Heron Resources
Annual Report 2019

Plain-text annual report

Corporate Directory ABN 30 068 263 098 DIRECTORS Chairman (Non-Executive) Stephen Dennis BCom BLL.B GDipAppFin(Finsia) Managing Director (Executive) Wayne Taylor BEng (Mining), MBA, MAusIMM (ceased employment and resigned as a Director on 18 September 2019) Director (Non-Executive) Borden Putnam III MSc (Geol), RPG, FAusIMM Director (Non-Executive) Fiona Robertson MA (Oxon) (Geology), MAusIMM, FAICD Director (Non-Executive) Mark Sawyer LL.B. Director (Non-Executive) Ricardo De Armas B.S. M.B.A (Harvard) Director (Non-Executive) Peter Rozenauers BME (Hons I), MAppFin, MAusIMM Director (Non-Executive) Ian Pattison B Sc (Hons), PhD, MAusIMM COMPANY SECRETARY Simon Smith B.Bus, CA REGISTERED OFFICE (Head Office) and Address for Correspondence Level 8, 309 Kent Street Sydney New South Wales 2000 Telephone: +61 2 9119 8111 Woodlawn Site Office 507 Collector Road, Tarago New South Wales 2580 Email: Website: heron@heronresources.com.au www.heronresources.com.au AUDITOR Ernst & Young 200 George St Sydney New South Wales 2000 BANKERS Westpac Bank 230-236 Hannan Street Kalgoorlie 6430 Western Australia SHARE REGISTRY Automic Pty Ltd Level 5, 126 Phillip Street Sydney New South Wales 2000 All securityholder correspondence to: GPO Box 5193 Sydney New South Wales 2000 Telephone: 1300 288 664 Email: hello@automic.com.au SOLICITORS TO THE COMPANY Allion Legal Pty Ltd 50 Kings Park Road, West Perth Western Australia 6005 Resources Legal Pty Ltd 1A Rosemead Rd, Hornsby New South Wales 2077 STOCK EXCHANGE Australian Securities Exchange Limited 2 The Esplanade, Perth Western Australia 6000 ASX CODE HRR INDUSTRY CLASSIFICATION GICS classification code is 15104020 Diversified Metals and Mining ISIN AU000 000 HRR6 Chairman’s Letter Dear Shareholders, When I wrote to you this time last year, we had all expected that by now Woodlawn would be up and running and close to achieving nameplate production. Disappointingly, as I write this year’s letter, we have not reached the goals we set ourselves when we started 2019. As you would be aware, the Company recently announced a new A$91 million funding package for Woodlawn. This became necessary when it was clear that Heron was facing a significant working capital shortfall, brought about by a 7 month delay in completing construction of the Woodlawn processing plant, and some early stage commissioning issues that further delayed ramp-up of production. Without this new financial package in place, there was a risk that Heron would not have been able to continue as a going concern. These new funding arrangements have been supported by our major shareholders (Greenstone, Castlelake and Orion Mine Finance), and I thank them for their support. One component of the package, a US$35 million convertible note, will be voted on at our Annual General Meeting in December, and I would encourage you to vote in favour of this resolution. As shareholders of Heron, you will also have had the ability to participate in Woodlawn’s refinancing by taking up your entitlements offered through the Entitlements Offer which closed on October 22. A thorough review of the technical fundamentals of Woodlawn was undertaken as a pre-requisite to the Company securing a new finance package, and I am pleased to report that these fundamentals remain positive. It is encouraging that the project is now ramping up and starting to produce concentrates to commercial specification. We also recently recorded a milestone of our first sales of Zinc and Lead concentrates in October 2019 – the first revenue from the project. We are aware that many Shareholders will be disappointed with the impact that the project start-up delays have had on the Company’s balance sheet, and the Board shares this disappointment. However we are confident that the package of measures we have negotiated and announced will allow us to complete commissioning activities at Woodlawn and see the project through to cash flow positive operations. During the refinancing process it became necessary for some senior management changes to be made at Heron, including the departure of our CEO. I would like to thank Wayne for his contribution throughout the development of Woodlawn, and I wish him well for the future. A search is currently under way for a new CEO, and I expect we will soon be able to announce this appointment. Finally, I would like to convey my thanks to the Board for their support as we have worked through our recent challenges. Thanks must also go to all of our Shareholders who have seen us through this difficult period. I look forward to bringing you further reports on our progress as Woodlawn enters commercial production. Sincerely Stephen Dennis Chairman First shipment of Zinc and Lead concentrates October 2019 Heron Resources Limited - Annual Report 2019 - Page 1 Forward Looking Statements This report contains forward-looking statements and forward-looking information within the meaning of applicable securities laws, which are based on expectations, estimates and projections as of the date of this report. This forward-looking information includes, or may be based upon, without limitation, estimates, forecasts and statements as to management’s expectations with respect to, among other things, the timing and amount of funding required to execute the Company’s exploration, development and business plans, capital and exploration expenditures, the effect on the Company of any changes to existing legislation or policy, government regulation of mining operations, the length of time required to obtain permits, certifications and approvals, the success of exploration, development and mining activities, the geology of the Company’s properties, environmental risks, the availability of labour, the focus of the Company in the future, demand and market outlook for precious metals and the prices thereof, progress in development of mineral properties, the Company’s ability to raise funding privately or on a public market in the future, the Company’s future growth, results of operations, performance, and business prospects and opportunities. Wherever possible, words such as “anticipate”, “believe”, “expect”, “intend”, “may” and similar expressions have been used to identify such forward-looking information. Forward-looking information is based on the opinions and estimates of management at the date the information is given, and on information available to management at such time. Forward-looking information involves significant risks, uncertainties, assumptions and other factors that could cause actual results, performance or achievements to differ materially from the results discussed or implied in the forward-looking information. These factors, including, but not limited to, fluctuations in currency markets, fluctuations in commodity prices, the ability of the Company to access sufficient capital on favourable terms or at all, changes in national and local government legislation, taxation, controls, regulations, political or economic developments in Australia or other countries in which the Company does business or may carry on business in the future, operational or technical difficulties in connection with exploration or development activities, employee relations, the speculative nature of mineral exploration and development, obtaining necessary licenses and permits, diminishing quantities and grades of mineral reserves, contests over title to properties, especially title to undeveloped properties, the inherent risks involved in the exploration and development of mineral properties, the uncertainties involved in interpreting drill results and other geological data, environmental hazards, industrial accidents, unusual or unexpected formations, pressures, cave-ins and flooding, limitations of insurance coverage and the possibility of project cost overruns or unanticipated costs and expenses, and should be considered carefully. Many of these uncertainties and contingencies can affect the Company’s actual results and could cause actual results to differ materially from those expressed or implied in any forward-looking statements made by, or on behalf of, the Company. Prospective investors should not place undue reliance on any forward-looking information. Although the forward-looking information contained in this report is based upon what management believes, or believed at the time, to be reasonable assumptions, the Company cannot assure prospective purchasers that actual results will be consistent with such forward-looking information, as there may be other factors that cause results not to be as anticipated, estimated or intended, and neither the Company nor any other person assumes responsibility for the accuracy and completeness of any such forward-looking information. The Company does not undertake, and assumes no obligation, to update or revise any such forwardlooking statements or forward-looking information contained herein to reflect new events or circumstances, except as may be required by law. Page 2 - Heron Resources Limited - Annual Report 2019 Heron Resources Limited ABN 30 068 263 098 2019 Annual Report CHAIRMAN’S LETTER............................................................................................................1 DIRECTORS ............................................................................................................................4 MANAGEMENT .....................................................................................................................6 CORPORATE REPORT .............................................................................................................7 OPERATIONS REPORT............................................................................................................8 CORPORATE PROFILE ...........................................................................................................21 CORPORATE GOVERNANCE STATEMENT...............................................................21 DIRECTORS’ REPORT ...........................................................................................................22 AUDIT INDEPENDENCE DECLARATION ..................................................................39 CONSOLIDATED FINANCIAL STATEMENTS ........................................................................40 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME................................................................41 CONSOLIDATED STATEMENT OF FINANCIAL POSITION........................................42 CONSOLIDATED STATEMENT OF CASHFLOWS......................................................43 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ........................................44 NOTES TO AND FORMING PART OF THE ACCOUNTS ...........................................45 DIRECTORS’ DECLARATION ....................................................................................70 INDEPENDENT AUDIT REPORT ...........................................................................................71 SHAREHOLDER INFORMATION ...........................................................................................76 STATEMENT OF MINERAL RESOURCES & ORE RESERVES ...............................................78 INTEREST IN MINING TENEMENTS ...................................................................................81 GLOSSARY ...........................................................................................................................82 Heron Resources Limited - Annual Report 2019 - Page 3 Directors STEPHEN DENNIS BCom BLL.B GDipAppFin(Finsia) CHAIRMAN (NON-EXECUTIVE) Stephen Dennis has been actively involved in the mining industry for 35 years. He has held senior management positions at CBH Resources Limited (the Australian subsidiary of Toho Zinc), MIM Holdings Limited, and Minara Resources Limited. BORDEN PUTNAM III MSc (Geol), RPG, FAusIMM DIRECTOR (NON-EXECUTIVE) Mr. Putnam is a professional geologist with over 42 years of experience in the mineral industry, with focus on exploration and asset evaluations in the mineral investment business. From 1976-1991 he worked as a Project Geologist and a District Manager for AMAX Exploration and Newmont Exploration Limited respectively. He served as Vice-President and Chief Geologist for MRDI (now AMEC) an internationally recognized mining consultancy firm from 1991-1996. Mr. Putnam was Vice-President and Principal with Robertson Stephens Investment Management from 1996-2001, and from 2001-2009 was Managing Director of Eastbourne Capital Management; both firms which were engaged in mineral investment management principally as private hedge funds. In 2009, Mr Putnam, established his mining industry consultancy business providing technical evaluations, due diligence audits and investment advice to clients in the mineral resource industry. Mr Putnam is also a Director of Skeena Resources Limited, a TSX-V listed exploration company. FIONA ROBERTSON MA (Oxon) (Geology), MAusIMM, FAICD DIRECTOR (NON-EXECUTIVE) Ms Robertson is a finance professional and practicing non-executive director and audit/risk committee chair with a background of more than 20 years as a chief financial officer in the emerging and mid-tier resources sector and 14 years as a corporate banker working in Sydney, New York and London with Chase Manhattan Bank. Ms Robertson’s executive experience includes CFO roles with Petsec Energy Ltd; Climax Mining Ltd and Delta Gold Ltd; as well as various corporate banking roles with Chase Manhattan Bank. Ms Robertson is also a Non-Executive Director of Whitehaven Coal. MARK SAWYER LL.B. DIRECTOR (NON-EXECUTIVE) Mr Sawyer co-founded Greenstone Resources in 2013 after a 16 year career in the mining sector. Prior to establishing Greenstone, Mr Sawyer was GM and Co-Head Group Business Development at Xstrata plc where he was responsible for originating, evaluating and negotiating new business development opportunities for Xstrata. Prior to Xstrata, Mr Sawyer held senior roles at Cutfield Freeman & Co (a boutique corporate advisory firm in the mining industry) and at Rio Tinto plc. Mr Sawyer is a solicitor and a resident of the United Kingdom. Page 4 - Heron Resources Limited - Annual Report 2019 DIRECTORS CONTINUED RICARDO DE ARMAS B.S. M.B.A (Harvard) DIRECTOR (NON-EXECUTIVE) Mr De Armas is an investment professional at Castlelake, where he focuses on emerging market investments. Mr. De Armas has more than 10 years of experience in investment and corporate finance, including roles as vice president at De Jong Capital, principal at Zaff Capital, associate at Citigroup’s investment banking division, and financial analyst at Procter & Gamble. His expertise includes value investments, restructuring and financial advisory. Mr. De Armas received his M.B.A. from Harvard Business School and a B.S. from Universidad Metropolitana in Business Administration. PETER ROZENAUERS BME (Hons I), MAppFin, MAusIMM DIRECTOR (NON-EXECUTIVE) Mr Rozenauers is a Portfolio Manager with Orion Mine Finance and has over 25 years of experience in the natural resources and finance industry. He earned a BEng (Honours I) in Mining from the University of NSW, a Master in Applied Finance from the University of Technology Sydney and is a member of the Australasian Institute of Mining and Metallurgy. Prior to Orion, Mr. Rozenauers was a Senior Investment Manager for a predecessor business of Orion, and prior to that was Managing Director and Head of Asian Commodities Distribution for Barclays Capital in Singapore, a leading global investment bank. Mr. Rozenauers spent over 13 years working in senior banking roles in Singapore, New York and London. IAN PATTISON B Sc (Hons), PhD, MAusIMM DIRECTOR (NON-EXECUTIVE) Dr Pattison is a highly respected metallurgist with over 30 years of Australian and international experience. His early career was with CRA where he held senior roles in operations, engineering and then as Metallurgy Manager in their base metal division. He joined Denehurst following their purchase of the Woodlawn Mine from CRA to take on an Executive Director role with the Woodlawn and Benambra mines. This was followed by Director and Managing Director roles in the nutrition industries mainly with the German based Henkel/Cognis companies. For the past 10 years he has been the Group Manager Metallurgy for the Australian operations of Japan’s Toho Zinc which incorporates the Rasp Mine in Broken Hill and the Endeavor Mine at Cobar. First shipment of Zinc and Lead concentrates October 2019 Heron Resources Limited - Annual Report 2019 - Page 5 Management SIMON SMITH B.Bus, CA. GENERAL MANAGER FINANCE AND COMPANY SECRETARY Mr Smith has been a Chief Financial Officer of both private and public companies in Australia and the USA. He brings over 25 years’ experience in the business world as a Chartered Accountant and holds a Bachelor’s Degree in Business from the University of Technology Sydney. Mr. Smith was the CFO and Company Secretary for TriAusMin prior to the merger with Heron Resources. DAVID VON PERGER BSc (Hons) MAusIMM (CP Geo) GENERAL MANAGER EXPLORATION David von Perger was appointed in 2004. Mr von Perger is a geologist with some 25 years’ experience in mineral exploration having worked in several locations around Australia. Mr von Perger has worked on various styles of mineral deposits including Archaean gold and nickel, and Proterozoic base-metals and iron-ore. His experience includes four years as a business analyst for a major mining group involving analysis of mining operations, project development and assessment of new opportunities. Since his appointment with Heron, Mr von Perger has been responsible for the identification and acquisition of several new nickel, gold, iron-ore and base-metal projects. Mr von Perger led the team that delineated the initial resource of the Kate Lens and discovered the G2 and Lisa Lenses at Woodlawn. BRIAN HEARNE BAppSc (Metallurgy) GENERAL MANAGER - WOODLAWN MINE Mr Hearne is a qualified mining professional and holds a degree in metallurgy (BAppSc). Mr. Hearne has extensive base-metals experience, previously having had a 16-year tenure at Woodlawn, starting in 1978, with a further 2 years at the Benambra Mine in Victoria. He then joined MIM at McArthur River (MRM) as the Metallurgical Manager, and following a number of General Manager roles within MIM / Xstrata both in Australia and overseas he was appointed COO of Xstrata Zinc Australia. The major achievements at all the operations he was involved in was improved safety statistics and lower operations costs. Page 6 - Heron Resources Limited - Annual Report 2019 Corporate Report CAPITAL RAISING On October 4 2019 Heron announced a A$91 million funding package that was made in response to a projected cash shortfall due to delays in construction and production ramp-up. The capital raising is anticipated to see the company through commissioning of the Woodlawn Project to completion and to positive cash flow operations. The funding package consists of A$35 million from a non-renounceable entitlement offer of new shares at A$0.20 per share; US$35 million (A$52 million) convertible note provided by Greenstone Resources LP, Orion Mine Finance Group and funds managed by Castlelake, L.P.; and a US$3 million (A$4 million) stream over zinc by-product. The funding package also included changes to the existing senior secured debt facility to extend the timing of repayments and a US$10 million prepayment. The funding package was finalised following a technical review by independent industry specialists which confirmed that the technical and operational basis for the Woodlawn Project remains sound, with the expected attractive production profile at the time of the 2017 financing intact, although delayed. On 25 October 2019 the Company announced the completion of the Institutional and Retail Entitlement Offers raising A$35.4 million. Heron Resources Limited - Annual Report 2019 - Page 7 Heron Projects Figure 1: Heron Resources - Project locations Page 8 - Heron Resources Limited - Annual Report 2019 Operations Report Heron Resources Limited - Annual Report 2019 - Page 9 OPERATIONS REPORT CONTINUED WOODLAWN PROJECT Heron holds a direct 100% ownership of the mineral rights at the Woodlawn Mine site situated 40km south of Goulburn and 250km south- west of Sydney, in southern NSW, Australia (Figure 1, 2). It is Heron’s aim to create a profitable, long-life, low-cost mining operation producing base metal concentrates. Heron also holds a portfolio of advanced stage exploration tenements adjacent to and contiguous with the Woodlawn site covering the prospective felsic volcanic units that host the Volcanogenic Massive Sulphide (VMS) deposit at Woodlawn. The last five years have seen Heron directing its efforts to developing the Woodlawn Zinc-Copper Project with the successful completion of a Preliminary Economic Assessment (PEA) in 2015, followed by the Feasibility Study (FS) in June 2016 and the completion of project financing in September 2017. Construction activities commenced in September 2017 and completed in June 2019 quarter. The Project has commenced commissioning with first concentrate production occurring in July 2019. Focus is now on ramping-up to Steady State production. The price outlook for all metals to be produced at Woodlawn, while seeing some recent pull back, remains positive, particularly for zinc which continues to face a significant supply shortfall. Figure 2: Woodlawn Project location and tenement map Page 10 - Heron Resources Limited - Annual Report 2019 OPERATIONS REPORT CONTINUED Woodlawn Project – Review of Operations Construction activities commenced in September 2017 and are now complete. Remaining activities are the completion of crusher and ball mill commissioning which are underway followed by plant performance testing of the underground ore circuit. The plant is currently processing reclaimed tailings and limited underground ore. Zinc and Lead concentrate load-out from site commenced on 4 July. The first revenue from the commissioning concentrate was received in October 2019. Other project developments throughout the year include: (cid:129) Jun 2019 100% 98% Dec 2018 95% 24% Mar 2019 99% 77% Sept 2019 100% 99% Sept 2018 79% - Concentrate Sales and Marketing: Contracts for sale of 100% of production remain in place. Despatch of zinc concentrate from site commenced on 9 July 2019 and rail movements to Port Kembla commenced on 15 August 2019. The first shipment of lead concentrate was achieved on 28 September 2019 and the first shipment of zinc was made on 23 October 2019. The first sales revenue was received in October 2019 as ramp-up production continues. Safety: Disappointingly the Company recorded three lost time injuries (“LTI”) this year. Recommendations arising out of investigations into the incidents which occurred in August and November 2018 and June 2019 have been adopted and acted on with the Company incurring no further lost time injuries since June 2019. Heron is committed to achieving zero harm and focused on the continuous improvement of its risk management systems and processes that target the wellbeing and safety of its employees and contractors. Environment: There was a significant increase in the resources applied to environmental management at Woodlawn commensurate with the ramp-up in site activity throughout the year. As part of trial works that will support the longer-term rehabilitation of the site, in-excess of 200 trees were planted as an initial step in creating a vegetation offset to compensate for the area impacted by project development. The focus for the June quarter was achieving a site water balance and targeted reductions in raw water demand. Through plant modifications and piping changes, raw water demand has been reduced by 70%. Further rehabilitation plans are in place and will continue to be implemented alongside mining operations. Project EPC Works: The process plant received first feed from reclaimed tailings on 6 May. As at the date of this report, the remaining EPC activities left to complete are crusher and ball mill commissioning, which is under way. A number of minor equipment component failures have been encountered in the process plant circuit during the commissioning process and the EPC contractor, Sedgman, continues to rectify these under the defects provision of the contract. As at 30 September 2019, the EPC contractor, reported project commissioning to be 99% The table below provides details of progress for both construction and commissioning on a quarter-by-quarter basis: Period Construction (%) Commissioning (%) Underground Mine: The underground mining operation made steady progress throughout the year with 3.1km of development completed as at 30 September, 2019. Ore has been stockpiled on the ROM pad ready for processing and includes 32,873t of combined low and high grade ore ready for the first crushing campaign. The mine has currently transitioned to multiple headings which has allowed increased advance rates for mine development. Modelling refinements were undertaken on shallow ore zones throughout the year targeting an improvement in mine design selectivity. The G2 lens was accessed during the March quarter and was the first ore mined (ASX announcement March 12). The raiseboring of the 5.0m diameter primary ventilation raise was completed from surface and the primary vent fans installed. In addition, the mining of the first leg of the second means of egress (small diameter raise) is completed. First stoping was achieved with mined ore delivered to the ROM in September 2019. Hydraulic Mining: The hydraulic mining circuit was fully operational and in production as at 30 June 2019. A second high pressure water cannon was delivered to site in May with processing commencing in the main production area on 8 May after the removal of low grade slimes at the toe of the dam. Production rates from reclaim are in line with design and removal of highly oxidised capping material is commencing which significantly improved metallurgical performance in the flotation plant. Adjustments to the pipelines have significantly improved the throughput of hydraulic mining, increasing the average mining rates to 154ph, and reaching rates of 190tph in the September quarter. Processing and Production: Production of concentrates from reclaimed tailings commenced on 8 May. A total of 91.4kt of reclaimed tailings was processed during the June 2019 quarter (121tph and 52% uptime) with grades in line with Ore Reserves (2.39% zinc, 0.44% copper and 1.22% lead). This was improved in the proceeding quarter with 197.6kt of reclaimed tailing processed (154tph and 62.9% uptime) with grades in line with Ore Reserves (2.5% zinc, 0.5% copper and 1.2% lead). Initial production has been hampered by a number of minor mechanical issues and piping errors which have been corrected. Processing of underground ore commenced early in the September quarter. Metallurgical recoveries and concentrate grades from these first production months were below target, however performance has been progressively improving. Community: Heron continues to welcome opportunities to connect with and support the Community. During this twelve month period, Heron has proudly supported Tarago Primary School, Tarago Pre-School, Tarago Men’s Shed, Southern Tablelands Athletics Club and the Annual Tarago Show. The Company continues to receive supportive local feedback for the project and the wider benefits the Company provides the Community through a number of channels including its quarterly meetings with the Woodlawn Community Consultation Committee. Personnel: All recruitment of operational roles is complete, although a few technical positions remain to be filled (covered by contract staff). Mr Wayne Taylor ceased employment and resigned as a Director on 18 September 2019. Sedgman claim: As announced on October 4 2019 the Company has settled all outstanding claims with Sedgman Pty Limited (“Sedgman”) relating to the Engineer, Procure & Construct Contract (“EPC Contract”) for the Woodlawn project. Settlement of A$15M has been reached based on a deferred cash payment and the issue of Heron shares to Sedgman, to be held in escrow for 2 years. A payment schedule has been agreed with Sedgman commencing in June 2021 and concluding in June 2022. (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Heron Resources Limited - Annual Report 2019 - Page 11 OPERATIONS REPORT CONTINUED Figure 3: Production of concentrates commenced during the June quarter (zinc concentrate pictured below), with focus now turning to increasing throughput to achieve nameplate capacity, design recoveries and product specifications. Figure 4: Woodlawn Process Plant in the final stages of commissioning. Page 12 - Heron Resources Limited - Annual Report 2019 OPERATIONS REPORT CONTINUED Figure 5: Flotation tanks in operation. Figure 6: IsaMill™ undergoing an internal inspection. Heron Resources Limited - Annual Report 2019 - Page 13 OPERATIONS REPORT CONTINUED Figure 7: Hydraulic mining progressed through the June quarter with completion of the main delivery trench in Tailings Dam South. Figure 8: Seeding of Hickory’s Paddock – east of the Woodlawn Plant site. Page 14 - Heron Resources Limited - Annual Report 2019 OPERATIONS REPORT CONTINUED Figure 9: Woodlawn underground mining operations. Figure 10: Woodlawn primary ventilation shaft. Heron Resources Limited - Annual Report 2019 - Page 15 OPERATIONS REPORT CONTINUED Woodlawn Near-Mine and Regional Exploration Programmes The Woodlawn deposit is a large Volcanogenic Massive Sulphide (VMS) system hosted within Silurian volcanic rocks of the eastern Lachlan Fold Belt. The exploration strategy has been to use modern geophysical techniques to generate regional and near-mine drilling targets. A review of a 15 km radius around the Woodlawn mine over the past year highlighted a lack of deeper exploration compared with similar deposits elsewhere, with most of the historical exploration limited to the near surface (>150m) within 2km of the mine. Furthermore, many of the targets in the existing geophysical data were incompletely tested and this confirmed the need for modern geophysical techniques like induced polarisation (IP), gravity and magnetics to seek targets down to depths of >400m below surface. The area in an arc NW to NE of Woodlawn was selected as being the most prospective for such new discoveries. Woodlawn Project – Induced Polarization Survey and Exploration Drilling Programmes Induced Polarisation (IP) geophysical surveys were successful in identifying the original Woodlawn deposit in the early 1970s; however, the early surveys could penetrate only to depths of approximately 150m whereas the modern high powered surveys can penetrate much deeper to approximately 700m. The Murphy’s to Cowley Hills trend (within the 2.5km arc to the NW and NE of Woodlawn) was selected for deep IP which has the ability to map out pyrite alteration and other sulphide mineralisation to depths of 400m. The IP survey was completed north of Woodlawn in an area which contains the Woodlawn Volcanogenic Massive Sulphide (VMS) host rocks, in an effort to identify anomalies at depth that could be related to potential new Woodlawn style deposits. Seven IP survey lines were spaced at 400m with some infill lines spaced at 200m and extended 4km in an east-west direction along the Murphy’s to Cowley Hills trend. The IP survey returned a coincident chargeability and conductivity anomaly at Murphy’s prospect and a large chargeability anomaly at Buckland’s and Buckland’s North prospects. A diamond drill hole (DDH) programme was completed to test the three IP targets. A total of 2,112m were drilled in four holes. Figure 11: Woodlawn near-mine exploration prospects with underlying geology, showing Murphy’s to Cowley Hills trend. Page 16 - Heron Resources Limited - Annual Report 2019 OPERATIONS REPORT CONTINUED Figure 12: 2D slices through 3D IP geophysical model showing chargeability responses in the area surveyed. The Woodlawn open pit and VMS lenses are shown to scale; and position relative to the plant site. Murphy’s Target The Murphy’s IP target, located 900m NNE of the Woodlawn pit, returned a broad chargeability and conductivity anomaly and CHDD0002 (final depth 525.7m) was drilled into the Murphy’s target and stopped in a thick sequence of weakly- to moderately-altered limestones and felsic volcanics of the De Drack Formation. The IP anomaly appears to be explained by a graphitic and sulfidic black shale intersected over 7.4m from 303.8m depth. The hole was continued to its final depth to cover off a potentially deeper target. Bucklands North Target The Bucklands IP target is located 1.8km north of the Woodlawn pit and returned a broad, deep chargeability anomaly. Previous drilling to the NE here had intersected weak base metal mineralisation in 3 holes. CHDD003 (final depth 700m), was drilled into the Buckland’s North prospect and intersected a distinct zone of pyrite-pyrrhotite alteration and quartz veining from 514m to 580m, with a stronger zone between 564m to 569m intercepted. The alteration and veining intersected indicate a potential “near miss” of a mineralised zone and DHEM and further drilling may be undertaken. Bucklands Target The Bucklands IP target is located 450m NW of the Woodlawn Pit and returned both a chargeability and conductivity anomaly offset from each other by about 100m. Both anomalies were in an area of little previous drilling to the depth of the anomalies (200 – 350m below surface). The first DDH here (WNDD0152, final depth 580m) tested the deeper chargeability anomaly and intersected a zone of weakly sulfidic shales of the De Drack Formation which may be the cause of the chargeability anomaly. WNDD00152 intersected Woodlawn-style silica, sulphide, sericite alteration with best intersection from fine sphalerite stringers of 0.5m @ 2.5% Zn from 29m. Down hole EM (DHEM) surveys will be completed on this hole as it provides an important stratigraphic test of the Woodlawn footwall sequence where massive sulphides may have been remobilised into during regional deformation. The second DDH here (WNDD0153, final depth 307m), and located 50m west of WNDD0151, tested the conductivity anomaly and intersected a strong to intensely atered zone of typical Woodlawn silica, sulphide, sericite development from 5m to 31m depth. The hole was continued to its final depth to fully test the zone. Surface infrastructure is likely to have influenced the interpreted positioning of the modelled IP anomaly, which may be related to this zone of alteration / mineralisation to the west and can be better positioned now with DHEM methods. Heron Resources Limited - Annual Report 2019 - Page 17 OPERATIONS REPORT CONTINUED Figure 13: Bucklands North target, cross section looking north showing chargeability anomaly and drill hole testing the anomalous zone. Figure 14: Bucklands target, cross section looking north showing chargeability and conductivity anomaly and drill holes testing the anomalous zone. The shale/dolomite beds with disseminated sulphides to the east explain the chargeability anomaly. The target zone to the west is a high priority target. Both recent holes will be surveyed with DHEM. Page 18 - Heron Resources Limited - Annual Report 2019 OPERATIONS REPORT CONTINUED Montrose Moving Loop EM Survey and Exploration Drilling Programme The Montrose prospect is located 6.5km NW of Woodlawn, straddling the contact between the Woodlawn Volcanics and the Currawang basalts. A total of 16 drill holes for 3,848m have been drilled here by CRA and Denehurst between 1986 and 1995 with a best result of 5.3m @ 4.9% ZnEq from 145m (4% Zn, 0.13% Cu, 0.12% Pb, 15g/t Ag). The majority of the drilling was focused on a single 100m section with little attention given elsewhere. Re-modelling of surface moving loop EM and down-hole EM at Montrose identified several conductors along a 700m zone. The geophysical responses were complex but pointed to a potentially deeper sulphide body at depth that had not been drilled. A modern, high-powered Moving Loop EM Survey (MLEM) was undertaken east and west of the Montrose prospect to reliably develop the drill targets over the subtle EM responses identified. Four anomalies were confirmed and tested with an RC drilling programme. Four Reverse Circulation (RC) drill holes for 981m (MNRC001 to MNRC004) were completed at the Montrose prospect that targeted four separate EM anomalies. All holes intersected weak to moderate disseminated pyrite and pyrrhotite mineralisation within either the Currawang Basalt or the underlying Woodlawn Volcanics. The first two holes (MNRC001 and MNRC002) contained pyrrhotite with little to no base metal sulphides, with the pyrrhotite content being sufficient to explain the EM anomalies. The final two drill holes intersected chalcopyrite associated with the pyrrhotite and should return weak copper results. Hole MNRC004, at the south end of the Montrose trend had a 20m zone from 246m of relatively strong disseminated pyrite / pyrrhotite and chalcopyrite mineralisation within a basalt unit. Such zones of sulphide mineralisation are often proximal to massive sulphide lenses and more work is warranted here – with downhole EM of this hole being planned for the next year. Figure 15: Drilling operation at the Montrose Prospect December 2018 Heron Resources Limited - Annual Report 2019 - Page 19 OPERATIONS REPORT CONTINUED Exploration Joint Venture Projects Sky Metals Farm-In (Kangiara EL 8400, Rosevale EL 8573 and Cullarin EL7954) In October 2019 Heron entered into an Agreement with Sky Metals Limited whereby Sky will earn into Heron’s non-core assets being the Cullarin (EL 7954), Kangiara (EL 8400) and Rosevale (EL 8573) projects. Sky will spend $400,000 in the first year and a total of $2.0 million over 3 years to earn an 80% interest. Heron will then be free carried at 80% until a definitive feasibility study (DFS) is completed or $10 million of total expenditure is reached. Heron receives 10 million Sky options at a strike price of 15c and exercisable when Sky proceeds to $2m farm- in stage. Alchemy Farm-In and JV (Overflow, Girilambone, Eurow, Yellow Mountain, Nyngan and Barraba) Heron entered into a Farm-In Agreement with Alchemy Resources Limited (Alchemy) (ASX: ALY) covering a portfolio of Heron's NSW exploration tenements in May 2016. The Farm-In Agreement covers 1,059 km2 of the central Lachlan Orogen in NSW. An Option Agreement was also finalised in March 2018 with the addition of two tenements into the existing Alchemy JV for 10 million ALY shares (2.3c) and 10 million ALY options (strike at 5c). During the year Alchemy earnt a 51% interest in the JV tenements after spending $1 million and are proceeding to earn 80% by spending an additional $1 million by April 2021. Alchemy has focused its exploration on the Nyngan (Ni-Co) deposit and the Overflow projects. At Nyngan Alchemy announced a maiden 2012 JORC Compliant Mineral Resource Estimate at the West Lynn Ni-Co-Al Project near Nyngan of: 21.3Mt @ 0.84% Ni, 0.05% Co, 2.4% Al and 20.0% Fe (ASX:ALY, 21 Feb 2019). This resource was defined from a 3 phase drilling campaign completed in 2018 and comprising 178 holes for 8,646m. The Ni-Co mineralisation is flat lying and associated with variably lateritic clay, saprolite and weathered serpentinite units. Mineralisation remains open along and across strike with potential to expand this resource. At the Overflow Project, following clearance of Native Title and establishment of a Land Access Agreement, a Moving Loop EM Survey (MLEM) with two DDH drilled into anomalies (OFDD001 and OFDD002). A broad zone of weak to moderate mineralisation was intersected in OFDD001 including: 14m @ 0.4g/t Au, 0.4% Zn from 368m (incl. 1m @ 2.1g/t Au, 12g/t Ag, 2.0% Zn, 1.0% Pb, 0.19% Cu from 379m). The results have helped define the known extent of mineralisation at Overflow and confirmed an increase in copper mineralisation with depth. A Down-Hole Electro-Magnetic survey (DHEM) is planned on OFDD002 to test for significant off-hole conductors and potential high-grade mineralisation at depth. Page 20 - Heron Resources Limited - Annual Report 2019 Corporate Profile CORPORATE GOVERNANCE STATEMENT The Board of Heron is committed to achieving and demonstrating the highest standards of Corporate Governance. The Board is responsible to its Shareholders for the performance of the Company and seeks to communicate extensively with Shareholders. The Board believes that sound Corporate Governance practices will assist in the creation of Shareholder wealth and provide accountability. In accordance with Listing Rule 4.10.3, the Company has elected to disclose its Corporate Governance policies and its compliance with them on its website, rather than in the Annual Report. Accordingly, the following information about the Company's Corporate Governance practices is set out on the Company's website at www.heronresources.com.au: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) Board Charter; Audit & Governance Committee Charter; Remuneration & Nomination Committee Charter Policy on securities trading; Policy on continuous disclosure; Policy regarding communication with Shareholders; Policy on the Company’s risk management; Community Engagement Policy Environmental Policy Fitness for Work policy Health and Safety policy Human Resources and Workplace practises policy (includes Diversity Policy) Workplace Injury and illness management policy Policy on Whistleblowers; and Code of Conduct. Heron Resources Limited - Annual Report 2019 - Page 21 Directors’ Report The Directors submit their report for the consolidated entity consisting of Heron Resources Limited (Heron or the Company) and the entities Heron controlled at the full year ended 30 June 2019. BOARD The names of the Directors of the Company during the period and at 30 June 2019 were: Stephen Dennis Wayne Taylor (ceased employment and resigned as a Director on 18 September 2019) Borden Putnam III Fiona Robertson Mark Sawyer Peter Rozenauers Ricardo de Armas Ian Pattison There were six meetings of directors held during the period with all directors (or their alternates) appointed attending each of the meetings they were eligible to attend. Director Executive W Taylor Non-executive S Dennis F Robertson B Putnam M Sawyer P Rozenauers R De Armas I Pattison Board of Directors' meetings Audit and Governance Committee meetings Remuneration and Nomination Committee meetings Held Attended Held Attended Held Attended 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 6 3 3 3 - - - - 3 3 3 - - - - 1 1 1 - - - 1 1 1 1 - - - 1 (BOLD GREEN) (BOLD) Current Chairman Current member (1) “Held” indicates the number of meetings held during the period of each director’s tenure. Where a director is not a member but attended meetings during the period, only the number of meetings attended, rather than held is shown. (2) “Attended” indicates the number of meetings attended by each director (or their alternates). Page 22 - Heron Resources Limited - Annual Report 2019 DIRECTORS’ REPORT CONTINUED DIRECTORS The names and details of the Directors of the Company in office at any time during or since the end of the year are: Director Appointed Position Stephen Dennis - BCom BLL.B GDipAppFin(Finsia) 05 December 2006 Chairman (Non-Executive) of the Board, Member of Audit and Governance Committee, Chair of Remuneration and Nomination Committee. Stephen Dennis has been actively involved in the mining industry for 35 years. He has held senior management positions at CBH Resources Limited (the Australian subsidiary of Toho Zinc), MIM Holdings Limited, and Minara Resources Limited. Other current directorships Non-executive Chairman of EHR Resources Limited, Non-executive Chairman of Rox Resources Limited, Non-executive Chairman of Graphex Mining Limited, Non-executive Chairman of Lead FX Inc, Board member of Kalium Lakes Ltd Former directorships in last 3 years None. Director Appointed Position Wayne Taylor - BEng (Mining), MBA, M AusIMM 11 August 2014 (ceased employment and resigned as a Director on 18 September 2019) Managing Director and CEO Mr. Taylor is a mining engineer with over 30 years’ experience in the mining industry. Mr Taylor has held senior roles with Western Mining Corporation and Glencore International’s Australian operations. For the six years prior to joining TriAusMin he managed Glencore’s base metal business development based out of Australia which involved assessing mining projects throughout the world. Prior to his role with Heron he was MD & CEO of TriAusMin Ltd from 2011 until the time of the merger with Heron in 2014. Other current directorships None. Former directorships in last 3 years None. Director Appointed Position Borden Putnam III - MSc (Geol), RPG, F AusIMM 12 December 2014 Director (Non-Executive), Member of Audit and Governance Committee, Member of Remuneration and Nomination Committee Mr. Putnam is a professional geologist with over 42 years of experience in the mineral industry, with focus on exploration and asset evaluations in the mineral investment business. From 1976-1991 he worked as a Project Geologist and a District Manager for AMAX Exploration and Newmont Exploration Limited respectively. He served as Vice-President and Chief Geologist for MRDI (now AMEC) an internationally recognized mining consultancy firm from 1991-1996. Mr. Putnam was Vice- President and Principal with Robertson Stephens Investment Management from 1996-2001, and from 2001-2009 was Managing Director of Eastbourne Capital Management; both firms which were engaged in mineral investment management principally as private hedge funds. In 2009, Mr Putnam, established his mining industry consultancy business providing technical evaluations, due diligence audits and investment advice to clients in the mineral resource industry. Other current directorships Non-executive Director of Skeena Resources Limited (TSX-V) Former directorships in last 3 years None. Director Appointed Position Fiona Robertson - MA (Oxon) (Geology), M AusIMM, FAICD 9 April 2015 Director (Non-Executive), Chairman of Audit and Governance Committee, Member of Remuneration and Nomination Committee Ms Robertson is a finance professional and practicing non-executive director and audit/risk committee chair with a background of more than 20 years as a chief financial officer in the emerging and mid-tier resources sector and 14 years as a corporate banker working in Sydney, New York and London with Chase Manhattan Bank. Ms Robertson’s executive experience includes CFO roles with Petsec Energy Ltd; Climax Mining Ltd and Delta Gold Ltd; as well as various corporate banking roles with Chase Manhattan Bank. Other current directorships Non-executive Director of Whitehaven Coal Ltd. Former directorships in last 3 years Non-executive Director and Chair of the Audit & Risk Committee of Drillsearch Energy Ltd; Non-executive Chair of One Asia Resources Ltd. Heron Resources Limited - Annual Report 2019 - Page 23 DIRECTORS’ REPORT CONTINUED Director Appointed Position Mark Sawyer - LL.B. 19 August 2015 Director (Non-Executive), Member of Remuneration and Nomination Committee (effective 1 July 2019) Mr Sawyer co-founded Greenstone Resources in 2013 after a 16 year career in the mining sector. Prior to establishing Greenstone, Mr Sawyer was GM and Co-Head Group Business Development at Xstrata plc where he was responsible for originating, evaluating and negotiating new business development opportunities for Xstrata. Prior to Xstrata, Mr Sawyer held senior roles at Cutfield Freeman & Co (a boutique corporate advisory firm in the mining industry) and at Rio Tinto plc. Mr Sawyer is a solicitor and a resident of the United Kingdom. Other current directorships Non-executive Director of Metro Mining Ltd. Former directorships in last 3 years None. Director Appointed Position Ricardo De Armas B.S. M.B.A. (Harvard) 22 September 2017 Director (Non-Executive) Mr De Armas is an investment professional at Castlelake, where he focuses on emerging market investments. Mr. De Armas has more than 10 years of experience in investment and corporate finance, including roles as vice president at De Jong Capital, principal at Zaff Capital, associate at Citigroup’s investment banking division, and financial analyst at Procter & Gamble. His expertise includes value investments, restructuring and financial advisory. Mr. De Armas received his M.B.A. from Harvard Business School and a B.S. from Universidad Metropolitana in Business Administration. Other current directorships None. Former directorships in last 3 years None. Director Appointed Position Peter Rozenauers BME (Hons I), MAppFin, MAusIMM 22 September 2017 Director (Non-Executive) Mr Rozenauers is a Portfolio Manager with Orion Mine Finance and has over 25 years of experience in the natural resources and finance industry. He earned a BEng (Honours I) in Mining from the University of NSW, a Master in Applied Finance from the University of Technology Sydney and is a member of the Australasian Institute of Mining and Metallurgy. Prior to Orion, Mr. Rozenauers was a Senior Investment Manager for a predecessor business of Orion, and prior to that was Managing Director and Head of Asian Commodities Distribution for Barclays Capital in Singapore, a leading global investment bank. Mr. Rozenauers spent over 13 years working in senior banking roles in Singapore, New York and London. Other current directorships None Former directorships in last 3 years Non-executive Director of Lynx Resources. Non-executive Director of Blackham Resources Ltd. Non-executive Director of MacPhersons Resources Ltd (now known as Horizon Minerals Ltd). Director Appointed Position Ian Pattison B Sc (Hons), PhD, MAusIMM 29 November 2017 Director (Non-Executive), Member of the Remuneration and Nomination Committee Dr Pattison is a highly respected metallurgist with over 30 years of Australian and international experience. His early career was with CRA where he held senior roles in operations, engineering and then as Metallurgy Manager in their base metal division. He joined Denehurst following their purchase of the Woodlawn Mine from CRA to take on an Executive Director role with the Woodlawn and Benambra mines. This was followed by Director and Managing Director roles in the nutrition industries mainly with the German based Henkel/Cognis companies. For the past 10 years he has been the Group Manager Metallurgy for the Australian operations of Japan’s Toho Zinc which incorporates the construction of the Rasp Mine in Broken Hill and operations at the Endeavor Mine at Cobar. Other current directorships None. Former directorships in last 3 years None. Page 24 - Heron Resources Limited - Annual Report 2019 DIRECTORS’ REPORT CONTINUED SENIOR EXECUTIVE OFFICERS Chief Operating Officer (ceased employment on 27 September 2019) The Chief Operating Officer (COO) is Andrew Lawry B App Sc (Metallurgy), ); F AusIMM. Mr Lawry brings more than 28 years’ experience in project management, engineering, construction, commissioning and operations, both in Australia and overseas. He has worked for several leading resource companies including Polymetals, Newcrest and engineering firms Bateman, Normet and Q-Proc. Notably, Mr Lawry managed, from construction through to operation, the successful retreatment of the Hellyer base metal tailings project in 2006 in western Tasmania. With this experience he is well qualified to lead the successful development of the Woodlawn Project which comprises the retreatment of tailings in combination with the development of an underground mine. General Manager – Finance and Administration and Company Secretary The GM - Finance and Company Secretary is Simon Smith B.Bus CA. Mr. Smith has been a Chief Financial Officer of both private and public companies in Australia and the USA. He brings over 25 years’ experience in the business world as a Chartered Accountant and holds a Bachelor’s Degree in Business from the University of Technology Sydney. Mr. Smith was the CFO and Company Secretary for TriAusMin prior to the merger with Heron Resources. General Manager - Exploration and Geology The Exploration Manager, David von Perger BSc (Hons) MAusIMM was appointed to this position in February 2006. Mr von Perger is a geologist with some 25 years’ experience in mineral exploration having worked in several locations around Australia. Mr von Perger has worked on various styles of mineral deposits including Archaean gold and nickel, and Proterozoic base-metals and iron-ore. His experience includes four years as a business analyst for a major mining group involving analysis of mining operations, project development and assessment of new opportunities. Since his appointment with Heron in February 2006, Mr von Perger has been responsible for the identification and acquisition of several new nickel, gold, iron-ore and base-metal projects. General Manager - Strategy & Business Development Charlie Kempson MEng (Oxon), MBA, GAICD is a senior corporate finance executive who was most recently an equity partner and Director of Azure Capital Limited, a mining focused leading independent Perth-based corporate advisor, where he worked for nine years advising boards and senior executives across a range of industries including mining, oil & gas and related services on business development, corporate strategy, finance, and mergers and acquisitions. Prior to his arrival in Australia in 2002 Mr Kempson spent five years with investment banks Commerzbank AG and Barclays Capital in London and Germany, and four years working in technical roles for Logica (now part of CGI Group). General Manager – Woodlawn Brian Hearne is the General Manager of Woodlawn Mine. He is a mining professional who has worked in the industry since 1978. He started his career in mineral processing plants, firstly at Woodlawn. Brian has managed mineral processing plants, smelters and mines both in Australia and overseas. The major achievements at all the operations he was involved in was improved safety statistics and lower operating costs. PRINCIPAL ACTIVITIES The principal activity of the Consolidated Entity during the year was the construction of the Woodlawn Mine. OPERATING RESULTS The loss of the consolidated entity for the 2019 financial year after income tax of nil (2018: nil) was $40,763,352 (2018: $5,819,116). DIVIDENDS No dividends were paid during the year and the Directors do not recommend the payment of a dividend. OPERATIONS REVIEW The detailed review of operations of the Consolidated Entity for the year is contained in the Operations Report in this Annual Report. Heron Resources Limited - Annual Report 2019 - Page 25 DIRECTORS’ REPORT CONTINUED EVENTS OCCURING AFTER 30 JUNE 2019 As a consequence of completion of plant construction running seven months behind schedule, the Company will require additional working capital to bridge the delay in achieving full production. As noted in the Company’s ASX release dated 30 August 2019, the Company is engaged with its major shareholders and senior debt provider with the objective of finalising a finance package which will address the Company’s working capital requirements, provide the additional funding necessary to complete commercialisation of Woodlawn and defer payments otherwise due under the senior debt and silver stream arrangements. As noted in the announcement, the senior debt provider agreed to a standstill arrangement until 27 September 2019 and this standstill letter was subsequently extended until 11 October 2019 in order to allow for finalisation of the finance package. As at the date of this report, the negotiations with the major shareholders and senior debt provider are well advanced and the Group expects to make an announcement on a finance package in early October 2019. On 1 February 2019 and 1 March 2019, the Company received progress claims from Sedgman for costs of $53M in excess of their Guaranteed Maximum Price EPC contract. Discussions between the Company and Sedgman have been ongoing through to the date of this report. Negotiations are now in their final stages and the Company expects a final resolution of all claims from Sedgman and counter claims from Heron to be concluded in October 2019. As at 30 June 2019 the Company’s best estimate of the cost to fully settle the claim and all counter claims was $15M and accordingly a provision for this amount was recorded. LIKELY DEVELOPMENTS Further information on the likely developments in the operations of the Consolidated Entity and the expected results of those operations have not been included in this Report because the Directors believe it would be likely to result in unreasonable prejudice to the Consolidated Entity. Page 26 - Heron Resources Limited - Annual Report 2019 DIRECTORS’ REPORT CONTINUED REMUNERATION REPORT (AUDITED) The Board continues to apply a fair and responsible executive remuneration framework which operates effectively to appropriately incentivise and reward senior executives and members of the Board to execute our strategy while being aligned with shareholder interests. At the 2018 Annual General Meeting (AGM), shareholders voted 95.1% in favour of the Remuneration Report. Changes to remuneration framework for FY2019 There were no changes to the remuneration framework during FY2019. Non-executive Directors fees The Directors fees paid to individual Non-executive Directors changed during FY 2019, whereby the Company began to remunerate Non- executive Directors who sit on the Audit and Governance Committee and the Remuneration and Nomination Committee to reflect the additional workload involved. 1 Introduction This Remuneration Report forms part of the Directors Report. In accordance with Section 308 (3C) of the Corporations Act 2001 (Cth) (Corporation Act), the external auditors, Ernst & Young, have audited this Remuneration Report. This report details the remuneration and fees during FY2019 of the Key Management Personnel (KMP) of the Company, who are listed in the table below. For the remainder of this Remuneration Report, the KMP are referred to as either Executive KMP or Non-executive Directors. 1.1 Key Management Personnel for FY2019 This report details the remuneration during FY2019 of: Name Role held during FY2019 Committee positions held Chair of Remuneration and Nomination Committee Member of the Audit and Governance Committee Member of the Remuneration and Nomination Committee Member of the Audit and Governance Committee Chair of the Audit and Governance Committee Member of the Remuneration and Nomination Committee Effective from 1 July 2019, Member of the Remuneration and Nomination Committee None None Member of the Remuneration and Nomination Committee Non-executive Directors Stephen Dennis Chairman and Non-executive Director Borden Putnam III Non-executive Director Fiona Robertson Non-executive Director Mark Sawyer Non-executive Director Non-executive Director Non-executive Director Non-executive Director Role held during FY2019 Managing Director and CEO Chief Operating Officer Ricardo De Armas Peter Rozenauers Ian Pattison Executive KMP Wayne Taylor Andrew Lawry Simon Smith David von Perger Charlie Kempson Brian Hearne General Manager, Finance & Administration and Company Secretary General Manager, Exploration & Geology General Manager, Strategy & Business Development General Manager, Woodlawn Mine Heron Resources Limited - Annual Report 2019 - Page 27 DIRECTORS’ REPORT CONTINUED 1.2 Summary of Company performance The Remuneration and Nomination Committee is of the view that the Executive Key Management Personnel (Executive KMP) have continued to execute the Company’s strategy and that remuneration outcomes for FY2019 are aligned to company performance. In FY2019, the Executive KMP have focused on key activities and initiatives including: - - - - - - Safety at Woodlawn Completing construction and other project development activities at Woodlawn. Commencement of production activities such as the underground decline development. Commissioning of the processing plant and associated systems and process in preparation of the commencement of production. Effective management of key stakeholder relationships including Veolia, government regulators and the community. Satisfaction of key conditions precedent for Senior Debt draw downs druring FY2019. Company performance for the last five years A snapshot of key Company performance indicators for the past five years is set out below: (in 000’) Revenue ($m’s) Net Assets ($’000’s) Profit/(loss) attributable to the group ($'000's) Share price at year end (dollars per share) (1) (2) Basic EPS (cents per share) (1) Dividends paid (cents per share) 2019 Nil $128,900 ($40,763) $0.57 ($0.169) Nil 2018 Nil $168,882 ($5,819) $0.63 ($0.028) Nil 2017 Nil $44,010 ($2,857) $0.71 ($0.006) Nil 2016 Nil $55,084 ($4,253) $1.22 2015 Nil $52,151 ($5,429) $0.92 ($0.0104) ($0.0162) Nil Nil (1) (2) The EPS and Share price information reflect the 1 for 10 share consolidation completed in December 2017 to ensure comparability between years. Ardea was spun out of Heron in February 2017 via an “in specie” distribution at an equivalent of $0.20 cents per share. 2. Remuneration Governance This section describes the role of the Board, Remuneration and Nomination Committee and external remuneration advisers when making remuneration decisions, and sets out an overview of the principles and policies that underpin the Company’s remuneration framework. 2.1 Role of the Board and Remuneration and Nomination Committee The Board is responsible for ensuring that the Company’s remuneration structures are equitable and aligned with the long-term interests of the Company and its shareholders. Consistent with this responsibility, the Board has established a Remuneration and Nomination Committee, whose role is to: - - - Review and recommend to the Board the remuneration of the Executive KMP; Review and approve the remuneration policies and practices for the Group generally, including incentive plans and other benefits; and Review and make recommendations to the Board regarding the remuneration of Non-executive Directors. The Remuneration and Nomination Committee comprises four Non-executive Directors as at 30 June 2019: Stephen Dennis (Chairman), Borden Putman III, Fiona Robertson, Ian Pattison and effective from 1 July 2019, Mark Sawyer. The Remuneration and Nomination Committee has a formal charter, which sets out its roles and responsibilities, composition structure and membership requirements. A copy of this charter can be viewed on Heron’s website. Further information regarding the Remuneration and Nomination Committee’s role, responsibilities and membership is set out in the Company’s Corporate Governance Statement. 2.2 Use of external remuneration advisors From time to time, the Remuneration and Nomination Committee seeks and considers advice from external advisors who are engaged by and report directly to the Remuneration and Nomination Committee. Such advice will typically cover Non-executive Director fees, Executive KMP remuneration and advice in relation to equity plans. The Corporations Act (2001) requires companies to disclose specific details regarding the use of remuneration consultants. The mandatory disclosure requirements only apply to those advisers that provide a ‘remuneration recommendation’ as defined in the Corporations Act. The Committee did not receive any such recommendations in FY2019. The Company participates in an industry recognised remuneration survey which it uses to assist in the benchmarking of remuneration across the organisation. Page 28 - Heron Resources Limited - Annual Report 2019 DIRECTORS’ REPORT CONTINUED 2.3 Executive KMP remuneration principles and framework The Company’s Executive KMP remuneration framework is based on the following core principles: - - - - to ensure the Company’s remuneration structures are equitable and aligned with the long-term interests of the Company and its shareholders, having regards to relevant Company policies; to attract and retain skilled executives; to structure short and long term incentives that are challenging and linked to service conditions and the creation of sustainable shareholder returns; and to ensure any termination benefits are justified and appropriate. These principles are reflected in the Company’s remuneration framework, which is comprised of both fixed and at-risk remuneration components as indicated below. Details of each of these components and how they applied during FY2019 are described in the tables below and in Section 3. All STI and LTI guidelines noted below are subject to Remuneration and Nomination Committee and Board approval. Fixed remuneration (TFR) At-risk STI At-risk LTI - - - - includes salary and superannuation reviewed annually by the Remuneration Committee benchmarked against peer companies influenced by individual performance and experience - - - determined based on a mix of financial and non-financial measures STI for FY2019 was set between 10% and 50% of TFR for target performance and between 20% and 100% of TFR for stretch performance. The STI is delivered as cash. - - - - provides the Remuneration and Nomination Committee with the flexibility to determine the nature, terms and conditions of the grant each year Operated in FY2019 as an award of performance rights. the face value of the LTI opportunity is currently set between 20% and 75% of TFR vesting is subject to an independent performance hurdle – Relative TSR Remuneration framework summary CEO COO KMP - GM’s Other Executives Form of Delivery Performance Period Further explanation (1) As a % of TFR. TFR Benchmarked Benchmarked Benchmarked Benchmarked --------------------At-risk % of TFR----------------- STI TARGET – STRETCH(1) LTI 50% - 100% 20% -50% 20% - 50% 10% - 20% 50-75% 30-50% 30-50% 20-30% Salary & Superannuation Cash 100% Deferred Share Rights N/A Section 3.1 to 3.2 1 year Section 3.3 3 years Section 3.4 Heron Resources Limited - Annual Report 2019 - Page 29 DIRECTORS’ REPORT CONTINUED 3. Remuneration of the Executive KMP for FY2019 This section describes in greater detail the different components of Executive KMP remuneration for FY2019. 3.1 Benchmarking total remuneration While benchmarking is a useful starting point, it is only one input used by the Remuneration and Nomination Committee when determining total remuneration for the Executive KMP. Executive KMP remuneration is benchmarked against the results of a survey conducted by a remuneration consulting organisation of similar roles across the Australian mining industry. The objective of the Board’s positioning remuneration levels in this manner is to ‘meet the market’ so as to attract and retain a leading management team while still ensuring appropriate restraint in respect of executive remuneration. Actual market positioning for each individual may deviate from the positioning policy (above or below) due to consideration such as internal relativities, experience, tenure in role, individual performance and retention considerations. 3.2 Fixed remuneration Fixed remuneration received by Executive KMP is subject to review by the Remuneration and Nomination Committee which will then make recommendations to the Board for approval. Fixed remuneration is comprised of base salary and superannuation. In line with Company policy and executives’ service agreements, remuneration levels are reviewed annually based on market benchmarking and individual performance. At present, fixed remuneration for Executive KMP is typically positioned between the 25th and 50th percentile of the market comparator group adopted by the Board. 3.3 STI awards and structure for FY2019 The terms of the STI that applied during FY2019 were. Who participated All Executive KMP. What was the performance period? The STI for FY2019 operated over a 12 month performance period from 1 July 2018 to 30 June 2019. What was the target STI award? In light of the Company’s delays to the commencement of production, the Board has determined that no STI’s will be paid to Executive KMP’s in respect of FY2019. What were the performance conditions, why were they chosen and how were they assessed? Heron has chosen performance conditions that expressly link to our strategy and motivate out-performance of annual business plans. The following KPIs were adopted as performance conditions and applied to the FY2019 STI: - - - - Zero harm to employees and contractors All construction and project activities to meet Woodlawn project schedule including key milestones Project capital and operating expenditures to be within Budget Satisfaction of Conditions Precedent to draw down of the Senior Debt At the commencement of FY2019, the Board set Target KPIs, the achievement of which was expected to be critical to the success of the Company as it began construction at Woodlawn. The Remuneration and Nomination Committee and the Board assessed and approved the STI performance conditions applying to the CEO’s STI award. The performance conditions for Other Executive KMP were assessed by the CEO and approved by the Board following the recommendation of the Remuneration and Nomination Committee. The weightings of each performance condition are set out in the following table. Safety & Environment Woodlawn project KPI’s Corporate KPI’s Individual Leadership KPIs CEO 10% 30% 20% 40% COO 10% 30% 20% 40% KMP – GM’s Other Execs 10% 30% 20% 40% 10% 30% 20% 40% Page 30 - Heron Resources Limited - Annual Report 2019 DIRECTORS’ REPORT CONTINUED What performance level was achieved? A snapshot of the performance levels achieved for FY2019 is set out below: Performance condition1 Safety & Environment Woodlawn project KPI’s Corporate KPI’s Individual KPI’s Actual (1) 50% of target achieved 41% of target achieved 75% of target achieved Outcome Below target Below target On target – below stretch 43-75% of target achieved On target – below stretch (1) The actual achievement of the target is a representative sample for Individual KPI’s across the KMP Executive team 3.4 LTI awards and structure for FY2019 The performance rights granted relate to LTI’s granted for FY2018 that were granted on 1 July 2018. There was no award of an LTI for FY2019 performance. 3.5 Executive KMP realised remuneration outcomes The table below is designed to give shareholders a better understanding of the actual remuneration outcomes for Executive KMP in FY2019. The amounts disclosed in the table, while not in accordance with accounting standards, are considered more helpful for shareholders to demonstrate the linkage between Company performance and remuneration outcomes for executives for FY2019. Executive KMP TFR(1) STI paid LTI awarded at fair value of award Other(2) Total Remuneration Wayne Taylor Andrew Lawry Simon Smith David von Perger Charlie Kempson Brian Hearne $477,480 $387,630 $332,333 $316,455 $332,333 $320,288 - - - - - - - - - - - - - - - $1,336 - $16,791 $477,480 $387,630 $332,333 $317,791 $332,333 $337,079 (1) (2) 4. Fixed remuneration comprises base salary and superannuation. Other includes housing, parking, motor vehicle benefits and other similar items. Executive KMP employment contracts The following section sets out an overview of key terms of employment for the Executive KMP, as provided in their service agreements. All Executive KMP contracts give the Company discretion to make payment in lieu of notice upon termination. No notice is required where termination is for cause. Treatment of unvested incentives is dealt with in accordance with the terms of grant. In general, under the STI and LTI arrangements, unvested entitlements will be forfeited where an executive is terminated or, subject to the Board’s discretion, where they resign. In all other circumstances where the Board considers the executive to be a ‘good leaver’, outgoing executives will generally retain a pro-rata share of entitlements (subject to satisfying any applicable performance conditions in the case of LTI arrangements). Managing Director Wayne Taylor was appointed as Managing Director and CEO of the Company on 11 August 2014 and ceased employment on 18 September 2019. Fixed remuneration Mr Taylor’s annual TFR for FY2019 is $477,480. It includes salary and superannuation (@15% of Base Salary). TFR is reviewed annually. Short term incentive Mr Taylor is eligible to participate in the annual STI plan as described in Section 3.4. At Target performance, his FY2019 STI opportunity is 50% of TFR with up to 100% for FY2019 stretch performance. Long term incentive Mr Taylor is eligible to participate in the LTI plan as described in section 3.5 and subject to receiving required or appropriate shareholder approval. Subject to recommendation by the Remuneration Committee and approval by the Board and shareholders, Mr Taylors LTI grant for FY2019 will be between 50-75% of TFR. Other key terms Other key items of Mr Taylor’s service agreement include the following; His employment is ongoing subject to 6 months’ notice of term by either party. Heron Resources Limited - Annual Report 2019 - Page 31 DIRECTORS’ REPORT CONTINUED Other Executive KMP contracts A summary of the notice periods and key terms of the current Executive KMP contracts, other than Mr Taylor, are set out in the table below. Mr Andrew Lawry was appointed COO of the Company on 22 June 2015 and ceased employment on 27 September 2019. All of the contracts below are of ongoing duration. Name and position (at year end) Fixed Remuneration (Base salary + SGC) STI Participation LTI Participation Notice Simon Smith General Manager, Finance & Administration/ Company Secretary Appointed 11 August 2014 $332,333. TFR is reviewed annually. David von Perger General Manager, Exploration & Geology Appointed February 2004 $316,455. TFR is reviewed annually. Charlie Kempson General Manager, Strategy & Business Development Appointed March 2013 $332,333. TFR is reviewed annually. Brian Hearne General Manager, Woodlawn Mine Appointed 4 October 2016 $377,775. TFR is reviewed annually 3 months by either party 3 months by either party 3 months by either party plus 6 months if his role is made redundant 3 months by either party Mr Smith is eligible to participate in the annual STI plan as described in Section 3.3. At Target performance, his FY2020 STI opportunity is 20% of TFR with up to 50% for FY2020 stretch performance. Mr von Perger is eligible to participate in the annual STI plan as described in Section 3.3. At Target performance, his FY2020 STI opportunity is 20% of TFR with up to 50% for FY2020 stretch performance. Mr Kempson is eligible to participate in the annual STI plan as described in Section 3.3. At Target performance, his FY2020 STI opportunity is 20% of TFR with up to 50% for FY2020 stretch performance. Mr Hearne is eligible to participate in the annual STI plan as described in Section 3.3. At Target performance, his FY2020 STI opportunity is 20% of TFR with up to 50% for FY2020 stretch performance. Mr Smith is eligible to participate in the LTI plan as described in section 3.5. Subject to approval by the Board, Mr Smith’s LTI grant for FY2020 will between 30-50% of TFR Mr von Perger is eligible to participate in the LTI plan as described in section 3.5. Subject to approval by the Board, Mr von Perger’s LTI grant for FY2020 will between 30-50% of TFR Mr Kempson is eligible to participate in the LTI plan as described in section 3.5. Subject to approval by the Board, Mr Kempson’s LTI grant for FY2020 will between 30-50% of TFR Mr Hearne is eligible to participate in the LTI plan as described in section 3.5. Subject to approval by the Board, Mr Hearne’s LTI grant for FY2020 will between 30-50% of TFR Page 32 - Heron Resources Limited - Annual Report 2019 DIRECTORS’ REPORT CONTINUED 5. Executive KMP remuneration tables 5.1 Executive KMP – Statutory remuneration table The following table sets out the statutory remuneration disclosures required under the Corporations Act and has been prepared in accordance with the appropriate accounting standards and has been audited. In AUD FY Managing Director & CEO Wayne Taylor (2) 2018 2019 Other Executive KMP Andrew Lawry (3) Simon Smith David von Perger Charlie Kempson Brian Hearne Total 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 Salary & fees Non Monetary benefits Super- annuation benefits STI Share-based Payments Rights Perfo- mance & Options(1) Remuneration related Total $ 400,000 415,200 340,000 354,000 292,500 305,903 280,000 286,351 292,500 305,903 280,000 289,819 1,885,000 1,957,176 - - - - - - 7,449 1,336 - - - 16,791 7,449 18,127 64,950 62,280 33,000 - 94,200 162,287 592,150 639,767 34,913 33,250 30,638 26,430 28,500 26,047 30,400 26,430 28,263 26,363 27,500 - 30,000 - 20,000 - 27,500 - 17,500 - 217,664 200,800 155,500 - 48,882 110,606 44,658 95,920 43,074 85,271 44,658 95,920 45,519 105,970 320,991 655,974 451,295 497,856 397,796 428,253 379,023 399,005 395,058 428,253 371,282 438,943 2,586,604 2,345,142 % 5.5 - 6.1 - 7.5 - 5.2 - 6.9 - 4.7 - 6 - (1) (2) (3) The Statutory Remuneration disclosure includes the accounting value of share based payments. Accounting Standards require share based payments to be amortised over the relevant performance and service periods. The accounting value for share based payments do not have regard to whether performance conditions were achieved or will be achieved in the future. Ceased employment on 18 September 2019 Ceased employment on 27 September 2019 5.2 LTI awards made in FY2019 There were no awards of LTI’s made for FY2019. The summary below represents LTI’s granted for the FY2018 that were granted to KMP’s on 1 July 2018. Number of performance rights granted Fair value of performance rights at grant Fair Value per right at grant date (1) Performance Hurdle 480,000 291,667 250,000 200,000 250,000 200,000 $216,000 $131,250 $112,500 $90,000 $112,500 $90,000 TSR TSR TSR TSR TSR TSR $0.45 $0.45 $0.45 $0.45 $0.45 $0.45 Latest Vesting Date 30 June 2021 30 June 2021 30 June 2021 30 June 2021 30 June 2021 30 June 2021 Executive KMP Wayne Taylor (2) Andrew Lawry (3) Simon Smith David von Perger Charlie Kempson Brian Hearne (1) (2) (3) The fair value for awards granted to the Executive KMP is based on their fair value at 1 July 2018 being the grant date. The share price at that date was $0.45 per share. Ceased employment on 18 September 2019 Ceased employment on 27 September 2019 Heron Resources Limited - Annual Report 2019 - Page 33 DIRECTORS’ REPORT CONTINUED 6. Non-executive Director remuneration This section explains the fees paid to Non-executive Directors during FY2019. 6.1 Setting Non-executive Director fees Non-executive Directors fees are designed to ensure that the Company can attract and retain suitably qualified and experienced Non- executive Directors. Non-executive Directors may also receive share options, performance rights and, in exceptional circumstances, a performance-related payment as part of their fees from the Company. Although there is no formal minimum shareholding, Non-executive Directors are encouraged to hold shares. Non-executive Directors are also entitled to be reimbursed for travel and other expenses reasonably incurred when attending meetings of the Board or in connection with the business of the Company. The Remuneration and Nomination Committee reviews and makes recommendations to the Board with respect to Non-executive Directors’ fees and Committee fees. In 2017 the shareholders approved a total aggregate maximum of Non-executive Directors’ fees of $750,000 per annum. 6.2 Current Non-executive Director fee levels and fee pool The table below sets out the Board and Committee fees for FY2020. Board Remuneration Committee Audit Committee Chair $90,000 $8,500 $10,000 Member $70,000 $5,000 $5,000 The fees set out above exclude mandatory statutory superannuation contributions made on behalf of the Non-executive Directors. It is not proposed to issue any additional options or performance rights to Non-executive Directors under the LTI awards for FY2020. In addition to the meetings that the Non-executive Directors attended (as shown on page 30), the Non-executive Directors participated in regular site visits to Woodlawn. 6.3 Non-executive Director fees – statutory disclosures The statutory disclosures required under the Corporations Act and in accordance with the Accounting Standards are set out in the table below. In AUD FY NON-EXECUTIVE DIRECTORS Stephen Dennis Borden Putnam III Fiona Robertson Mark Sawyer Ricardo de Armas(1) Peter Rozenauers(1) Ian Pattison(1) Total 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 Board & Committee fees Short- Term incentive Share based payments Superannuation benefits Total fees for services as a Non-exec Director 90,000 103,500 76,650 86,650 70,000 85,000 76,650 76,650 57,487 76,650 42,075 76,650 44,713 81,650 457,575 586,750 - - - - - - - - - - - - - - - 23,159 26,777 20,250 21,567 20,250 21,567 20,250 21,567 9,503 18,757 9,503 18,757 - 9,369 8,550 9,833 - - 6,650 8,075 - - - - - 102,915 138,361 15,200 17,908 121,709 140,110 96,900 108,217 96,900 114,642 96,900 98,217 66,990 95,407 51,578 95,407 44,713 91,019 575,690 743,019 (1) Ricardo de Armas and Peter Rozenauers were appointed to the Board on 22 September 2017; Ian Pattison was appointed to the Board on 29 November 2017. Page 34 - Heron Resources Limited - Annual Report 2019 DIRECTORS’ REPORT CONTINUED LTI awards made in FY2019 There was no award of LTI’s to Non-Executive Directors during FY2019. 7. Related party transactions and additional disclosures 7.1 Loans with Executive KMP and Non-executive Directors There were no loans outstanding to any Executive KMP or any Non-executive Director or their related parties, at any time in the current or prior reporting periods. 7.2 Other KMP transactions Apart from the details disclosed in this report, no Executive KMP or Non-executive Director or their related parties have entered into a material contract with the consolidated entity since the end of the previous financial year and there were no material contracts involving those people’s interests existing at year end. On 1 July 2019, the Company entered into a consultancy agreement with Tannachy Pty Ltd, a company associated with Non-executive Director Dr Ian Pattison. The term of this the agreement is on an "on call" basis at commercially negotiated terms to meet the Company's requirement for metallurgical processing consultancy services. 7.3 Movement in options and rights over equity instruments held by Executive KMP The movement during the reporting period, by number and value of equity instruments in the Company held by each Executive KMP is detailed below. Executive KMP Instrument Balance as at 1 Jul 18 (number) Granted (number) (A) Granted (value) (B) $ Vested during the year (number) Exercised (number) Exercised Lapsed Lapsed (year (number) of grant) (value) $ Vested & Balance as at 30 exercisable at 30 Jun 19 Jun 19 (number) Wayne Taylor (1) Performance Rights (LTI) Options (LTI) Andrew Lawry (2) Performance Rights (LTI) Options (LTI) Simon Smith Performance Rights (LTI) Options (LTI) David von Perger Performance Rights (LTI) Options (LTI) Charlie Kempson Performance Rights (LTI) Options (LTI) Brian Hearne Performance Rights (LTI) Options (LTI) 485,000 485,836 480,000 - 216,000 - 295,000 165,000 291,667 - 131,250 - 255,000 165,000 250,000 - 112,500 - 240,000 165,000 200,000 - 90,000 - 255,000 165,000 250,000 - 112,500 - 245,000 165,000 200,000 - 90,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (85,836) - 2014 965,000 400,000 - 133,334 - - - - - - - - - - - - - - - - - - - - 586,667 165,000 - 55,000 505,000 165,000 - 55,000 440,000 165,000 - 55,000 505,000 165,000 - 55,000 445,000 165,000 - - (A) The number of rights granted during FY2019 includes the FY2018 LTI awards granted on 1 July 2018. There were no award of LTI for the FY2019 year. Further details are provided in section 5.3; and, (B) (1) (2) The value of LTI performance rights granted in the year is the fair value of the performance rights at grant date. Ceased employment on 18 September 2019 Ceased employment on 27 September 2019 Heron Resources Limited - Annual Report 2019 - Page 35 DIRECTORS’ REPORT CONTINUED 7.4 Movement in options and rights over equity instruments held by Non-executive Directors The movement during the reporting period, by number and value of equity instruments in the Company held by each Non-Executive Director is detailed below. Non-Executive KMP Instrument Balance as at 1 Jul 18 (number) Granted (number) Granted (value) (A) (B) $ Stephen Dennis Performance Rights (LTI) Options (LTI) Fiona Robertson Performance Rights (LTI) Options (LTI) Borden Putnam Performance Rights (LTI) Options (LTI) Mark Sawyer Performance Rights (LTI) Options (LTI) Ricardo De Armas Performance Rights (LTI) Options (LTI) Peter Rozenauers Performance Rights (LTI) Options (LTI) Ian Pattison Performance Rights (LTI) Options (LTI) 115,000 100,000 90,000 100,000 90,000 100,000 90,000 100,000 90,000 100,000 90,000 100,000 - - - - - - - - - - - - - - - - - - - - 90,000 - 40,500 - Vested during the year (number) Exercised (number) Exercised Lapsed Lapsed (year (value) (number) of grant) Vested & Balance as at 30 exercisable Jun19 at 30 Jun 19 (number) $ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 115,000 100,000 - 33,333 90,000 100,000 - 33,333 90,000 100,000 - 33,333 90,000 100,000 - 33,333 90,000 100,000 - 33,333 90,000 100,000 - 33,333 90,000 - - - (A) The number of rights granted during FY2019 includes the FY2018 LTI awards granted on 1 July 2018. There were no award of LTI for the FY2019 year. Further details are provided in section 5.3; and, (B) The value of LTI performance rights granted in the year is the fair value of the performance rights at grant date. Page 36 - Heron Resources Limited - Annual Report 2019 DIRECTORS’ REPORT CONTINUED 7.5 Additional disclosures relating to ordinary shares The movement during the reporting period in the number of ordinary shares in the Company held, directly, indirectly or beneficially, by each Executive KMP and each Non-executive Director, including their related, parties is as follows: No. of shares DIRECTORS Stephen Dennis Wayne Taylor Borden Putnam II Fiona Robertson Mark Sawyer Ricardo de Armas Peter Rozenauers Ian Pattison EXECUTIVE Andrew Lawry Simon Smith David von Perger Charlie Kempson Brian Hearne Held at 1 July 2018 Received on vesting and excersice of LTI Received as remuneration Other net change Held at 30 June 2019 179,429 250,740 - 71,429 - - - 51,429 17,000 60,000 60,814 485,130 - - - - - - - - - - - - - - - - - - - - - - - - -- - - - 22,000 - - - - - - 1,429 - - - - 179,429 272,740 - 71,429 - - - 51,429 18,429 60,000 60,814 485,130 - EMPLOYEE DIVERSITY Women currently represent 23% of employees in the Company as a whole. There is currently one woman on the Board. CORPORATE GOVERNANCE The Company has undertaken a thorough review of its Corporate Governance practices and policies in accordance with ASX Corporate Governances Best Practices Recommendations. Following guidance from the ASX the Corporate Governance policy can be found on our website in line with Listing Rule 4.10.3. ENVIRONMENTAL REGULATION The Consolidated Entity is subject to and compliant with all aspects of environmental regulation in respect of its exploration and development activities. The Directors are not aware of any environmental regulation which is not being complied with. ABORIGINAL CULTURE AND HERITAGE The Consolidated Entity is subject to and compliant with all aspects of Aboriginal Heritage regulation in respect of its exploration and development activities. The Directors are not aware of any regulation which is not being complied with. The Directors are committed to cultural respect in undertaking business activities of the Company. INDEMNITY AND INSURANCE OF OFFICERS During the financial year, the company paid a premium in respect of a contract to insure the directors and executives of the company against a liability to the extent permitted by the Corporations Act 2001. The insurance premium relates to liabilities that may arise from an officers position within the company, with the exception of conduct involving a wilful breach of duty or improper use of information or position to gain personal advantage. The Officers covered by the insurance policies are the Directors and officers of the company. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. The company has indemnified the Directors and Executives of the company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. Heron Resources Limited - Annual Report 2019 - Page 37 DIRECTORS’ REPORT CONTINUED INDEMNIFICATION OF AUDITORS To the extent permitted by law, the company has agreed to indemnify its auditors, Ernst & Young Australia, as part of the terms of its audit engagement agreement against claims by third parties arising from audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year. ROUNDING OFF The Company is of a kind referred to in ASIC Corporations Instrument 2016/191 and in accordance with that Corporations Instrument, amounts in the financial report and directors' report have been rounded off to the nearest thousand dollars, unless otherwise stated. AUDITOR’S INDEPEDENCE DECLARATION A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on the following page. Signed in accordance with a resolution of Directors S Dennis Chairman Sydney, 30 September 2019 Page 38 - Heron Resources Limited - Annual Report 2019 Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Auditor’s Independence Declaration to the Directors of Heron Resources Limited As lead auditor for the audit of the financial report of Heron Resources Limited for the financial year ended 30 June 2019, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Heron Resources Limited and the entities it controlled during the financial year. Ernst & Young Scott Jarrett Partner Sydney 30 September 2019 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Heron Resources Limited - Annual Report 2019 - Page 39 Consolidated Financial Statements CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DIRECTORS’ DECLARATION INDEPENDENT AUDITOR’S REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Introduction Capital Structure and Financial Risk Management Corporate Information Basis of Preparation Financial and Capital Risk Management Strategy Borrowings Statement of Accounting Policies Financial Assets and Liabilities Contributed Equity Reserves Group Structure Controlled Entities Parent Entity Information Other Commitments Events Subsequent to Reporting Date Contingencies Related Party Transactions Share-Based Payments Key Management Personnel Auditors’ Remuneration New Accounting Standards and Interpretations Critical Accounting Judgements, Estimates and Assumptions Performance Segment Information Other Income Operating Expenses Income Tax Expense Earnings per Share Note to the Consolidated Statement of Cash Flows Operating Assets and Liabilities Property, Plant and Equipment Mine Property Financial Assets – Equity Instruments Inventories Trade and Other Receivables Other Assets Provisions Trade and Other Payables Page 40 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2019 Notes 30 JUNE 2019 $'000 30 JUNE 2018 $'000 OTHER INCOME Administrative expenses Professional services and consultants Depreciation and amortisation expense Directors fees Employee benefits expense Equity settled share based payments Exploration expenditure expensed General expenses from ordinary activities Interest expense Hedge financing costs Finance expense amortised Fair value and other loss on financial instruments Unrealised fair value (loss) / gain on equity instruments Unrealised foreign exchange loss Sedgman settlement provision (LOSS) FROM ORDINARY ACTIVITIES BEFORE INCOME TAX EXPENSE INCOME TAX EXPENSE (LOSS) FROM ORDINARY ACTIVITIES AFTER INCOME TAX EXPENSE OTHER COMPREHENSIVE INCOME TOTAL COMPREHENSIVE LOSS FOR THE YEAR Basic earnings per Share Diluted earnings per Share 3 4a 20 4b 10 14 5 6 6 1,186 (469) (843) (170) (581) (1,778) (781) (1,431) (1,105) - - (795) (10,776) (4,182) (4,038) (15,000) (40,763) - (40,763) - (40,763) $ (0.169) (0.169) 3,635 (57) (372) (55) (488) (1,204) (587) (1,011) (2,025) (227) (776) (507) (1,018) 561 (1,688) - (5,819) - (5,819) - (5,819) $ (0.028) (0.028) The above Statement should be read in conjunction with the accompanying notes Heron Resources Limited - Annual Report 2019 - Page 41 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2019 Notes 30 JUNE 2019 $'000 30 JUNE 2018 $'000 CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Financial assets - equity instruments Other assets TOTAL CURRENT ASSETS NON-CURRENT ASSETS Restricted cash Other assets Financial assets - equity instruments Property, plant and equipment Mine property TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables Borrowings Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Borrowings Provisions TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Option reserve Accumulated losses TOTAL EQUITY 8 12 11 10 13 7 13 10 8 9 15 17 14 17 14 19 20 20 31,465 1,043 2,355 1,587 499 36,949 7,777 125 132 11,962 242,849 262,845 65,532 1,777 - - 795 68,104 8,777 35 5,901 647 156,517 171,877 299,794 239,981 6,060 126,330 15,786 148,176 6,580 16,138 22,718 7,002 - 547 7,549 47,607 15,943 63,550 170,894 71,099 128,900 168,882 259,742 2,857 (133,699) 128,900 259,742 2,076 (92,936) 168,882 The above Statement should be read in conjunction with the accompanying notes Page 42 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED CONSOLIDATED STATEMENT OF CASHFLOWS FOR THE YEAR ENDED 30 JUNE 2019 Notes 30 JUNE 2019 $'000 30 JUNE 2018 $'000 CASH FLOWS FROM OPERATING ACTIVITIES Interest received Payments to suppliers Exploration and development expenditure – expensed NET CASH USED IN OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Woodlawn Mine – asset under construction Refund / (payment) of bond and bank guarantees Proceeds from sale of investments Payments for plant and equipment Payments for foreign currency hedge transaction Proceeds from research and development refund NET CASH USED IN INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from equity raising Payments for capital raising costs Realised foreign exchange loss – Woodlawn equity raising Proceeds from silver stream Proceeds from drawdown of senior debt NET CASH PROVIDED BY FINANCING ACTIVITIES NET INCREASE / (DECREASE) IN CASH HELD Cash at the beginning of the reporting period Foreign exchange (gain) / loss on translation - unrealised CASH AT THE END OF THE REPORTING PERIOD 1,184 (6,698) (1,431) (6,945) (80,623) 1,000 - (2,748) (6) 1,796 (80,581) - - - - 53,587 53,587 (33,939) 65,532 (128) 31,465 1,174 (7,774) (1,011) (7,611) (112,038) (8,577) 2,584 (663) (776) 1,839 (117,631) 140,115 (4,623) (4,956) 21,648 27,060 179,244 54,002 11,690 (160) 65,532 The above Statement should be read in conjunction with the accompanying notes Heron Resources Limited - Annual Report 2019 - Page 43 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2019 Notes Issued Capital $’000 Accumulated Losses $’000 Option Reserve $’000 Total $’000 259,742 (92,936) 2,076 168,882 - - - (40,763) - - - 965 (184) - - - 259,742 (133,699) 2,857 168,882 129,638 (87,117) 1,489 44,010 - (5,819) 140,115 (5,055) (4,956) - - - - - - - - - - - 646 (59) (5,819) 140,115 (5,055) (4,956) 646 (59) 20 20 19 19 19 20 20 As at 30 June 2018 Total comprehensive income for the period after tax Cost of share based payments Option reserve write back As at 30 June 2019 As at 30 June 2017 Total comprehensive income for the period after tax Issue of share capital Share issue costs Realised foreign exchange loss Cost of share based payments Option reserve write back As at 30 June 2018 259,742 (92,936) 2,076 168,882 The above Statement should be read in conjunction with the accompanying notes. Page 44 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTES TO AND FORMING PART OF THE ACCOUNTS FOR THE YEAR ENDED 30 JUNE 2019 NOTE 1: STATEMENT OF ACCOUNTING POLICIES Corporate Information Heron Resources Limited is a company limited by shares, domiciled and incorporated in Australia, whose shares are publicly traded on the Australian Securities Exchange. The registered office of Heron Resources Limited is Level 8, 309 Kent Street, Sydney, New South Wales, 2000, Australia. The nature of operations and principal activities of Heron Resources Limited and its controlled entities are exploration, mine development, mine operations and the sale of Zinc, Copper and Lead concentrates. The financial report of Heron Resources Limited for the year ended 30 June 2019 was authorised for issue in accordance with a resolution of the Directors on 30 September 2019. Basis of preparation This financial report is a general purpose financial report, prepared by a for-profit entity, in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board (AASB). The financial report also complies with International Financial Reporting Standards (IFRS) including interpretations as issued by the International Accounting Standards Board (IASB). The financial report has been prepared on a going concern basis and in accordance with the historical cost convention, unless otherwise stated. The financial report has been presented in Australian (AUD) dollars. All values are rounded to the nearest AUD $1,000 (AUD $’000s) unless otherwise stated. This is in accordance with ASIC Corporations Instrument 2016/191, dated 1 April 2016. The accounting policies have been consistently applied by all controlled entities included in the Group and are consistent with those applied in the prior financial year. Where necessary, comparatives have been reclassified and repositioned for consistency with the current financial year disclosures. Going Concern Under the senior debt and silver stream lending arrangements the Group must maintain a minimum forecast cash balance of not less than $15m. Due to the extent of the delays in commissioning Woodlawn, the Group identified that the aforementioned covenant was not met when preparing the cash flow forecast as at 30 June 2019. As a result, all amounts owing under the senior debt and silver stream lending arrangements have been classified as current liabilities as at 30 June 2019. This indicates a material uncertainty related to the Group’s ability to continue as a going concern. As noted in the Company’s ASX release dated 30 August 2019, the Company is engaged with its major shareholders and senior debt provider with the objective of finalising a finance package which will address the Company’s working capital requirements, provide the additional funding necessary to complete commercialisation of Woodlawn and defer payments otherwise due under the senior debt and silver stream arrangements. As noted in the announcement, the senior debt provider agreed to a standstill arrangement until 27 September 2019 and this standstill letter was subsequently extended until 11 October 2019 in order to allow for finalisation of the finance package. As at the date of this report, the negotiations with the major shareholders and senior debt provider are well advanced and the Group expects to make an announcement on a finance package in early October 2019. As a result of the advanced stage of negotiations on the finance package and the expectation that it will be finalised under the terms currently being contemplated, the Directors are of the opinion that the Group can continue as a going concern and therefore realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report. This financial report does not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the Group not continue as a going concern. New and Amended Standards and Interpretations The Group has adopted the following new and amended AASB Standards and AASB Interpretations from 1 July 2018. The change in accounting policies were assessed to have no material impact on the Group. Several other amendments and interpretations apply for the first time from 1 July 2018, but do not have an impact on the consolidated financial statements of the Group. Revenue from Contracts with Customers Financial Instruments AASB 15 AASB 9 AASB Interpretation 22 Foreign Currency Transactions and Advanced Consideration Basis of consolidation The consolidated financial statements include the financial statements of the parent entity, Heron Resources Limited, and its controlled entities (referred to as ‘the Group’ in these financial statements). A list of controlled entities (subsidiaries) is presented in Note 21. Control is achieved when the Group is exposed, or has the rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. Heron Resources Limited - Annual Report 2019 - Page 45 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 1. STATEMENT OF ACCOUNTING POLICIES CONTINUED The Group re-assesses whether or not it controls a subsidiary if facts and circumstances indicate that there are changes to one or more of the three elements of control. Specifically, the Group controls an subsidiary if, and only if, the Group has all of the following: (cid:129) (cid:129) (cid:129) Power over the subsidiary (i.e. existing rights that give it the current ability to direct the relevant activities of the subsidiary); Exposure, or rights, to variable returns from its involvement with the subsidiary; and The ability to use its power over the subsidiary to affect its returns. A subsidiary is consolidated from the date on which control is transferred to the Group and ceases to be consolidated from the date on which control is transferred out of the Group. The acquisition method of accounting is used to account for business combinations by the Group. Income tax Current tax Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises assets and liabilities for the potential tax effect based on the Group’s current understanding of tax laws and requirements. Where the final tax outcome of these items is different from the carrying amounts, such differences will impact the current and deferred tax assets and/or provisions in the period in which such determination is made. Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Significant judgements, estimates and assumptions Deferred tax assets, including those arising from unutilised tax losses, require management to assess the likelihood that the Group will comply with the relevant tax legislation and will generate sufficient taxable earnings in future periods in order to recognise and utilise those deferred tax assets. Estimates of future taxable income are based on forecast cash flows from operations. These assessments require the use of estimates and assumptions such as commodity prices, exchange rates and operating performance over the life of the assets. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST except: (cid:129) where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable, and receivables and payables are stated with the amount of GST included. The amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. Earnings per Share Basic earnings per share Basic earnings per share is calculated as profit/(loss) after tax attributable to members, adjusted to exclude costs of servicing equity (other than dividends) and preference share dividends, divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted earnings per share Diluted earnings per share is calculated as profit/(loss) after tax attributable to members, adjusted for costs of servicing equity (other than dividends) and preference share dividends, the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses, and other non-discretionary changes in revenues or expenses during the period that would result from the Page 46 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 1. STATEMENT OF ACCOUNTING POLICIES CONTINUED dilution of potential ordinary shares divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. Revenue recognition Revenue is recognised when control of the promised goods or services passes to the customer. The amount of revenue recognised reflects the consideration to which the Group expects to be entitled in exchange for those goods or services. Commodity concentrate sales The Group currently does not yet generate any revenue from commodity concentrate sales. Interest income Interest income is recognised as interest accrues using the effective interest method. Financial Assets – Equity Instruments The Group holds investments in Australian Stock Exchange listed companies. Investments are classified and measured as fair value through profit or loss financial assets. Trade and other receivables Receivables to be settled within 30 - 120 days are carried at amounts due. The collectability of debts is assessed at the reporting date and specific allowance is made for any expected credit losses. Inventories Store stock and consumables are valued at the lower of cost and net realisable value. Regular reviews are undertaken to establish whether any items are obsolete or damaged, and if so their carrying value is written down to net realisable value. Cash and cash equivalents Cash and cash equivalents comprises cash at bank and in hand and short-term deposits that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. For the purpose of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Bank overdrafts, if any, are included within borrowings in current liabilities on the statement of financial position. Impairment The Group undertakes an impairment review to determine whether any indicators of impairment are present. Where indicators of impairment exist, an estimate of the recoverable amount of the Cash Generating Unit (CGU) is made. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. Where an impairment loss subsequently reverses, the carrying amount of the asset, other than goodwill, is increased to the revised estimate of its recoverable amount, but only to the extent the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised in prior years. A reversal of an impairment loss is recognised immediately in Statement of Profit or Loss and Other Comprehensive Income. An impairment indicator assessment was undertaken for the Woodlawn mine project at reporting date. The Group considers the relationship between its market capitalisation and its net assets, among other factors, when reviewing for indicators of impairment. Where the net assets of the Group is more than its market capitalisation this is considered to be an indicator of impairment. The net assets of the Group exceeded its market capitalisation at 30 June 2019. Impairment test The Group has assessed the Woodlawn mine as a single cash generating unit. This is the smallest group of assets that generate independent cashflows. An impairment will arise where the carrying amount exceeds the recoverable amount. The Group has determined the recoverable amount of the cash generating unit based on a value in use calculation using cashflow projections for the life of the Woodlawn mine. As a result of the analysis, the Group has assessed that there is no impairment to the Woodlawn mine project assets. Key assumptions used in the value in use model and sensitivity to changes in assumptions The calculation of value in use is most sensitive to the following assumptions (cid:129) Zinc, Lead, Copper, Silver and Gold metal prices – these have been derived from market pricing. A 5% decrease would result in an impairment of $14.3 million. US dollar to Australian dollar foreign exchange rate – this has been derived from market exchange rates. A 5% unfavourable change would result in an impairment of $13.9 million. (cid:129) Heron Resources Limited - Annual Report 2019 - Page 47 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 1. STATEMENT OF ACCOUNTING POLICIES CONTINUED (cid:129) Discount rate – this has been derived from the weighted average cost of capital. A 1% increase in the discount rate would not result in impairment. Significant judgements, estimates and assumptions Assessments of the recoverable amounts require the use of estimates and assumptions such as reserves, mine life, discount rates, exchange rates, commodity prices, grade of ore mined, recovery percentage, operating performance, costs and capital estimates. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits and annual leave are expected to be settled within 12 months of the reporting date are recognised in current liabilities in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits Liabilities, including long service leave, not expected to be settled within 12 months of the reporting date are recognised in non-current liabilities, provided there is an unconditional right to defer settlement of the liability. The liability is measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to the expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Share-based payment transactions Share based compensation benefits are provided to Directors, employees and consultants by: an Employee Share Option Plan; and a Performance Rights Program. The fair value of options and rights granted under the respective schemes are recognised as a share based payment expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the options and rights granted, which includes any market performance conditions and the impact of any non-vesting conditions but excludes the impact of any service and non-market performance vesting conditions. Non-market vesting conditions are included in assumptions about the number of options and rights that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the Group revises its estimates of the number of rights that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. Significant judgements, estimates and assumptions The Group measures the cost of equity settled transactions with employees by reference to the fair value of equity instruments at the date at which they are granted. Significant judgement is required in determining the achievement of non-market conditions. Foreign Currency Presentation and Functional Currency The functional and presentation currency of the Group is Australian (AUD) dollars. Transactions and Balances Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. The subsequent payment or receipt of funds related to a transaction is translated at the rate applicable on the date of payment or receipt. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the reporting date. Non- monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. All exchange differences in the financial statements are taken to the Statement of Profit or Loss and Other Comprehensive Income. Trade and other payables Liabilities are recognised for amounts to be paid in the future for goods and services received whether or not billed to the Group. Trade payables are usually settled within 30 days of recognition. Page 48 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 1. STATEMENT OF ACCOUNTING POLICIES CONTINUED Contributed equity Ordinary share capital is recognised at the fair value of the consideration received by the Group or at the fair value of equity issued as consideration for the acquisition of assets. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received. Provisions Provisions are recognised when the Group has a present obligation as a result of a past event, it is probable a future sacrifice of economic benefits will be required and a reliable estimate of obligation can be made. Restoration, Rehabilitation and Environmental Provision A provision for restoration and rehabilitation is recognised when there is a present obligation as a result of development activities undertaken, it is probable that an outflow of economic benefits will be required to settle the obligation, and the amount of the provision can be measure reliably. The estimated future obligations include the costs of abandoning sites, removing facilities and restoring affected areas. The provision for future restoration costs is the best estimate of the present value (including an appropriate discount rate relevant to the time value of money plus any risk premium associated with the liability) of the expenditure required to settle the restoration obligation at the reporting date. Future restoration costs are reviewed annually and any changes in the estimate are reflected in the present value of the restoration provision. The initial estimate of the restoration and rehabilitation provision is capitalised into the cost of the related asset and amortised on the same basis as the related assets, unless the present obligation arises from the production of inventory in the period, in which case the amount is included in the cost of production for the period. Changes in the estimate of the provision for restoration and rehabilitation are treated in the same manner, except that the unwinding of the effect of discounting on the provision is recognised as a finance cost rather than being capitalised into the cost of the related asset. Significant judgements and estimates The determination of the provision requires significant judgement in terms of the best estimate of the future costs of performing the work required, the timing of the cash flows, the appropriate discount rate and inflation rate. In relation to estimating the costs of performing the work required, significant judgement and estimates are required in relation to estimating the extent of rehabilitation activities, including volume to be rehabilitated and unit rates, technological changes, regulatory changes and appropriate discount rates. When these estimates change or become known in the future, such differences will impact the mine rehabilitation provision on the period in which they change or become known. A change in any, or a combination of, the key estimates used to determine the provision could have a material impact on the carrying value of the provision. Property, plant and equipment Exploration, Evaluation and Deferred Feasibility Expenditure Exploration and Evaluation Exploration and evaluation expenditure related to areas of interest is capitalised and carried forward to the extent that: (i) Rights to tenure of the area of interest are current; and (ii) Costs are expected to be recouped through successful development and exploitation of the area of interest or alternatively by sale; or (a) (b) Where activities in the area of interest have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in, or in relation to, the area of interest are continuing. Such expenditure consists of an accumulation of acquisition costs and direct exploration and evaluation costs incurred, together with an appropriate portion of directly related overhead expenditure. The carrying value of capitalised exploration and evaluation assets are assessed for impairment when facts and circumstances suggest that the carrying value may exceed its recoverable amount. Deferred Feasibility Feasibility expenditure represents costs related to the preparation and completion of a feasibility study to enable a development decision to be made in relation to an area of interest and are capitalised as incurred. At the commencement of construction, all past exploration, evaluation and deferred feasibility expenditure in respect of an area of interest that has been capitalised is transferred to assets under construction. Heron Resources Limited - Annual Report 2019 - Page 49 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 1. STATEMENT OF ACCOUNTING POLICIES CONTINUED Significant judgements, estimates and assumptions Judgement is required to determine whether future economic benefits are likely, from either exploitation or sale, or whether activities have not reached a stage that permits a reasonable assessment of the existence of reserves. In addition to these judgements, the Group has to make certain estimates and assumptions. The determination of a Joint Ore Reserves Committee (‘JORC’) resource is itself an estimation process that involves varying degrees of uncertainty depending on how the resources are classified (i.e. measured, indicated or inferred). The estimates directly impact when the Group capitalises exploration and evaluation expenditure. The capitalisation policy requires management to make certain estimates and assumptions as to future events and circumstances, in particular, the assessment of whether economic quantities of reserves will be found. Any such estimates and assumptions may change as new information becomes available. Assets Under Construction This expenditure includes net direct costs of construction, borrowing costs capitalised during construction and an appropriate allocation of attributable overheads. Expenditure is net of proceeds from the sale of ore extracted during the construction phase to the extent that this ore extracted is considered integral to the development of the mine. After production commences, all aggregated costs of construction are transferred to mine property or plant and equipment as appropriate. Significant judgements, estimates and assumptions The Group estimates its ore reserves and mineral resources, based on information compiled by Competent Persons as defined in accordance with the Australasian code for reporting Exploration Results, Mineral Resources and Ore Resources (JORC code 2012). The estimated quantities of economically recoverable reserves are based upon interpretations of geological models and require assumptions to be made regarding factors such as estimates of short and long-term exchange rates, estimates of short and long-term commodity prices, future capital requirements and future operating performance. Changes in reported reserves estimates can impact the carrying value of property, plant and equipment (including exploration and evaluation assets), the provision for rehabilitation obligations, the recognition of deferred tax assets, as well as the amount of depreciation charged to the Statement of Profit or Loss and Other Comprehensive Income. Plant and Equipment and Mine Development Cost Plant and equipment and mine development is carried at cost less accumulated depreciation and any accumulated impairment losses. The initial cost of an asset comprises its purchase price or construction cost, and any costs directly attributable to bringing the asset into operation, the initial estimate of the rehabilitation obligation, and for qualifying assets (where relevant), borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Construction cost for mine development includes expenditure in respect of exploration, evaluation and feasibility, previously accumulated and carried forward in relation to areas of interest in which development or construction is underway. Depreciation and Amortisation Items of plant and equipment and mine development are depreciated over their estimated useful lives. The Group uses the units of production basis when depreciating mine specific assets which results in a depreciation charge proportional to the depletion of the anticipated remaining life of mine production. Each item’s economic life has due regard to both its physical life limitations and to present assessments of economically recoverable reserves of the mine property at which it is located. For the remainder of assets, the straight line method is used, resulting in estimated useful lives between 3 – 25 years, the duration of which reflects the specific nature of the asset. The Group has the following depreciation and amortisation policy: Motor vehicles Fixture and fittings Plant and equipment Buildings 3 – 5 years 5 – 15 years 5 – 15 years 15 – 25 years Estimates of remaining useful lives, residual values and depreciation methods are reviewed annually for all major items of plant and equipment and mine development. Any changes are accounted for prospectively. When an asset is surplus to requirements or no longer has an economic value, the carrying amount of the asset is reviewed and is written down to its recoverable amount or derecognised. Page 50 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 1. STATEMENT OF ACCOUNTING POLICIES CONTINUED Significant judgements, estimates and assumptions The Group uses the units of production basis when depreciating / amortising specific assets which results in a depreciation / amortisation charge proportional to the depletion of the anticipated remaining life of mine production. Each item’s economic life, which is assessed annually, has due regard to both its physical life limitations and to present assessments of economically recoverable reserves of the mine property at which it is located. These calculations require the use of estimates and assumptions. Any change in these estimates and assumptions are accounted for prospectively. Critical accounting judgements, estimates and assumptions Judgements, estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. All judgements, estimates and assumptions made are believed to be reasonable based on the most current set of circumstances available to management. The resulting accounting estimates will, by definition, seldom equal the related actual results. The judgements, estimates and assumptions that potentially have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are found within the following notes: (cid:129) (cid:129) (cid:129) (cid:129) Mine property Provisions Borrowings Share-based payments Note 9. Note 14. Note 17. Note 20. NOTE 2. SEGMENT INFORMATION The nature of operations and principal activities of Group are exploration, mine development, mine operations and the sale of Zinc, Copper and Lead concentrate in Australia. Given the nature of the Group, its size and current operations, management does not treat any part of the Group as a separate operating segment. Internal financial information used by the Group’s chief operating decision maker is presented as a Group without dissemination to any separately identifiable segments. Accordingly the financial information reported elsewhere in this financial report is representative of the nature and financial effects of the business activities in which it engages and the economic environments in which it operates. NOTE 3. OTHER INCOME Interest received Proceeds from exercise of Alchemy / Siberia agreement Gain from sale of listed investments Sundry income NOTE 4. OPERATING EXPENSES The profit / (loss) before income tax expense has been determined after charging a number of items including the following: 4a Depreciation of: Plant and equipment Motor vehicles 4b Rental expense Listing expense Investor relations Information technology Other expense 30 June 2019 $'000 30 June 2018 $'000 1,140 - - 46 1,186 33 137 170 125 83 154 33 710 1,105 1,410 170 1,979 76 3,635 27 28 55 167 187 319 168 1,184 2,025 Heron Resources Limited - Annual Report 2019 - Page 51 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 5. INCOME TAX EXPENSE 5A Income tax expense for current year Current tax Deferred tax Under provision for previous years The Heron Resources Ltd group of companies have tax consolidated. There is presently a tax sharing agreement in place. The parent entity and each of the subsidiaries are in tax loss for the year and have substantial tax losses carried forward. There is insufficient probability that the parent entity and its subsidiaries will derive sufficient income in the forseeable future to justify booking the tax losses and temporary differences as deferred tax assets and deferred tax liabilities. 5B Numerical reconciliation of income tax expense to prima face tax payable is as follows Loss from operations before income tax expense Tax at Australian tax rate of 27.5% Tax effect of non-temporary differences Tax effect of equity raising costs debited to equity Over or under provision from previous years Tax effect of tax losses and temporary differences not recognised Income tax expense at 27.5% 5C There is no amount of tax benefit recognised in equity as the tax effect of temporary differences has not been booked. 5D Tax Losses Unused tax losses for which no tax loss has been booked as a DTA adjusted for non temp differences Potential benefit at 27.5% 30 June 2019 $'000 30 June 2018 $'000 - - - - - - - - (40,763) (11,210) 1,232 (286) - 10,264 - (5,819) (1,600) (584) (286) - 2,470 - 131,753 36,232 123,058 33,841 Page 52 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 5. INCOME TAX EXPENSE CONTINUED NOTE 6. EARNINGS PER SHARE Basic earnings per Share (dollars per share) Weighted average number of ordinary shares outstanding during the year used in the calculation of basic earnings per share Diluted earnings per Share (dollars per share) Weighted average number of ordinary shares outstanding during the year used in the calculation of diluted earnings per share. 30 June 2019 $'000 30 June 2018 $'000 (0.169) (0.028) 241,666,912 205,191,724 (0.169) (0.028) 241,666,912 205,191,724 Earnings profit/(loss) used in calculating basic and diluted earnings profit/(loss) per share (40,763) (5,819) The outstanding options and performance rights as at reporting date are not considered dilutive given the Group has incurred a loss. NOTE 7. NOTE TO THE CONSOLIDATED STATEMENT OF CASH FLOWS a) Reconciliation of loss after income tax to the net cash flows from operations: Operating loss after income tax (40,763) (5,819) Adjustments to reconcile loss after income tax to net operating cash flows Depreciation and amortisation expense Finance expense amortised Equity settled share based payments Exploration and evaluation costs expensed Unrealised foreign exchange loss Unrealised fair value loss on financial instruments Unrealised fair value (loss) / gain on equity instruments Sedgman settlement provision Changes in Assets and Liabilities Decrease / (increase) in Other receivables and Other assets (Increase) / decrease in Inventories Increase / (decrease) in Trade and other payables Increase / (decrease) in Provisions b) Reconciliation of Cash Cash on hand Deposit at call (1) Closing cash balance c) Restricted cash (2) Environmental bond Bank Guarantee - Veolia (3) Westpac corporate credit card bond 170 795 781 - 4,038 10,776 4,182 15,000 1,029 (2,355) (942) 434 (6,945) 15,465 16,000 31,465 3,577 4,000 200 7,777 55 507 587 1,011 1,688 1,018 (561) - (1,749) - (4,348) - (7,611) 15,532 50,000 65,532 3,577 5,000 200 8,777 Cash (1) (2) (3) Deposit at call are Term Deposits of range between 1 to 3 months. The yield on the Term Deposits during the year ranges between 1.5% to 2.73%. Restricted cash is classified as non current and relates to cash held in deposits as security. During the financial year $1M of the Bank Guarantees required under the Veolia Cooperation Deed was returned to the Group. Heron Resources Limited - Annual Report 2019 - Page 53 NOTE 8. PROPERTY, PLANT AND EQUIPMENT 30 June 2019 Cost Accumulated depreciation Reconciliation Opening carrying value Additions (1) Disposals Depreciation expense Closing carrying value 30 June 2018 Cost Accumulated depreciation Reconciliation Opening carrying value Additions Disposals Depreciation expense Closing carrying value CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Plant and equipment $'000 Motor vehicles $'000 12,975 (1,287) 11,688 229 11,492 - (33) 11,688 1,329 (381) 948 418 667 - (137) 948 Plant and equipment $'000 1,483 Motor vehicles $'000 662 (1,254) 229 26 230 - (27) 229 (244) 418 13 433 - (28) 418 (1) The Group entered into finance leases arrangements for the purchase of Plant and equipment and Motor vehicles during FY 2019. NOTE 9. MINE PROPERTY Total $'000 14,304 (1,668) 12,636 647 12,159 - (170) 12,636 Total $'000 2,145 (1,498) 647 39 663 - (55) 647 Total $'000 242,849 242,849 156,517 86,332 - - Mine under construction $'000 Rehabilitation asset $'000 227,098 227,098 140,766 86,332 - - 15,751 15,751 15,751 - - - 227,098 15,751 242,849 Mine under construction $'000 Rehabilitation asset $'000 140,766 140,766 26,434 115,854 (1,522) - 140,766 15,751 15,751 - 15,751 - - 15,751 Total $'000 156,517 156,517 26,434 131,605 (1,522) - 156,517 30 June 2019 Cost Reconciliation Opening carrying value Additions (1) Transfers Amortisation Closing carrying value 30 June 2018 Cost Reconciliation Opening carrying value Additions Transfers Amortisation Closing carrying value (1) Mine under construction includes non-cash capitalised interest of $6.7M during FY 2019. Page 54 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 10. FINANCIAL ASSETS – EQUITY INSTRUMENTS The Group holds the following investments in Australian Stock Exchange listed companies: Ardea Resources Limited (ARL) is an Australian listed public exploration company with a focus on the Goongarrie Nickel Cobalt Project. As at 30 June 2019, the Group held 10,000,000 options in Ardea with an exercise price of $0.25 cents. The underlying Ardea share price as at 30 June 2019 was $0.37 cents. The carrying value of the Group’s investment in Ardea has been calculated using the Black Scholes valuation model and has been calculated at $0.15 cents per option. Refer to subsequent event note for details on sale of Ardea options in August and September 2019. The options in Ardea expire in February 2020 and so have been classified as a Current asset. Alchemy Resources Limited (ALY) is an Australian listed public exploration company with a focus on gold, base metal, and nickel-cobalt projects. The Group held 12,000,000 shares and 12,500,000 options with an exercise price of $0.10 at reporting date. The underlying Alchemy share price as at 30 June 2019 was $0.011 cents. The options have been valued at nil as at reporting date. CURRENT Ardea Resources Limited NON CURRENT Alchemy Resources Limited Ardea Resources Limited NOTE 11. INVENTORIES CURRENT Store stock and consumables 30 June 2019 $'000 30 June 2018 $'000 1,587 1,587 132 - 132 2,355 2,355 - - 180 5,721 5,901 - - Store stock and consumables represents commissioning spares, chemical reagents, and other spare parts required at the Woodlawn mine. Store stock and consumables are valued at cost. NOTE 12. TRADE AND OTHER RECEIVABLES CURRENT Accrued interest receivable Goods & services tax receivable Sundry debtors NOTE 13. OTHER ASSETS CURRENT Prepayments and other NON CURRENT Tenement bonds and other 192 777 74 1,043 499 499 125 125 236 1,488 53 1,777 795 795 35 35 Heron Resources Limited - Annual Report 2019 - Page 55 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 30 June 2019 $'000 30 June 2018 $'000 786 15,000 15,786 357 15,781 16,138 547 - 547 162 15,781 15,943 NOTE 14. PROVISIONS CURRENT Employee entitlements Sedgman settlement (1) NON CURRENT Employee entitlements Rehabilitation provision (2) (1) (2) Sedgman legal claim - On 1 February 2019 and 1 March 2019, the Company received progress claims from Sedgman for costs of $53M in excess of their Guaranteed Maximum Price EPC contract. Discussions between the Company and Sedgman have been ongoing through to the date of this report. Negotiations are now in their final stages and the Company expects a final resolution of all claims from Sedgman and counter claims from Heron to be concluded in October 2019. As at 30 June 2019 the Company’s best estimate of the cost to fully settle the claim and all counter claims was $15M and accordingly a provision for this amount was recorded. The Company has recorded the estimated settlement as an expense through the consolidated statement of profit and loss and comprehensive income on the basis that the amount to be paid pertains to significant inefficiencies incurred by Sedgman. The Company was required to reach a settlement agreement under the terms of the funding package currently being finalised The rehabilitation provision for the Woodlawn mine project is based on the assessment of an independent environmental consultant using the NSW Department of Resources and Energy (DRE) rehabilitation cost estimation tool. Veolia Environmental Services (Australia) Pty Ltd (Veolia) has been instructed by the Environmental Protection Agency (EPA) to halt production of the mulch material it produces at their Woodlawn Bio-Reactor site for a period of 12 months whilst further studies are undertaken. This mulch material is to be used by the Group free of charge to rehabilitate the Woodlawn mine site. If the Group is unable to use Veolia's mulch then the rehabilitation provision may increase. NOTE 15. TRADE AND OTHER PAYABLES Trade and other creditors 6,060 6,060 7,002 7,002 Trade and other payables are non-interest bearing and are normally settled on 30 day terms. Due to the short term nature of these payables, their carrying value is assumed to be the same as their fair value. NOTE 16. FINANCIAL AND CAPITAL RISK MANAGEMENT STRATEGY Financial and capital risk management strategy Financial risks arising from the Group’s normal course of business operations comprise market risk (including commodity price risk, equity price risk, interest rate risk and foreign currency risk), credit risk (including performance risk) and liquidity risk. It is the Group’s policy and practice to identify and, where appropriate and practical, actively manage such risks to support its objectives in managing its capital and future financial security and flexibility. The Board of Directors has overall responsibility for the establishment and oversight of the financial and capital risk management strategy. The Board has constituted the Audit and Governance Committee to oversee the Group’s financial and capital risk management strategy. The Group’s financial and capital risk management risk strategy is to maintain a current account balance sufficient to meet the Group’s short term expense and capital expenditure commitments with the balance held in term deposits. The Group holds the following financial instruments: Financial assets Cash and cash equivalents Other receivables Financial assets - equity instruments Other assets Financial liabilities Trade and other payables Borrowings Page 56 - Heron Resources Limited - Annual Report 2019 30 June 2019 $'000 30 June 2018 $'000 31,465 1,043 1,587 227 34,322 6,060 132,910 138,970 65,532 1,777 5,901 128 73,338 7,002 - 7,002 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 16. FINANCIAL AND CAPITAL RISK MANAGEMENT STRATEGY CONTINUED (a) Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk, foreign currency risk, interest rate risk and other price risk. Other price risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or foreign currency risk), whether those changes are caused by factors specific to the individual financial instrument, its issuer or by factors affecting all similar financial instruments traded in the market. The Group’s activities expose it to market risks associated with movements in, commodity prices, equity prices, interest rates and foreign currencies. Commodity price risk Commodity price risk is defined as the potential adverse impact on earnings and economic value due to commodity price movements. The Group’s exposure to commodity risk arises from movements in zinc, lead, copper, silver and gold prices. The ability for the Group to develop the Woodlawn mine and the future profitability of the Group is directly related to the movements in the zinc, lead, copper, silver and gold prices. As the Group moves closer to commercial production, the Group will assess the appropriateness of commodity hedging strategies. The Group’s exposure at 30 June 2019 to the impact of movements in commodity prices on commodity concentrate sales was nil. The Group did not enter into any commodity concentrate sales transactions during the reporting period. Interest rate risk The Group’s exposure to interest rate risk relates to financial assets and liabilities bearing floating interest rates. The Group does not engage in any hedging or derivative transactions to manage interest rate risk. The following table sets out the Group’s exposure to interest rate risk and the effective interest rate for each financial instrument: Effective interest rate % Variable interest rate $'000 Fixed interest rate $'000 30 June 2019 Financial assets Cash and cash equivalents 2.30% Financial liabilities Finance leases Senior debt 30 June 2018 Financial assets 7.20% LIBOR + 7.25% Cash and cash equivalents 2.30% Financial liabilities Senior debt LIBOR + 7.25% 31,465 31,465 - 92,556 92,556 65,532 65,532 24,941 24,941 - - 9,411 - 9,411 - - - - Total $'000 31,465 31,465 9,411 92,556 101,967 65,532 65,532 24,941 24,941 Heron Resources Limited - Annual Report 2019 - Page 57 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 16. FINANCIAL AND CAPITAL RISK MANAGEMENT STRATEGY CONTINUED The following table demonstrates the sensitivity of the Group’s financial assets and liabilities to an increase or decrease of 50 basis points in interest rates, with all other variables held constant, on the Group’s financial assets and liabilities bearing floating interest rates. +/- 50 basis point change Effect on profit / (loss) before tax $'000 Effect on pre -tax equity $'000 30 June 2019 Financial assets Cash and cash equivalents Financial liabilities Finance leases Senior debt 30 June 2018 Financial assets Cash and cash equivalents Financial liabilities Senior debt Foreign currency risk 157 157 47 463 510 - - - - - +/- 50 basis point change Effect on profit / (loss) before tax $'000 Effect on pre -tax equity $'000 328 328 125 125 - - - - The Group undertakes transactions denominated in foreign currencies. The Group’s foreign currency risk exposures comprise: 1. 2. Translational exposure in respect of non-functional currency monetary items; and Transactional exposure in respect of non-functional currency expenditure and revenues. The Group’s functional currency is the Australian (AUD) dollar. The Group’s exposure to foreign currency risk principally relates to Woodlawn mine development expenditure, the silver stream and financial liabilities bearing floating interest rates. The following table demonstrates the sensitivity of the Group’s financial assets and liabilities to a 5% strengthening or weakening of the Australian (AUD) dollar against the US (USD) dollar, with all other variables held constant. Change in foreign currency rate % Effect on profit / (loss) before tax $'000 Effect on pre-tax equity $'000 5% 5% 5% 5% 3,312 (3,312) 922 (922) - - - - 30 June 2019 Foreign currency - increase foreign currency - decrease foreign currency 30 June 2018 Foreign currency - increase foreign currency - decrease foreign currency Page 58 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 16. FINANCIAL AND CAPITAL RISK MANAGEMENT STRATEGY CONTINUED (b) Credit risk The Group’s exposure to credit risk arises from the potential default of the counterparty to the Group’s financial assets. The Group has credit risk management policies in place covering the credit analysis, approvals and monitoring of counterparty exposures. These processes ensure that the ongoing creditworthiness of counterparties are regularly assessed. The Group’s principal exposure to credit risk relates to cash. Cash is held with reputable financial institutions. Commodity concentrate sales are made with secured payment terms which include prepayments, letters of credit and other risk mitigation instruments. The Group did not enter into any commodity concentrate sales transactions during the reporting period. There are no material concentrations of credit risk either with individual counterparties or groups of counterparties, by industry or geography. The Group’s exposure to credit risk at the reporting date was: Financial assets Cash and cash equivalents Other receivables 30 June 2019 $'000 30 June 2018 $'000 31,465 1,043 32,508 65,532 1,777 67,309 Liquidity risk (c) The Group’s liquidity risk arises from the possibility that it may not be able to settle or meet its obligations as they fall due. The specific risk exposures include the sufficiency of available unutilised facilities and the repayment maturity profile of existing financial instruments. Operational, capital and regulatory requirements are considered in the management of liquidity risk, in conjunction with short and long term forecast information. The Group is funded from a combination of debt and equity market raisings. The Group has utilised a US dollar $60 million loan facility. Refer to Note 17 Borrowings. The table below demonstrates the maturity profile of the Group’s financial liabilities. 30 June 2019 Financial liabilities Trade and other payables Finance leases Senior debt Silver stream 30 June 2018 Financial liabilities Trade and other payables Senior debt Silver stream Under 1 year $'000 6,060 2,929 92,556 30,943 132,488 Under 1 year $'000 7,002 - 2,091 9,093 1 to 2 years $'000 - 2,924 - - 2,924 1 to 2 years $'000 - 4,717 8,768 13,485 2 to 5 years $'000 - 4,893 - - 4,893 2 to 5 years $'000 - 20,224 28,615 48,839 5+ years $'000 - - - - - 5+ years $'000 - - 23,855 23,855 Total $'000 6,060 10,746 92,556 30,943 140,305 Total $'000 7,002 24,941 63,330 95,273 Heron Resources Limited - Annual Report 2019 - Page 59 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 30 June 2019 $'000 30 June 2018 $'000 92,556 30,943 2,831 126,330 - - 6,580 6,580 - - - - 24,941 22,666 - 47,607 NOTE 17. BORROWINGS CURRENT Senior debt Silver stream Finance leases NON CURRENT Senior debt Silver stream Finance leases The Silver Stream and Senior Debt Loan are held with OMF Fund II (H) Ltd. As stated at Note 1, with respect to Going Concern, the Group received an interim debt waiver letter suspending the exercise of their rights with respect to payment to allow for finalisation of the finance package. The Group has classified the silver stream and Senior Debt Loan as a current liability. Senior Debt A loan facility for USD $60 million, with funds to be drawn down in three equal tranches, was provided as part of the financing agreement with OMF Fund II (H) Ltd. The respective draw down dates were the 29 May 2018, 26 September 2018, and 21 December 2018. The funding rate is the aggregate of a margin of 7.25% and the applicable Libor rate, being a minimum of 2.5%, for each interest period. The loan was initially recorded at fair value less associated transaction costs. The proceeds from draw down was considered to represent the fair value of the facility at that time. The loan is subsequently measured at amortised cost. Under the agreement, the Group has to maintain a cash balance of not less than AUD $15 million in its Tarago Operations Pty Ltd subsidiary operating accounts. As the Senior Debt Loan is classified as current, it has been remeasured to its face value. Silver Stream The Group through its wholly owned subsidiary, Tarago Operations Pty Ltd, entered into a financing agreement with OMF Fund II (H) Ltd. This agreement included a Silver Streaming arrangement of USD $16 million which the Group received on the 8 March 2018. The sum received has been accounted for as a financial liability at fair value through Statement of Profit or Loss and Other Comprehensive Income. Under this agreement, the Group will deliver 80% of the silver extracted from the Woodlawn Mine (SML20) until it has delivered 2,150,000 ounces of Refined Silver, followed by 40% of the silver extracted from the mine until it has delivered 3,400,000 of Refined Silver, and thereafter 25% of the Refined Silver extracted from the mine. The Group has elected to fair value the entire instrument. The obligation represents a derivative liability for the silver price option feature included in the agreement and will therefore be remeasured at each reporting date at fair value through profit or loss. 30 June 2019 Senior debt Silver stream 30 June 2018 Senior debt Silver stream Opening carrying value $'000 24,941 22,666 47,607 Opening carrying value $'000 - - - Foreign exchange loss/(gain) Drawdown $'000 $'000 55,717 - 55,717 2,894 - 2,894 Foreign exchange loss/(gain) $'000 396 - 396 Drawdown $'000 26,664 20,516 47,180 Accrued Interest $'000 6,707 - 6,707 Accrued Interest $'000 227 - 227 Debt finance costs $'000 2,297 - 2,297 Fair value loss/(gain) $'000 - 8,277 8,277 Debt finance costs Fair value loss/(gain) $'000 (2,346) - (2,346) $'000 - 2,150 2,150 Closing carrying value $'000 92,556 30,943 123,499 Closing carrying value $'000 24,941 22,666 47,607 Page 60 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 18. FINANCIAL ASSETS AND LIABILITIES Financial instruments All financial assets are initially recognised at the fair value of consideration paid. Subsequently, financial assets are carried at fair value through profit and loss, fair value through other comprehensive income or amortised cost less impairment. Financial assets at fair value through profit or loss are carried in the Consolidated Statement of Financial Position at fair value with net changes in fair value recognised in the Statement of Profit or Loss and Other Comprehensive Income. The classification of financial assets is based on the Group’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Financial assets are designated as being held at fair value through profit or loss where this is necessary to reduce measurement inconsistencies for related assets and liabilities. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all risks and rewards of ownership of the financial asset are transferred, or it neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. Any interest in such derecognised financial assets that is created or retained by the Group is reported as a separate asset or liability. Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings and payables. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The measurement of financial liabilities depends on their classification, financial liabilities at fair value through profit or loss, or amortised cost using the effective interest rate (EIR) method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the Statement of Profit or Loss and Other Comprehensive Income. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled, or expire. Where there is an exchange or modification of an existing financial liability by the original lender on substantially different terms, or the terms are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. Where the exchange or modification of an existing financial liability is not derecognised the change in the carry value of the financial liability is recognised directly in the Statement of Profit and Loss and Other Comprehensive Income. Financial assets and liabilities are offset and the net amount presented in the Consolidated Statement of Financial Position when the Group has a legal right to offset the amounts and intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. Derivatives, including those embedded in other contractual arrangements but separated for accounting purposes because they are not clearly and closely related to the host contract, are initially recognised at fair value on the date the contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss on remeasurement depends on whether the derivative is designated as a hedging instrument, and, if so, the nature of the item being hedged. Accounting classification and fair values The following table presents the Group’s financial assets and liabilities by class at their carrying value which approximates their fair value. Heron Resources Limited - Annual Report 2019 - Page 61 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 18. FINANCIAL ASSETS AND LIABILITES CONTINUED Fair value through profit or loss $'000 Amortised cost $'000 - - 1,587 - 1,587 - - - 30,943 30,943 - - 5,901 - 5,901 - - 22,666 22,666 31,465 1,043 - 227 32,735 6,060 9,411 92,556 - 108,027 65,532 1,777 - 128 67,437 7,002 24,941 - 31,943 Total $'000 31,465 1,043 1,587 227 34,322 6,060 9,411 92,556 30,943 138,970 65,532 1,777 5,901 128 73,338 7,002 24,941 22,666 54,609 30 June 2019 Financial assets Cash and cash equivalents Trade and other receivables Financial assets - equity instruments Other assets Financial liabilities Trade and other payables Finance leases Senior debt Silver stream 30 June 2018 Financial assets Cash and cash equivalents Trade and other receivables Financial assets - equity instruments Other assets Financial liabilities Trade and other payables Senior debt Silver stream The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments which are measured at fair value by valuation technique, the nature of valuation inputs used: 1. 2. 3. Level 1 Valuation is based on unadjusted quoted prices in active markets for identical financial assets and liabilities. Level 2 Valuation is based on inputs (other than quoted prices included in Level 1) that are observable for the financial asset or liability, either directly (i.e. as unquoted prices) or indirectly (i.e. derived from prices). Level 3 Valuation includes inputs that are not based on observable market data. The categorisation of the Group’s financial assets and liabilities by valuation inputs used, is based on the lowest level input that is significant to the fair value measurement as a whole during the reporting period. All financial instruments except the investments in listed companies (Level 1) and the Silver Stream (Level 3) are measured using Level 2 valuations inputs. There were no transfers between categories during the reporting period. Valuation techniques used to derive level 2 and level 3 fair values The Group uses the following valuation techniques in deriving fair values for financial assets and financial liability: discounted cashflows; Black-Scholes; and Monte Carlo methodology. The respective valuation techniques rely on observable and unobservable market data. Input assumptions include: commodity prices; equity prices; foreign currency rates; the risk free interest rate; and the Woodlawn project life of mine model. The Silver Stream valuation is classified as Level 3. Refer to: Note 17 Borrowings for additional details. Page 62 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 18. FINANCIAL ASSETS AND LIABILITES CONTINUED Sensitivity analysis for Silver Stream The Silver Stream valuation model uses input assumptions with respect to commodity prices, foreign currency rates, the discount rate, and the expected silver ounces to be delivered from the Woodlawn project life of mine model. The potential effect of using reasonably possible alternative assumptions in the Silver Stream valuation model, based on changes in the most significant input assumption of commodity prices; foreign currency rates and the Woodlawn project life of mine model by 5 per cent while holding all other variables constant, is $995,563. NOTE 19. CONTRIBUTED EQUITY Issue of ordinary shares Opening balance Issue of shares 1 for 10 Share Consolidation Share issue costs Realised foreign exchange loss Closing balance 30 June 2019 Shares 30 June 2018 Shares 30 June 2019 $’000 30 June 2018 $’000 241,666,912 415,009,381 259,742 - - - - 2,001,562,259 (2,174,904,728) - - - - - - 241,666,912 241,666,912 259,742 129,638 140,115 - (5,055) (4,956) 259,742 Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Group in proportion to the number of shares held. On a show of hands every holder of shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. The Group does not have authorised capital or par value in respect of its issued shares. No dividends have been paid or proposed during or since reporting date. NOTE 20. RESERVES Option Reserve Opening balance Cost of share based payments Write back lapsed options expense Equity settled share based payments Closing balance The option reserve is used to recognise the fair value of options issued and expensed over the vesting period and credited to this reserve. The shares will reverse against ordinary share capital when the underlying options are exercised or lapse. Accumulated Losses Opening balance Net profit/(loss) for the period Closing balance 30 June 2019 $'000 30 June 2018 $'000 2,076 965 (184) 781 2,857 1,489 646 (59) 587 2,076 (92,936) (40,763) (133,699) (87,117) (5,819) (92,936) Heron Resources Limited - Annual Report 2019 - Page 63 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 21. CONTROLLED ENTITIES Controlled entities are consolidated from the date on which control commences until the date that control ceases. All intercompany balances and transactions, including unrealised gains and losses arising from intra-group transactions, have been eliminated in preparing the consolidated financial statements. The Group comprises the following significant entities: Entity Parent Entity Heron Resources Limited Subsidiaries Hampton Nickel Pty Limited Ochre Resources Pty Limited Tarago Operations Pty Ltd Tarago Exploration Pty Ltd Woodlawn Mine Holdings Pty Ltd NOTE 22. PARENT ENTITY INFORMATION Information relating to the parent entity (‘the Company’) is set out below. Current assets Total assets Current liabilities Total liabilities Contributed equity Option reserve Accumulated losses Profit or loss of the Parent entity Other comprehensive income/(loss) Total comprehensive income/(loss) of the Parent entity Commitments The Company’s capital commitments are disclosed in Note 23. Guarantees Country of Incorporation Percentage Holding 2019 Percentage Holding 2018 Australia Australia Australia Australia Australia Australia 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 30 June 2019 $'000 30 June 2018 $'000 19,441 129,413 358 513 259,742 2,857 (133,699) (27,791) - (27,791) 24,393 169,407 342 525 259,742 2,076 (92,936) (3,085) - (3,085) Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 the wholly-owned controlled entities Tarago Operations Pty Ltd and Woodlawn Mine Holdings Pty Ltd are relieved from the Corporations Act 2001 requirements for preparation, audit, and lodgement of financial reports, and Directors’ Report. It is a condition of the Corporation Instrument that the Company and each of its eligible controlled entities enter into a Deed of Cross Guarantee (‘Deed’). The effect of the Deed is that the Company guarantees to each creditor payment in full of any debt in the event of winding up of any of the controlled entities under certain provisions of the Corporations Act 2001. The controlled entities have also given similar guarantees in the event that the Company is wound up. At the reporting date, no amounts have been recognised in the financial information of the Company in respect of this Deed on the basis that the possibility of default is remote. Contingent Liabilities The Company’s contingent liabilities are disclosed in Note 25. Page 64 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 23. COMMITMENTS Operating lease commitments Operating leases Within one year Later than one year but not later than five years Later than five years Finance lease and hire purchase commitments Finance lease and hire purchase Within one year Later than one year but not later than five years Later than five years 30 June 2019 $'000 30 June 2018 $'000 308 831 - 1,139 242 653 - 895 30 June 2019 Minmum payments $'000 Present value of payments $'000 30 June 2018 Minimum payments $'000 Present value of payments $'000 2,929 2,924 4,893 10,746 2,330 2,498 4,584 9,413 - - - - - - - - Exploration commitments The Group has certain obligations to perform minimum exploration work on exploration tenements and to pay rental on all tenements. Minimum exploration work commitments on tenements held by the Group have not been provided for in the financial statements, however the expenditure required to maintain the tenements over which the Group has an interest in at reporting date is detailed in the table below: Exploration Within one year Later than one year but not later than five years Later than five years 30 June 2019 $'000 30 June 2018 $'000 638 2,575 1,260 4,473 491 - - 491 Capital commitments The Group has not entered into any significant capital commitment contracts. Other commitments The Group has entered into a two year electricity supply agreement for the supply of electricity to the Woodlawn mine project. The terms of the agreement includes a consumption variation of +/- 30%. Heron Resources Limited - Annual Report 2019 - Page 65 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 24. EVENTS SUBSEQUENT TO REPORTING DATE Other than those noted below there is no matter or circumstance which has arisen since reporting date that has significantly affected or may significantly affect: The operations, in the financial years subsequent to 30 June 2019, of the Group or the results of those operations. Capital Raise As a consequence of completion of plant construction running seven months behind schedule, the Company will require additional working capital to bridge the delay in achieving full production. As noted in the Company’s ASX release dated 30 August 2019, the Company is engaged with its major shareholders and senior debt provider with the objective of finalising a finance package which will address the Company’s working capital requirements, provide the additional funding necessary to complete commercialisation of Woodlawn and defer payments otherwise due under the senior debt and silver stream arrangements. As noted in the announcement, the senior debt provider agreed to a standstill arrangement until 27 September 2019 and this standstill letter was subsequently extended until 11 October 2019 in order to allow for finalisation of the finance package. As at the date of this report, the negotiations with the major shareholders and senior debt provider are well advanced and the Group expects to make an announcement on a finance package in early October 2019. Sedgman legal claim On 1 February 2019 and 1 March 2019, the Company received progress claims from Sedgman for costs of $53M in excess of their Guaranteed Maximum Price EPC contract. Discussions between the Company and Sedgman have been ongoing through to the date of this report. Negotiations are now in their final stages and the Company expects a final resolution of all claims from Sedgman and counter claims from Heron to be concluded in October 2019. As at 30 June 2019 the Company’s best estimate of the cost to fully settle the claim and all counter claims was $15M and accordingly a provision for this amount was recorded. The Company has recorded the estimated settlement as an expense through the consolidated statement of profit and loss and comprehensive income on the basis that the amount to be paid pertains to significant inefficiencies incurred by Sedgman. The Company was required to reach a settlement agreement under the terms of the funding package currently being finalised Sale of Ardea Resources Limited Options During August and September 2019, the Group sold 3.9M of the 10M options it holds in Ardea Resources Ltd for cash proceeds of $382,313. NOTE 25. CONTINGENCIES Performance bonds and rental bond commitment The Group has provided cash backed performance bonds with the NSW Department of Resources and Energy with respect to its environmental obligations. The Group has rental bond commitments over its leased offices and residential premises. Agreement with Veolia Environmental Services (Australia) Pty Ltd The Group has agreed with Veolia: (i) (ii) (iii) (iv) To assume the environmental liabilities associated with the Woodlawn site, excluding Veolia’s area of operation. Subject to certain approvals being received by Veolia and the Group, the Group will receive “free-on-board” compost from Veolia to be utilised in the rehabilitation of the Woodlawn mine site. To fully indemnify Veolia for all direct and or consequential loss and damage suffered by Veolia as a result of or caused by or contributed to by any act or omission or default by the Group, connected with its operations at the Woodlawn mine site. To provide staged bank guarantees in favour of Veolia up to $9 million of which $4 million has been provided as at reporting date. A further $5 million bank guarantee will be provided in favour of Veolia approximately 36 months after commencement of the box cut. Other contingent liabilities Native title claims have been made with respect to areas which include tenements in which the Group has interests. The Group is unable to determine the prospects for success or otherwise of the claims and, in any event, whether or not and to what extent the claims may significantly affect the consolidated entity or its projects. None of these contingent liabilities has been provided for in the financial report. Page 66 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 26. RELATED PARTY TRANSACTIONS Directors The Directors of the Company during the financial year were: Non-Executive Directors Stephen Dennis Fiona Robertson Borden Putnam III Mark Sawyer Peter Rozenauers Ricardo de Armas Ian Pattison Executive Directors Wayne Taylor (ceased employment and resigned as a Director on 18 September 2019) Salary and fees Share based payments Superannuation benefits STI 30 June 2019 $'000 30 June 2018 $'000 1,002 301 80 - 1,383 858 197 80 33 1,168 Detailed remuneration disclosures are provided in the remuneration report on pages 27-37 of the Directors report. On 1 July 2019, the Company entered into a consultancy agreement with Tannachy Pty Ltd, a company associated with Non-executive Director Dr Ian Pattison. The term of this the agreement is on an "on call" basis at commercially negotiated terms to meet the Company's requirement for metallurgical processing consultancy services. NOTE 27. SHARE-BASED PAYMENTS The Group provides benefits to employees (including Directors and Officers) in the form of share-based compensation, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions). The Group operates a number of share-based payment plans, including: Employee share option plan The Employee Share Option Plan, was approved at the 2015 General Meeting, where employees, Directors and Officers of the Group may be issued with options over ordinary shares of Heron Resources Limited. Options vest subject to the achievement of key milestones at the Woodlawn mine project. The options will not be quoted on the Australian Stock Exchange and cannot be transferred. Detailed information of Options over unissued ordinary shares is set out below: Movement in Number of Options During the Year Excercise date Exercise price Beginning of the year Issued Exercised 5 August 2014 20 November 2018 5 December 2015 4 December 2020 1 February 2017 1 February 2022 $0.70 $0.72 $1.10 85,836 1,650,000 265,000 - - - - - - Movement in Number of Options During the Year 30 June 2019 Grant date 30 June 2018 Grant date Excercise date Exercise price Beginning of the year Issued Exercised 5 March 2013 5 March 2018 5 August 2014 23 October 2017 5 August 2014 20 November 2018 5 December 2015 4 December 2020 1 February 2017 1 February 2022 $2.90 $1.20 $0.70 $0.72 $1.10 100,000 21,459 85,836 1,950,000 265,000 - - - - - - - - - - Forfeited / Lapsed (85,836) End of year - - 1,650,000 (100,000) 165,000 Forfeited / Lapsed (100,000) (21,459) End of year - - - 85,836 (300,000) 1,650,000 - 265,000 Heron Resources Limited - Annual Report 2019 - Page 67 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 27. SHARE0BASED PAYMENTS CONTINUED Performance rights plan A Performance Rights Plan, was approved at the 2017 General Meeting, where employees, Directors and Officers of the Group may be issued with zero exercise price options over ordinary shares of Heron Resources Limited. Performance Rights will vest in 3 years’ time subject to the achievement of Total Shareholder Return hurdles. The Performance Rights will not be quoted on the Australian Stock Exchange and cannot be transferred. The assessed fair value at grant date of the Performance Rights granted under the Performance Rights Plan is independently determined using a Monte Carlo simulation. Detailed information of Performance Rights over unissued ordinary shares is set out below: 30 June 2019 Performance Rights Issue 2017 Grant 2018 Grant Movement in Number of Performance Rights During the Year Beginning of the year 2,895,000 - 2,895,000 Issued 90,000(1) 1,788,334 1,878,334 Forfeited / Lapsed (345,000) - (345,000) End of year 2,640,000 1,788,334 4,428,334 (1) the issue of 90,000 performance rights in FY19 was to Non executive Director Ian Pattison on the same terms as those issued to other Non executive Directors. 30 June 2018 Performance Rights Issue 2017 Grant Movement in Number of Performance Rights During the Year Beginning of the year - - Issued 2,895,000 2,895,000 Forfeited / Lapsed - - End of year 2,895,000 2,895,000 NOTE 28. KEY MANAGEMENT PERSONNEL Key Management Personnel The Key Management Personnel other than Executive Directors for the financial year were (for full year unless stated): Chief Operating Officer Andrew Lawry (ceased on 27 September 2019) General Manager - Finance and Company Secretary Simon Smith General Manager - Exploration Manager David von Perger General Manager - Strategy and Business Development Charlie Kempson General Manager – Woodlawn Brian Hearne Salary and fees Non monetary benefits Superannuation benefits STI Share based payments 30 June 2019 $'000 30 June 2018 $'000 1,542 18 139 - 232 1,931 1,485 7 153 123 227 1,995 Detailed remuneration disclosures are provided in the remuneration report on pages 27-37 of the Directors report. Page 68 - Heron Resources Limited - Annual Report 2019 CONSOLIDATED FINANCIAL STATEMENTS CONTINUED NOTE 29. AUDITORS' REMUNERATION Amounts received or due and receivable by Ernst & Young Australia for: An audit or review of the financial report of the Group: NOTE 30. NEW ACCOUNTING STANDARDS AND INTERPRETATIONS Standards issued but not yet effective 30 June 2019 $'000 30 June 2018 $'000 210 210 89 89 Australian Accounting Standards and Interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s financial statements that the Group reasonably expects will have an impact on its disclosures, financial position or performance when applied at a future date, are disclosed below. The Group is in the process of assessing the impact of the new standards and interpretations. The Group intends to adopt these standards when they become effective. Of the other standards and interpretations that are issued, but not yet effective, as these are not expected to have a material impact on the Group, they have not been listed. AASB Interpretation 23 Uncertainty over Income Tax treatment Application date: 1 January 2019 AASB 16 AASB 2018-1 AASB 16 Leases Leases Amendments to Australian Accounting Standards, Annual Improvements, 2015-2017 Cycle Application date: 1 January 2019 Application date: 1 January 2019 AASB 16 was issued in January 2016 and it replaces AASB 117 Leases, AASB Interpretation 4 Determining whether an Arrangement contains a Lease, AASB Interpretation-115 Operating Leases-Incentives and AASB Interpretation 127 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. AASB 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under AASB 117. The standard includes two recognition exemptions for lessees – leases of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees will be also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. Transition to AASB 16 The Group plans to adopt the modified retrospective transition approach with respect to AASB 16. This approach does not require the re- statement of prior periods. The Group will recognise the cumulative effect of initially applying the new standard as an adjustment to equity at the date of initial application. The Group will elect to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months as of the date of initial application, and lease contracts for which the underlying asset is of low value. During 2019, the Group commenced a detailed impact assessment of AASB 16 and is finalising the impact of adopting AASB 16. The Group expects to recognise a right of use asset and a lease liability for operating leases on the Statement of Financial Position. The Group is continuing to assess whether embedded leasing arrangements are contained within its contracts. Heron Resources Limited - Annual Report 2019 - Page 69 Directors’ Declaration In accordance with a resolution of the Directors of Heron Resources Limited it is declared that: a) b) The financial statements and notes comply with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and Give a true and fair view of the Company's and the Consolidated Entity's financial position as at 30 June 2019 and of their performance, as represented by the results of their operations, for the financial year ended on that date. In the Directors' opinion: a) b) c) The financial statements and notes are in accordance with the Corporations Act 2001; and At the date of this declaration there are reasonable grounds to believe that the Company will be able to pay its debts when they become due and payable; and The Directors have been given a declaration by the Chief Financial Officer required by section 295A of the Corporations Act 2001. On behalf of the Board S Dennis Chairman Sydney, 30 September 2019 Page 70 - Heron Resources Limited - Annual Report 2019 Heron Resources Limited - Annual Report 2019 - Page 71 Page 72 - Heron Resources Limited - Annual Report 2019 Heron Resources Limited - Annual Report 2019 - Page 73 Page 74 - Heron Resources Limited - Annual Report 2019 27-37 Heron Resources Limited - Annual Report 2019 - Page 75 Shareholder Information AT 23 OCTOBER 2019 1. a) b) c) d) e) Issued Shares and Options Distribution of Shareholders: Size of Holding 1 1,001 5,001 10,001 100,001 1,000 5,000 10,000 100,000 - - - - - Number of Holders 354 863 254 475 95 2,041 Shares Held 232,656 2,165,060 1,998,576 15,339,773 290,247,067 309,983,132 The twenty largest shareholders hold 87.50% of the issued fully paid capital of the Company. Substantial Shareholders including related parties who have notified the Company: Holder GREENSTONE MANAGEMENT (DELAWARE) LLC ORION MINE FINANCE CASTLELAKE LP Number of Shares 45,262,790 70,663,685 88,880,568 % 14.60% 22.80% 28.67% There were 849 shareholders who held less than a marketable parcel. 10,000,000 shares have been classified by ASX as subject to a 2 year escrow. VOTING RIGHTS In accordance with the Company's constitution, voting rights are on the basis of a show of hands, one vote for every registered holder and on a poll, one vote for each share held by registered holders. Twenty largest shareholders as at 6 September 2018 1 2 CITICORP NOMINEES PTY LIMITED GREENSTONE MANAGEMENT (DELAWARE) LLC MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED ORION MINE FINANCE FUND II LP HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED-GSCO ECA CASTLELAKE IV LP CL V INVESTMENT SOLUTIONS LLC SEDGMAN PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED J PAUL GETTY TRUST G LTP LLC 3 4 5 6 7 8 9 10 11 12 13 WASHINGTON H SOUL PATTINSON AND COMPANY LIMITED 14 15 NATIONAL NOMINEES LIMITED ONE MANAGED INVT FUNDS LTD 16 MBM CORPORATION PTY LTD 17 18 19 20 FRETENSIS PTY LTD G JBD LLC G HSP LLC CANADIAN REGISTER Number of Shares 54,128,461 45,262,790 37,850,741 29,874,211 23,335,069 17,090,605 10,619,811 10,000,000 9,857,792 8,874,484 4,854,529 4,096,685 3,836,320 2,393,375 2,346,017 1,502,000 1,500,000 1,311,529 1,259,952 1,227,544 % 17.46% 14.60% 12.21% 9.64% 7.53% 5.51% 3.43% 3.23% 3.18% 2.86% 1.57% 1.32% 1.24% 0.77% 0.76% 0.48% 0.48% 0.42% 0.41% 0.40% TOTAL Total issued capital 271,221,915 309,983,132 87.50% 100.00% Page 76 - Heron Resources Limited - Annual Report 2019 SHAREHOLDER INFORMATION CONTINUED f) 1 2 3 4 Distribution of Option/Performance Rights holders 1,085,000 exercisable on or before 4 December 2020 for a payment of $0.72 per option 165,000 exercisable on or before 1 February 2022 for a payment of $1.10 per option 1,860,000 Vesting on 30 June 2020 for a payment of $Nil per Right subject to TSR vesting conditions 1,016,667 Vesting on 30 June 2021 for a payment of $Nil per Right subject to TSR vesting conditions Size of Holding 1 10,001 5,001 100,001 - - - - 10,000 5,000 100,000 Number of Holders - - - 12 12 Options/Performance Rights Held - - - 4,126,667 4,126,667 Summary of option and performance rights holders as at 23 October 2019 1 Employees & directors Number of Options 4,126,667 % of Issued Options 100% Heron Resources Limited - Annual Report 2019 - Page 77 Statement of Mineral Resources & Ore Reserves Refer to ASX announcement on 30 October 2019 for details on the Statement of Mineral Resources and Ore Reserves. Woodlawn Underground Mineral Resource 2019 (7% ZnEq cut-off grade for Polymetallic and 1% Cu cut-off grade for Copper) Measured + Indicated Mineral Resource Lense Type Polymetallic Copper Combined Resource Category Mea + Ind Mea + Ind Mea + Ind Inferred Mineral Resource Resource Category Lense Type Polymetallic Copper Combined Inf Inf Inf Total Mineral Resource Quantity (Mt) 2.8 1.8 4.5 Quantity (Mt) 2.0 0.9 2.9 Lense Type Resource Category Quantity (Mt) Polymetallic Copper Mea + Ind + Inf Mea + Ind + Inf Combined Mea + Ind + Inf 4.8 2.6 7.4 ZnEq (%) 20.2 9.5 16.1 ZnEq (%) 16.3 8.6 14.0 ZnEq (%) 18.6 9.2 15.2 Zn (%) 10.1 0.7 6.5 Zn (%) 7.1 0.8 5.2 Zn (%) 8.8 0.8 6.0 Cu (%) 1.5 2.7 2.0 Cu (%) 1.5 2.4 1.8 Cu (%) 1.5 2.6 1.9 Pb (%) 3.8 0.1 2.4 Pb (%) 2.8 0.2 2.0 Pb (%) 3.4 0.2 2.2 Au (g/t) 0.6 0.2 0.5 Au (g/t) 0.7 0.2 0.5 Au (g/t) 0.7 0.2 0.5 Ag (g/t) 79 7 51 Ag (g/t) 55 8 40 Ag (g/t) 69 7 48 Notes: 1) Please refer to the end of this section for Qualified Persons statements; 2) ZnEq refers to a calculated Zn equivalent grade the formula for which is stated below; 3) Polymetallic Type refers to polymetallic massive sulphide mineralisation with high-grade Zn and Pb; Copper Type refers to Cu dominated massive and stringer sulphide mineralisation; 4) the Mineral Resource is reported in accordance with the JORC Code (2012); 5) Some rounding related discrepancies may occur in the totals; Woodlawn Tailings Retreatment Mineral Resource Estimate 2019 (Production depleted to June 30 2019. Resource previously estimated 2015, no cut-off grade applied) Measured + Indicated Mineral Resource Type South Dam North Dam West Dam Resource Category Meas + Ind Meas + Ind Meas + Ind Total Meas + Ind Inferred Mineral Resource Resource Category Type South Dam North Dam West Dam Total Inf Inf Inf Inf Quantity (Mt) ZnEq (%) 3.2 2.7 3.9 9.8 5.9 6.0 6.5 6.2 Quantity (Mt) ZnEq (%) 0.9 0.2 0.0 1.1 5.6 6.2 0.0 5.8 Page 78 - Heron Resources Limited - Annual Report 2019 Zn (%) 2.5 2.4 2.0 2.2 Zn (%) 2.3 2.4 0.0 2.3 Cu (%) 0.5 0.4 0.6 0.5 Cu (%) 0.5 0.4 0.0 0.5 Pb (%) 1.2 1.3 1.4 1.3 Pb (%) 1.2 1.4 0.0 1.2 Au (g/t) 0.3 0.3 0.4 0.3 Au (g/t) 0.3 0.3 0.0 0.3 Ag (g/t) 27 34 35 32 Ag (g/t) 24 36 0 27 STATEMENT OF MINERAL RESOURCES & ORE RESERVES CONTINUED Total Mineral Resource Type Resource Category Quantity (Mt) ZnEq (%) South Dam North Dam West Dam Mea + Ind + Inf Mea + Ind + Inf Mea + Ind + Inf Total Mea + Ind + Inf 4.0 2.9 3.8 10.8 5.9 6.0 6.5 6.1 Zn (%) 2.4 2.4 2.0 2.2 Cu (%) 0.5 0.4 0.5 0.5 Pb (%) 1.2 1.3 1.3 1.3 Au (g/t) 0.3 0.3 0.4 0.3 Ag (g/t) 26 34 31 31 Notes: 1) Please refer to the end of this section for Qualified Persons statements; 2) ZnEq refers to a calculated Zn equivalent grade the formula for which is stated below; 3) the Mineral Resource is reported in accordance with the JORC Code (2012); 4) Some rounding related discrepancies may occur in the totals; Woodlawn Underground Ore Reserve Estimate 2019 Production depleted to June 30, 2019 Reserve Category Proven Probable Total (Proven + Probable) Quantity (Mt) 0.0 3.1 3.1 ZnEq (%) - 13.1 13.1 Zn (%) - 5.2 5.2 Cu (%) - 1.6 1.6 Pb (%) - 1.8 1.8 Au (g/t) - 0.4 0.4 Ag (g/t) - 38 38 Notes: 1) Please refer to the end of this section for Qualified Persons statements; 2) ZnEq refers to a calculated Zn equivalent grade the formula for which is stated below; 3) Cut-off grades vary and have been determined by current economic and metallurgical factors which are slightly different to those used in the ZnEq formula; 4) This estimate has been prepared in accordance with the JORC Code (2012); 5) Some rounding related discrepancies may occur in the totals; Woodlawn Tailings Ore Reserve Estimate 2019 Production depleted to June 30, 2019. Reserve previously estimated 2016. Reported with no cut-off grade applied. Reserve Category Proven Probable Total (Proven + Probable) Quantity (Mt) ZnEq (%) 6.2 3.1 9.3 6.0 6.0 6.0 Zn (%) 2.2 2.1 2.2 Cu (%) 0.5 0.5 0.5 Pb (%) 1.3 1.3 1.3 Au (g/t) 0.3 0.3 0.3 Ag (g/t) 31 32 31 Notes: 1) Please refer to the end of this section for Qualified Persons statements; 2) ZnEq refers to a calculated Zn equivalent grade the formula for which is stated below; 3) This estimate has been prepared in accordance with the JORC Code (2012); 4) Some rounding related discrepancies may occur in the totals; Zinc equivalent calculation for the Woodlawn Mineral Resources and Ore Reserves The zinc equivalent ZnEq calculation takes into account, mining costs, milling costs, recoveries, payability (including transport and refining charges) and metal prices in generating a Zinc equivalent value for Au, Ag, Cu, Pb and Zn. ZnEq = Zn%+Cu%*3.12+Pb%*0.81+*Au g/t*0.86+Ag g/t*0.03. Metal prices used in the calculation are: Zn US$2,300/t, Pb US$ 2,050/t, Cu US$6,600/t, Au US$1,250/oz and Ag US$18/oz. These metal prices are based on Heron's long term view on average metal prices. It is Heron's view that all the metals within this formula are expected to be recovered and sold. Metallurgical metal recoveries used for the formula are: 88% Zn, 70% Pb, 70% Cu, 33% Au and 82% Ag; these are based on historical recoveries at Woodlawn and supported by metallurgical testwork undertaken during the 2015-16 feasibility study. Commodity prices and metallurgical recoveries are factored into the zinc equivalent calculation using a standard metal equivalent formula. Heron Resources Limited - Annual Report 2019 - Page 79 STATEMENT OF MINERAL RESOURCES & ORE RESERVES CONTINUED Competent Persons Statements - Declaration and JORC (2012) Compliance 1. 2. 3. The information in the report that relates to the Mineral Resources for the Woodlawn Underground Project and the Woodlawn Tailings Retreatment Project is based on information compiled by Ms Katie Yamaguchi, who is an employee of Heron Resources Limited and a Member of the Australian Institute of Mining and Metallurgy. Ms Yamaguchi has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the resource estimation activity that she has undertaken to qualify as a Competent Person as defined in the 2012 edition of the JORC Code; Australasian Code for the Reporting of Exploration Results, Mineral Resources and Ore Reserves. Ms Yamaguchi consents to the inclusion in this report of the matters based on her information in the form and context that it appears. The information in the report that relates to the Ore Reserves for the Woodlawn Underground Project and the Woodlawn Tailings Retreatment Project is based on information compiled by Mr Tim Brettell who is a Member of the Australian Institute of Mining and Metallurgy. Mr Brettell is a full-time employee of Heron Resources Limited and has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the ore reserve estimation activity that he has undertaken to qualify as a Competent Person as defined in the 2012 edition of the JORC Code; Australasian Code for the Reporting of Exploration Results, Mineral Resources and Ore Reserves. Mr Brettell consents to the inclusion in this report of the matters based on his information in the form and context which it appears. The information in this report relating to the exploration results is based on information compiled by Mr David von Perger, who is a Member of the Australian Institute of Mining and Metallurgy (Chartered Professional – Geology). Mr von Perger is a full time employee of Heron Resources Limited and has sufficient experience, which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the JORC Code (2012 edition). Mr von Perger consents to the inclusion of the exploration results in the form and context in which they appear. Page 80 - Heron Resources Limited - Annual Report 2019 Interest in Mining Tenements Tenement Location Heron Interest Status Note Tenement Location Heron Interest Status Note New South Wales Projects (%) Woodlawn Project EL7257 EL7469 EL8353 S(C&PL)L20 EL8623 EL8796 40km SSW of Goulburn 15km E of Bungendore 7.5km SE of Woodlawn 40km SSW of Goulburn 90km north of Woodlawn 65km south of Woodlawn 100 100 100 100 100 100 Live Live Live Live Live Live Alchemy Farm-in & JV Tenements Girilambone Project EL8318 27km NW of Nyngan Overflow/Eurow/Parkes EL5878 EL8267 EL8192 100km NW of Condobolin 70km SE of Cobar 23km SE of Parkes Barraba-Manilla Project EL8711 90km west of Armidale 49 49 49 49 49 Live Live Live Live Live Sky Metals Farm-in Tenements3 Cullarin & Kangiara Projects EL7954 EL8573 25km W of Goulburn 30km NNW of Yass 100 100 Live Live (%) 100 100 100 100 100 100 Live Live Pending Pending Live Live EL7468 EL8325 ELA5811 ELA5832 EL8712 EL8797 5km E of Collector 60km ENE of Canberra 20km southeast of Woodlawn 20km southeast of Woodlawn 90km north of Woodlawn 65km south of Woodlawn 1 1 1 1 2 2 EL7941 EL8356 100km NW of Condobolin 59km WSW of Tottenham 49 49 Live Live Nyngan Project EL8631 10km NW of Nyngan 49 Live EL8400 27km NNE of Yass 100 Live Western Australia Projects – Royalty Interests E24/00203 78km NW of Kalgoorlie Pending 3 M24/00683 78km NW of Kalgoorlie E29/00889 78km NW of Kalgoorlie M24/00634 78km NW of Kalgoorlie M24/00660 75km NW of Kalgoorlie M24/00663 75km NW of Kalgoorlie M24/00664 75km NW of Kalgoorlie M24/00686 75km NW of Kalgoorlie M24/00915 78km NW of Kalgoorlie M24/00916 78km NW of Kalgoorlie M24/00665 75km NW of Kalgoorlie E15/01010 60km SSE of Kalgoorlie Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Base metals and gold royalty Live Live Live Live Live Live Live Live Live Live 3 M24/00772 71km NW of Kalgoorlie 3 M24/00797 78km NW of Kalgoorlie 3 M24/00757 63km NW of Kalgoorlie P24/04395 70km NW of Kalgoorlie P24/04396 70km NW of Kalgoorlie P24/04400 70km NW of Kalgoorlie P24/04401 70km NW of Kalgoorlie P24/04402 70km NW of Kalgoorlie P24/04403 70km NW of Kalgoorlie 3 3 3 3 3 3 4 Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Retains Gold royalty Live Live Live Live Live Live Live Live Live Live 2 3 3 3 3 3 3 3 3 3 3 Notes: 1 2 3 4 1 Alchemy: Subject to Farm-in and Joint Venture between Alchemy Resources Ltd and Heron where Alchemy earning 80% by spending $2M over 5 years Sky Metals Ltd: Subject to Farm-In agreement between Heron and Sky where Sky earning 80% by spending $2 million over 3 years. Eastern Goldfields Ltd hold 100% interest, Heron retains gold royalty, Ardea Resources Ltd receiving non-gold rights. St Ives Gold Mining, Heron retains gold royalty and the right to explore and mine nickel Heron Resources Limited - Annual Report 2019 - Page 81 Glossary Corporate / General Definitions ASIC means Australian Securities and Investments Commission ASX means ASX Limited (ABN 98 008 624 691) or the Australian Securities Exchange, as appropriate Australian Registry means Automic, Level 5, 126 Phillip Street Sydney NSW 2000. Heron or HRR means Heron Resources Limited (ABN 30 068 263 098) HRR : ASX is the Heron code on ASX IFRS means International Financial Reporting Standards Subsidiary has the meaning given to that term in section 9 of the Corporations Act VWAP means Volume weighted average price Technical Definitions Ag means Silver Au means Gold Anomaly means a value higher or lower than expected, which outlines a zone of potential exploration interest but not necessarily of commercial significance Cu means Copper Decline means a declined tunnel accessing an ore body JORC (2012 edition) means the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves and is a professional code of practice that sets minimum standards for Public Reporting of minerals Exploration Results, Mineral Resources and Ore Reserves. The JORC Code provides a mandatory system for the classification of Exploration Results, Mineral Resources and Ore Reserves according to the levels of confidence in geological knowledge and technical and economic considerations in Public Reports. Level means Horizontal series of developments all at the same distance measured from the surface m means metre and km means kilometres Mt means million tonnes Mineralisation means in economic geology, the introduction of valuable elements into a rock body Mineral Resource means a Mineral Resource as defined by JORC Code and is a concentration or occurrence of material of intrinsic economic interest in or on the earth’s crust in such form, quality and quantity that there are reasonable prospects for eventual economic extraction. Mineral Resources are further sub-divided, in order of increasing geological confidence, into Inferred, Indicated and Measured categories. Measured Resource means a ‘Measured Mineral Resource’ is that part of a Mineral Resource for which quantity, grade (or quality), densities, shape and physical characteristics are estimated with confidence sufficient to allow the application of Modifying Factors to support detailed mine planning and final evaluation of the economic viability of the deposit. Geological evidence is derived from detailed and reliable exploration, sampling and testing gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes, and is sufficient to confirm geological and grade (or quality) continuity between points of observation where data and samples are gathered. A Measured Mineral Resource has a higher level of confidence than that applying to either an Indicated Mineral Resource or an Inferred Mineral Resource. It may be converted to a Proved Ore Reserve or under certain circumstances to a Probable Ore Reserve. Indicated Resource means an ‘Indicated Mineral Resource’ is that part of a Mineral Resource for which quantity, grade (or quality), densities, shape and physical characteristics are estimated with sufficient confidence to allow the application of Modifying Factors in sufficient detail to support mine planning and evaluation of the economic viability of the deposit. Geological evidence is derived from adequately detailed and reliable exploration, sampling and testing gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes, and is sufficient to assume geological and grade (or quality) continuity between points of observation where data and samples are gathered. An Indicated Mineral Resource has a lower level of confidence than that applying to a Measured Mineral Resource and may only be converted to a Probable Ore Reserve. Inferred Resource means an ‘Inferred Mineral Resource’ is that part of a Mineral Resource for which quantity and grade (or quality) are estimated on the basis of limited geological evidence and sampling. Geological evidence is sufficient to imply but not verify geological and grade (or quality) continuity. It is based on exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. An Inferred Mineral Resource has a lower level of confidence than that applying to an Indicated Mineral Resource and must not be converted to an Ore Reserve. It is reasonably expected that the majority of Inferred Mineral Resources could be upgraded to Indicated Mineral Resources with continue exploration. Page 82 - Heron Resources Limited - Annual Report 2019 GLOSSARY CONTINUED Ore Reserves as defined by JORC Code Proven Ore Reserve means the economically mineable part of a Measured Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments, which may include Feasibility Studies, have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could reasonably be justified. The term "economic" implies that extraction of the Ore Reserve has been established or analytically demonstrated to be viable and justifiable under reasonable investment assumptions. Probable Ore Reserve is the economically mineable part of an Indicated Mineral Resource Pb means lead Project means a grouping of prospects within a specific geographic location, often with a common geological setting Prospect means a target upon which exploration programmes are planned or have commenced Province means a grouping of projects within a geological district defined by a major mineralised crustal structure RC means Reverse Circulation drilling method employing a rotating or hammering action on a drill bit which returns a sample to the surface inside the rod string by compressed air. Sample quality is very good, particularly if the drill hole is dry. Zn means zinc ZnEq means zinc equivalent and is a means of combining the elemental grade of mineralisation into a single number that provides a useful value for assessing and comparing the grade of mineralisation. The formula is provided at the end of the section in this report detailing Mineral Resources and Ore Reserves Heron Resources Limited - Annual Report 2019 - Page 83 ASX Code: HRR www.heronresources.com.au 

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