Lion Selection Group Limited
Annual Report 2019

Plain-text annual report

2019 ANNUAL REPORT Lion Selection Group Limited ABN 26 077 729 572 Level 2, 175 Flinders Street Melbourne Vic 3000 Tel: +61 3 9614 8008 www.lionselection.com.au Diamond drill core from Awak Mas Pani Ridge Contents 02 03 04 11 12 14 16 17 18 20 21 34 42 43 44 44 45 46 47 48 66 70 72 72 Chairman’s Letter to Shareholders Lion Selection Group Investment Summary Lion Manager’s Report Lion Performance Pani Gold Project Nusantara Resources Erdene Resources Development Corp EganStreet Resources Manager Performance Incentive Principal Risks and Uncertainties Corporate Governance Statement Director’s Report Auditor’s Independence Declaration Lion Selection Group Limited Directors’ Declaration Financial Statements Statement of Comprehensive Income for the Year ended 31 July 2019 Statement of Financial Position as at 31 July 2019 Statement of Cash Flows for the Year ended 31 July 2019 Statement of Changes in Equity for the Year ended 31 July 2019 Notes to the Financial Statements for the Year ended 31 July 2019 Independent Auditor’s Report Shareholder Information Lion Selection Group Limited Registry Corporate Directory LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 1 Chairman’s Letter to Shareholders Your directors provide you with the annual report for the year ended 31 July 2019. We are pleased to report that the state of your company remains strong. Lion’s portfolio has delivered during the year, benefiting from the standout performance for gold. Your directors provide you with the annual report for the year ended 31 July 2019. We are pleased to report that the state of your company remains strong. Lion’s portfolio has delivered during the year, benefiting from the standout performance for gold. Driven by low to negative interest rates and risk-aversion, investment has flowed into physical gold, ETFs and gold equities, reflecting gold’s safe-haven investment status and portfolio diversification benefits. Although the loudest drivers of the rally are trade wars and Brexit, the key fundamental driver of gold remains negative yields in the bond market and consequential inflated values for many asset classes. The uncertainty about how the current extreme monetary policy settings will unfold is high, with no clear resolution in sight. In order to benefit from the current gold rally, pre- production gold companies must be in a position to pull together technical feasibility, finance and first-class teams. The market has begun to recognise the positioning of many of Lion’s investees to deliver these elements. This has seen corporate activity across the portfolio, with Toro Gold acquired by Resolute Mining, Egan Street Resources under takeover by Silverlake Resources, and the introduction of local strategic partners at Pani (Merdeka Copper Gold) and Nusantara Resources (Indika Energy). Lion remains well positioned to unlock its key investments in Pani and Nusantara. Efforts at Pani are aimed at combining the Pani IUP project (Lion 33%/ Merdeka 67%) with the adjoining Pani Contract of Work (CoW) tenement owned by J Resources to create a world class gold asset. In addition, step out drilling will shortly commence targeting known mineralisation between the Pani IUP Resource and J Resources’ CoW. The understanding of Pani will unfold as the project is put through the rigours of various studies, but initial work suggests potential for a multi-million-ounce project with favourable economics. 2 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT At Nusantara, the Awak Mas gold project is ready to go, with the project potential to be unlocked if financing discussions can introduce partner Indika Energy at the project level and cornerstone project financing. A combination of higher gold price and very promising extensional drilling at Awak Mas also has the potential to materially upgrade the current open-pit ore reserve of 1.1Moz based on a USD$1,250/ oz used in last year’s DFS compared with the Mineral Resource Estimate of 2.0Moz using a USD$1,400/oz pit shell. Importantly the new extensional result opens up a nearly 1km wide, sparsely drilled, potential gold mineralised corridor, that lies between the eastern edge of the proposed Awak Mas open-pit and the Salu Bulo deposit, further to the east. Other investments in the Lion portfolio continue to progress, largely flying under the radar. In many cases these investees have equally compelling fundamentals, just at an earlier stage on the development curve. Lion continues to see many opportunities, with many companies suffering in the doldrums due to the scarcity of equity capital holding these companies back. Lion closely monitors the value and risks of its portfolio. Despite the strong financial performance this year, Lion’s underlying potential portfolio value proposition remains compelling, with unlocking funding risk in many cases being the key to realising the upside. The Lion board would like to thank the Lion team who have been particularly active in helping many investees throughout the year. Barry Sullivan Chairman Lion Selection Group Investment Summary AS AT 30 SEPTEMBER 2019 Diamond drill site at Awak Mas COMMODITY MARKET VALUE A$M Pani Joint Venture (33.3% Interest) Gold 39.2 Fair value for Pani based on Merdeka’s acquisition of 66.7% interest in the Pani JV from Lion’s previous JV partner in November 2018 Portfolio Nusantara Resources Egan Street Resources Erdene Resources Other • Portfolio holdings measured at fair value • Includes investments held directly by Lion and the value to Lion of investments held by African Lion Net Cash Net Tangible Assets NTA Per Share Capital Structure Shares on Issue: Share Price: Options on Issue: Gold Gold Gold 11.5 6.3 2.0 3.4 8.6 A$71.0m 47c 150,134,879 42¢ps 30 September 2019 15,720,958 $0.50 expiry 12 April 2020 LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 3 Lion Manager’s Report z o / $ S U 2000 1800 1600 1400 1200 1000 Au US$/oz 1.2 1 0.8 0.6 A$:US$ Jan11 Jan12 Jan13 Jan14 Jan15 Jan16 Jan17 Jan18 Jan19 Jan11 Jan12 Jan13 Jan14 Jan15 Jan16 Jan17 Jan18 Jan19 l Commodity prices have been mostly weak in 2019; the key exception is gold. l Gold has provided a strong lead for gold equities. l Junior resources companies have underperformed; investors who would typically invest in exploration stage companies distracted by technology plays and cannabis investments. l However, the mining industry is investing again; exploration activity continues its four year growth trend and large miners are investing (or buying outright) in juniors. Growth oriented thinking has re-emerged. l The Lion Clock is between 8 and 9 o’clock. Commodity prices Equity investors in miners tend to take a strong lead from commodity prices, and as the outlook for commodities fluctuates, it influences market interest for producers and explorers. Broadly speaking, the performance of most mineral commodities over the last 12 months has been insufficient to provide a strong lead, with the recent exceptions of gold and nickel. Long term fundamentals for many metals remain broadly attractive, driven by under-investment in new supply which has the potential to result in a supply shortfall in many commodities. Even so, commodity markets have responded to macroeconomic and political factors in 2019. Most mineral commodities have weakened during this time against a strengthening US dollar. Key themes that have affected commodities during the past 12 months include: • Ongoing posturing between China and the United States and prospects of a potential trade war. • Evolution of energy storage technologies and electric vehicles, and potential for much broader adoption of battery technology. Whilst the long term thematic appears robust, recent development of new projects to unlock new supply of key battery commodities (graphite, lithium, etc) will test the robustness of those commodity markets especially how readily demand takes up new supply. • Global settings of central bank and bond rates and outlook for interest rates, which has been particularly influential for gold. 4 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Lion Manager’s Report 10000 T / $ S U 8000 6000 4000 Cu US$/T Commodity prices have been mostly weak in 2019; the key exception is gold Jan11 Jan12 Jan13 Jan14 Jan15 Jan16 Jan17 Jan18 Jan19 The stand-out commodity which has electrified a significant portion of the resources equities market in 2019 has been gold. The fundamentals for gold are driven by an intersection of macroeconomics and emotion. Through the course of the last 12 months, sentiment towards interest rates has shifted from ‘increasing’ to ‘decreasing’ and there is talk of fresh quantitative easing in some economies. Historically, periods of low to negative real interest rates combined with an outlook for weakening real rates have been positive for gold, and persistence of global interest rate weakness is likely to contribute to a continued robust environment for gold. Layered around the macroeconomic picture for gold is various geopolitical events that generate nervousness in global markets – significant recent contributors include: Donald Trump (various themes), North Korea, Brexit. Whilst these themes don’t directly drive gold, they produce fear and volatility in markets which from day to day adds to interest in gold. US$ Gold Price vs US real interest rates (Federal Reserve Official Rate minus US CPI) z o / $ S U e i r P d l o G 2000 1500 1000 500 0 -500 -1000 a p % s e t a R t s e r e t n I l a e R 10 5 0 -5 Sep 70 Sep 75 Sep 80 Sep 85 Sep 90 Sep 95 Sep 00 Sep 05 Sep 10 Sep 15 Source: IRESS data, US Bureau of Labour Statistics LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 5 Lion Manager’s Report Mining Equities – caught in recent market froth Resources equities are still well within a continuous year-on-year positive trend established in early 2016. As a whole, Resources have strongly outperformed the rest of the market in that period, particularly during 2016 and 2017. The exception to this pattern has been gold producers, which have not only led the market each year but have continued the trend of market outperformance during 2019, led strongly by the standout performance of the gold price whilst the rest of the sector is arguably without a clear commodity lead. Year by year (2016, 2017, 2018 and 2019 YTD) performance of key ASX stock indices % 4 7 % 1 2 % 2 3 % 4 5 % 180 160 140 120 100 80 60 40 20 0 % 8 2 % 6 5 % 7 3 - % 5 1 % 8 2 % 2 % 8 5 % 8 3 % 3 % 4 % 9 - % 9 1 % 2 % 2 1 % 1 1 - % 1 2 -20 2016 2017 2018 2019 YTD 2016 2017 2018 2019 YTD 2016 2017 2018 2019 YTD 2016 2017 2018 2019 YTD 2016 2017 2018 2019 YTD ASX Gold Index ASX 100 Resources ASX Small Resources ASX 100 Industrials ASX Small Industrials Year by year (2016, 2017, 2018 and 2019 YTD) performance of key ASX stock indices: ASX Gold Index (XGD), ASX100 Resources Index (XTR), ASX Small Resources Index (XSR), ASX100 Industrials Index (XTI) and ASX Small Industrials (XSI). Bars show incremental index appreciation (dark grey) or loss (light grey) comparing the end of a calendar year with the opening prices of 2016. 2019 YTD is to 30 September 2019. Source: IRESS data 6 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Lion Manager’s Report But junior resources still neglected Despite the appealing picture painted by the performance of miners, smaller capitalisation junior resources and exploration stocks have largely been left behind. 2019 has been as tough a year as any for junior resources and exploration companies to raise funds or experience share price appreciation. There is no index which expresses the performance of resources juniors, so a direct side-by-side comparison with larger miners isn’t possible. However, the median share price performance of all the metals and mining classified companies which are not included in any ASX index provides a suitable indication. In stark contrast to the indices containing large miners which have almost doubled since 2016, or gold miners which have almost tripled, the juniors have fallen by over 15%. Qualitatively, different sources of money sit behind the investors which buy equities of larger versus junior resources companies. Institutional investment comprises all manner of hedge funds, exchange traded funds and other managed investment structures, and when it comes to resources tend to direct equity investment toward larger companies. The rationale is simple: these institutional investors want liquidity and to avoid risks such as funding, project commissioning and single asset failure, and the solution is to target larger, established miners with diverse portfolios. Whilst this tendency can lead to concentration of investment in a small number of companies, it appears so far that investors are focussed on returns from the gold price and are satisfied with the risk / reward (ie minimal risk / potential price premium) equation of the larger companies, and not yet ready to take on greater risk (smaller producers, project developers, miners in geologically attractive but otherwise challenging jurisdictions) in search of a better potential reward. Historically this is consistent with early cycle behaviours that have been seen before. ‘Risk Money’ is an expression that describes the kind of investor that might invest in early stage ventures such as exploration. It is important to distinguish that Risk Money is not philosophical, it can invest in any speculative venture that has an appealing story attached in any industry. Whilst institutional investors can become part of the Risk Money pool, generally speaking Risk Money is non-institutional in nature. The dot.com bubble which took place in the late 1990’s / early 2000’s is an example as well as a useful analogy for how we might expect Risk Money to behave in the near term. A mining bust unfolded through 1997 and 1998, exacerbated by the Bre-X scandal and East Asian Currency Crisis. Risk Money deserted exploration companies in favour of dot.com stocks, which were adopting business models to exploit opportunities created by the advent of the internet and the World Wide Web. Explorers suffered for several years, even after the share prices and operating performance of miners had begun to correct and it wasn’t until after the dot.com bubble popped that Risk Money began to move back to early stage resources opportunities. Whilst not necessarily internet related, technology focussed companies have captured a growing proportion of the interest of Risk Money investors for almost a decade. More recently, Risk Money has also poured into medicinal cannabis stocks, especially in North America. In a general sense, there are many companies finding market success in either tech or cannabis that share common traits – despite an abundance of investment willing to buy new shares, the revenue model is unclear and eventual profitability is highly uncertain. It may be easy to be sceptical of this from a distance, but not drastically dissimilar from early stage exploration companies. There is no doubt, a broad range of opinions surrounding the fundamentals for technology or cannabis stocks – the fact is that the investors that are prepared to take risks like backing explorers and project developers are currently more interested in other sectors. So for an equally risky, but perhaps on perception alone far less interesting explorer or developer to obtain funding – it needs to tick a lot of boxes. There is a strong historical precedent for Risk Money moving decisively back to resources 1) after larger miners have undergone a share price recovery, 2) fundamentals are waning (or have collapsed) in another ‘hot’ sector and 3) there is an attractive catalyst underpinning the speculative case for the early stage resource sector. Gold 2.80x ASX100 Resources 1.95x Small Resources 1.91x ASX100 Industrials 1.16x Small Industrials 1.24x Non-index Resource Juniors 0.84x 100% Break Even Multiple returns of key ASX Indices (ASX Gold Index (XGD), ASX100 Resources Index (XTR), ASX Small Resources Index (XSR), ASX100 Industrials Index (XTI) and ASX Small Industrials (XSI)) compared with the median share price performance of 572 Metals and Mining (GICS classified) stocks that are listed on ASX and not included in any index, 1 January 2016 to 30 September 2019. Source: IRESS data, Lion Manager. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 7 Lion Manager’s Report Exploration and Liquidity – the Mining Industry is Investing Again The recovery of equity prices for miners, an improvement in operational cash generation and partial recapitalisation of the sector has culminated in the recovery of the trend in exploration activity. There has now been three to four years of increases in annual exploration expenditure and metres drilled in Australia (according to Australian Bureau of Statistics data). Over a long period, the Australian trend has tended to mimic the global trend. The recommencement of expenditure on exploration, which is an investment with an uncertain return profile, and several strong year-on-year increases is a strong signal that the mining industry is again investing for the future. r t Q / e r u t i d n e p x E n o i t a r o l p x E n a i l a r t s u A $m 1,200 1,000 800 600 400 200 0 Australian exploration expenditure (LHS) and exploration meters drilled (RHS) r t Q / d e l l i r D s r e t e M n o i t a r o l p x E n a i l a r t s u A 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Sep 1989 Sep 1994 Sep 1999 Sep 2004 Sep 2009 Sep 2014 Sep 2019 Source: Australian Bureau of Statistics, publication 8412. Exploration appetite is a part indicator that miners are thinking about future growth. However, it is hard to use this as conclusive evidence, as the exploration trend lacks any differentiation between greenfields (looking for new discoveries) and brownfields (extensional) work, and whether or not exploration is taking place to detect new potential mines, or just replace production. Stronger evidence that growth oriented thinking is returning to miners is their own investment behaviour – over the past three to four years there has been a trend toward larger miners investing in, or with, junior resources companies, or making outright takeover offers. The public nature of this investment means the intent is not ambiguous, and there is a clear common thread that the larger companies are investing to potentially broaden their project portfolio. This is the strongest signal the mining industry can send to the market of how it sees value on offer. 8 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Lion Manager’s Report Then and Now – Comparing Two Cycles All cycles share characteristics as they evolve, irrespective of how quickly they evolve or ultimate return they provide, so comparison of one period to another is a useful (even if not precise) indicator of what might transpire in the future. Clock Time (Lion Clock) 1998-2008 2016-present Bayan Khundii Large capitalisation miners recovery commenced IPO market reopened Exploration recommenced Junior resources recovery commenced 6 7 8 9 August 1998 January 2016 2000 (17 IPO’s vs 3 in 1998, 5 in 1999) 2016 2002 Dot.com 2003 2017 Technology, cannabis ? ? ‘Good years’ of the cycle 9-12 2003 – 2008 % 800 700 600 500 400 300 200 100 0 % n r u t e R x e d n I Comparison of mining index performance 1998-2008 versus 2016-present, rebased to the lowest point of ASX100 Resources index in each case (where month = 0) Late 90’s / Early 00’s: Dot.com bubble ASX100 Resources Index 1998-2008 / 2016-present ASX Small Resources Index 1998-2008 / 2016-present 0 10 20 30 40 50 60 70 80 90 100 110 Months after market base Source: IRESS data, Lion Manager LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 9 Lion Manager’s Report The Lion clock depicts the mining cycle according to liquidity indicators that are diagnostic of the different stages of the cycle. The clock moved to 6 o’clock in early 2016, after the sense of sentiment toward miners flipped and became positive. It became 7 o’clock later in 2016 when it became clear that the IPO market was opening, and investor interest had commensurately increased. A recapitalisation of the sector between capital raisings and improving operating cash flows precipitated an increase in funds available for exploration and growth, which moved the clock to 8 o’clock in 2017. Whilst liquidity has been flowing back into the sector, it has clearly favoured larger (particularly mid-tier) companies who in turn have been key contributors to exploration activity. Many junior companies are yet to benefit from the improvement in sentiment, and sentiment in North American / European markets are lagging the Australian market. However, there have been several consecutive year-on-year increases in exploration spend in Australia (which mirrors a global trend), as well as growing activity of established miners investing in joint ventures or equity of smaller resource companies. The industry is sending a clear signal that it sees valuable opportunities at attractive prices, and is acting on those. We do not feel that the clock has moved yet to 9 o’clock – this would require an improvement in sentiment in the North American market. However we feel strongly that the clock has moved past 8 o’clock. Lion Clock – between 8 and 9 o’clock AGGRESSIVE SELLER New floats (big companies) Paper takeovers CAUTIOUS BUYER People leave big companies (top $ small companies short careers) 10 CRASH 12 1 Company liquidations Declining exploration L O O K 2 11 L E L S 9 8 Rising exploration New floats (small companies) 7 BU Y 6 5 BOOM 3 4 Mergers Cash takeovers AGGRESSIVE BUYER CAUTIOUS SELLER 10 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Lion Performance Total shareholder return for Lion Selection Group versus ASX Small Resources Accumulation Index 40% % 6 . 0 3 20% 0% -20% % 5 . 0 1 % 4 . 4 % 3 % 8 % 2 . 8 Lion ASX Small Resources 1 Year Return 3 Year Return 5 Year Return 10 Year Return 15 Year Return Return since inception at 31 July 2019 1 Year 3 Years 5 Years 10 Years 15 Years Return since inception – 21 years Lion 30.6% 10.5% 3.0% 4.4% 8.0% 8.2% ASX Small Resources -3.3% 9.9% 4.3% -4.5% 3.4% 3.9% Lion places the greatest emphasis on long term returns, as this timeframe best matches the investment timeframe approach used by Lion. Past performance is no guarantee of future performance, but we believe the long-term performance illustrated above endorses the Lion investment model which importantly has remained unchanged. Lion takes a portfolio approach to invest in companies with quality people and projects, with the advantage of being able to take a long-term investment view, elements which are essential to generating excess returns from the small resources sector. 1. Investment performance figures reflect the historic performance of Lion Selection Group Limited (ASX:LSG, 1997 – 2007), Lion Selection Limited (ASX:LST, 2007-2009), Lion Selection Group Limited (NSX:LGP, 2009-2013) and Lion Selection Group Limited (ASX:LSX, 2013-present) 2. Methodology for calculating total shareholder return is based on MorningStar (2006), which assumes reinvestment of distributions 3. Distributions made include cash dividends, shares distributed in specie as a dividend, proceeds from an off-market buyback conducted in Dec 2008, and the distribution of shares in Catalpa Resources via the demerger of Lion Selection Limited in Dec 2009. Lion assume all distributions are reinvested, with all non-cash distributions sold and the proceeds reinvested on the distribution pay date. Investment performance is pre-tax and ignores the potential value of franking credits on dividends that were partially or fully franked. 4. 5. Past performance is not a guide to future performance. 6. 7. Source: IRESS, Lion Manager Indices used for comparison are accumulation indices, which assume reinvestment of dividends. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 11 Pani Joint Venture (33.3%) Since Lion acquired its 33.3% joint venture interest in the Pani Gold Project in April 2018 for $16.6m, a number of crucial de-risking steps have been achieved. The focus for the joint venture is now on advancing project assessment studies and seeking to strike a deal with J Resources on its adjoining Pani CoW tenement. • Following regulatory approval, in August 2018 Lion’s 33.3% economic interest in the Pani Joint venture was converted into a direct ownership interest and Lion appointed a representative to the board of the Pani Joint Venture. • In November 2018, leading Indonesian gold mining company, PT Merdeka Copper Gold TbK (IDX:MDKA) (Merdeka) became Lion’s joint venture partner in the Pani Joint Venture after paying US$55m cash to buy the 66.6% joint venture interest from Lion’s former joint venture partner. This transaction imputed a look through value of $39m for Lion’s 33.3% interest. Merdeka’s technical, financial and Indonesian operations expertise brings essential skills to the development of the Pani Gold Project. • Lion and Merdeka completed a Joint Venture Agreement in November 2018 with respect to the Pani Joint Venture setting out the detailed arrangements with respect to the funding, operation and management of the Pani Joint Venture. • At July 2019, key permits had been obtained for the project including the new 100% owned processing and refining tenement and forestry permits to enable step out drilling to take place between the Pani IUP Resource and the Resource identified on the adjoining Contract of Work (CoW) tenement. The focus for the joint venture is now on advancing project assessment studies and seeking to strike a deal with J Resources on its adjoining Pani CoW tenement. If a deal can be Pani Superpit concept joins two separate Resources (looking South) Approx 1.5km Kolokoa Baginite IUP Boundary Pani IUP Resource: 2.37Moz at 0.82g/t1 Pani Ridge Pani Luar Borose Pani Dalam STEP OUT DRILLING J Resources’ Resource: 2.06Moz at 0.96g/t2 Informal workings 12 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT consummated, the joint project would be a world class gold deposit with immediate upside, uniting the Pani JV’s 2.37Moz1 Resource with J Resources Resource of 2.30Moz2. Such a deal would unlock optimal development of the Pani deposit in a ‘Superpit’ operation, unrestricted by tenement boundaries, including: • Favourable topography: low strip ratio, open pit operation amenable to bulk mining. • Low processing costs anticipated, with grid power available. • Metallurgical work to date suggests high recoveries via heap leach or CIL. • Due to key permits already being in place, it may be possible to fast track development. Subject to appropriate assessment, initial concepts envisage a 250Koz – 300Koz operation. In parallel, the Pani joint venture continues to progress towards a standalone operation for the Pani IUP. A standalone operation would entail trucking material on an access haul road to the Pani JV’s processing and refining area several kilometres south of the Pani IUP mining area where it would be treated. Such an operation is also expected to be low cost due to favourable characteristics, but would not benefit from the economies of scale of a combined operation. In addition, some mineralisation is expected to be challenging to mine due to topography and tenement boundaries. 1. Refer to One Asia Resources Limited news release 3 December 2014, (https://www.lionselection. com.au/wp-content/uploads/2018/08/PANI%20 JORC%20RESOURCE.pdf). 2. J Resources Reserve and Resources Statement 31 December 2017. http://www.jresources.com/ assets/uploads/home/JRAP_-_2017_-_RR_ table_@_20171231_(Sanjaya).pdf Pani IUP (Lion 33.3%/Merdeka 66.7%) 0.2g/t cut off1 Category Ore (Mt) Grade (g/t Au) Au (m oz) Measured 10.8 Indicated Inferred 62.4 16.2 1.13 0.81 0.67 0.39 1.63 0.35 Total 89.5 0.82 2.37 Pani CoW (J Resources 100%) 0.4g/t cut off 2 Category Ore (Mt) Grade (g/t Au) Au (m oz) Measured 13.8 Indicated Inferred 38.7 14.1 0.95 0.91 1.12 0.42 1.13 0.50 Total 66.6 0.96 2.06 LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 13 Nusantara Resources Awak Mas camp and core farm Nusantara is actively working with strategic partner Indika towards financing Awak Mas, anticipated to be partly funded by Indika Energy’s purchase of a project interest. Lion was a cornerstone investor in Nusantara’s ASX IPO in 2017. The company has completed comprehensive assessments of mining and processing gold at its 100% owned Awak Mas Gold project located in Central Sulawesi, Indonesia, culminating in completion of a Definitive Feasibility Study during 2018. Strategic Partner • In December 2018 Indonesian energy and resources company PT Indika Energy Tbk (Indika) invested $7M to become Nusantara’s 19.9% shareholder and strategic partner. At the same time as this investment took place, Nusantara and Indika entered into a strategic relationship focussed on exploring avenues for completing the financing and development of the Awak Mas Gold Project. • Richard Ness joined the board of Nusantara as a Non-Executive Director as the nominee of Indika. Richard is a mining executive based in Indonesia, and former senior executive at Newmont Indonesia and Freeport Indonesia, and brings a great deal of recent and historical, highly relevant project development and operations experience in Indonesia. Project Funding and Development • Nusantara is actively working with strategic partner Indika towards financing Awak Mas, anticipated to be partly funded by Indika Energy’s purchase of a project interest. • The project is considered ‘development ready’ and a review of Nusantara’s DFS by Independent Technical Expert identified no technical deficiencies. • Follow up confirmatory work since the DFS supporting the technical studies on metallurgy, quarry materials and grade benching were completed. Metallurgical test-work increased the estimated gold recovery from 91.1% to 93.1% gold, and in-fill bench sampling in the starter pit area demonstrates the potential to uplift the reserve grade. People In preparation for development, Nusantara appointed Neil Whitaker as its new Jakarta based CEO. Neil has over 40 years’ experience in the mining sector and has held operating and senior executive roles with companies such as Anglo American, Western Mining Corporation, Clough Indonesia (Petrosea Tbk) and Newcrest Mining. Neil has extensive international operating experience with a demonstrated background in leading resource companies through the transitional stages of the full project life cycle. 14 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT • Diamond drill hole intersection of 63.7m at 2.12g/t was returned from outside (to the west) of the current US$1250/oz Reserve and US$1400 Resource pit shells. This intersection is not only one of the best gold intersections on the project, but demonstrates the continuation of mineralisation to the west in the corridor between Awak Mas and Salu Bulo. • The work completed has shown that understanding of the prospectivity of the Awak Mas region is at an early stage, with multiple regional targets for further work. Importantly, this work has continued to demonstrate the prospectivity of the region between Awak Mas and Salu Bulo which lays below unmineralised ophiolite. Definition of mineralisation in this zone has potential game-changing consequences for Nusantara and sets the scene for an exciting 2020. Exploration & Regional Prospectivity • In parallel to progressing funding discussions to enable development, a geological campaign has been conducted to refine the geological model of Awak Mas and explore for extensions and new occurrences of mineralisation. • Benching conducted within the Rante domain (a region of mineralisation within the pit design currently scheduled to be the first mineralisation mined) exposed geology on two platforms to enable detailed mapping, collection of trench samples across the floor and face and close spaced drilling. Results of trench sampling included 66m at 1.56g/t gold (from a trench in the face) and 62m at 2.3g/t gold (from a trench in the floor), which compared favourably with the block model grades for the same area. • A ground based electrical geophysics program was completed over a 3km strike length of the Salu Bulo deposit and areas of potential strike extensions. Targets generated from this work are being drill tested. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 15 Erdene Resources Development Corp Diamond drill rig at Bayan Khundii Erdene is well established in Mongolia, having maintained a team and work programs for over a decade. This has resulted in Erdene having a strong knowledge of Mongolian geology and the largest proprietary technical database. Erdene is well established in Mongolia, having maintained a team and work programs for over a decade. This has resulted in Erdene having a strong knowledge of Mongolian geology and the largest proprietary technical database which, combined with outstanding relationships and community interactions, positions the company uniquely to successfully transition from exploration to operations. Erdene’s recent focus has been on two, 100% owned epithermal gold projects in South-West Mongolia. These have been progressed by Erdene from grass-roots discovery, to have defined Resources and now economic studies in place with attractive fundamentals. Highlights: • Preliminary Economic Assessment for the Khundii Gold Project, which combines both the Bayan Khundii and Altan Nar discoveries for sequential development. • Infill and extensional drilling continued to return impressive results: eg 112m at 5.9g/t gold at Bayan Khundii. • Mining license granted for Bayan Khundii, which secures long term tenure over the project. • Partnership with the European Bank for Reconstruction and Development (EBRD), with the establishment of a US$5m convertible loan, to contribute substantially toward completion of an independent feasibility study, front end engineering and design. EBRD is one of the largest investors in Mongolia, and the investment is seen as an endorsement of the Erdene team, the Khundii Gold Project and the company’s approach to the social and environmental aspects of development. This is likely to position the company strongly moving through feasibility completion and toward project financing during 2020. • The pre-feasibility study for the Khundii Gold Project envisages average gold production of 60,000oz pa starting with high grade production from an open pit mine at Bayan Khundii. The combined Bayan Khundii and Altan Nar deposits feature Measured and Indicated Resources of 839koz at 2.59g/t, and the establishment investment requirement is expected to be low at circa US$40m initial capital expenditure to establish a long life (10 years), low cost (US$746/oz AISC) gold operation. 16 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT EganStreet Resources Reverse circulation drill rig at Rothsay EganStreet advanced its 100% owned Rothsay gold project during 2019 including a new Resource and updated Definitive Feasibility Study. In July 2019 EganStreet announced a Recommended Takeover Offer for EganStreet by Silver Lake Resources Limited that remains in progress at the date of this report. EganStreet listed on ASX in 2016 in order to complete assessments of mining and processing gold at its 100% owned Rothsay Gold project in the Southern Murchison region of Western Australia. Scoping and Pre-Feasibility studies during 2016 and 2017 led to completion of a Definitive Feasibility Study in 2018. Highlights: • Increased the Mineral Resource to 454koz at 9.2g/t, including a substantial increase to the proportion of Indicated ounces which are available for conversion to Ore Reserves. • The revised Resource enabled an update to the Definitive Feasibility Study, which incorporated a new mine design and increased mining inventory of 320koz of gold. • Regional exploration work returned a number of high- grade results, demonstrating prospectivity of the field for further high-grade gold discoveries. Key examples include intersections of 1m at 29.6g/t, 1m at 29.1g/t and 1m at 25g/t gold from the Orient Shear, which is located less than 200m west of, and parallel to, the main Woodleys Resource. • Additionally, mapping work on the exploration licenses identified historic workings on a geological structure not previously examined by EganStreet. The structure has been drilled in placed by previous tenement holders, with historic results from the drill hole database including 1m at 29.52g/t and 4m at 2.64g/t gold. The identification of the prospectivity of the Karara Shear increased the total estimated prospective strike by 4km. • On 30 July 2019, EganStreet announced a Recommended Takeover Offer for EganStreet by Silver Lake Resources Limited (Silver Lake) pursuant to which Silver Lake will acquire all of the issued and outstanding shares of EganStreet. Under the terms of the offer, EganStreet shareholders will receive 0.27 Silver Lake shares for every EganStreet share held. Lion entered into a pre-bid acceptance deed with Silver Lake with respect to all of its shares in EganStreet. Silver Lake’s offer can only be declared unconditional with minimum shareholder acceptances (including Lion) of 38%, subject to Lion’s waiver. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 17 Manager Performance Incentive (a) The Highwater Mark in respect of which an Annual Performance has been paid; or (b) The Invested Capital attributable to direct investments (ie. excluding funds) at the time the Management Agreement, compounded each month by 8% p.a, adjusted for new capital raisings and fund distributions (“Benchmark Amount”). As at the date of this report, the Benchmark Amount is the higher hurdle rate at approximately $0.79 per share. Lion entered into a Management Agreement with Lion Manager Pty Ltd (Lion Manager), under which Lion Manager provides the company with management and investment services. The arrangements were approved by shareholders at Lion’s AGM on 5 December 2012, with ongoing management fees of 1.5% p.a. based on the direct investments under management The Management Agreement provides that Lion Manager is entitled to an annual incentive which would apply where Lion’s performance outperforms a benchmark, with the ability to settle up to 40 percent of any incentive in Lion shares. As at the date of this report no incentive fee had accrued with respect to the Lion Manager contract. The performance fee is calculated as 15 percent of the amount by which the 3 month average market capitalisation of the Company attributable to direct investments exceeds a 3 month average hurdle. The hurdle is the higher of: Lion Manager Performance Incentive $m 140 120 100 80 60 40 20 0 2 1 t c O 3 1 n a J 3 1 r p A 3 1 l u J 3 1 t c O 4 1 n a J 4 1 r p A 4 1 l u J 4 1 t c O 5 1 n a J 5 1 r p A 5 1 l u J 5 1 t c O 6 1 n a J 6 1 r p A 6 1 l u J 6 1 t c O 7 1 n a J 7 1 r p A 7 1 l u J 7 1 t c O 8 1 n a J 8 1 r p A 8 1 l u J 8 1 t c O 9 1 n a J 9 1 r p A 9 1 l u J Moving Average Benchmark Market Cap (Direct Investments) Moving Average Market Cap (Direct Investments) 18 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT High grade hand specimen from the Rante domain, Awak Mas | 19 Principal Risks and Uncertainties The activities of Lion are subject to risks that can adversely impact its business and financial condition. The risks and uncertainties described below are not the only ones that Lion may face. There may be additional risks unknown to Lion and other risks, currently believed to be immaterial, which could turn out to become material. Risk Factor Nature Investment in resource companies Lion has investments in a range of resource companies whose exploration, development and mining activities are at varying stages. Lion’s investees are subject to operating risks that are inherent to mining and exploration activities, and may influence the financial performance and share price of the investees. The value of Lion’s investments in these companies, and in turn the financial performance of Lion itself, will continue to be influenced by a variety of factors including: • general investment, economic and market conditions as outlined above, which can affect the investee’s performance and share price; • exploration is a speculative endeavour which may not result in investees finding economic deposits capable of being successfully exploited; • mining operations may be affected by a variety of factors which may or may not be within the control of the investee. Whether or not income will result from exploration and development programs depends on the successful establishment of mining operations. Factors including costs, integrity of mineralisation, consistency and reliability of ore grades, metallurgical recoveries, and commodity prices affect successful project development and mining operations; • depending on the location of its exploration and/or mining activities, an investee may be subject to political and other uncertainties, including risk of civil rebellion, expropriation, nationalisation, and renegotiation or nullification of existing contracts, mining licences and permits or other agreements; • reliance on the performance of key management of Lion, investees and Lion Manager; • investees may enter into hedging transactions to fix the commodity price for a portion of production and there is a risk that the investee may not be able to deliver into these hedges if, for example, there is a production shortage at their mining operations, which could adversely affect the investee’s operating performance if the commodity price moves unfavourably; • investees that borrow money are potentially exposed to adverse interest rate movements that may affect their cost of borrowing, which in turn would impact on their earnings and increase the financial risk inherent in their businesses. In this situation there is also risk that an investee may not be able to repay its debts and may be at risk of bankruptcy; • resource nationalisation, politicial unrest, war or terrorist attacks anywhere in the world could result in a decline in economic conditions worldwide or in a particular region, which could impact adversely on the business, financial condition and financial performance of the investee; • there is a risk that investees may lose title to mining tenements if conditions attached to licences are changed or not complied with. Further, it is possible that tenements in which Lion’s investees have an interest may be subject to misappropriation or legal challenge in jurisdictions without well-established legal systems. • a form of native title reflecting the rights and entitlements of indigenous inhabitants to traditional lands may exist on investee’s tenements, such that exploration and/or mining restrictions may be imposed or claims for compensation forthcoming; and • the high initial funding requirements of emerging exploration and mining companies can result in delays in developing projects and a lack of liquidity, which may affect Lion’s ability to invest or divest. Market Movements The performance of Lion and the prices at which its shares may trade on ASX can be expected to fluctuate depending on a range of factors including movements in inflation, interest rates, exchange rates, general economic conditions and outlooks, changes in government, fiscal, monetary and regulatory policies, prices of commodities, global geo-political events and hostilities and acts of terrorism. Certain of these factors could affect the trading price of Lion’s shares, regardless of operating performance. Lion attempts to mitigate these factors by implementing appropriate safeguards and commercial actions but these factors are largely beyond Lion’s control. The underlying value of Lion’s investments in its investees also may not be fully reflected in Lion’s share price. Reliance on key personnel Pani Gold Project A number of key management and personnel is important to attaining the respective business goals of Lion. One or more of Lion’s or Lion Manager’s respective key employees could leave their employment, and this may adversely affect the ability of Lion to conduct its business and, accordingly, affect the financial performance and share price of Lion. Further, the success of Lion in part depends on the ability of Lion and Lion Manager to attract and retain additional highly qualified management and personnel. The Company is exposed to operating risks associated with holding an interest in the Pani Joint Venture including: • Increased investment portfolio exposure to Indonesian country risk. • Concentrated exposure to the inherent risks and uncertainties of the relatively early stage Pani Gold Project operations. • Elevated exposure to the various counterparties to the contractual arrangements that create the ownership interest in the Pani Gold Project that may default on their contractual obligations or act in a manner contrary to the best interests of the Company. The Company will need to contribute investment with respect to Pani Joint Venture expenditure. As the Pani Gold Project progresses towards development, it is anticipated that the Company will need to undertake an equity raising in order to meet its commitments to the Pani Joint Venture, which may ultimately lead to dilution for all shareholders. Further, there is no surety that the Company would be successful with raising sufficient funds in an equity raising, risking material dilution or loss of its interest in the Pani Joint Venture. 20 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Corporate Governance Statement As a professional investor in junior miners, Lion is particularly focussed on the corporate governance of its investee companies. Lion’s approach is based on experience through multiple resource cycles and reflects its view that in corporate governance one size does not fit all and careful consideration must be given for smaller mining companies, notably a material sub-set of ASX listed companies. Three key departures are relevant, in particular for pre-production mining companies: (1) (2) (3) The ASX guidelines provide that non-executive directors should not receive options with performance hurdles or performance rights as part of their remuneration which may lead to bias in their decision making and compromise their objectivity. Lion notes that pre-production mining companies almost always have limited cash, and issuing appropriately structured options both reduces the cash burden on the company and provides greater alignment with the interests of shareholders. Because the mineral resource/ore reserve usually has both greater value and risk than purely financial assets, a company’s internal controls and processes surrounding establishing and announcing these are one of the most material aspects for pre- production mining companies. This extends to studies that seek to establish parameters around how a mining operation might operate. This area may have been overlooked in the current ASX guidelines and consideration should be given for how mining companies approve such releases, and having geological and mining expertise at board level to understand the issues and provide formal approval. Regulatory debate in 2016 focussed on scoping study disclosure and restricting release of this information which is vital to investor comprehension and proper functioning of the ASX as a funding mechanism. Lion opposes any restriction on disclosure of feasibility work. The ASX Corporate Governance Council requires listed firms to adopt a majority of ‘independent’ board members without links to management or substantial shareholders (ie 5% or greater shareholding), or explain ‘if not, why not’. The concept is that such directors should be more dispassionate and less biased in favour of either management or significant shareholders. We note that there is limited empirical research supporting that such boards add value to a company, and in Lion’s experience this structure can be detrimental for junior mining companies. Lion concurs that it is essential that a board operates as an effective check on management, however a non-executive director with a significant shareholding is often better placed to fulfil this role, and has interests closely aligned with the general shareholder register. Junior mining companies often have many challenges to be overcome to develop their projects, and need the necessary entrepreneurial drive to achieve this. In a crisis, an ASX-defined independent director risks being disinterested, overly conservative, or may lack the fortitude to see the task through when their personal incentives are limited to on-going directors fees. LION SELECTION GROUP LIMITED 2018 ANNUAL REPORT | 21 Corporate Governance Statement Introduction The Board of Directors of Lion Selection Group Limited (Lion or the Company) is committed to high standards of corporate governance. The Company recognises that it has responsibilities to its shareholders and personnel, as well as to the communities in which it invests. As required by the ASX Listing Rules, this statement discloses the extent to which the Company follows the Corporate Governance Principles and Recommendations released in March 2014 by the ASX Corporate Governance Council (ASX Recommendations). Except where otherwise explained, the Company follows all of the ASX Recommendations. This Corporate Governance Statement has been approved by the Board of Directors of Lion Selection Group Limited. PRINCIPLE 1: Lay solid foundations for management and oversight Recommendation 1.1 A listed entity should disclose: (a) the respective roles and responsibilities of its board and management; and (b) those matters expressly reserved to the board and those delegated to management. The Board The Board of directors monitors the progress and performance of Lion on behalf of its shareholders, by whom it is elected and to whom it is accountable. The Board charter seeks to ensure that the Board discharges its responsibilities in an effective and capable manner. The Board’s primary responsibility is to satisfy the expectations and be a custodian for the interests of its shareholders. In addition, the Board seeks to fulfil its broader ethical and statutory obligations, and ensure that Lion operates in accordance with these standards. The Board is also responsible for identifying areas of risk and opportunity, and responding appropriately. Responsibility for the administration and functioning of Lion is delegated by the Board to the Chief Executive Officer and to Lion Manager Pty Ltd (the Manager), which provides investment management services to the Company. Through monitoring the performance of these parties at least annually by way of performance evaluations, the Board ensures that Lion is appropriately administered and managed. Lion’s investments are managed by the Manager. Lion’s Board reviews the Manager’s performance internally through the Manager’s reports, processes and presentations. The Board monitors the Manager’s staffing and processes. 22 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT In addition, the Board guides strategic planning and ensures it adheres to the interests and expectations of Lion’s shareholders, manages risks and opportunities, and monitors company progress, expenditure, significant business investments and transactions, key performance indicators and financial and other reporting. Management The Manager has been appointed by Lion to implement its investment strategy and manage its investments. This includes all steps of the investment selection process and the making of recommendations to the Board. A Management Agreement has been established to formalise the relationship between the Company and the Manager. The Manager, under this agreement, undertakes to act as investment manager for Lion. The Manager is at liberty to engage specialists and consultants as appropriate to assist in the investment assessment process and provides a regular flow of information to Lion’s directors. Lion’s Board retains the power to make the final investment decision on the basis of this information and advice. This retention of final investment decision allows the Board to effectively review the function and proficiency of the Manager and of the investment selection processes. Further information on performance evaluations can be found under ASX Principle 8. Recommendation 1.2 A listed entity should: (a) undertake appropriate checks before appointing a person, or putting forward to security holders a candidate for election, as a director; and (b) provide security holders with all material information in its possession relevant to a decision on whether or not to elect or re-elect a director. Lion ensures that all candidates for directorship are well known to the company. In addition, all appropriate checks and due diligence are undertaken by the Lion board prior to nominating a director for election. Information about candidates who are standing for election or re-election as a director including biographical details, qualifications, experience and other directorships is provided to shareholders to enable them to make an informed decision. Recommendation 1.3 A listed entity should have a written agreement with each director and senior executive setting out the terms of their appointment. Corporate Governance Statement The terms on which the directors and senior executives are appointed is set out in the written agreement between the Company or the Manager and the individual. This establishes the roles and responsibilities of each person, their duties and accountabilities. Recommendation 1.4 The company secretary of a listed entity should be accountable directly to the board, through the chair, on all matters to do with the proper functioning of the board. The Company Secretary is responsible for co-ordination of all Board business, including agendas, Board papers, minutes, communication with regulatory bodies and ASX and all statutory and other filings. Through the Chairman, the Company Secretary is accountable directly to the Board on all matters to do with the proper functioning of the Board. Recommendation 1.5 A listed entity should: (a) have a diversity policy which includes requirements for the board or a relevant committee of the board to set measurable objectives for achieving gender diversity and to assess annually both the objectives and the entity’s progress in achieving them; (b) disclose that policy or a summary of it; and (c) disclose as at the end of each reporting period the measurable objectives for achieving gender diversity set by the board or a relevant committee of the board in accordance with the entity’s diversity policy and its progress towards achieving them, and either: 1. the respective proportions of men and women on the board, in senior executive positions and across the whole organisation (including how the entity has defined “senior executive” for these purposes); or 2. if the entity is a “relevant employer” under the Workplace Gender Equality Act, the entity’s most recent “Gender Equality Indicators”, as defined in and published under that Act.16 While the Company does not have a gender diversity policy at present, the Company promotes a culture of equal opportunity and has the principles of equality, fairness and contribution to commercial success at all levels within the Company. Lion recognises and values the blend of skills, perspectives, styles and attitudes available to the Company through a diverse workforce. Different perspectives in the investment selection process and stronger problem- solving capabilities flow from a diverse workforce. Workplace diversity in this context includes, but is not limited to, gender, age, ethnicity and cultural background. Workplace flexibility involves developing people management strategies that accommodate differences in background, perspectives and family responsibilities of staff. Recommendation 1.6 A listed entity should: (a) have and disclose a process for periodically evaluating the performance of the board, its committees and individual directors; and (b) disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. Recommendation 1.7 A listed entity should: (a) have and disclose a process for periodically evaluating the performance of its senior executives; and (b) disclose, in relation to each reporting period, whether a performance evaluation was undertaken in the reporting period in accordance with that process. The small scale of the Board and the nature of the Company’s activities make the formal establishment of a performance evaluation strategy unnecessary. Performance evaluation is managed by the Chairman. The Chairman assesses each Board member’s performance and the performance of management (including the Chief Executive Officer), the Board as a whole and its committees on an annual basis. This process includes one-on-one and collective meetings. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 23 Corporate Governance Statement PRINCIPLE 2: Structure the board to add value Recommendation 2.1 The board of a listed entity should: (a) have a nomination committee which: 1. has at least three members, a majority of whom are independent directors; and 2. is chaired by an independent director, and disclose: 3. the charter of the committee; 4. the members of the committee; and 5. as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have a nomination committee, disclose that fact and the processes it employs to address board succession issues and to ensure that the board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively. Lion recognises that Recommendation 2.1 of the Principles and Recommendations of the ASX Corporate Governance Council suggests the establishment of a Nomination Committee and associated Charter. However, in view of the small size of Lion’s Board, the Board in its entirety, acts effectively as Nomination Committee and there is no need to further subdivide it. As such, a Nomination Committee is an unnecessary measure for Lion. The Lion Board as a whole reviews the size, structure and composition of the Board including competencies and diversity, in addition to reviewing Board succession plans and continuing development. Recommendation 2.2 A listed entity should have and disclose a board skills matrix setting out the mix of skills and diversity that the board currently has or is looking to achieve in its membership. 24 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Recommendation 2.3 A listed entity should disclose: (a) the names of the directors considered by the board to be independent directors; (b) if a director has an interest, position, association or relationship of the type described in Box 2.3 but the board is of the opinion that it does not compromise the independence of the director, the nature of the interest, position, association or relationship in question and an explanation of why the board is of that opinion; and (c) the length of service of each director. It is a policy of Lion that the Board comprises individuals with a range of knowledge, skills and experience which are appropriate to its objectives. A summary of the Lion directors’ skills and experience is set out below: Skills and Experience No. of Lion Directors Leadership and Governance Leadership Corporate Governance Strategy Operations Geology & Exploration Infrastructure Engineering Project Delivery Finance & Risk Accounting Finance Acquisitions Risk Management Mining Investment 4 4 4 1 2 2 4 2 3 4 4 4 Lion’s Constitution provides that the number of directors is to be determined by the Board shall not be less than three. As a matter of policy, the Board is comprised of a majority of independent non-executive directors. At present, the Company has four directors – three independent non- executive directors, being Barry Sullivan (who is also the Chairman), Chris Melloy and Peter Maloney, and an executive director, Robin Widdup. The relevant skills, experience and expertise of each director as well as the period of office held by each director are described in the Company’s Annual Report. Corporate Governance Statement Recommendation 2.4 A majority of the board of a listed entity should be independent directors. The independent and objective judgment of Lion’s directors is of paramount importance to the effective operation of the Board. Independence is defined for the purposes of the director as he/she being independent of any business relations, whether managerial or otherwise, with Lion or its actual or potential investments which might interfere with their ability to make sound, unfettered, objective judgments, and act in the best interest of Lion and its shareholders. The directors’ independence is regularly assessed by the Board. The majority of the Board of Lion are independent non-executive directors. The executive director, Robin Widdup, is a director of the Manager, which manages Lion’s portfolio. To avoid any conflict of interest and in keeping with the Corporations Act, Mr Widdup is not present during any deliberations concerning Lion’s relationship with the Manager, nor does he vote in relation to such matters. Nomination, Appointment and Retirement of Directors If a vacancy occurs or if it is considered that the Board would benefit from the services and skills of an additional director, the Board selects a panel of candidates with appropriate expertise and experience and, after assessment, appoints the most suitable candidate. Lion’s Constitution requires that directors appointed by the Board submit themselves for re-election at the first meeting of shareholders following their appointment. Whilst directors are not appointed for a fixed term, under the Constitution, one-third of the directors (excluding any Managing Director) must retire by rotation each year and submit themselves for re-election by shareholders. Directors’ Access to Professional Advice In the discharge of their duties, directors have the right to seek independent professional advice at the expense of the Company subject to the prior approval of the Chairman. Please see comments under ASX Principle 8 with respect to the performance evaluation of the board, its committees and individual directors. PRINCIPLE 3: Act ethically and responsibly Recommendation 2.5 Recommendation 3.1 A listed entity should: The chair of the board of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the entity. (a) have a code of conduct for its directors, senior executives and employees; and (b) disclose that code or a summary of it. To accord with good corporate governance practices and in step with our objective of diversification of Board representatives, the roles of Chairman and Chief Executive Officer have been segregated. Recommendation 2.6 A listed entity should have a program for inducting new directors and provide appropriate professional development opportunities for directors to develop and maintain the skills and knowledge needed to perform their role as directors effectively. The directors of the Board are specifically and individually selected for their diverse skills and knowledge already acquired through their education, professions, experience, positions held and ongoing exposure to industry. The Company’s code of conduct is as follows: The highest standards of corporate governance practice and ethical conduct must be upheld by all directors and employees of both the Company and the Manager. All directors and employees of the Company must, and the directors must ensure that the Manager and its employees, preserve the highest standards of integrity, accountability and honesty in their dealings, operating in strict adherence to statutory and ethical obligations. All such individuals are to be mindful and respectful of relevant policies and responsibilities, must avoid all conflicts of interest or, where a conflict is able to be managed, must speak with the Chairman about how the conflict should be managed (who will consult with the board of directors if necessary). Where there is uncertainty about whether a conflict exists, all directors and employees are encouraged to discuss the relevant circumstances with the Chairman. All concerns about a breach of this code are to be reported to the Chairman (who will in turn consult with the board). LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 25 Corporate Governance Statement The Company’s practices are to be stringently monitored by the Board, while the Board itself must adhere to the principles of its charter and uphold a high standard of independence, objectivity and openness in its dealings and relationship with shareholders and the management team. if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of securities (“inside information”) and the person knows, or ought reasonably to know that the information is inside information. The Shareholder Communications Strategy, the Securities Trading Policy, and the Continuous Disclosure Policy, which collectively form a solid ethical foundation for company practices, must be complied with at all times. Securities Trading Policy The Company’s securities trading policy is as follows: Introduction As a result of the nature of the business of Lion and the Manager, directors, officers and other employees of Lion and the Manager will be in possession of information regarding a wide range of small and medium sized exploration and mineral production companies. From time to time some of this information may be classified as “inside” information. They may also be aware of potential transactions between small and medium sized exploration companies and other companies. u The Manager has a management contract with Lion, and also has management contracts with private funds African Lion and Asian Lion. u Lion and the Manager will continue to be in the possession of information on a variety of small companies which at times may be insider information. u The Manager maintains a parallel Securities Trading Policy which applies to all employees and directors of the Manager. u Office space is shared by Lion and the Manager. 1. The Policy and Procedures are designed to prevent the possibility of any actual or perceived: • conflict of interest between the Manager and Lion; and • insider trading by the directors and employees (and related parties) of Lion. The policy extends to include investments for, or on behalf of the relevant director or employee, spouse, an associated company or trust, or any other related person, company or entity (related parties). Information is taken to be generally available if it: • consists of readily observable matter; or • has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in securities of a kind whose prices might be affected by the information and since it was so made known, a reasonable period for it to be disseminated among such persons has elapsed; or • consists of deductions, conclusions or inferences made or drawn from such information. A reasonable person is taken to expect information to have a material effect in the price or value of securities if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, buy or sell the relevant securities. What activities are prohibited under the Corporations Act? The Corporations Act prohibits an insider from “trading” or “procuring” another person to trade in relevant securities and from “tipping” another person in relation to the relevant securities, whether as principal or agent. (a) Trading means to subscribe for, purchase or sell, or enter into an agreement to subscribe for, purchase or sell any such relevant securities; (b) Procuring includes to incite, induce or encourage another person to trade in the relevant securities; and (c) Tipping means to communicate directly or indirectly inside information (or to cause the inside information to be communicated) to another person where the insider knows, or ought reasonably to know, that the other person would or would be likely to trade or procure a third person to trade in the relevant securities. 3. Supervisory Procedures To assist in the adherence to this policy, the Lion Board will: 2. Summary of the insider trading prohibitions in the Corporations Act Meaning of insider and inside information For the purposes of the insider trading provisions of the Corporations Act, a person is an “insider” if the person possesses information that is not generally available but, • ensure all directors, officers and employees of Lion are familiar with these policies and procedures; • review on a regular basis and update as necessary, these policies and procedures; • seek declarations of interests at each regular Board meeting; and 26 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Corporate Governance Statement • review the trading activity of each director and employee from time to time, including trading for or on behalf of the relevant director or employee, a family member (spouse or minors only), company or trust, or any other person, company or entity, and whether directly, or through a stockbroker or other intermediary. Each director, officer and employee of Lion will annually provide the Company Secretary with a statement that they are aware of this policy (or update), and have adhered to it for the prior 12 month period. 4. Compliance Procedures The compliance procedures are as follows: (a) Directors and employees of Lion (and their related parties) are not to invest in or otherwise trade in the securities of: • • • small and medium sized exploration and mining companies, (other than Lion); any company in which Lion, or any funds managed by the Manager, may have a material business transaction or association with or where such a transaction or association is being contemplated; any Investee Company of Lion, or any funds managed by the Manager. For the purposes of this policy: • a small and medium company is defined as one with a market capitalisation of less than A$250 million at the time of investment; • • material transaction or association means one which may be reasonably expected to have a material financial effect; Investee Company means any company in which Lion, or any funds managed by the Manager has, or is, contemplating an interest; additionally, all employees of Lion, prior to making a transaction in the resource sector, must make reasonable enquiries to ensure they are in compliance with this policy. • (b) Directors and employees of Lion must submit to the Lion Board a list of the names of resource companies with a market capitalisation below A$250 million (at time of purchase or have subsequently become) which were existing investments of that individual or a related party before the Compliance Procedures were enacted or in which the individual or related party held shares prior to becoming an employee of Lion. (c) The sale of investments which apply to 4(b) above must be approved in advance by the other Lion Directors. (d) In special circumstances: (i) following approval by the other Lion Directors, directors or employees of Lion may acquire new shares in Investee Companies (e.g. floats, rights issues and placements) but not existing shares; (ii) following approval by the other Lion Directors, directors or employees of Lion may acquire shares through rights issues or placements on a pro-rata basis, in small and medium sized exploration and mining companies (normally only if that individual has a pre existing interest); and (iii) in the case of 4(d) above, individuals can sell following approval of the other Lion Directors. If there is a Lion employee or director on the Board of the Investee Company each sale must follow the approval of that Board member. (e) (i) With respect to the purchase and sale of shares in Lion by Lion employees or directors, transactions must only be in windows (as defined below) following quarterly reports, half yearly and full yearly financial results announcements, and the Annual General Meeting provided always that the person is not in receipt of inside information. Approval for Lion employees or directors to buy or sell shares in Lion to be given by one of the Directors of Lion. For this purpose, a window is defined as commencing the day after each relevant event or announcement, and ending 20 business days after that date. (ii) With respect to the purchase and sale of shares in Lion by Lion directors or employees outside the windows defined in 4(e)(i), prior approval to be given by the Lion Board. 5. Notification Requirements All details of transactions above must be immediately submitted to the Lion Board and recorded in the register. The register is to be updated by the Lion Company Secretary. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 27 Corporate Governance Statement 6. Securities Trading Policy – Voluntary 3 Month Rule The following proposal is an addition to the existing Policy but is a voluntary section not requiring notification or record keeping with the Lion Company Secretary. 3 Month Rule • All listed investments must be held for a minimum of 3 months. Philosophy • Lion has an investment culture not a trading culture and should look to buy and hold for a medium to long term. • Individuals should not be active in non-Lion trading activities, during work time. Ethical Policies Lion’s policies on indigenous communities, the environment and social governance are as follows: Local Indigenous Communities Lion’s policy is that developments of investees are not exploitative of local and indigenous communities and must assist local communities such through symbiotic project development. Investees are to have a focus on health, education and employment of indigenous people near to investee companies’ development projects. Environment Lion’s policy is that the environmental impact of developments be in line with country/international standards and not adversely impact local communities’ geology/economy. Statement of Social Governance It is the Company’s objective to achieve sustainable economic and social benefits to the communities in which mineral activity takes place by: • recognising local realities and concerns; • promoting dialogue and participation; • building social and economic capital; and • integrating activities locally and regionally. To achieve its social governance objectives, the Company considers the following areas of activity: • Exploration/access to land and resources. • Project development and governance of mining and processing activity. • Rent (royalty, tax etc) capture and distribution. • Stewardship of water, biodiversity and energy use. • Waste management. • Social and environmental aspects of mine closure. PRINCIPLE 4: Safeguard integrity in corporate reporting Recommendation 4.1 The board of a listed entity should: (a) have an audit committee which: 1. has at least three members, all of whom are non-executive directors and a majority of whom are independent directors; and 2. is chaired by an independent director, who is not the chair of the board, and disclose: 3. the charter of the committee; 4. the relevant qualifications and experience of the members of the committee; and 5. in relation to each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have an audit committee, disclose that fact and the processes it employs that independently verify and safeguard the integrity of its corporate reporting, including the processes for the appointment and removal of the external auditor and the rotation of the audit engagement partner. The Company’s audit committee charter is as follows: Charter of the Lion Audit Committee Scope and Authority The primary function of the Lion Audit Committee is to assist the Board of directors in fulfilling their responsibilities by reviewing: • the financial information that will be provided to shareholders and the public; • the systems of internal controls that the Board and management have established; and • the Company’s auditing, accounting and financial reporting processes. In carrying out its responsibilities the Committee has full authority to investigate all matters that fall within the terms of reference of this charter. Accordingly, the Committee may: • obtain independent professional advice in the satisfaction of its duties at the cost of the Company; and • have such direct access to the resources of the Company Subsequent stages of metals trade, smelting and refining may often be beyond the influence of the Company. as it may reasonably require, including the external auditors. 28 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Corporate Governance Statement Composition • The Audit Committee shall comprise three non- executive directors. The Board will determine each director’s independence having regard to any past and present relationships which, in the opinion of the Board, could influence the director’s judgment. • The chair of the Audit Committee will be an independent non-executive director who is not chair of the Board. • All members of the Committee shall have a working knowledge of basic finance and accounting practices. At least one member of the Committee will have accounting or related financial management expertise, as determined by the Board. • A quorum will comprise any two Committee members. • The Committee may invite the external auditor and members of the management team and Board of directors to attend the meetings and to provide information as necessary. Meetings • The Committee shall meet not less than two times a year or more frequently as circumstances require. Audit Committee minutes will be approved by members of the Committee at the following meeting of the Committee and tabled as soon as practicable at a meeting of the Board. • The Company’s senior financial management and external auditors shall be available to attend all meetings. • As part of its responsibility to foster open communication, the Committee should meet separately with management and the external auditors, at least annually, to discuss any matters that are best dealt with privately. The Committee should be available to meet with the external auditor if required. Responsibilities • The Board and the external auditors are accountable to shareholders. The Audit Committee is accountable to the Board. • To fulfil its responsibilities the Committee shall: Review of Charter • Review and, if appropriate, recommend to the Board updates to this Charter at least annually. Financial Reporting • Review with management and the external auditors the financial statements and ASX releases in respect of each half year and full year financial result, and make recommendations to the Board in relation to such financial statements and ASX releases. • Review with management and the external auditors the accounting policies and practices adopted by the Company and their compliance with accounting standards, ASX listing rules and relevant legislation, and recommend to the Board any appropriate changes to the accounting policies and practices. • Discuss with management and the external auditors management’s choice of accounting principles and material judgments, including whether they are aggressive or conservative and whether they are common or minority practices and make recommendations to the Board in relation to such accounting principles and judgments as appropriate. • Recommend to the Board that the annual financial statements reviewed by the Committee be included in the Company’s annual report. Internal Financial Controls • Review any reports prepared by the external auditor including the effectiveness of the Company’s internal financial controls. • Assess management’s programs and policies which deal with the adequacy and effectiveness of internal controls over the Company’s business processes. • Approve changes to the Company’s formal accounting policies and monitor their implementation. • Review jointly with management, the external auditors and if necessary, legal counsel, any litigation, claim or other contingency, including tax assessments, which could have a material effect on the financial position or operating results of the Company. • Review and assess compliance monitoring programs in place within the Company, in relation to financial controls. External Audit • Recommend to the Board the external auditor to be proposed to shareholders. • Review with the external auditor the planned scope of their audit and subsequently their audit findings including any internal control recommendations. • Periodically consult with the external auditor out of the presence of management about the quality of the Company’s accounting principles, material judgments and any other matters that the Committee deems appropriate. • Review the performance of the external auditor. • Review and recommend the fees and other compensation to be paid to the external auditors. • Ensure that the external auditor submits a written statement outlining all of its professional relationships with the Lion Group including the provision of services that may affect their objectivity or independence. Review and discuss with the external auditors all significant relationships they have with the Company to determine their independence and its investees. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 29 Corporate Governance Statement Risk Management • Assess the adequacy of the Company’s insurance program. • Review the Company’s internal controls in relation to financial risk. Other Matters • The Committee shall also perform any other activities consistent with this Charter that the Committee or Board deems appropriate. The current members of the Audit Committee are Peter Maloney, Chris Melloy and Barry Sullivan with Peter Maloney being the chair. Details of the number of meetings of the Audit Committee held during the year and the attendees at those meetings are included in each Annual Report. Recommendation 4.2 The board of a listed entity should, before it approves the entity’s financial statements for a financial period, receive from its CEO and CFO a declaration that, in their opinion, the financial records of the entity have been properly maintained and that the financial statements comply with the appropriate accounting standards and give a true and fair view of the financial position and performance of the entity and that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. Prior to approval of any financial statement for a financial period, the Chief Executive Officer of Lion (who is also responsible for the financial reports of the company) provides to the Lion Board a declaration in accordance with Section 286 of the Corporations Act which also accords with Recommendation 4.2 Recommendation 4.3 A listed entity that has an AGM should ensure that its external auditor attends its AGM and is available to answer questions from security holders relevant to the audit. The external auditor of Lion is duly represented at the company’s Annual General Meeting and is available to answer questions from shareholders which are relevant to the audit. 30 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT PRINCIPLE 5: Make timely and balanced disclosure Recommendation 5.1 A listed entity should: (a) have a written policy for complying with its continuous disclosure obligations under the Listing Rules; and (b) disclose that policy or a summary of it. Lion’s continuous disclosure policy is as follows: Continuous Disclosure Policy Lion and the Manager are committed to continuous disclosure of material information as a means of promoting transparency and investor confidence. The practices of Lion are fully compliant with the ASX Listing Rules, including in particular those regarding continuous disclosure. Lion will immediately notify the market of any information concerning itself which is not subject to the exceptions in Rule 3.1A of the ASX Listing Rules and which a reasonable person would expect to have a material effect on the price or value of Lion’s securities. The Chief Executive Officer and the Company Secretary of Lion (together, ‘Management’), are responsible for the regular review of Lion’s affairs to ensure that any relevant information is promptly announced to the ASX. Management is well aware of its legal responsibilities regarding continuous disclosure under the ASX Listing Rules. Management ensures that the processes governing the review and release of material information ensures compliance with these obligations, and that information is released in an efficient and consistent fashion. Where there is any disagreement or ambiguity as to the release of particular information, members of management will consult the full Board. Events such as trading halts, if they occur, will be arranged by the Management. Release of material information to the ASX is conducted by Lion’s Company Secretary. Where the ASX contacts Lion, for example in the event of unusual share price fluctuations, communications are managed by the Company Secretary. The Company expects listed investee companies to adopt and adhere to the same standards of continuous disclosures. Corporate Governance Statement PRINCIPLE 6: Respect the rights of security holders Recommendation 6.1 A listed entity should provide information about itself and its governance to investors via its website. Recommendation 6.2 A listed entity should design and implement an investor relations program to facilitate effective two- way communication with investors Recommendation 6.3 A listed entity should disclose the policies and processes it has in place to facilitate and encourage participation at meetings of security holders. Recommendation 6.4 A listed entity should give security holders the option to receive communications from, and send communications to, the entity and its security registry electronically. In addition to the management and investment services the Manager provides to Lion, it also provides comprehensive investor relations services which are reviewed annually by the Lion board. Both the Lion board and the Manager are mindful of the importance of not only providing information, but also encouraging and enabling two-way communication between the Company and its shareholders. The Company’s shareholder communications strategy is as follows: Shareholder Communications Strategy Lion places great importance on the communication of accurate and timely information to its shareholders and market participants. Lion recognises that efficient and continuous contact between the Company and the interested public, and particularly with shareholders and their representatives, is an essential part of earning the trust and loyalty of shareholders, building shareholder value and allowing shareholders to make informed decisions regarding their investment in Lion. Lion encourages shareholder participation at general meetings and welcomes regular contact with its shareholders. From time to time members of the Lion Board and Manager meet with shareholders and analysts. Presentations made to those persons are published in the Investor Relations section of the Company’s website and released to the market via the ASX if they contain information that may be price sensitive and is not already publicly available. www.lionselection.com.au ASX announcements, quarterly reports, presentations, notices of meetings and explanatory material are posted to Lion’s website regularly. Other information on the site includes details of Lion’s investment portfolio, Lion’s share price, information about the Company and its governance, information from the Annual General Meeting and regular updates to investors as well as links to the share registry and other sites of interest. Share Registry Lion’s register of shareholders is maintained by Computershare Investor Services Pty Limited. Lion shareholders with internet access can view and update their holding, change their address details or elect to receive company communications by logging on to the Computershare website and accessing the Investor Centre. Alternatively, the Registrar for Lion at Computershare can be contacted by mail, phone or fax. PRINCIPLE 7: Recognise and manage risk Recommendation 7.1 The board of a listed entity should: (a) have a committee or committees to oversee risk, each of which: 1. has at least three members, a majority of whom are independent directors; and 2. is chaired by an independent director, and disclose: 3. the charter of the committee; 4. the members of the committee; and 5. as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have a risk committee or committees that satisfy (a) above, disclose that fact and the processes it employs for overseeing the entity’s risk management framework. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 31 Corporate Governance Statement Recommendation 7.2 The board or a committee of the board should: (a) review the entity’s risk management framework at least annually to satisfy itself that it continues to be sound; and (b) disclose, in relation to each reporting period, whether such a review has taken place. In view of the small size of Lion’s Board, the Board in its entirety acts, effectively, as a committee to oversee risk and there is no need to further subdivide it. Lion is a specialist investor in listed and unlisted mining and exploration companies and assets and its major business risk is the performance of these companies and assets. Risks associated with the exploration and mining industry include geological, technical, political, title and commodity pricing risks. The main areas of business risk to the Company arise from: Lion has no internal audit function. The Lion board and Audit Committee are responsible for establishing and maintaining an internal control structure. This structure is documented and periodically reviewed with the CEO. Recommendation 7.4 A listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks. The activities of Lion are subject to risks that can adversely impact its business and financial condition. Risks and uncertainties are described in the Company’s Annual Report. PRINCIPLE 8: Remunerate fairly and responsibly • failure of an investee company due to one or a number Recommendation 8.1 of the above causes; • downturn in the stock market; and • changes to the law – corporations/taxation legislation. Individual investments each have their own risks which relate to the mining industry generally. Under the guidance of the Lion board, Manager has established procedures relating to investment and divestment decisions, and management of investments with emphasis on risk assessment. The Manager reports through monthly reports and at Board meetings on Lion’s investments and related risk. The Board aims to reduce investment risk through diversifying investments geographically and avoid over dependence on a single commodity, investee company or country. In certain circumstances the Board may elect to have higher concentrations of the Company’s portfolio in a particular commodity, investee company or country if the anticipated rewards merit this approach. Recommendation 7.3 A listed entity should disclose: (a) if it has an internal audit function, how the function is structured and what role it performs; or (b) if it does not have an internal audit function, that fact and the processes it employs for evaluating and continually improving the effectiveness of its risk management and internal control processes. 32 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT The board of a listed entity should: (a) have a remuneration committee which: 1. has at least three members, a majority of whom are independent directors; and 2. is chaired by an independent director, and disclose: 3. the charter of the committee; 4. the members of the committee; and 5. as at the end of each reporting period, the number of times the committee met throughout the period and the individual attendances of the members at those meetings; or (b) if it does not have a remuneration committee, disclose that fact and the processes it employs for setting the level and composition of remuneration for directors and senior executives and ensuring that such remuneration is appropriate and not excessive. Recommendation 8.2 A listed entity should separately disclose its policies and practices regarding the remuneration of non- executive directors and the remuneration of executive directors and other senior executives. Corporate Governance Statement Recommendation 8.3 A listed entity which has an equity-based remuneration scheme should: (a) have a policy on whether participants are permitted to enter into transactions (whether through the use of derivatives or otherwise) which limit the economic risk of participating in the scheme; and (b) disclose that policy or a summary of it. Lion does not have an equity based remuneration scheme. Compensation Arrangements and Remuneration Committee Due to the small size of the Lion Board and the fact that remuneration matters are monitored by the Board in its entirety, the Board believes a separate Remuneration Committee is unnecessary and inappropriate. Neither the Executive Director nor Chief Executive Officer receives any remuneration from the Company, but are paid by the Manager, which receives fees from the Company as per the Management Agreement. Additionally, remuneration matters for the Company predominantly relate to the remuneration paid to the Manager, something which is addressed by a set formula in the Management Agreement. Lion’s Constitution stipulates that the aggregate remuneration available for division amongst the non- executive directors is determined by the shareholders in general meeting. With shareholder approval, the aggregate was increased to $200,000 per annum commencing 1 August 2011. This amount, or some part of it, is divided among the non-executive directors as determined by the Board. At present the aggregate annual remuneration paid to non-executive directors is $132,000. D&O Insurance and Indemnity The Company maintains a Directors and Officers and Company Reimbursement Insurance Policy. An indemnity agreement has been entered into between Lion and each of the directors of the Company and with the Chief Executive Officer and the Company Secretary. Under the agreement, the Company has agreed to indemnify those officers against any claim or for any expenses or costs which may arise as a result of work performed in their respective capacities to the extent permitted by law. There is no monetary limit to the extent of this indemnity. Performance Evaluation The small scale of the Board and the nature of the Company’s activities make the formal establishment of a performance evaluation strategy unnecessary. Performance evaluation is managed by the Chairman. The Chairman assesses each Board member’s performance and the performance of management (including the Chief Executive Officer), the Board as a whole and its committees on an annual basis. This process includes one-on-one and collective meetings. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 33 Director’s Report The Directors of Lion Selection Group Limited (‘Lion’ or ‘the Company’) submit their report on the operations of the Company for the financial year ended 31 July 2019. At the date of this report, Lion had 150,134,879 fully paid ordinary shares on issue and 15,720,958 options on issue with an exercise price of $0.50 per share and expiry of 12 April 2020. Directors The following persons were directors of Lion during the financial year and up to the date of this report: • Barry Sullivan Non-Executive Chairman • Peter Maloney Non-Executive Director • Chris Melloy Non-Executive Director • Robin Widdup Director Principal Activities During the financial year the principal continuing activities of the Company were investment in mining and exploration companies. Operating and Financial Review This financial report is prepared in accordance with Australian Accounting Standards and therefore includes the result of the “mark-to- market” of the Company’s investment portfolio in both the Statement of Comprehensive Income and the Statement of Financial Position. The Company’s gain before tax for the year was $23.7 million (2018: loss $11.8 million). The result for the year reflects a mark to market gain of $25.0 million with respect to investments, with key movements in the portfolio value outlined below: • An increase of $22.1 million in the valuation of Lion’s 33.3% interest in the Pani Joint Venture reflecting the value imputed by PT Merdeka Copper Gold Tbk’s (IDX: MDKA) (Merdeka) acquisition of 66.6% of the joint venture interest from Lion’s existing joint venture partner for US$55 million in November 2018. • An increase in the value of Lion’s holding in Egan Street Resources ($2.4 million) following a takeover offer for EganStreet Resources by Silverlake Resources Limited, announced on 30 July 2019 with Lion entering a Pre-Bid Acceptance Deed with Silver Lake in respect of its EganStreet shares. • An increase in the value of Lion’s investment in Nusantara Resources Limited ($1.4 million) reflecting progress towards financing its Awak Mas Gold Project including engagement with its strategic partner PT Indika Energy Tbk. • An increase in the value of Lion’s indirect holding in Toro Gold ($0.8 million) reflecting Toro Gold’s announcement that it would be acquired by Resolute Mining for US$305M (50% cash and 50% Resolute shares). At 31 July 2019 the Company held investments valued at $66.3 million (31 July 2018: $46.7 million), and cash of $2.5 million (31 July 2018: $1.5 million). Pani Joint Venture The Pani Joint Venture is advancing the Pani Gold Project with step out drilling to commence in 3Q 2019. The Pani JV has received all key permits including the Pani IUP licence containing the Pani gold Resource, a processing and refining area and an access corridor. Lion acquired its 33.3% Pani Joint Venture interest from One Asia in April 2018 having been involved with the Pani project since 2012 when Lion made its first investment into One Asia. One Asia published a Mineral Resource Estimate (MRE) of 89.5Mt at 0.82g/t for 2.37 million ounces of gold based on a 0.2g/t cut off (3 December 2014)1. Technical work on the project accelerated in December 2017 following settlement of a four-year ownership dispute. Mineralisation remains open to the south and to the west. It is noteworthy that PT J Resources Asia Pasifik Tbk (J Resources) holds the Contract of Work surrounding the Pani IUP and has publicly released a resource estimate of 2.063 million oz of contained gold2 for the project. This suggests the potential for continuity of the mineralisation across the two tenements and that the Pani project has substantial potential for a large-tonnage, low- grade disseminated gold deposit amenable to bulk mining. Dividends No dividend was declared or paid during the year (2018: Nil). Compliance with Environmental Regulations Lion has a policy that environmental impacts of developments of investees are in line with country/international standards and do not adversely impact local communities. Lion has not been notified by any investee of any environmental breach by any government or other agency, and is not aware of any such breach. Significant Changes in the State of Affairs There were no significant changes in the State of Affairs of the Company. Significant Events after Balance Date Since the end of the year, the Company has received distributions from African Lion 3 Limited (AFL3) of $6.7 million relating to AFL3’s sale of its investments in Toro Gold and Roxgold. These distributions include $1.2 million distributions receivable as at the end of the year. Other than the event above, there has not arisen in the interval between 34 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Director’s Report the end of the year and the date of this report, any item, transaction or event of a material or unusual nature which has or may significantly affect the operations of the Company, the results of those operations, or the state of affairs of the Company in future periods. market conditions, exploration, operational and political risk, tenure of tenements, liquidity and native title issues. Because of the vagaries of the mining and exploration industry and the long term nature of most of Lion’s investments, the directors are unable to predict future results. Proceedings on Behalf of the Company No proceedings have been brought or intervened in or on behalf of the Company with leave of the court under section 237 of the Corporations Act 2001. Likely Developments and Future Results The Company’s future operating results will depend on the results of its investments. The Company’s ability to sustain profits is dependent on future sales of investments which in turn are dependent on market opportunities and the performance of the Company’s various investments, which are difficult to predict. There are a wide variety of risks associated with the mining and exploration industry including Corporate Governance Statement In recognising the need for the highest standards of corporate behaviour and accountability, the directors of Lion support the applicable principles of good corporate governance. The Company’s corporate governance statement can be found in the Investor section of our website www.lionselection.com.au. Employees At 31 July 2019 there was 1 full time equivalent employee of the Company (2018: 1 FTE). Remuneration Report All disclosures in this remuneration report have been audited. This remuneration report outlines the director and executive remuneration arrangements of the Company as required by section 308 (3C) of the Corporations Act 2001. For the purposes of this report, key management personnel of the Company are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company, directly or indirectly, including any director, and includes the executive employed by the Company considered to meet the definition of key management personnel. Key Management Personnel Remuneration Framework Emoluments of individual Board members and other key management personnel are determined on the basis of market conditions and the level of responsibility associated with their position. The emoluments are not specifically related to company performance and there are no long- term or short-term performance- related incentives provided to key management personnel. Remuneration and other terms of employment for key management personnel are formalised in either service agreements or employment contracts. 1. Refer to One Asia Resources Limited news release 3 December 2014 (https://www.lionselection.com.au/wp-content/uploads/2018/08/PANI%20JORC%20RESOURCE.pdf) Pani Joint Venture (IUP) Classification Tonnes (Mt) Cut off grade Au Grade (g/t) 0.2 g/t Au (Million Oz) Measured Indicated Inferred Total 10.8 62.5 16.2 89.5 1.13 0.81 0.67 0.82 0.39 1.63 0.35 2.37 2. J Resources Reserve and Resources Statement 31 December 2017. http://www.jresources.com/assets/uploads/home/JRAP_-_2017_-_RR_table_@_20171231_(Sanjaya).pdf J Resources Group (CoW) Resource Classification Tonnes (Mt) Cut off grade Au Grade (g/t) 0.4 g/t Metal Koz Au Measured Indicated Inferred Total MRE 13.8 38.7 14.1 66.6 0.95 0.91 1.12 0.96 423 1,136 504 2,063 LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 35 Voting and Comments at the Company’s 2018 Annual General Meeting The Company received more than 98% of ‘yes’ votes on its Remuneration Report for the previous financial year. The Company did not receive any specific feedback at the Company’s 2018 Annual General Meeting on its remuneration practices. Details of Remuneration Details of remuneration paid/ payable to directors and the other key management personnel of the Company are detailed in the table below. The benefits provided to Key Management Personnel are fixed with no at-risk components of remuneration. Director’s Report The remuneration policy in relation to directors is determined by the full Board. Remuneration of other key management personnel is determined by the directors of the Company. Directors’ fees are determined within an aggregate directors’ fee pool limit, which is periodically recommended for approval by shareholders. As approved by shareholders at the Annual General Meeting held on 1 December 2011, the maximum aggregate amount, including superannuation contribution, that may be paid to directors of the Company as remuneration for their services is $200,000 for any financial year. Other key management personnel receive a base salary and superannuation contributions in accordance with Australian superannuation guarantee legislation. Lion’s only contracted executive, Ms Jane Rose, is employed under an employment contract with no fixed duration. The contractual notice period under this agreement is 3 months with no termination benefit specified in the agreement. The other Key Management Personnel are not subject to any notice period or termination benefit with respect to their positions with the Company. The remuneration policy of the Company with respect to directors and other key management personnel provides for Director’s & Officer’s (D&O) Insurance cover, but does not provide options, shares, loans or any other non-monetary benefits. 36 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Director’s Report KEY MANAGEMENT PERSONNEL OF THE COMPANY – REMUNERATION FOR YEAR TO 31 JULY 2019 SHORT TERM BENEFITS SALARIES/ FEES CASH BONUS TERMINATION BENEFITS POST- EMPLOYMENT SUPERANNUATION TOTAL NOTES $ Other Key Management Personnel 2019 NAME Directors B J K Sullivan P J Maloney C Melloy R A Widdup C K Smyth J M Rose Total 2018 NAME Directors B J K Sullivan P J Maloney C Melloy R A Widdup Other Key Management Personnel C K Smyth J M Rose Total (a) (a) (a) (a) 47,475 15,000 15,000 - - 86,055 163,530 47,440 15,000 15,000 - - 86,055 163,495 $ - - - - - - - $ - - - - - - - $ $ 4,525 25,000 25,000 - - 52,000 40,000 40,000 - - 8,175 62,700 94,230 226,230 $ - - - - - - - $ - - - - - - - $ $ 4,525 25,000 25,000 - - 51,965 40,000 40,000 - - 8,175 62,700 94,230 226,195 SHORT TERM BENEFITS SALARIES/ FEES CASH BONUS TERMINATION BENEFITS POST- EMPLOYMENT SUPERANNUATION TOTAL NOTES $ (a) R A Widdup and C K Smyth are employed by Lion Manager Pty Ltd, and do not receive any remuneration from the Company Both Mr R A Widdup and Mr C K Smyth are executive directors and beneficial owners of Lion Manager Pty Ltd and have the capacity to significantly influence decision making of that company. Lion Manager provides management and investment services to Lion. These arrangements were approved by shareholders at Lion’s AGM on 5 December 2012, with ongoing management fees of 1.5% p.a. based on the direct investments under management, currently equating to $645,000 per annum plus GST. There is an incentive applicable which would apply where Lion’s performance outperforms a benchmark. In addition, up to a 12 month termination fee may be applicable should Lion seek to terminate the management agreement. Further details of the Management Agreement are set out in the Notice of Meeting for the 2012 AGM, available on Lion’s website. As at the date of this report no incentive fee had accrued with respect to the Lion Manager contract. In addition, from 1 August 2013 Lion has requested Lion Manager provide comprehensive Investor Relations services associated with Lion’s ASX listing for $12,500+ GST per month for twelve months. These arrangements are reviewed annually and may be terminated without fee. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 37 Director’s Report KEY MANAGEMENT PERSONNEL SHAREHOLDINGS At the date of this report the direct and indirect interests of the directors and other key management personnel in the ordinary shares and options of Lion are detailed below. No shares or options were issued as remuneration. SHAREHOLDINGS OF KEY MANAGEMENT PERSONNEL OF THE COMPANY NAME Directors P J Maloney C Melloy R A Widdup B J Sullivan Other Key Management Personnel C K Smyth J M Rose Total NAME Directors P J Maloney C P Melloy R A Widdup B J Sullivan Other Key Management Personnel C K Smyth J M Rose Total BALANCE 1 AUGUST 2018 SHARES ISSUED AS REMUNERATION NET CHANGE OTHER CLOSING BALANCE 31 JULY 2019 1,940,389 5,561,827 14,724,732 813,074 1,286,152 - 24,326,174 - - - - - - - 250,000 156,250 2,190,389 5,718,077 1,442,545 16,167,277 - 813,074 124,985 1,411,137 - - 1,973,780 26,299,954 BALANCE 1 AUGUST 2017 SHARES ISSUED AS REMUNERATION NET CHANGE OTHER CLOSING BALANCE 31 JULY 2018 1,740,389 4,861,824 15,520,428* 727,358 416,743 - 23,266,742 - - - - - - - 200,000 700,003 1,940,389 5,561,827 (795,696)* 14,724,732 85,716 813,074 869,409 1,286,152 - - 1,059,432 24,326,174 * Mr Widdup’s shareholding as at 1 August 2017 reflected his relevant interest in the Company including 3,822,351 Lion shares issued to Lion Manager on 27 July 2017 in exchange for US$1,298,644 (A$1,720,058) payable by Asian Lion Limited to Lion Manager. Lion Manager has distributed these shares to its ultimate owners with Mr Widdup’s entitlement being determined as 1,256,742 shares. In addition, Mr Widdup purchased a further 1,418,052 shares via the Share Purchase Plan and Share Placement completed in October 2017 and received 351,861 shares by way of in-specie distribution from Lion Manager Pty Ltd conducted on 31 July 2018. 38 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Director’s Report KEY MANAGEMENT PERSONNEL SHAREHOLDINGS – OPTIONS ON ISSUE NAME Director P J Maloney C Melloy R A Widdup B J Sullivan Other Key Management Personnel C K Smyth J M Rose Total NAME Director P J Maloney C Melloy R A Widdup B J Sullivan Other Key Management Personnel C K Smyth J M Rose Total BALANCE 1 AUGUST 2018 OPTIONS ISSUED AS REMUNERATION EXPIRED CLOSING BALANCE 31 JULY 2019 - - 234,572 - 117,251 - 351,823 - - - - - - - - - - - - - - - - 234,572 - 117,251 - 351,823 BALANCE 1 AUGUST 2017 OPTIONS ISSUED AS REMUNERATION EXPIRED CLOSING BALANCE 31 JULY 2018 - - - - - - - - - - - - - - - - - - 234,572# 234,572# - - 117,251# 117,251# - - 351,823 351,823 # Mr Widdup and Mr Smyth received options by way of in-specie distribution from Lion Manager Pty Ltd. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 39 Director’s Report Information on Directors Barry Sullivan BSc (Min), ARSM, FAusIMM, MAICD Chairman Barry Sullivan is an experienced and successful mining engineer with a career spanning 40 years in the mining industry. His initial mining experience was gained in the South African gold mining industry, followed by more than 20 years with Mount Isa Mines. In the final five years of his tenure with MIM, Barry was Executive General Manager responsible for the extensive Mount Isa and Hilton operations. Barry was previously a non-executive Director and Chairman of Exco Resources and a non-executive Director of Catalpa Resources, Sedimentary Holdings, Bass Metals and Allegiance Mining. He was also a non-executive director of Lion’s predecessor company, Lion Selection Limited. Barry has been a non-executive director of Lion since December 2011, becoming Chairman from 25 February 2016. Barry is also Non-Executive Chairman for EganStreet Resources. Peter Maloney BComm, MBA (Roch) Non-Executive Director Peter Maloney has broad commercial, financial and management expertise and experience. He has been Chief Financial Officer of Lion and an executive director of Lion Manager. Prior to that he held senior executive positions with WMC Resources and a number of other companies. Peter holds a Bachelor of Commerce from the University of Melbourne and an MBA from University of Rochester. He has also completed the Advanced Management Program at Harvard Business School. Peter has been a non-executive director of Lion since December 2010, including serving as Chairman between 1 January 2012 and 24 February 2016. Chris Melloy BE (Mining) (Hons), MEngSc, MAusIMM, F Fin Non-Executive Director Chris Melloy is a mining engineer with some 40 years’ experience in the mining industry in operations, securities analysis and investment. He held senior positions in MIM and JB Were & Son prior to joining Lion. Chris was an Executive Director of Lion Manager from its inception in 1997 through to 2011, becoming a non-executive director of Lion on 1 November 2012. Robin Widdup BSc (Hons), MAusIMM Director Robin has over 39 years of industry experience. He graduated from Leeds University in 1975 with an Honours Degree in Geology. From 1986 to 1997 Robin worked as an Analyst and Manager for J B Were & Sons – Resource Research team. Robin founded Lion Selection Group and Lion Manager in 1997. Robin is Managing Director of Lion Manager Pty Ltd and a non-executive director of Lion investees Nusantara Resources, One Asia and Asian Mineral Resources Ltd. Other Key Management Personnel Craig Smyth BCA (Acctg), M App Fin, CA Chief Executive Officer Craig Smyth graduated from the Victoria University of Wellington with a Bachelor of Commerce and Administration, and has completed his Master of Applied Finance at the University of Melbourne. Craig’s financial background includes Coopers & Lybrand, Credit Suisse First Boston (London) and ANZ Investment Bank. He is currently the CEO of Lion and Executive Director of Lion Manager Pty Limited. Craig is a member of the Institute of Chartered Accountants of Australia and New Zealand. Craig is a director of PT Pani Bersama Jaya with respect to Lion’s investment in the Pani Joint Venture. Jane Rose Investor Relations Manager & Company Secretary Jane Rose commenced work in 1983 as a legal administrative assistant. During the following 12 years, Jane held senior administrative positions with Phillips Fox and Corrs Chambers Westgarth in Melbourne and Nabarro Nathanson in London. On returning to Australia, Jane worked as Executive Assistant to the Managing Director of Acacia Resources Limited and AngloGold Ashanti Limited where she was also responsible for the management of various corporate initiatives, including marketing and co-ordination of investor relations activities. From 2002 to 2006, Jane worked for several Lion investees, including MPI Mines Ltd, Leviathan Resources and Indophil Resources. Jane worked with Lion in early 2007 to assist with the merger, and she subsequently joined the company in July 2007 as Corporate Relations Manager. In November 2008 Jane was appointed Company Secretary. 40 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Director’s Report Directors’ Meetings During the year and up until the date of this report, the Company held nine directors’ meetings. The table below reflects attendances of the directors at meetings of Lion’s Board. BOARD OF DIRECTORS ATTENDED MAX. POSSIBLE ATTENDED P J Maloney R A Widdup B J K Sullivan C P Melloy 8 9 7 9 9 9 7 9 Audit Committee Meeting During the year and up until the date of this report, the Company held two audit committee meetings. The table below reflects attendances of the audit committee meeting. AUDIT COMMITTEE ATTENDED MAX. POSSIBLE ATTENDED P J Maloney B J K Sullivan C P Melloy 2 2 2 2 2 2 Directors’ Benefits Since the end of the preceding financial year, no director has received or become entitled to receive a benefit, other than benefits disclosed in this report as emoluments or the fixed salary of a full time employee of the Company or a related body corporate, by reason of a contract made by the Company or related body corporate with the director or with a firm of which he is a member, or with an entity in which he has a substantial financial interest. Rounding of Amounts The Company is of a kind referred to in ASIC Instrument 2016/191 relating to the ‘rounding off’ of amounts in the financial report and Directors’ report. Amounts in the financial report and Directors’ report have been rounded off in accordance with that Instrument to the nearest thousand dollars unless specifically stated to be otherwise. This report has been made in accordance with a resolution of the directors. B J K Sullivan Chairman R A Widdup Director Melbourne Indemnification of Directors, Officers and Auditors An indemnity agreement has been entered into between Lion and each of the Company’s directors named earlier in this report and with the Company Secretary. Under the agreement, the Company has agreed to indemnify those officers against any claim or for any expenses or costs which may arise as a result of work performed in their respective capacities to the extent permitted by law. There is no monetary limit to the extent of this indemnity. Lion has paid an insurance premium of $51,749 in respect of a contract insuring each of the directors, previous directors of the Company, and other key management personnel, against all liabilities and expenses arising as a result of work performed in their respective capacities, to the extent permitted by law. Auditor Independence We have obtained an independence declaration from our auditors, PricewaterhouseCoopers, as required under section 307 of the Corporations Act 2001. A copy can be found on page 42. Non-Audit Services No fees for non-audit services were paid/payable to the external auditors during the year ended 31 July 2019. The directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 41 Auditor’s Independence Declaration As lead auditor for the audit of Lion Selection Group Limited for the year ended 31 July 2019, I declare that 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. Anthony Hodge Partner PricewaterhouseCoopers Melbourne 5 September 2019 PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 42 | LION SELECTION GROUP LIMITED 2017 ANNUAL REPORT Lion Selection Group Limited Directors’ Declaration In accordance with a resolution of the directors of Lion Selection Group Limited, we declare that: 1. In the opinion of the directors: (a) the financial statements, notes set out on pages 44 to 65 are in accordance with the Corporations Act 2001 and other mandatory reporting requirements, including: (i) (ii) complying with the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and giving a true and fair view of the financial position of the Company’s position as at 31 July 2019 and its performance for the year ended on that date; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. 3. 4. Note 2(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. This declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the financial year ended 31 July 2019. The directors have been given the declaration by the chief executive officer required by section 295A of the Corporations Act 2001. On behalf of the Board B J K Sullivan Chairman Melbourne Date: 5 September 2019 R A Widdup Director LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 43 Statement of Comprehensive Income for the Year ended 31 July 2019 NOTES 2019 $’000 2018 $’000 Gain/(loss) attributable to movement in fair value Interest Income Other Income Exchange Gain/ (loss) Management fees Employee benefits Other expenses Profit/(Loss) before income tax Income tax (expense)/benefit Net Profit/(Loss) after tax Other Comprehensive Income Total Comprehensive Income/(Loss) for the year Attributable to: Non-controlling interest Members Basic earnings/(loss) per share Diluted earnings/(loss) per share 4 4 5 24,951 (10,382) 7 10 53 (802) (225) (343) 96 90 - (804) (223) (576) 23,651 (11,799) - - 23,651 (11,799) - - 23,651 (11,799) - - 23,651 (11,799) Cents per share Cents per share 15.8 15.8 (9.0) (9.0) The above statement of comprehensive income should be read in conjunction with the accompanying notes. 44 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Financial Statements Statement of Financial Position as at 31 July 2019 Current Assets Cash and cash equivalents Trade and other Receivables Total Current Assets Non-Current Assets Financial Assets Property Plant & Equipment Total Non-Current Assets Total Assets Current Liabilities Trade and Other Payables Total Current Liabilities Non-Current Liabilities Total Non-Current Liabilities Total Liabilities Net Assets Equity Contributed equity Reserves (Accumulated losses) Total Equity NOTES 13 6 7 8 9 11 12 10 2019 $’000 2,467 1,214 3,681 66,336 21 66,357 70,038 72 72 - 72 2018 $’000 1,512 9 1,521 46,672 27 46,699 48,220 1,905 1,905 - 1,905 69,966 46,315 126,211 1,341 (57,586) 69,966 126,211 1,341 (81,237) 46,315 The above statement of financial position should be read in conjunction with the accompanying notes. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 45 Financial Statements Statement of Cash Flows for the Year ended 31 July 2019 NOTES Cash flows from operating activities Interest received Other income received Payments to suppliers and employees (including GST) Net operating cash flows 13(b) Cash flows from investing activities Payments for investments Payments for property, plant and equipment Proceeds from investments Net investing cash flows Cash flows from financing activities Proceeds from issue of shares Payments for cost of share issue Net financing cash flows Net increase/(decrease) in cash and cash equivalents held Exchange rate variations on foreign cash Cash and cash equivalents at beginning of financial period Cash and cash equivalents at end of financial period 2019 $’000 7 - (1,374) (1,367) 2018 $’000 97 90 (1,584) (1,397) (4,185) (6,771) - 6,456 2,271 - - - 904 51 1,512 2,467 (2) 650 (6,123) 5,529 (21) 5,508 (2,011) - 3,523 1,512 The above statement of cash flows should be read in conjunction with the accompanying notes 46 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Financial Statements 15,015 (4,461) 5,529 (21) 16,062 46,315 46,315 23,651 - Statement of Changes in Equity for the Year ended 31 July 2019 Balance at 31 July 2017 Total comprehensive income/(loss) Transactions with owners in their capacity as owners Issue of new securities – Pani acquisition Buyback and cancellation of securities – Pani acquisition Issue of new shares – placement/SPP Expenses of issue of new shares Balance at 31 July 2018 ISSUED CAPITAL $’000 111,490 - 13,228 (4,015) 5,529 (21) 14,721 126,211 RESERVES $’000 ACCUMULATED LOSSES $’000 TOTAL $’000 (69,438) (11,799) 42,052 (11,799) - - 1,787 (446) - - 1,341 1,341 - - - - - (81,237) Balance at 31 July 2018 126,211 1,341 (81,237) Total comprehensive income/(loss) Transactions with owners in their capacity as owners - - - - 23,651 - Balance at 31 July 2019 126,211 1,341 (57,586) 69,966 The above statement of changes in equity should be read in conjunction with the accompanying notes LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 47 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 NOTE 1. CORPORATE INFORMATION The financial report of Lion Selection Group Limited (‘Lion’ or ‘the Company’) for the year ended 31 July 2019 was authorised for issue in accordance with a resolution of the directors on 5 September 2019. The directors have the power to amend and reissue the financial report. Lion is a company limited by shares incorporated in Australia. The nature of the operations and principal activities of the Company are described in the Directors’ Report. The registered address of Lion is Level 2, 175 Flinders Lane, Melbourne. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Comparative information is reclassified where appropriate to enhance comparability. (a) Basis of Preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. Lion is a for-profit entity for the purpose of preparing the financial statements. The financial report complies with Australian Accounting Standards. The financial report also complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The financial report has been prepared on a historical cost basis, except for certain financial assets and financial liabilities that have been measured at fair value. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated under the option available to Lion under ASIC Instrument 2016/191. Lion is an entity to which the class order applies. Lion meets the qualifying criteria under AASB 10 of an ‘investment entity’, and entities controlled by Lion (Asian Lion Limited and Lion Selection Asia Limited) do not provide investment related services to the Company. Accordingly, the Company has applied the exemption from consolidating these entities and continues to carry these investments at fair value. (b) New accounting standards and interpretations New Standards A number of new or amended standards have been applied from 1 August 2018, in particular AASB 9 Financial Instruments and AASB 15 Revenue from Contracts with Customers. There was no impact to accounting for the Company’s investments from AASB 9 as investments continue to be measured at fair value through profit and loss. AASB 15 did not have a material impact on the Company’s financial statements as the Company does not have any arrangements within the scope of the standard. Accounting standards issued but not yet effective The Company is required to adopt AASB 16 Leases from 1 August 2019. As at the reporting date, the Company has nil non-cancellable operating leases commitments, see note 15. As a result, the Company does not currently expect any impact on adoption of the new standard. AASB Interpretation 23 Uncertainty over Income Tax Treatments is applicable for annual reporting periods beginning on or after 1 January 2019. This interpretation clarifies how to apply recognition and measurement requirements when there is uncertainty over income tax treatments. Given the nature of the Company’s income tax matters, it is not expected to have a material impact on amounts recognised in the financial statements of future periods. There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. (c) Significant accounting estimates and assumptions The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have an impact on the carrying amounts of certain assets and liabilities are: 48 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 (i) Fair value of investments and other financial assets The Company carries its investments at fair value with changes in the fair values recognised in profit or loss. The fair value of investments and other financial assets that are not traded in an active market is determined based on either the last sale price, or where not available, the market value of underlying investments. Determination of market value involves the Company’s judgment to select a variety of methods and in making assumptions that are mainly based on market conditions existing at each balance sheet date. The key assumptions used in this determination are set out in note 2(j). (ii) Income taxes Lion is subject to income taxes in Australia. Judgment is required in determining the provision for income taxes and deferred taxes. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. Lion recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax provisions in the period in which such determination is made. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that sufficient future taxable amounts will be available to utilise those temporary differences and losses. This involves judgment regarding the future financial performance and is therefore inherently uncertain. To the extent assumptions regarding future profitability change, there can be an increase or decrease in the level of deferred tax assets recognised which can result in a charge or credit in the period in which the change occurs. (d) Other Income Other income is recognised to the extent that it is probable that the economic benefits will flow to Lion and the other income can be reliably measured. The following specific recognition criteria must also be met before other income is recognised: (i) Interest Income is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the fair value of the financial asset. (ii) Dividends Dividend income is recognised when the shareholders’ right to receive the payment is established. (e) Cash and cash equivalents For cash flow statement purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less or that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet. (f) Trade and other receivables Trade receivables are generally due for settlement within 30 days and therefore are all classified as current. Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less loss allowance. The Company applies the AASB 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. The Company recognises a provision based on historical default rates, debtor analysis and the Company’s monitoring of credit risk. Trade and other receivables are written off when there is no reasonable expectation of recovery. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 49 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 (g) Foreign currency translation Both the functional and presentation currency of Lion is Australian dollars (AUD). Transactions and Balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss and translation differences on non-monetary assets such as equities classified as available-for- sale financial assets are included in the fair value reserve in equity. (h) Income tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences except: • when the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or • when the taxable temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, and the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilised, except: • when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or • when the deductible temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. 50 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 (h) Income tax (continued) Income taxes relating to items recognised directly in equity are recognised in equity as part of Other Comprehensive Income. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. (i) Other taxes Revenues, expenses and assets are recognised net of the amount of GST except: • when 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, which are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Cash flows are included in the Cash Flow Statement on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority, are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (j) Investments, Other Financial Assets and Investments in Associates From 1 August 2018, the Company classifies its financial assets into the following categories: • • those to be measured subsequently at fair value (either through OCI or through profit or loss), and those to be held at amortised cost. The classification depends on the business model for managing the financial assets and the contractual terms of the cash flows. Lion is a venture capital organisation, and designates its investments as being fair value through profit or loss. The scope of AASB 128 Investments in Associates allows the Company to elect to measure that investment at fair value through profit or loss in accordance with AASB 9. After initial recognition, investments are measured at fair value, with gains or losses on fair value of investments being recognised in the Statement of Comprehensive Income. The fair value of assets is re-measured at each reporting date. This recognition is more relevant to shareholders and consistent with internal investment evaluation. The fair value of financial assets traded in active markets is based on their quoted market prices at the end of the reporting period without any deduction for estimated future selling costs. The quoted market price used for financial assets held by the Company is the current bid price. The fair value of financial assets that are not traded in an active market are determined using valuation techniques. The Company uses a variety of methods and makes assumptions that are based on market conditions existing at each reporting date. Valuation techniques used include the use of comparable recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants making the maximum use of market inputs and relying as little as possible on entity-specific inputs. All regular purchases and sales of financial assets are recognised on the trade date i.e. the date that the Company commits to purchase the asset. Regular purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the marketplace. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 51 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 (j) Investments, Other Financial Assets and Investments in Associates (continued) Accounting policies applied until 31 July 2018 The Company has applied AASB 9 retrospectively. As a result, the comparative information provided continues to be accounted for in accordance with the Company’s previous accounting policy. Until 31 July 2018, the company classified its financial assets as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale investments, as appropriate. The measurement at initial recognition did not change on adoption of AASB 9 as financial assets continue to be measured subsequently at fair value through profit or loss. Investments in controlled entities During the period the Company held a 100% ownership interest in Asian Lion Limited and Lion Selection Asia Limited and controls these companies. Lion is an investment entity for the purposes of AASB 10 Consolidated Financial Statements, AASB 127 Separate Financial Statements, and AASB 2013-5 Amendments to Australian Accounting Standards – Investment Entities. AASB 2013-5 Amendments to Australian Accounting Standards – Investment Entities is effective for annual periods beginning on or after 1 August 2014, exempting ‘Investment entities’ from consolidating controlled investees. Investment entities are entities that: (a) obtain funds from one or more investors for the purpose of providing those investors with investment management services; (b) commit to their investor(s) that their business purpose is to invest funds solely for returns from capital appreciation, investment income or both, and (c) measure and evaluate the performance of substantially all of their investments on a fair value basis. (k) Derecognition of financial assets and financial liabilities (i) Financial assets (l) (m) Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Company has transferred substantially all the risks and rewards of ownership. (ii) Financial liabilities A financial liability is de-recognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss. Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying value exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal 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 (cash generating units). Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the Statement of Comprehensive Income over the period of the borrowings using the effective interest method. Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss as other income or finance costs. Borrowings are classified as current liabilities unless Lion has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. 52 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 (n) (o) Payables Payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. Payables represent liabilities for goods and services provided to the Company prior to the end of the financial year that are unpaid and arise when the Company becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition. Provisions Provisions are recognised when Lion has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When Lion expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the Statement of Comprehensive Income net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pretax rate that reflects the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as an interest expense. (p) Employee leave benefits – Wages, salaries, annual leave and long service leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave that are expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. The liability for long service leave for which Lion has an unconditional right to defer settlement for at least 12 months after the balance sheet date is recognised in the provision for employee benefits and 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 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 corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. (q) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. If the entity reacquires its own equity instruments, for example, as a result of a share buy-back, those instruments are deducted from equity and the associated shares are cancelled. No gain or loss is recognised in the profit or loss and the consideration paid including any directly attributable incremental costs (net of income taxes) is recognised directly in equity. (r) Earnings per share Basic earnings per share is calculated as net profit, adjusted to exclude any costs of servicing equity (other than dividends) and preference share dividends, divided by the weighted average number of ordinary shares. Diluted earnings per share is calculated as net profit, 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 dilution of potential ordinary shares, divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 53 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 (s) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the segments, has been identified as the Board. Investments have similar characteristics and so segments are determined on a geographical basis. The company invests only in small and medium mining and exploration companies with gold and base metal activities in Australia, Africa, Asia and the Americas. NOTE 3. FINANCIAL RISK MANAGEMENT Lion’s activities expose it to a variety of financial risks: market risk (including foreign currency risk, interest rate risk and price risk), credit risk and liquidity risk. Lion’s overall risk management program is carried out under policies approved by the Board of Directors, and focuses on the unpredictability of the financial markets and seeks to minimise potential adverse effects on the financial performance of the Company. The Board provides written principles for overall risk management, as well as policies covering specific areas. The Board reviews and agrees policies for managing each of these risks and they are summarised below. Lion also monitors the market price risk arising from all financial instruments. Lion holds the following financial instruments: Financial assets Cash Investments in securities Trade and other receivables Financial liabilities Trade and other creditors (a) Market risk (i) Foreign Currency Risk 2019 $’000 2,467 66,336 1,214 70,017 72 72 2018 $’000 1,512 46,672 9 46,376 1,905 1,905 Lion operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the United States dollar (USD), including with respect to commitments. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the entity’s functional currency. The Company has a US dollar denominated cash account to meet future US dollar denominated obligations, and the trade and other receivables balance is expected to be received in US dollars. To mitigate the Company’s exposure to foreign exchange risk, non-AUD cash flows are closely monitored. Based on the US dollar cash account at the end of the period, if the value of US dollar/AUD exchange rate had increased by 10%/decreased by 10% with all other variables held constant, the Company’s post-tax profit for the year would have been $232,000 higher/lower as a result of foreign exchange gains/losses. The Company’s 2018 post-tax profit is not sensitive to movements in the AUD/USD exchange rate due to limited USD denominated asset holdings. (ii) Price risk Lion is exposed to equity securities price risk, with many of the Company’s equity investments being publicly traded. This arises from investments held by Lion and classified on the balance sheet as fair value through profit or loss. To manage its price risk, including exposure to changes in commodity prices arising from investments in equity securities, the Company diversifies its portfolio. Diversification by way of different commodities and locations of the portfolio is done in accordance with the limits set by the Company, however from time to 54 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 NOTE 3. FINANCIAL RISK MANAGEMENT (continued) time the Company may seek to increase exposure to particular investments. Lion does not hedge its equities securities price risk. Based on the financial instruments held at the end of the period, if the value of equity securities had increased by 10%/decreased by 10% with all other variables held constant, the Company’s post-tax profit for the year would have been $6,634,000 higher/lower (2018: $4,485,500 higher/lower) as a result of gains/losses on equity securities classified as fair value through profit or loss. (iii) Interest Rate Risk Exposures Lion is exposed to interest rate risk through its primary financial assets. The interest rate risk exposures together with the effective interest rate for each class of financial assets and financial liabilities at balance date are summarised below. Most assets and liabilities are current, maturing within one year, with the exception of investments in securities, the value of which will be realised at the discretion of the Company. No decision has been made regarding the timing of this realisation. FLOATING INTEREST RATE $’000 FIXED INTEREST RATE $’000 NON INTEREST BEARING $’000 TOTAL $’000 AVERAGE INTEREST RATE FLOATING % FIXED % 376 2,091 - - - 1,512 - - - - - - - - - - - - - 1,214 66,336 376 2,091 1,214 66,336 72 72 2.0 - - - - - 9 1,512 2.0 9 46,672 46,672 1,905 1,905 - - - - - - - - - - - - 2019 Financial assets Cash – AUD Cash – USD Bank bills and deposits receivable Investment in securities Financial Liabilities: Trade and other creditors 2018 Financial assets Cash – AUD Bank bills and deposits receivable Investment in securities Financial Liabilities: Trade and other creditors (b) Credit risk Lion is exposed to credit risk. Credit risk arises from cash and cash equivalents and deposits with banks as well as credit exposures to counter parties, including outstanding receivables and committed transactions. Lion has a policy of maintaining its cash and cash equivalents with the ‘top 4’ Australian Banks. For other counter parties, if there is no independent rating, management assesses the credit quality of the party, taking into account its financial position, past experience and other factors. The maximum exposure to credit risk approximates the carrying values as disclosed above. Based on historical default rates, debtor analysis and the Group’s monitoring of credit risk, no impairment allowance is considered necessary in respect of trade receivables not past due. Previous accounting policy for impairment of trade receivables. In the prior year, an allowance for bad debts was made when there was objective evidence that the Company will not be able to collect the debts. Bad debts were written off when identified. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 55 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 NOTE 3. FINANCIAL RISK MANAGEMENT (continued) (c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities and the ability to close out market positions. Lion manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. (d) Fair value measurements The Company carries its investments at fair value with changes in value recognised in profit or loss. AASB 13 Fair Value Measurement requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) quoted priced (unadjusted) in active markets for identical assets or liabilities (level 1); (b) inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). The fair value of financial instruments traded in active markets (such as publicly traded securities) is based on quoted market prices at the reporting date. Recognised fair value measurements The following tables present the Company’s assets and liabilities measured and recognised at fair value for the periods ended 31 July 2019 and 31 July 2018. At 31 July 2019 Assets Financial assets at fair value through profit or loss Investments Total Assets At 31 July 2018 Assets LEVEL 1 $’000 LEVEL 2 $’000 LEVEL 3 $’000 TOTAL $’000 21,081 21,081 6,334 6,334 38,921 38,921 66,336 66,336 Financial assets at fair value through profit or loss Investments Total Assets 18,623 18,623 11,185 11,185 16,864 16,864 46,672 46,672 Valuation techniques used to derive level 2 and level 3 fair values The fair value of financial instruments that are not traded in an active market (for example, unlisted investments) is determined using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on unobservable inputs. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. 56 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 NOTE 3. FINANCIAL RISK MANAGEMENT (continued) Specific valuation techniques used to value financial instruments are applied in accordance with the International Private Equity and Venture Capital Valuation Guidelines, including: • Net assets, looking through to the underlying assets held through interposed investment vehicles. • The fair value of unlisted option contracts is determined using a Black Scholes valuation at the reporting date. • The use of quoted market prices or dealer quotes for similar instruments where available. • Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments. The price of a recent investment conducted in an orderly transaction between market participants generally represents fair value as of the transaction date. At subsequent measurement dates, the price of a recent investment may be an appropriate reference point for estimating fair value subject to the current facts and circumstances including changes in market conditions or changes in the performance of the investee company that would impact a market participant’s perspective of fair value. Valuation Processes The Lion Manager includes a team that performs monthly valuations of the financial instruments required for financial reporting purposes, including level 3 fair values. This team reports directly to the Lion Board. Discussions of valuation processes and results are held between the Lion Manager and the Lion Board at least once every six months in line with Lion’s half-yearly reporting dates, including changes in level 2 and 3 fair values. The following table presents the changes in level 3 instruments for the years ended 31 July 2018 and 31 July 2019. Investments – Level 3 Opening Balance Transfers out of Level 3 (to level 1) Transfers out of Level 3 (to level 2) Other increases (purchases) Gain/(Losses) recognised in profit or loss Closing balance 2019 $’000 16,864 - - - 22,057 38,921 2018 $’000 2,496 - - 16,838 (2,470) 16,864 The Level 3 balance primarily relates to Lion’s investment in One Asia and the Pani Joint Venture. During the prior period Lion acquired One Asia’s 33.3% Pani Joint Venture interest and invested further funds in the company. Pani Joint Venture In April 2018 Lion acquired One Asia’s 33.3% economic interest in the Pani Joint Venture in Sulawesi, Indonesia. The transaction involved Lion issuing 35,750,000 Shares and 23,833,333 Options to One Asia, with One Asia distributing 34,750,000 Shares and 23,166,666 Options by way of an in specie equal capital return to One Asia Shareholders in proportion to their respective interests in One Asia. Lion held approximately 35% of the issued share capital of One Asia, and accordingly received 12,168,562 Lion shares and 8,112,375 Lion options in One Asia’s capital return that were cancelled upon receipt. In August 2018, Lion converted its economic interest to a 33.3% equity interest in the Pani project following regulatory approvals. The valuation of Lion’s interest in the Pani JV at 31 July 2019 reflects the value imputed by PT Merdeka Copper Gold Tbk’s (IDX: MDKA) (Merdeka) acquisition of 66.6% of the joint venture interest from Lion’s existing joint venture partner for US$55 million in November 2018. The determination of fair value has also taken into account recent developments in relation to progress of activities for Pani, perspectives on long-term commodity price movements and other comparable recent transactions. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 57 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 NOTE 4. INCOME AND EXPENSES Gain/(loss) attributable to movement in fair value of investments Mark to Market adjustment for year – investments realised during year Mark to Market adjustment for year – investments held at end of year Gain/(loss) attributable to movement in fair value of investments as recorded in the Statement of Comprehensive Income 2019 $’000 2018 $’000 (161) 25,112 (56) (10,326) 24,951 (10,382) Lion is a long term investor and investment performance generally spans a number of financial periods. Measured on historic cost, gross profit/(loss) on investments realised during the year includes mark to market adjustments realised in the current year as well as mark to market adjustments recognised in the Statement of Comprehensive Income in prior years as set out in the table below. Results of investments realised during year Proceeds from sale of shares Historical Cost of investment sales Gross profit/(loss) measured at historical cost on investments realised Represented by: Mark to Market recognised in prior periods (including on acquisition) Mark to Market recognised in current year The total comprehensive profit/(loss) is after charging the following other expenses Investor Relations D & O Insurance Legal Expenses Depreciation Corporate overheads Total other expenses 137 (510) (373) (212) (161) (373) 72 52 25 5 189 343 650 (5,906) (5,256) (5,200) (56) (5,256) 177 48 151 9 190 576 58 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 NOTE 5. INCOME TAX EXPENSE (a) Statement of Comprehensive Income Current income tax Deferred income tax Income tax expense/(benefit) reported in the Statement of Comprehensive Income Reconciliation of income tax expense Profit/(loss) from ordinary activities before income tax Prima facie tax thereon at 30% Tax effect of permanent and other differences: Non-deductible expenses Accounting mark to market movement in the fair value of investments Realised gain/(loss) on sale of investments Deductible business related capital expenditure under Section 40-880 Tax benefit not recognised for accounting purposes Total current income tax (benefit)/expense 2019 $’000 2018 $’000 - - - 23,651 7,095 - (7,485) (112) (19) 521 - - - - (11,799) (3,540) - 3,115 (1,577) - 2,002 - (b) Unrecognised temporary differences A deferred tax asset has not been recognised in the Statement of Financial Position as the benefits will only be realised if the conditions for deductibility and/or recognition set out in Note 2(h) occur. Unrecognised temporary differences at 31 July relate to the following: Tax losses available – revenue account Tax losses available – capital account Temporary Difference – unrealised investments Note (i) Accrued Expenses/Other temporary differences Unrecognised tax losses and temporary differences at 31 July Potential Tax Benefit @ 30% 12,476 70,617 29,411 71 112,575 33,772 11,299 70,052 43,468 63 124,882 37,465 Note (i) – Temporary difference – unrealised investments arises from the difference between the fair value and taxable value of the investment. NOTE 6. RECEIVABLES (CURRENT) Share sales receivable Distributions receivable Sundry Debtors Total current receivables, net 30 1,176 8 1,214 - - 9 9 LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 59 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 NOTE 7. FINANCIAL ASSETS Listed investments (at fair value) Unlisted investments (at fair value) Total non-current financial assets 2019 $’000 21,081 45,255 66,336 2018 $’000 18,623 28,049 46,672 Listed shares are readily saleable with no fixed terms, with the exception of 20,802,944 shares acquired in the IPO of Nusantara Resources Limited that are escrowed until 2 August 2019 ($4,992,707). NOTE 8. OTHER ASSETS (FIXED) Plant, Property and Equipment – Cost Accumulated Depreciation Total other assets NOTE 9. PAYABLES (CURRENT) Sundry creditors and accruals Amounts payable to related body corporate Total current payables 79 (58) 21 72 - 72 79 (52) 27 88 1,817 1,905 During the year Asian Lion Limited transferred investments to Lion at market value of $1,419,000 (2018: $512,000 with an inter-group loan recognised between the parties). The loan payable to Asian Lion increased to $3,236,000 (2018: $1,817,000), before being settled in 2019 in exchange for a share buyback by Asian Lion. The amount payable was interest free and payable at call. NOTE 10. RETAINED PROFITS Movements in retained earnings were as follows: (Accumulated losses) at the beginning of the financial year Net profit/(loss) for period (Accumulated losses) at the end of the financial year NOTE 11. CONTRIBUTED EQUITY Issued and paid up capital (fully paid) Opening Balance Shares Issued – Placement/ SPP Shares Issued – Pani acquisition Buyback and cancellation of securities – Pani acquisition Expenses of Issue of new shares Issued and paid up capital (fully paid) 60 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT (81,237) 23,651 (57,586) (69,438) (11,799) (81,237) 126,211 111,490 - - - - 5,529 13,228 (4,015) (21) 126,211 126,211 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 NOTE 11. CONTRIBUTED EQUITY (continued) Share Capital Issued and paid up capital (fully paid) Opening Balance Shares Issued Buyback and cancellation of treasury shares Issued and paid up capital (fully paid) 2019 SHARES 2018 SHARES 150,134,879 110,733,981 - - 51,569,460 (12,168,562) 150,134,879 150,134,879 In April 2018 Lion acquired One Asia’s 33.3% interest in the Pani Joint Venture in Sulawesi, Indonesia. The transaction involved Lion issuing 35,750,000 Shares and 23,833,333 Options to One Asia, with One Asia distributing 34,750,000 Shares and 23,166,666 Options by way of an in specie equal capital return to One Asia Shareholders in proportion to their respective interests in One Asia. Lion held approximately 35% of the issued share capital of One Asia, and accordingly received 12,168,562 Lion shares and 8,112,375 Lion options in One Asia’s capital return that were cancelled upon receipt. Capital Risk Management Lion’s objective when managing capital is to safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders. In order to maintain or adjust the capital structure, Lion may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares. NOTE 12. OPTION RESERVE Opening Balance Options Issued – Pani acquisition Buyback and cancellation of securities – Pani acquisition Option Reserve Options Opening Balance Options Issued – Pani acquisition Buyback and cancellation of treasury shares Options on Issue 2019 $’000 1,341 - - 1,341 2018 $’000 - 1,787 (446) 1,341 2019 OPTIONS 2018 OPTIONS 15,720,958 - - - 23,833,333 (8,112,375) 15,720,958 15,720,958 Under the terms of Lion’s purchase of One Asia Resources Limited’s 33.3% Joint Venture interest in the Pani Gold Project, Lion issued to One Asia 35,750,000 Lion shares at a deemed price of $0.37 per share and 23,833,333 Lion options at a deemed price of $0.075 per option exercisable to acquire ordinary shares at $0.50 per share, expiring on 12 April 2020. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 61 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 NOTE 13. NOTES TO THE STATEMENT OF CASH FLOWS (a) Reconciliation of cash and cash equivalents For the purpose of the Statement of Financial Position and Statement of Cash Flows, cash and cash equivalents includes cash on hand and in banks, term deposits, cash managed by third parties and other bank securities which can be liquidated at short notice, net of outstanding bank overdrafts if applicable. Cash at the end of the year as shown in the Statement of Cash Flows is reconciled to the related item in the Statement of Financial Position as follows: Cash on hand and at bank (b) Reconciliation of Net Profit/(Loss) after Income Tax to Net Cash Provided by Operating Activities 2019 $’000 2,467 2018 $’000 1,512 Net profit/(loss) after income tax 23,651 (11,799) Adjustments for non cash income and expense items: Movement in fair value of investments (increase)/decrease in assets Other non-cash (income)/expense Decrease/(Increase) in assets: Other receivables (Decrease)/increase in liabilities: Payables Net cash flow from operating activities (24,951) (53) - (14) (1,367) 10,382 11 12 (3) (1,397) (c) Non-cash investing and financing activities During the year Asian Lion Limited transferred investments to Lion at market value of $1,419,000 (2018: $512,000) with an inter-group loan recognised between the parties. The loan payable to Asian Lion increased to $3,236,000 (2018: $1,817,000), before being settled in 2019 in exchange for a share buyback by Asian Lion. The amount payable was interest free and payable at call. During 2018 Lion acquired One Asia’s 33.3% interest in the Pani Joint Venture in Sulawesi, Indonesia. The transaction involved Lion issuing 35,750,000 Shares and 23,833,333 Options to One Asia, with One Asia distributing 34,750,000 Shares and 23,166,666 Options by way of an in specie equal capital return to One Asia Shareholders in proportion to their respective interests in One Asia. Lion held approximately 35% of the issued share capital of One Asia, and accordingly received 12,168,562 Lion shares and 8,112,375 Lion options in One Asia’s capital return that were cancelled upon receipt. NOTE 14. EARNINGS PER SHARE (a) Earnings/(Loss) used in calculating earnings per share – basic and diluted 2019 $’000 23,651 2019 NUMBER 2018 $’000 (11,799) 2018 NUMBER (b) Weighted average number of ordinary shares for basic earnings per share 150,134,879 130,377,770 The calculation of weighted average number for the diluted earnings per share does not include any potential ordinary shares with respect to options as the options on issue are not considered to be dilutive for the current period (2018: nil). 62 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 NOTE 15. COMMITMENTS Superannuation Commitments Lion does not have its own superannuation plan. The only commitment to superannuation is with respect to statutory commitments. At balance date, the Company was contributing to various approved superannuation funds at the choice of employees at a minimum rate of 9.5% of salaries paid. Employees are able to make additional contributions to their chosen superannuation funds by way of salary sacrifice up to the age based deductible limits for taxation purposes. NOTE 16. REMUNERATION OF AUDITORS (a) Audit Services Audit and review of financial reports Total remuneration for audit services (b) Non-audit Services 2019 $’000 104,400 104,400 2018 $’000 99,079 99,079 No fees for non-audit services were paid/payable to the external auditors during the year ended 31 July 2019 (2018: Nil). NOTE 17. RELATED PARTY DISCLOSURES (a) Directors and Key Management Personnel The directors and key management personnel in office during the financial year and up until the date of this report are as follows: Barry Sullivan Peter Maloney Chris Melloy Robin Widdup Craig Smyth Jane Rose (Non-Executive Chairman) (Non-Executive Director) (Non-Executive Director) (Director) (Chief Executive Officer) (Company Secretary) (b) Subsidiaries and Associates Lion meets the qualifying criteria under AASB 10 of an ‘investment entity’, and entities controlled by Lion (Asian Lion Limited and Lion Selection Asia Limited) do not provide investment related services to the Company. Accordingly, the Company has applied the exemption from consolidating these entities and continues to carry these investments at fair value. Similarly, the scope of AASB 128 Investments in Associates allows the Company to elect to measure that investment at fair value through profit or loss in accordance with AASB 9. Transactions with controlled entities and associates: Lion Selection Asia Limited (100% ownership interest) During the year the Company advanced funds to Lion Selection Asia Limited of $3,925,000 (2018: $1,680,000), with a loan balance of $5,605,000 (2018: 1,680,000). The amount payable was interest free and payable at call. Asian Lion Limited (100% ownership interest) During the year Asian Lion Limited transferred investments to Lion at market value of $1,419,000 (2018: $512,000) with an inter-group loan recognised between the parties. The loan payable to Asian Lion increased to $3,236,000 (2018: $1,817,000), before being settled in 2019 in exchange for a share buyback by Asian Lion. The amount payable was interest free and payable at call. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 63 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 NOTE 17. RELATED PARTY DISCLOSURES (continued) Pani Joint Venture (33% ownership interest) As at 31 July 2018 Lion’s 33.3% interest in the Pani Gold Project was an economic interest. During 2019 regulatory approval was received by the Pani Joint Venture allowing for foreign investors to hold equity directly, and Lion’s 33.3% economic interest in the Pani Joint Venture was converted into a direct equity ownership interest, with the shares in the Pani Joint Venture held by Lion Selection Asia Limited. As part of this restructuring process, during the year the Company was repaid loan facilities for $4,324,000. (c) Key Management Personnel Remuneration Short term employee benefits Post-employment benefits (d) Lion Manager Pty Ltd Contract 2019 $’000 163,530 62,700 226,230 2018 $’000 163,495 62,700 226,195 Lion entered into a Management Agreement with Lion Manager Pty Ltd (Lion Manager), under which Lion Manager provides the Company with management and investment services. The arrangements were approved by shareholders at Lion’s AGM on 5 December 2012, with ongoing management fees of 1.5% p.a. based on the direct investments under management, currently equating to $645,000 per annum plus GST. There is an incentive applicable which would apply where Lion’s performance outperforms a benchmark. In addition, up to a 12 month termination fee may be applicable should Lion seek to terminate the management agreement. Further details of the Management Agreement are set out in the Notice of Meeting for the 2012 AGM, available on Lion’s website. As at the date of this report no incentive fee had accrued with respect to the Lion Manager contract. In addition, from 1 August 2013 Lion has requested Lion Manager provide comprehensive Investor Relations services associated with Lion’s ASX listing for $12,500 + GST per month for twelve months. These arrangements are reviewed annually and may be terminated without fee. NOTE 18. MATERIAL INVESTMENTS The Company had direct ownership of the following material investments at year end: African Lion 3 Asian Lion Egan Street Resources Erdene Resource Development Lion Selection Asia Nusantara Resources Pani Joint Venture CARRYING AMOUNT ENTITY OWNERSHIP 2019 $’000 2018 $’000 2019 % 2018 % 6,281 55 7,292 2,358 42 9,514 38,723 9,006 1,774 4,862 2,338 341 8,132 16,628 24 100 16 6 100 23 33 24 100 16 6 100 32 33* Each of the above companies is involved in the mining and exploration industry. * As at 31 July 2018 Lion’s 33.3% interest in the Pani Gold Project was an economic interest. During 2019 regulatory approval was received by the Pani Joint Venture allowing for foreign investors to hold equity directly, and Lion’s 33.3% economic interest in the Pani Joint Venture was converted into a direct equity ownership interest. 64 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2019 NOTE 19. SEGMENT INFORMATION Management has determined the Company’s segments based on the internal reporting reviewed by the Board to make strategic decisions. The Company provides patient equity capital to carefully selected small and medium mining enterprises. Investments have similar characteristics and so segments are determined on a geographical basis. Lion invests only in mining and exploration companies and projects with gold and base metal activities in Australia, Africa, Asia and the Americas. Information with respect to Geographical Segments is set out below. AUSTRALIA $’000 AFRICA $’000 Net Cash flow from investing activities (15) 2,077 AUSTRALIA $’000 AFRICA $’000 ASIA $’000 AMERICAS $’000 UNALLOCATED $’000 TOTAL $’000 2019 Mark to Market adjustment Segment Income Segment Expense Segment Result Before Tax Segment Assets Segment Liabilities Other Segment Information Assets Acquired during the period Cash Flow Information Net Cash flow from operating activities 2018 Mark to Market adjustment Segment Income Segment Expense Segment Result Before Tax Segment Assets Segment Liabilities Other Segment Information 2,592 2,592 - 2,592 7,568 - - 15 (754) (754) - (754) 4,862 - 54 1,605 381 381 - 381 6,335 (518) (518) - (518) 9,648 - - - - ASIA $’000 22,028 22,028 - 22,028 51,907 - - 209 (9,087) (9,087) - (9,087) 32,162 1,817 AMERICAS $’000 UNALLOCATED $’000 TOTAL $’000 (50) (50) (50) 526 - - - - - - 17 (1,317) (1,300) 3,702 72 24,951 24,968 (1,317) 23,651 70,038 72 - 1,674 (1,367) - (1,367) 2,271 - - - - - - - - - - - (10,359) 186 (10,173) (1,603) (1,603) (1,417) (11,776) 1,548 88 48,220 1,905 - 21,786 (1,397) (2) 5,508 (1,397) (6,123) 5,508 Assets Acquired during the period 2,606 Cash Flow Information Net Cash flow from operating activities - 818 18,362 - Net Cash flow from investing activities (2,172) (477) (3,472) Net Cash flow from financing activities - - - NOTE 20. EVENTS OCCURRING AFTER THE REPORTING PERIOD Since the end of the year, the Company has received distributions from African Lion 3 Limited (AFL3) of $6.7 million relating to AFL3’s sale of its investments in Toro Gold and Roxgold. These distributions include $1.2 million distributions receivable as at the end of the year. Other than the event above, there has not arisen in the interval between the end of the year and the date of this report, any item, transaction or event of a material or unusual nature which has or may significantly affect the operations of the Company, the results of those operations, or the state of affairs of the Company in future periods. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 65 Financial Statements Independent auditor’s report To the members of Lion Selection Group Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Lion Selection Group Limited (the Company) is in accordance with the Corporations Act 2001, including: (a) (b) giving a true and fair view of the Company’s financial position as at 31 July 2019 and of its financial performance for the year then ended complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The financial report comprises: • the statement of financial position as at 31 July 2019 • the statement of comprehensive income for the year then ended • the statement of changes in equity for the year then ended • the statement of cash flows for the year then ended • the notes to the financial statements, which include a summary of significant accounting policies • the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Company in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. The principal activities of the Company involve investing in mining and exploration companies through a number of listed and unlisted investments. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Company, its accounting processes and controls and the industry in which it operates. PricewaterhouseCoopers, ABN 52 780 433 757 2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001 T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 66 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Materiality • For the purpose of our audit we used overall materiality of AU$699,000, which represents approximately 1% of the Company’s net assets. • We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. • We chose net assets, because, in our view the performance of the Company is measured against the net value of investments held and it is a commonly accepted benchmark within the investment industry. • We utilised a 1% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. Audit scope • Our audit focused on where the Company made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. • The Company’s finance function and corporate office is based in Melbourne, where we predominantly performed our audit procedures. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit Committee. Key audit matter How our audit addressed the key audit matter Carrying value of investments Refer to note 3(d) The total carrying value of investments comprises 3 levels in line with AASB 13 Fair Value Measurement: • Level 1 - AU$21.1 million • Level 2 - AU$6.3 million • Level 3 - AU$38.9 million Total - AU$66.3 million We focused on the fair value applied by the Company to listed and unlisted investments due to the significant impact any movement in the fair value as at 31 July 2019 could have on the net assets. We also had particular regard to the valuation technique applied by the Company to its unlisted equity investments and the Pani project. There is particular judgement involved in estimating the fair value of these investments given they are classified as Level 3 with unobservable inputs. We obtained the Company’s investment schedule as at 31 July 2019 which includes a listing of each investment held and details the number of shares held and value per share. We reconciled this to the amounts recorded by the Company as at 31 July 2019, identifying no significant reconciling differences. We assessed whether the listed and unlisted investment valuation techniques used by the Company are in accordance with AASB 13 and other relevant accounting standards. We tested the fair values applied to investments as follows: • We obtained confirmations of the number of shares held for all material listed and unlisted investments. • For all material listed investments (Level 1: AU$21.1 million) we compared their fair value to market quoted prices. • For a sample of unlisted investments (Level 2: AU$6.3 million) we obtained and assessed observable market data, if available, such as the most recent transacted price made on arm’s length basis. Where that information was unavailable, we reviewed other available financial information such as the most recent annual reports, financial statements and shareholder presentations in respect of the unlisted investments held by the Company. • For the investment in the Pani project (Level 3: AU$ 38.7 million) our procedures are outlined below. LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 67 Key audit matter How our audit addressed the key audit matter To test the measurement of the Company’s investment in the Pani project as at 31 July 2019, amongst other procedures, we: • Considered management’s summary of developments through the year to 31 July 2019 relating to the Pani project and potential impacts to the fair value of the investment. • Tested the calculation prepared by management implying the fair value of the Company’s investment in Pani. • Considered external economic factors such as long-term commodity price movements during the year to consider potential impacts to the fair value of the investment in Pani. • Inquired of the Company’s management and directors as to whether they had identified further matters that would materially impact the fair value of the investment in Pani. • Evaluated whether, in view of the requirements of Australian Accounting Standards, the financial report provided adequate disclosure about the investment in Pani. Fair value measurement of the investment in the Pani project Refer to note 3(d) In August 2018, the Company’s economic interest in the Pani project was converted to a 33.3% equity interest via acquisition of shares in PT Pani Bersama Jaya (‘PT PBJ’). At 31 July 2019, the Company’s measurement of the fair value of its investment in the Pani project was primarily based on the implied value of a recent market transaction. During the year, PT Merdeka Copper Gold Tbk acquired 66% of the shares in PT PBJ for a purchase price of US$55 million, implying a fair value of AU$38.7 million for the Company’s investment in Pani. This was considered to be a key audit matter given: • The significance of the Pani project’s value as a proportion of the total investments of the Company. • The judgement involved in estimating the fair value of the investment given it is classified as Level 3 with unobservable inputs. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 31 July 2019, but does not include the financial report and our auditor’s report thereon. Prior to the date of this auditor’s report, the other information we obtained included the Director’s Report. We expect the other information to be made available to us after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. 68 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Company to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar2.pdf. This description forms part of our auditor’s report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 35 to 36 of the directors’ report for the year ended 31 July 2019. In our opinion, the remuneration report of Lion Selection Group Limited for the year ended 31 July 2019 complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Anthony Hodge Partner Melbourne 5 September 2019 LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 69 Shareholder Information Top 20 holders of ordinary fully paid shares – 30 September 2019 RANK NAME NO. OF SHARES % OF UNITS 1 2 3 4 5 6 7 8 9 10 11 National Nominees Limited Rojana Hero Pty Ltd Mr Robin Anthony Widdup + Mrs Janet Widdup ‹Widdup Super Fund A/C› J P Morgan Nominees Australia Pty Limited Inconsultare Pty Ltd ‹Morrison Family S/F A/C› Mr Mark Gareth Creasy Mirrabooka Investments Limited HSBC Custody Nominees (Australia) Limited Brigstow Pty Ltd ‹Md & Jl Brook Super Fund A/C› Retzos Executive Pty Ltd ‹Retzos Executive S/Fund A/C› CPAC Melloy Super Pty Ltd ‹Melloy Super Fund A/C› 12 Macquarie Bank Limited 13 BNP Paribas Nominees Pty Ltd ‹Jarvis A/C Non Treaty DRP› 14 Mr Dominic Paul McCormick 15 Mrs Pamela Julian Sargood 16 Melcor Investments Pty Ltd 17 Bond Street Custodians Limited ‹Bbbfs - D69416 A/C› 18 WAL Assets Pty Ltd ‹The L A Wilson Property A/C› 19 T E & J Pasias Pty Ltd 20 Majoli Pty Ltd Total Top 20 holders of ORDINARY FULLY PAID SHARES Total Remaining Holders Balance 11,887,500 7,483,653 7,219,369 5,506,870 5,200,000 4,448,976 4,360,378 4,017,798 3,791,841 3,670,000 3,082,259 2,919,489 2,854,919 2,425,324 2,381,500 1,411,020 1,393,073 1,207,802 1,200,000 1,195,651 7.92 4.98 4.81 3.67 3.46 2.96 2.90 2.68 2.53 2.44 2.05 1.94 1.90 1.62 1.59 0.94 0.93 0.80 0.80 0.80 77,657,422 72,477,457 51.73 48.27 Distribution of Shareholdings as at 30 September 2019 SIZE OF HOLDING (ORDINARY FULLY PAID SHARES) NO. OF SHAREHOLDERS 1 – 1,000 1,001 – 5,000 5,001 –10,000 10,001 – 100,000 100,001 Over Total Shareholders Number of ordinary shareholders with less than a marketable parcel 353 877 279 509 177 2,195 460 70 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Shareholder Information Voting Rights All ordinary shares issued by Lion Selection Group Limited carry one vote per share without restriction. Substantial Shareholders as at 30 September 2019 The following information is extracted from notices received by the company. NAME Robin Anthony Widdup Cooper Investors Pty Ltd NO. OF ORDINARY SHARES 16,167,277 11,462,262 Lion Directors and Lion Manager Holdings As at 30 September 2019, the members of the Lion Board and Lion Manager held shares directly and/or indirectly in Lion Selection Group Limited as follows: NAME Peter Maloney Chris Melloy Barry Sullivan Robin Widdup Craig Smyth Tim Markwell Hedley Widdup Total NO. OF ORDINARY SHARES 2,190,389 5,718,077 813,074 16,167,277 1,411,137 948,702 1,102,353 28,351,009 LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT | 71 Lion Selection Group Limited Registry You can gain access to your security holding information in a number of ways. The details are managed via our registrar, Computershare Investor Services, and can be accessed as outlined below. Computershare Investor Services Pty Limited Enquiries within Australia Enquiries outside Australia Investor Enquiries Facsimile Investor Enquiries Online 1300 850 505 +61 3 9415 4000 +61 3 9473 2500 www.investorcentre.com/contact INVESTORPHONE INTERNET ACCOUNT ACCESS VIA INVESTOR CENTRE InvestorPhone provides telephone access 24 hours a day 7 days a week. Securityholders can view their details online via Investor Centre: Alternatively, update your details or manage your portfolio by registering as a member of Investor Centre: STEP 1 Call 1300 850 505 STEP 1 Go to STEP 1 Go to (within Australia) or 61 3 9415 4000 (outside Australia) STEP 2 Say ‘Lion Selection Group Limited’ STEP 3 Follow the prompts to gain secure, immediate access to your holding details, registration details and payment information. www.investorcentre.com www.investorcentre.com STEP 2 Select ’Access a Single STEP 2 Click on ‘Login’ and enter your User ID and follow the prompts to login, or for new users click on the ‘Create Login’ link and follow the prompts to register. Holding’ STEP 3 Enter your Securityholder Reference Number (SRN) or Holder Identification Number (HIN), postcode or country if outside Australia STEP 4 Enter LSX or Lion Selection Group Limited STEP 5 Agree to the Terms and Conditions and type in the characters shown and click ‘Login’. Share Registry Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street, Abbotsford Vic 3067 Postal Address – GPO Box 2975 Melbourne Vic 3001 Enquiries within Australia Enquiries outside Australia Investor Enquiries Facsimile Investor Enquiries Online Website: 1300 850 505 +61 3 9415 4000 +61 3 9473 2500 www.investorcentre.com/contact www.computershare.com Corporate Directory Registered and Principal Office Level 2 175 Flinders Lane Melbourne Vic 3000 +61 3 9614 8008 Tel: +61 3 9614 8009 Fax: info@lsg.com.au Email: Website: www.lionselection.com.au Directors • Barry Sullivan Non-Executive Chairman • Peter Maloney Non-Executive Director • Chris Melloy Non-Executive Director • Robin Widdup Director Chief Executive Officer Craig Smyth Company Secretary Jane Rose Auditors PricewaterhouseCoopers 72 | LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT LION SELECTION GROUP LIMITED 2019 ANNUAL REPORT Inspecting drill core at Awak Mas core farm | 73 Khundii Gold Project Level 2, 175 Flinders Street, Melbourne Vic 3000. Tel: +61 3 9614 8008 Fax: +61 3 9614 8009 www.lionselection.com.au Lion Selection Group Limited ABN 26 077 729 572 

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