facility at Caijiaying. At the end of the agreement term in February 2021, this facility becomes the property of Hebei Hua Ao with no further payment. In determining the total liability it is assumed that one half of future production over the term of the agreement will be treated by the dry tailings facility. In determining the value of the dry tailings facility and applicable interest a deemed interest rate of 6.6% has been applied. Hebei Hua Ao holds all the risks and rewards of ownership. 23. TRADE AND OTHER PAYABLES Trade creditors Other creditors Accruals 2013 $000 9,550 1,806 2,859 14,215 2012 $000 5,672 3,613 3,305 12,590 All amounts are short term. The carrying values of all trade and other payables are considered to be a reasonable approximation of fair value. 55 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 24. BANK LOANS Bank loans falling due within one year 2013 $000 49,205 2012 $000 47,112 The bank loans are repayable within one year under revolving facilities. At 31st December 2012 the loan from Zhangjiakou Commercial Bank of $13,415,000 was secured on inventories held at Caijiaying. This loan was repaid during 2013. All other amounts were unsecured. The bank loans carried interest as follows: Zhangjiakou Commercial Bank Bank of Communications Bank of China 2013 2012 $000 - 16,402 32,803 49,205 % 6.6 6.6 $000 13,415 8,023 25,674 47,112 % 10.44 6.6 6.6 25. 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 31st December 2013 of $147,731,000 ($137,786,000 at 31st December 2012) divided by the number of ordinary shares in issue at 31st December 2013 of 179,091,830 (175,451,830 at 31st December 2012). 26. RISK MANAGEMENT The Group is exposed to a variety of financial risks which result from its operating and investing activities. The Group's risk management is coordinated by its senior management and executive directors and focuses on actively securing the Group's short to medium term cash flows. Foreign Currency Risk The majority of the Group's operational and financial cash flows are denominated in Renminbi and United States Dollars with sterling bank deposits held to cover future sterling expenditure estimates. Currently the Group does not carry out any significant operations in currencies outside the above. The Group currently does not have a foreign currency hedging policy. However, the management monitors foreign exchange exposure and will consider hedging significant foreign currency exposure should the need arise. In addition, the conversion of Renminbi into foreign currencies is 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 2013 $000 2,385 2012 $000 1,722 56 R E P O RT A N D A C C O U N T S 2 0 13 NOTES TO THE FINANCIAL STATEMENTS 26. RISK MANAGEMENT (CONTINUED) Foreign Currency risk (continued) 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 31st December 2013. These changes are considered to be reasonable based on observation of current market conditions for the year ended 31st 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% (2012 10%) this would have had the following impact: Net result for the year and on equity 2013 $000 265 If sterling had weakened against the US Dollar by 10% (2012: 10%) this would have the following impact: Net result for the year and on equity 2013 $000 (217) 2012 $000 191 2012 $000 (157) 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: 2013 Rmb $000 GBP $000 2,497 24,448 (130) (78,398) 2,367 (53,950) AusD $000 633 (5) 628 2012 Rmb $000 GBP $000 1,697 15,232 (294) (63,248) 1,403 (48,016) AusD $000 739 (1) 738 Financial assets Financial liabilities Short term exposure Interest rate risk The Group's exposure to the risk of changes in market interest rates relates primarily to the Group's bank loans and 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% (2012 + 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 2013 2012 Plus 300% Minus 100% Plus 300% Minus 100% $000 968 $000 (145) $000 548 $000 (183) 57 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 26. RISK MANAGEMENT (CONTINUED) Interest rate risk (continued) Fixed and non interest bearing financial assets and liabilities are as follows: Floating interest rate $000 26,278 - 26,278 (49,205) (12,499) - (61,704) (35,426) 2013 Non interest bearing $000 - 3,309 3,309 - - (11,356) (11,356) Total $000 26,278 3,309 29,587 (49,205) (12,499) (11,356) (73,060) Floating interest rate $000 16,764 - 16,764 (47,112) - - (47,112) 2012 Non interest bearing $000 Total $000 - 2,810 2,810 16,764 2,810 19,574 - - (9,285) (9,285) (47,112) - (9,285) (56,397) (8,047) (43,473) (30,348) (6,475) (36,823) Financial Assets Cash at bank Other receivables Total Financial Assets Bank Loans Finance Lease Liabilities Trade and other payables Total Financial Liabilities Net Financial (Liabilities) 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 2013 or in 2012. 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% (2012 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 Credit risk 2013 Plus 20% Minus 20% $000 $000 2012 Plus 20% $000 Minus 20% $000 7,765 2,120 815 (7,765) (2,120) (815) 8,025 1,871 1,401 (8,025) (1,871) (1,401) Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments. The Group does not have trade receivables and does not hold collateral as security. Credit risk from balances with banks and financial institutions is managed by the Board. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counterparty. Counterparty credit limits are reviewed by the Griffin Board on a regular basis. The limits are set to minimise the concentration of risks and therefore mitigate financial loss through potential counterparty failure. No material exposure is considered to exist by virtue of the possible non performance of the counterparties to financial instruments. 58 R E P O RT A N D A C C O U N T S 2 0 13 NOTES TO THE FINANCIAL STATEMENTS 26. RISK MANAGEMENT (CONTINUED) Liquidity Risk The Group is exposed to liquidity risk in the event that Hebei Hua Ao is unable to renew and roll over its banking facilities. As described in note 24 at 31st December 2013 the Group had bank loans outstanding under revolving credit facilities due within one year of $49,205,000 with an additional $17,580,000 in other payables due within one year whilst cash balances throughout the Group at that date were $26,278,000. During 2013 the Group generated $22,305,000 after tax and to date has been able to fully service its debts and meet all obligations. In January 2014 Hebei Hua Ao renewed banking facilities of $8.2m for a further year. The Group does not expect any acceleration in payment terms for other payables. 27. 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. The directors consider the capital of the Group to be the total equity attributable to the equity holders of the parent of $147,731,000 at 31st December 2013. 28. 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. The Group held the following investments in financial assets and financial liabilities: FINANCIAL ASSETS Loans and receivables Cash and cash equivalents FINANCIAL LIABILITIES Loans Trade and other payables 2013 $000 4,214 26,278 30,492 61,704 14,215 75,919 2012 $000 4,168 16,764 20,932 47,112 12,590 59,702 59 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 29. SUBSIDIARY COMPANIES At 31st December 2013, 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 Hebei Hua’ Ao Mining Industry Company Ltd* Ordinary Ordinary Panda Resources Ltd Ordinary Hebei Sino Anglo Mining Development Company Ltd* 100% 100% 88.8%** 100% 90% Service company Australia Holding company Hong Kong Base and precious metals mining and development Holding company Mineral exploration and development 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) 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 Hebei Hua Ao was acquired, China Zinc 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. 30. COMMITMENTS At 31st December 2013 the Group had capital commitments of $630,000 (31st December 2012 $333,000). 31. CONTINGENT LIABILITIES As described in note 29, the joint venture contract establishing the Hebei Hua' Ao Mining Industry Company Ltd provides that with effect from 24th 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 31st December 2013, the net assets of Hebei Hua' Ao amounted to $50m. The non-controlling share of the net assets at 31st December 2013 on a termination of Hebei Hua' Ao could amount to $2.6m. This liability is only trigged 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. 60 R E P O RT A N D A C C O U N T S 2 0 13 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 Rupert Crowe Adam Usdan 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. 61 G R I F F I N M I N I N G L I M I T E D 62 R E P O RT A N D A C C O U N T S 2 0 13 Caijiaying Mine, Winter 2014 63 G R I F F I N M I N I N G L I M I T E D 64 

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