Lion Selection Group Limited
Annual Report 2020

Plain-text 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 Drilling at Erdene’s Bayan Khundii Gold Project Erdene geologists, Bayan Khundii Gold Project Contents 02 03 04 14 15 16 20 22 24 25 27 40 50 51 52 52 53 54 55 56 74 78 80 80 Chairman’s Letter to Shareholders Lion Selection Group Investment Summary Lion Manager’s Report Lion Performance First Class Partners in Indonesia Pani Joint Venture Nusantara Resources Erdene Resources Development Corp EganStreet Resources 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 2020 Statement of Financial Position as at 31 July 2020 Statement of Cash Flows for the Year ended 31 July 2020 Statement of Changes in Equity for the Year ended 31 July 2020 Notes to the Financial Statements for the Year ended 31 July 2020 Independent Auditor’s Report Shareholder Information Lion Selection Group Limited Registry Corporate Directory LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 1 Chairman’s Letter to Shareholders Your directors provide you with the annual report for the year ended 31 July 2020. Back-to-back performance in Lion’s portfolio over the last two years has put your company in a strong position. Lion has benefited from its exposure to advanced gold projects, reflecting both technical progress and the standout increases in the gold price. Your directors provide you with the annual report for the year ended 31 July 2020. Back-to-back performance in Lion’s portfolio over the last two years has put your company in a strong position. Lion has benefited from its exposure to advanced gold projects, reflecting both technical progress and the standout increases in the gold price. The gold price has materially increased since mid 2019, and gold equities most noticeably following suit since March 2020. The outlook for gold remains strong, driven by low to negative interest rates and risk-aversion. The global response to the COVID-19 crisis has seen extreme monetary policy settings, with excess liquidity potentially devaluing paper currencies worldwide in comparison to hard assets like gold. Investment has flowed into physical gold, ETFs and gold equities, reflecting gold’s safe-haven investment status and portfolio diversification benefits. Gold’s importance as a standalone asset class was underlined by the Bank of International Settlement upgrading gold reserves held by banks to be Tier-1 capital, encouraging central banks and commercial banks alike to increase their gold reserves. Gold has also been gaining ground because of low interest rates. Although gold has no yield, when real interest rates turn negative, gold becomes more attractive. Pleasingly, Lion’s portfolio is positioned to take advantage of the current gold bull market. At Pani, a deal with J Resources was executed to combine two tenements, creating what increasingly appears to be a world class gold project. Early indications are promising from step-out drilling potentially linking the two existing resources. Closure of the J Resources deal has taken longer than originally envisaged to receive approval from regulatory authorities and third-party financiers, however the parties continue to work towards completion. 2 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT At Nusantara, the Awak Mas gold project is essentially ready to go, with local strategic partner Indika Energy corner-stoning finance at the project level. A combination of higher gold price, optimising higher grade material in the early years and extensional drilling at Awak Mas has materially upgraded reserves and project economics. Erdene Development Corp has delivered in multiple areas with its Bayan Khundii project being fast-tracked towards development. Unique in Lion’s experience, Erdene has made a new high-grade discovery within its conceptual open pit when doing in-fill drilling. The recently released DFS highlights compelling economics, with the potential for a further sweetener early in the production profile if the new in-pit discovery holds together. These facets have attracted the attention of high profile investor Eric Sprott, whose investment in Erdene has helped re-rate the share price. As ever, 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. After two decades of operation the African Lion Fund has begun the process of closure, which is expected to be achieved by late 2020. This move has simplified the structure and operation of Lion, also signalling increased focus on Australia rather than international for future new investments. The Lion board would like to thank the Lion team who continue to be active in helping many investees throughout the year. Barry Sullivan Chairman Lion Selection Group Investment Summary Water well restored by Erdene Resource Development Corp at the Bayan Khundii Gold Project AS AT 30 SEPTEMBER 2020 Pani Joint Venture (33.3% Interest) Gold 60.7 COMMODITY MARKET VALUE A$M The fair value of Lion’s interest in the Pani Joint Venture increased to A$60.7M at 31 July 2020. This increase reflects the sustained escalation in gold prices from the time of the most recent arm’s length transaction in November 20181. Portfolio Nusantara Resources Erdene Resources Sihayo Gold Celamin Holdings Other • Portfolio holdings measured at fair value • Includes investments held directly by Lion and the value to Lion of investments held by African Lion Gold Gold Gold Phosphate Net Cash Net Tangible Assets NTA Per Share Capital Structure Shares on Issue: Share Price: 1. Lion Selection Group ASX Announcement 4 August 2020, Pani Update and Valuation Revision. 15.5 5.3 1.8 1.2 0.6 10.5 A$95.6M 63.7c 150,141,271 50¢ps 30 September 2020 LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 3 Lion Manager’s Report T / $ S U 12000 10000 8000 6000 4000 Cu US$/T 1.2 1.1 1 0.9 0.8 0.7 0.6 A$:US$ Jan10 Jan12 Jan14 Jan16 Jan18 Jan20 Jan10 Jan12 Jan14 Jan16 Jan18 Jan20 l 2020 has seen the proliferation of COVID-19, which has impacted economies and markets and resulted in the roll out of stimulus and fresh quantitative easing. l Gold has surged and reached new record highs off the back of an outlook for persistently low interest rates, a fundamental which is excellent for gold. l Gold equities have been amongst the best performing equities, one of the few sectors that has recovered pre-COVID-19 highs and is now seeing interest from generalist investors. l The Canadian market has regained an appetite for exploration stage companies, recording a stunning market re-rating and fresh funding – especially for gold explorers. l Investors in explorers have switched from rewarding success to pricing potential, which reflects a surge in liquidity to explorers. l Lion Clock – now at 10 o’clock. 2020: the year of COVID-19 2020 has been characterised by extremes, and not just in the mining industry or equity market. The biggest news of 2020 has been COVID-19, which has had, and continues to have, far reaching social and economic effects. Aside from wars, COVID-19 is the most monumental disruption to the global economy during the modern industrial era. Many people probably feel that January and February 2020 (which were ‘pre-COVID-19’) was a very long time ago – so may well have forgotten that many equity market indices hit record high prices in February 2020, and COVID-19 impacted a market that was already beginning to show signs of exuberance. As the world shut down to try and stem the spread, sudden enforced restrictions brought on the worst unemployment statistics since the Great Depression. In response to the economic shock, Governments and Central Banks implemented their largest ever stimulus and quantitative easing measures, with the result that interest rates are now virtually zero with little prospect of a short-term increase. Equity markets fell by around 40% in late February and early March, in the most rapid correction of that magnitude in history and March was the worst month for stock markets since 1987. The aftermath of the crash was equally unusual, where most historical crashes have featured a period of market risk aversion, the equity market recovery (especially in certain sectors) has been stunning, in fact on many stock markets April was the best month ever. 4 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Lion Manager’s Report z o / $ S U 2200 2000 1800 1600 1400 1200 1000 Au US$/oz By mid-year in 2020, gold had appreciated by more than the whole of 2019 Jan10 Jan12 Jan14 Jan16 Jan18 Jan20 The effect on commodities has been mixed. All commodities were caught up in the March market weakness, although many had begun to soften in the months leading up to the market collapse. The outlook for commodities has evolved from earlier in the year to now feature even lower interest rates and the likelihood of new demand from stimulus measures. The most noticeable difference in the world is an enormous jump in sovereign debt levels and fiscal deficits which have blown out to fund economic stimulus packages. The most unusual aspect of all is that COVID-19 has not gone away, nor is it expected to fade rapidly. Nevertheless, markets are taking a more optimistic view on the future than might be expected following a massive economic contraction, market meltdown and the continued overshadowing of the pandemic over the world. Commodities Commodity prices have a strong influence on the equity market for resource stocks. As the price and outlook for commodities fluctuate, it influences investor interest for explorers and producers of individual minerals. The immense economic impact of COVID-19 brought about a fresh episode of quantitative easing and stimulus in the world’s largest economies, which feeds directly into the fundamentals for many commodities. Quantitative easing was struck off the back of already very low interest rates. Mid 2019 saw the perception toward rates shift from ‘rates likely to rise’ to ‘not rising soon’, and the effect of the latest economic shock has been to push rates firmly into ‘lower for longer’ territory. Gold has historically performed well under low to negative real interest rates and is often sought during times of uncertainty. The combination of these with money seeking a return in a market where debt provides little to no yield and a market recovery that is far from certain has provided wonderful fundamentals for gold. Gold was robust in 2019 as the interest rates scenario was teetering, but then became a focus of the market in 2020 when any glimmers of interest rate recoveries in the short-term were put to bed. The gold price appreciated by US$230/oz in 2019, and most of that performance was within the period June to August. In 2020, but for the disruption of the March market weakness and a softening gold price in August and September, the trend for gold has been more consistently positive. By mid-year in 2020, gold had appreciated by more than the whole of 2019, and by early August was up by almost $550/oz, peaking at a record closing price of $2,063/oz on 6 August. Gold can often be the domain of gold fanatics, but when it sets new record highs it draws huge attention such that fundamentals for gold are now reported in mainstream media. LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 5 Lion Manager’s Report The short-term impact of COVID-19 has been to slow economies, and this is intuitively negative for most other commodities. The nature and timing of stimulus has had varying effects on the outlook for individual commodities and short- and medium-term demand. Even so, most commodities have resumed their pre-collapse trading patterns. COVID-19 has ravaged the oil price owing to a demand shock as the world slowed in early 2020, existing surplus production and inflexible supply due to the combined challenges of engineering a slowing of oil production and the dependence of many oil nations on continued production to prop up their own economies. Had the CoronaVirus shock happened at any other time in the industrial era, a recovery in the oil price would have been expected to correlate with a global economic recovery. Now however, decarbonisation and reduction in fossil fuel dependency is a high-level global concern. Stimulus directed at decarbonisation and apparent global resolve toward a cleaner world may well accelerate the development of greener energy generation or larger scale storage. This could well impinge on the recovery outlook for oil and could also have a consequence for future demand patterns of other commodities that are related to batteries and alternative power generation. Iron ore has benefited over recent years from disaster related supply disruption in Brazil, and more recently from the deployment of post COVID-19 stimulus in China. Base metals prices are mostly still well off their 2018 peaks. The outlook for copper should be promising under a global decarbonisation / electrification theme, however this is still far enough off for the market to remain fairly circumspect. At any rate, copper and most other base metals are trading at prices that are below the incentive price that is probably needed to develop new sources of supply. The exception is nickel, which finds itself as part-traditional base metal, part-battery metal and enjoys periods where one fundamental or the other rejuvenates market interest. Gold price during 2019 and 2020 2019 Gold performance limited to June–August 2020 Sustained gold performance most of the year. Disruptions: • COVID-19 disruption March • Gold price weakness since August a t a d S S E R I : e c r u o S z 0 / $ S U e c i r P d l o G 2200 2000 1800 1600 1400 1200 Jan 19 Jul 19 Jan 20 Jul 20 6 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Lion Manager’s Report Morning briefing at Nusantara’s Awak Mas Gold Project Mining equities Global equity markets underwent a rapid recovery following the March COVID crash, although recovery has been mixed when all sectors of the market are considered. In the Australian market, only the IT and gold sectors are trading at levels above their pre-COVID peaks – the rest of the market is below the levels attained in February. An apparently spectacular overall recovery in the US market has been anchored to technology stocks which account for a large proportion of that market. In a low interest rate environment there are fewer options for attractive yields that are ‘risk free’. Under these circumstances more and more money seeks equities to obtain a reasonable return, and the pattern so far has seen equity investors seeking this from ‘growth’ sectors. With big technology as a driver, large markets such as the US are now trading at close to record price to earnings levels and whilst that logically presents a risk, the backdrop of such dramatically low interest rates and an outlook for ongoing quantitative easing is also unprecedented. The performance of gold producers has been the standout of the Australian market over five years (being the time since the end of the 2011-2015 mining market downturn). In this time the gold index has outperformed not only non- resources market indices (such as the ASX 100 Industrials Index) but also the collective resources market (e.g. ASX 100 Resources Index) by a long margin. Performance of ASX market sector indices in 2020: % above or below pre-COVID peak % 20 10 0 -10 -20 -30 -40 -50 -60 d l o G h c e T o f n I s l a i r e t a M Source: IRESS data s n o C y r a n o i t e r c s D i s e l p a t S s n o C e r a C h t l a e H s e i r a n d r O i l l A s m o c e l e T s e i t i l i t U s e c r u o s e R 0 0 1 s l a i r t s u d n I 0 0 1 T I E R s l a i r t s u d n I T I E R x E i s l a c n a n F i y g r e n E i s l a c n a n F i LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 7 Lion Manager’s Report Generalist investors recognising the gold sector From 2011 to 2015 the mining sector was punished by investors for the excesses of the previous boom. As investors rotated their funds into other sectors, the market weighting of miners fell to multi-decade lows. Miners began to regain market favour in 2016, and as is typical of the early stages of a boom, the first investors consisted mostly of mining specialists – investors that always hold miners and could recognise the value on offer. As booms progress, there is typically a growing participation from generalist investors who are not obliged by their mandate to consider the sector over any other and only do so once operating and financial performance justifies their investment. 2020 has seen generalist investors take a strong interest in the gold sector, which is part of the reason for the strong performance that has taken place. In August 2020, Berkshire Hathaway made headlines for taking a circa US$560M position in Barrick Gold, the world’s largest producer, tantalising because Warren Buffett has been famously outspoken against holding gold in the past. It is important to point out that this is in fact a small investment for Berkshire Hathaway, and in that regard might not even have been championed by Buffett directly. To an outsider looking in, this appears an ideal exposure for a value-oriented investor such as Berkshire Hathaway – the investment is in a gold producer which has leverage to the commodity price, but also generates earnings and is capable of paying dividends. Even so, the underlying assumption is that such an investment is presumably underpinned by a view on the outlook for gold, and as such is an excellent example of ‘generalist’ money moving into the space having previously held little to no exposure. Large investments by generalist investors and outstanding index performance paint a picture of uniform investor interest across the sector. It is important to note that indices measure only the performance of the largest companies in a market – and performance in the large companies does not necessarily mean the juniors in the same sector share the same investor appeal. This is especially so in mining, where explorers are totally reliant on investment market support to fund their activities. Year by year (2016–2019, 2020 YTD) performance of key ASX stock indices ASX Gold Index +217% ASX 100 Resources +79% ASX Industrials -1% % 8 5 % 2 5 % 1 2 % 2 3 % 4 5 % 8 3 % 7 2 - % 8 2 % 2 % 8 3 % 3 % 4 % 9 - % 7 1 % 6 1 - % 250 200 150 100 50 0 2016 2017 2018 2019 2020YTD 2016 2017 2018 2019 2020YTD 2016 2017 2018 2019 2020YTD Year by year (2016 – 2019, 2020 YTD) performance of key ASX stock indices: ASX Gold Index (XGD), ASX100 Resources Index (XTR) and ASX100 Industrials Index (XTI). Bars show incremental index (n) or loss (n) comparing the end of a calendar year with the opening prices of 2016. 2020 YTD is to 30 September 2020. Source: IRESS data 8 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Lion Manager’s Report Liquidity for explorers and developers, and the return of Canada Globally significant events often overshadow everything else that happens during the same year. Hewlett Packard was founded in 1939, and the Spanish Civil War came to an end – but the year is overshadowed by Hitler’s invasion of Poland which led to the start of World War II. 2020 will forever be synonymous with the COVID-19 pandemic, and whilst it might not make the same headlines, 2020 is also the year that liquidity truly returned to the explorer space. The two events are connected – investor interest has targeted gold explorers above all, and the gold price surge stems in no small way from factors linked to COVID-19. The matter of extreme significance for the mining cycle is that liquidity is now surging toward explorers from the largest market for miners in the world – Canada, which until quite recently has been reluctant to fund explorers. Exploration companies are incredibly sensitive to liquidity because constant market funding is required for them to be able to operate. When funding is scarce, they underperform their larger peers and the market. Yet when funding is plentiful, they can provide outstanding returns. Canadian equity exchanges collectively have historically raised more equity funding for miners and explorers on an annual basis than any other exchange, which makes Canadian markets the largest pool of investment capital for risky enterprises such as exploration. But ‘risk investors’ are not obliged to continually fund exploration, and for periods of time these investors’ ‘risk money’ flows elsewhere. Through 2017, 2018 and much of 2019, the main fascination for Canadian risk money was medicinal cannabis, but by late 2019 this theme had waned. Canadian investors were ready for something new, and the renewed lustre of gold against a backdrop of declining outlook for interest rates and then a global pandemic has been the catalyst to cause a migration of capital. The performance of early stage mining equities (but especially gold explorers) in the Canadian market in 2020 has been stunning. As at 31 August 2020 mining enterprises listed on the small capitalisation TSX Venture exchange (the TSXV – which are overwhelmingly explorers or small scale miners) have already raised more money than the same group did in the whole of 2019, 86% more than to the same time in 2019. The junior miners and explorers of the TSXV have also raised more than the large capitalisation miners listed on TSX so far in 2020 – if this trend is maintained it would be the first time for well over a decade that more money has flowed to juniors than established miners for fresh funding. Funds raised on the TSXV for mining companies 2019 vs 2020 YTD s n o i l l i M $ C d e s i a R s d n u F g n n M V X S T i i 3000 2500 2000 1500 1000 500 0 2020 C$2.5 Billion raised (to August) 2019 C$2.1 Billion raised Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Funds raised on the TSXV for mining companies, most of which are explorers and many that focus on gold. LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 9 . e c n e g i l l e t n I t e k r a M X M T : e c r u o S Lion Manager’s Report Core from drilling at Pani The phenomenon of investor interest in explorers in Canada is not limited to capital raisings – the increase in market capitalisation has also been incredibly strong. To the end of August, the collective market capitalisation of mining classified companies on the TSXV has increased by 89% in 2020 (versus 10% in CY 2019), or an aggregate increase of C$16.9B. The C$2.5B of new capital that has been raised in the same period is only a small fraction of the difference. These trends align strongly with a gold price tailwind, as a high proportion of mining companies active on TSX-V are gold explorers. The capitalisation of miners on the large capitalisation TSX has increased by 35% in 2020 so far (versus 43% in CY2019) – so whilst there is a positive trend for the sector, the story clearly has been about explorers in Canada in 2020. ASX listed exploration and assessment stage companies have also experienced a similar positive surge of investor sentiment with a commensurate increase in capital raising tempo, albeit below TSX levels. For liquidity to now be flowing into the exploration space is important, but of overwhelming significance is that a great deal of this new liquidity is from the re-awakened Canadian market. Investor appetite for exploration – now pricing potential and driving activity 2019 and 2020 have been successful years for the exploration business, with a number of discoveries taking place and a strong sense that the tempo of discovery has lifted above previous years. To make discoveries it is necessary to explore, and there should be no doubt that discoveries stem from exploration spending. Success is a critical factor for attracting new investment to the exploration space, and this recent track record, when combined with the tailwind of a strong gold price, sits behind a change in the way investors are now treating exploration companies. The corollary of a jump in valuations across the exploration sector is that investors now value exploration differently. Up until January of this year, investors were clearly rewarding successful explorers which was a healthy improvement on much of the period from 2011 through to 2018. Whilst not universal, there are now growing instances where valuations can only indicate that investors are valuing potential, yet still await the milestone of exploration success. This stems from new liquidity now flowing into the exploration sector, which may bring with it a dilution of investor sophistication and hence a 10 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Lion Manager’s Report Awak Mas, Indonesia willingness to invest in risky situations at a price that misrepresents the uncertainty of the proposition. Exploration expenditure patterns provide a great proxy for investor sentiment – because investors are directly influential in whether or not exploration budgets are available to spend. The Australian Bureau of Statistics tracks quarterly exploration expenditure within Australia – which is a useful, if possibly leading proxy of activity globally. Total exploration spend has been trending upward since 2016, and the proportion of exploration spend which is for gold now accounts for almost half (45% at June 2020). Gold exploration in Australia was as low as 19% of the total in late 2011/early 2012, and 2020 is the first time since 2004 that gold has accounted for such a large proportion of total exploration. Total exploration expenditure and gold exploration expenditure in Australia, January 1990 to June 2020 (quarterly data) 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 A$M 1200 1000 800 600 400 200 0 Australian Exploration Expenditure: positive trend since 2016 Australian Gold Exploration Expenditure: positive trend since 2014, now accounts for 45% of total spend up from 19% in 2011 s c i t s i t a t S f o u a e r u B n a i l a r t s u A : e c r u o S Jan-1990 Jan-2000 Jan-2010 Jan-2020 LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 11 Lion Manager’s Report The Lion Clock was at 9 o’clock in January 2020, and the collapse of global markets in February and into March because of the COVID-19 pandemic could have brought about a premature bust (midnight) for the mining cycle. However, aggressive government stimulus and quantitative easing has been deployed which has so far prevented further equity market weakness. In doing so, this has underwritten robust fundamentals for gold, which has set new record highs during the year. The gold sector has been amongst the strongest performers in the equity market recovery since and despite the clear centricity toward gold, investor enthusiasm for risky activities such as exploration is spreading across the sector in a fashion that was last seen almost a decade ago. Explorers are now able to raise equity funds more readily than at any other time since mid-2011, indeed investors are clamouring into some stocks to the extent that valuations reflect potential rather than necessarily success. The change in sentiment of the investment market toward exploration stage companies recorded during 2020 opens the door to a new and exciting stage of the boom and takes the Lion Clock to 10 o’clock. The Lion Clock does not move at a steady pace, rather it reacts to indicators of liquidity and these tend to occur in irregular surges rather than a set tempo. The time between 10 o’clock and 12 midnight in previous cycles has lasted for years, and importantly for investors substantial capital returns are most readily available through this stage. This is especially the case for junior miners and explorers, as this stage is characterised by liquidity moving into smaller companies as investors search for value. With exploration funds now being raised in the market and deployed widely, we expect to see discoveries take place and new projects developed as well as growth in the form of M&A to form larger companies. Lion Clock – 10 o’clock AGGRESSIVE SELLER New floats (big companies) Paper takeovers CRASH 12 11 1 CAUTIOUS BUYER Company liquidations Declining exploration People leave big companies (top $ small companies short careers) 10 9 8 L O O K 2 3 4 Rising exploration New floats (small companies) 7 6 5 BOOM Mergers Cash takeovers AGGRESSIVE BUYER CAUTIOUS SELLER 12 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Drilling at Nusantara’s Awak Mas Gold Project Lion Performance Total shareholder return for Lion Selection Group versus ASX Small Resources Accumulation Index 20% 10% 0% -10% % 6 . 3 1 % 8 . 4 % 0 . 7 1 Lion ASX Small Resources % 4 . 8 % 2 . 7 % 6 . 1 - 1 Year Return 3 Year Return 5 Year Return 10 Year Return 15 Year Return Return since inception at 31 July 2020 1 Year 3 Years 5 Years 10 Years 15 Years Return since inception – 22 years Lion 13.6% 4.8% 17.0% -1.6% 7.2% 8.4% ASX Small Resources 1.5% 11.5% 14.4% -4.9% 1.5% 3.8% 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 December 2008, and the distribution of shares in Catalpa Resources via the demerger of Lion Selection Limited in December 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. 14 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT First Class Partners in Indonesia Lion is fortunate to have extremely well-credentialled partners in each of its Indonesian projects: l Pani: Merdeka CopperGold l Nusantara – Awak Mas: Indika Energy Multi-asset mid-tier Indonesian gold miner Back by Provident, Thohir Group, Saratoga ASX:LSX Multi-asset Indonesian energy, mining and services conglomerate ASX:NUS Pani World class size and shape gold project Drilling and assessment to come Awak Mas Long life / high margin gold project Seeking debt funding LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 15 Pani Joint Venture (33.3%*) Lion holds 33.3% in the Pani Joint Venture alongside Merdeka Copper Gold. The Pani gold project is emerging as a potential world class gold project, showing signs of size, exposure, geometry and metallurgy to warrant investigation of a large scale, long-life, open pit operation. * Lion interest to become 20% after closing of the deal with J Resources Pani currently consists of two Resources [2.37Moz1 (33.3% Lion/ 66.7% Merdeka) and 2.30Moz2 (100% J Resources)] on two licenses which historically have been separately held. Mineralisation on the Pani trend that contains the two Resources extends for over 1.2km, and features intersections of gold mineralisation hundreds of metres thick. Mineralisation is open in all directions, and the ‘link’ zone between the two Resources has seen recent diamond drilling with preliminary results appearing broadly consistent with mineralisation on either side. During the year a conditional agreement was signed with PT J Resources Asia Pasifik Tbk (J Resources) to combine the two adjacent gold Resources to form a single gold deposit, subject to approval from regulatory authorities and J Resources’ lenders. Pani developments during the year: • Pani valuation increased to A$60.7M, up from A$38.7M. • Preliminary results from step- out drilling in the zone between Resources appear broadly consistent with mineralisation on either side. • Conditional agreement signed with J Resources to combine two adjacent gold Resources to form a single gold deposit, subject to approval from regulatory authorities and J Resources lenders. • Concept study underway considering large-scale project with CIL processing. Pani Cross Section KUD/IUP BOUNDARY KUD/IUP BOUNDARY Section 62,000mN West m N 0 0 2,2 fi l e 6 o r P Profile 62,000 mN OPEN Base Oxid a tio n STEP OUT DRILLING Pani CoW (J Resources) Resource & Reserve 72.7Mt @ 0.98g/t Au for 2.30Moz2 (cut off grade 0.4g/t Au) Reported 31/12/2018 Extent of Pani JV drilling GPD-04 406m @ 0.5 g/t Au 18-424m EOH Drill trace Pani IUP (Merdeka/Lion) Mineral Resource Estimate 89.5Mt @ 0.82g/t Au for 2.37 Moz1 (cut off grade 0.2g/t Au) Reported 31/12/2014 388,000mE 389,000mE 250m 16 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT 750mRL East 500mRL 250mRL History of Lion holding value of Pani Incorporating value increases resulting from Lion investment into Pani Potential evolution of Lion holding value of Pani Implied value for Lion Pani interest based on broker estimates of Pani combined project value n o i L o t i n a P f o e u l a v M $ A A$60.7M A$39.3M A$15.4M Lion Acquisition of Pani interest3 Merdeka Acquisition of Pani interest4 Revaluation July 20205 JV deal completion Project economic study Broker 1 Broker 2 Lion’s Pani Valuation History and Potential Pani Valuation During the year the fair value of Lion’s interest in the Pani Joint Venture increased to A$60.7M at 31 July 2020. The increase reflects the sustained escalation in gold prices since November 2018, being the most recent arms-length transaction when Merdeka acquired its project interest in the Pani Joint Venture. This increase is most notable since mid-March 2020 with spot gold prices strengthening ~US$500/oz, and the share prices of most peer companies selected increasing by more than 100%. Further material upside is expected for the Pani gold project once the J Resources transaction completes. This upside has not been considered in the fair value for the assessment made at 31 July as the deal has not yet been completed. Until completed, there is an ongoing risk that the conditions precedent are not met and the deal is unable to be completed. In addition to revaluation reflecting the combination of ground positions, the combined project value could improve to the extent that step-out drilling on the Pani IUP between the two Resources confirms continuity. J Resources Agreement In December 2019 Lion and Merdeka announced that its Pani Joint Venture had reached conditional agreement with J Resources to combine the two neighbouring Pani tenements into one ownership group. Until recently, both Merdeka/Lion and J Resources had intended to develop separate projects. Reserves for both projects would have been constrained by the need to maintain pit walls within the respective tenements. By combining the projects into one project, the overall reserves are likely to be materially larger than the reserves would have been if the projects were developed separately. Merdeka/Lion and J Resources have concluded that there is a clear logic in combining the Pani IUP and the Pani COW into one ownership group, in order to develop one, larger gold mine project. The resultant structure will see J Resources transfer its interests in PT Gorontalo Sejahtera Mining (GSM), the holder of the Pani Contract of Work tenement in exchange for a 40% ownership interest in the combined entity, including the Pani IUP tenement, diluting Lion’s ownership to 20% in the larger combined entity. The J Resources agreement remains subject to regulatory approvals and approval from J Resources’ secured lenders. The parties continue to work towards deal completion prior to deal expiry in November 2020 (unless extended by the parties): • Regulatory approvals have been delayed by the COVID-19 pandemic along with changes to Indonesian mining laws enacted in May 2020. • The parties have engaged with J Resources’ secured lenders. • The geological teams from both parties continue to work closely to share and integrate technical data in preparation for further technical work, drilling and development studies. The parties expect conditions precedent to be satisfied in the second half of 2020 after which the new joint venture will commence. Once completed, the combination of the two tenements is anticipated to materially improve the valuation of Lion’s investment in the Pani Joint Venture. LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 17 Pani Joint Venture Pani Regional Map Step-Out Drilling As reported previously, the Pani Joint Venture has been drilling a 11,000 metre drill program in the ‘link’ zone, which is the area on the Pani IUP between the established mineral resources. Two holes were drilled by Utah International in this zone in 1982, which assayed 406m @ 0.5 g/t Au (GPD-04) and 154m @ 0.57 g/t Au (GPD-05). As reported in Merdeka’s June 2020 quarterly report6, four further holes have been completed or were underway for a total of 1,578.6 metres. This brings total drilling in the current program to 13 holes completed or underway for a total of 3,407.6 metres. The Pani Joint Venture has temporarily paused its on-going drilling program pending completion of the J Resources agreement. It is anticipated that assay results of holes that have been drilled will be progressed and become available after the recommencement of drilling. Preliminary assays and observations from visual geological logging are broadly consistent with mineralisation that is observed within both the Pani COW and the Pani IUP. look. The purpose of the concept study is to help scope further work, understand key risks requiring further assessment, and to assess for potential fatal flaws. The study is premised on high level assumptions, including that the Pani deposit is one continuous zone of mineralisation across the two tenements. It is expected that unification of technical databases, geological models and integration of new diamond drilling results will ultimately culminate in a unified Resource for the ‘Pani Besar’ (‘Greater Pani’) region which can then be used as the basis of project development studies. During the year the Pani Joint Venture worked on an internal concept study focused on how a combined Pani Besar project might The Internal Concept Study aims to determine the potential viability of an open pit mine with conventional milling and CIL processing. The study is a preliminary technical and economic study based on low-level technical and economic assessments that are not sufficient to support the estimation of ore reserves. Further evaluation and appropriate studies are required before any ore reserves estimate or any assurance of an economic development of the project. 18 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Schematic showing Pani proposed and completed drill holes The combination of the Pani IUP and Pani COW unlocks optimal development of the Pani deposit unrestricted by tenement boundaries, including: • Favourable topography and ore geometries: low strip ratio, open pit operation amenable to large scale bulk mining. • Metallurgical work to date suggests high recoveries are achievable, with conventional CIL assumed for the internal concept study. • Low processing costs anticipated, with grid power available. • Subject to appropriate assessment, initial concepts envisage 7.5 Mtpa to 15 Mtpa processing rates. Pani IUP (Lion 33.3%/Merdeka 66.7%) 0.2g/t cut off1 Pani CoW (J Resources 100%) 0.4g/t cut off 2 Category Ore (Mt) Grade (g/t Au) Au (m oz) 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 Measured 15.5 Indicated Inferred 41.3 15.9 1.03 0.98 0.93 0.51 1.31 0.48 Total 89.5 0.82 2.37 Total 72.7 0.98 2.30 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). 2. J Resources Reserve and Resources Statement 31 December 2018. (http://www.jresources.com/assets/ uploads/investor/Final_Reserves_Resources_Compilation_2017_to_2018.pdf) 3. See Lion announcement 17 April 2018. 4. See Lion announcement 5 November 2018. 5. See Appendix to Lion announcement 4 August 2020. 6. PT Merdeka Copper Gold Tbk Quarterly Report: June 2020 (3 August 2020, https://www.merdekacoppergold. com/en/download/activities-report-q2-2020/). LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 19 Nusantara Resources Awak Mas Gold Project – Indonesia’s next gold mine Strong Foundation Value1 Optionality ASSET 1.53Moz Reserve2 2.35Moz Resource3 LOCAL PARTNERS Indika – 40% Petrosea – contractor NPV5 IRR US$517M 45% Long Life 16 years Payback <2 years FUNDING PATH4 US$40M Indika US$40M Petrosea Project Finance & Mezzanine Nusantara NPV5 A$2.08/share* EXPANSION EXPLORATION GOLD PRICE *NPV5 at USD1,700 per ounce gold price = USD517M. 60% NUS share at USD1:AUD0.70 over existing issued NUS shares of 212.6M = A$2.08/share. Following exploration drilling in 2019 and increased gold price in 2020, a new resource and an ore reserve were estimated for the Awak Mas Gold Project in Indonesia: • Resource +19% • Ore Reserve + 34% 2.35Moz 1.53Moz These increases combined with updated metallurgical testwork allowed the 2018 DFS to be updated. Exploration Since discovery in the 1980’s, the region around Awak Mas has been explored by a number of different gold companies outlining 16 known prospects with gold mineralisation over a 15 x 5 km area. New targets have been found using geophysics over a small area around Salu Bulo and this program is planned to be expanded over the next year targeting a gold field with multi-million ounce potential. Near mine drill targets are also expected to be tested in the corridor between Awak Mas and Salu Bulo. 1. ASX Announcement, 29 June 2020, Awak Mas NPV Increases by 240% to USD517M. 2. ASX Announcement, 16 June 2020, Ore Reserves Increase by 34% to 1.53M ounces. 3. ASX Announcement, 28 April 2020, Mineral Resource increases 18% to 2.35M ounces. 4. ASX Announcement, 26 February 2020, USD40M Gold Project Equity Deal. 2020 Addendum key assumptions and outcomes compared to the 2018 DFS Description 2018 DFS 2020 Addendum Gold Price Assumption USD1,250 per ounce USD1,700 per ounce Upfront capital Pre-Production capital USD146M USD16M USD156M USD16M Gold Produced LOM 1.1M ounces 1.5M ounces* AISC Initial mine life NPV5% real ungeared – after tax IRR – after tax USD758 per ounce USD875 per ounce 11 years USD152M 20% 16 years USD517M 45% Payback – post tax 48 months 21 months * The production targets referred to in Nusantara’s announcement made 29 June 2020 are based on 92% Probable Reserves and 8% Inferred Mineral Resources. There is a low level of geological confidence associated with Inferred Mineral Resources and there is no certainty that further exploration work will result in the determination of Indicated Mineral Resources or that the production targets themselves will be realised. Mineral Resource Estimate – April 2020 Reported at a cut-off grade of 0.5g/t Au and constrained within USD1,600 per ounce optimised pit shells Ore Reserve Estimate – June 2020 Reported at a cut-off grade of 0.5g/t Au and USD1,400 per ounce gold price Category Tonnes (Mt) Au (g/t) Au (Moz) Category Tonnes (Mt) Au (g/t) Au (Moz) Indicated 44.2 Inferred 9.8 1.39 1.16 1.97 0.37 Probable 35.6 1.33 1.53 Total 54.0 1.35 2.35 Total 35.6 1.33 1.53 20 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Awak Mas – Sensitivity to gold price Gold Price per ounce (USD) $1,250 $1,400 $1,500 $1,600 $1700 $1,800 $1,900 $2,000 NPV 5% post tax (USD) $194M $303M $375M $446M $517M $588M $661M $735M IRR post tax 22% 31% 36% 40% 45% 49% 53% 58% Payback post tax 2.8 years 2.1 years 2.0 years 1.9 years 1.8 years 1.7 years 1.6 years 1.5 years Partner – Indika Indonesian listed company Indika Energy invested US$15m in 2020 for a 25% stake in the Awak Mas Gold Project and is under agreement to invest a further US$25m for a further 15% upon reaching a Final Investment Decision (FID) in early to mid 2021. The agreement with Indika additionally provided interim funding from 70% owned subsidiary Petrosea with which to begin the FEED or Front End Engineering & Design process which, at completion early in 2021 is expected to be followed by provision of bank debt and mezzanine funding with which to reach FID. Matt Doube was employed as Chief Financial Officer in September 2020 to oversee the funding process. Nusantara Indika US$40m 60% 40% Awak Mas Gold Project Indika has invested US$15M and has earned 25% project equity LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 21 Erdene Resources Development Corp Bayan Khundii Developing a new high grade gold district in Mongolia Erdene has spent over a decade establishing a platform from which to operate in Mongolia, which has delivered several discoveries including the high-grade Bayan Khundii in Southern Mongolia. With a Bankable Feasibility Study complete and debt financing discussions underway, Erdene is now strongly positioned to become a gold miner. Highlights: In July 2020, Erdene delivered a Bankable Feasibility Study1 for the Bayan Khundii Gold Project which, being a shallow and high-grade open pit mine, delivers strong NPV and IRR from a low initial capital investment: • US$59M establishment capital, with six years of production based on Reserves, averaging 63,500oz gold per annum. • 3.71g/t Reserve grade underpins an All-In Sustaining Cost of US$733/oz. • Using a gold price assumption of US$1,800/oz, the project has an after tax NPV of US$216M and IRR of 77%. Exploration work continues to add value: Strongly funded: • Drilling within the Bayan Khundii • Erdene completed a C$20M open pit design has detected a new zone of mineralisation, featuring some extremely high grades including 5m at 126g/t gold2. This zone will see further drilling as Erdene progresses toward mine development. • The Dark Horse target is located 3.5km North of Bayan Khundii and features similar alteration style and extensive gold anomalism. High grade gold in trenches (eg 6m at 8.8g/t gold3) is to be followed up by drilling. The results available confirm Dark Horse as the best on-license target since the discovery of Bayan Khundii. financing in August 2020 which positions Erdene strongly to continue with pre-production development works and exploration at Bayan Khundii. • Of the C$20M financing, C$15M was invested by well known gold investor Eric Sprott, which is a strong endorsement of Erdene’s high-grade Bayan Khundii Gold Project and the prospectivity of the 100% owned Khundii Gold District. Hedley Widdup from Lion Manager is a director of Erdene. 1. Refer to Erdene Resource Development Corporation news release made 20 July 2020. 2. Refer to Erdene Resource Development Corporation news release made 7 July 2020. 3. Refer to Erdene Resources Development Corporation news release made 15 July 2020. 22 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Bayan Khundii camp, Mongolia EganStreet Resources Former Board of EganStreet at Rothsay Taken over by Silver Lake Resources A takeover bid by Silver Lake for EganStreet was announced on 30 July 2019, with an initial offer of 0.27 Silver Lake shares for every EganStreet share. The offer was subsequently improved to 0.431 Silver Lake shares for every EganStreet share and then declared unconditional on 7 November 2019. As consideration for its 16% shareholding in EganStreet, Lion received 9,110,050 Silver Lake shares, which were sold for net proceeds of A$9.5M. Brief history of Lion’s investment in EganStreet Lion made its first investment in Auricup in July 2011 to assist with funding of the purchase of the historic Rothsay gold mine from Silver Lake Resources. The company initially planned to list on ASX to explore and assess Rothsay for potential redevelopment but the deterioration of the gold price and the market for junior resource companies between 2011 and 2015 made fundraising challenging and thwarted ambitions of listing early on. The high-grade nature of Rothsay was well known from historic production and work done by previous owners. After several changes of directors in the intervening period, Marc Ducler and Lindsay Franker were appointed to the board in 2015 after having made an investment in the company. In 2016, the company was renamed EganStreet Resources (so named after the street that Marc and Lindsay lived on in Kalgoorlie whilst studying at the Western Australian School of Mines) and went on to list on ASX in the same year after a well-supported $6M IPO. The company grew Resources at Rothsay and produced economic assessments culminating in a definitive feasibility in July 2018, which was updated with an expanded Resource and mine plan in February 2019. Lion invested A$5.87M between 2011 and 2018, and the sale of the Silver Lake shares received as consideration for the takeover closed out a successful investment for Lion and somewhat of an end of an era having had a close and successful working relationship with EganStreet for the duration of the investment. 24 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT 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, regulatory changes (including environmental, social, taxation and royalties) 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. LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 25 Principal Risks and Uncertainties Risk Factor Nature Reliance on key personnel 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. Pani Gold Project 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 possible 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. Impact of COVID-19 COVID-19 has caused a significant amount of uncertainty worldwide and has had a substantial impact on global financial markets. Equity markets have been very volatile as governments and central banks try to respond to deteriorating conditions and control of the virus remains uncertain. In the unstable economic environment created by COVID-19, the following risks exist for Lion and its investees, which could in turn affect Lion’s financial performance: • disruption to work practices and access to operations; • interruption to exploration and development activities; • inability to raise finance to progress projects; • decreasing share price and valuation for exploration and development companies. 26 | LION SELECTION GROUP LIMITED 2020 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 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 2020 ANNUAL REPORT | 27 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 3rd Edition of the ASX 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. The Board will measure its governance practices against the recommendations of the 4th Edition of the ASX Corporate Governance Principles and Recommendations commencing with the financial year ended 31 July 2021. 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 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. 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. (b) those matters expressly reserved to the board and those delegated to management. Further information on performance evaluations can be found under ASX Principle 8. 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 28 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT 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. Corporate Governance Statement Recommendation 1.3 A listed entity should have a written agreement with each director and senior executive setting out the terms of their appointment. 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 2020 ANNUAL REPORT | 29 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. 30 | LION SELECTION GROUP LIMITED 2020 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 2020 ANNUAL REPORT | 31 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 32 | LION SELECTION GROUP LIMITED 2020 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 2020 ANNUAL REPORT | 33 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. Subsequent stages of metals trade, smelting and refining may often be beyond the influence of the Company. 34 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT 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 as it may reasonably require, including the external auditors. 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 2020 ANNUAL REPORT | 35 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. 36 | LION SELECTION GROUP LIMITED 2020 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 2020 ANNUAL REPORT | 37 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. 38 | LION SELECTION GROUP LIMITED 2020 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 2020 ANNUAL REPORT | 39 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 2020. to its high weighting to gold equities, one of the few beneficiaries in these times of uncertainty and extraordinary injections of liquidity into global economies. At the date of this report Lion had 150,141,271 fully paid ordinary shares on issue. 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 profit before tax for the year was $29.9 million (2019: $23.7 million). Economic and operating conditions have been extremely challenging for many businesses as the fallout from the COVID-19 outbreak impacts the world. Equity markets have been very volatile, as governments and central banks try and respond to deteriorating conditions and control of the virus remains uncertain. Despite this difficulty in business operations for Lion and its investees, Lion’s portfolio has materially increased in value due The result for the year reflects a mark to market gain of $31.8 million with respect to investments, with key movements in the portfolio value outlined below: • Lion’s interest in the Pani Joint Venture had a mark to market increase of $20.0 million to $60.7 million at 31 July 2020. This increase reflects the sustained escalation in gold prices that has been experienced in recent months. • A mark to market increase of $5.0 million in the valuation of Lion’s investment in Erdene Development Corporation, with the market re-rating the company following release of its Bayan Khundii Gold Project feasibility study and improvements in the gold price. • A mark to market increase of $3.9 million in the valuation of Lion’s investment in Nusantara Resources reflecting advances with the Awak Mas Gold Project towards financing and construction, including the introduction of Indika Energy (IDX: INDY) as strategic partner at the project level. • An increase in the value of Lion’s holding in Egan Street Resources of $2.2 million as a result of Silverlake’s takeover of the company, resulting in Lion receiving $9.5 million in cash when Lion’s holding was sold in November 2019. At 31 July 2020 the Company held investments valued at $89.1 million (2019: $66.3 million), and cash of $10.8 million (2019: $2.5 million). Pani Joint Venture In December 2019 Lion and Merdeka announced that its Pani Joint Venture had reached conditional agreement 40 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT with PT J Resources Asia Pasifik Tbk (J Resources) to combine the two neighboring Pani tenements into one ownership group. The resultant structure will see J Resources transfer its interests in PT Gorontalo Sejahtera Mining (‘GSM’), the holder of the Pani Contract of Work tenement in exchange for a 40% ownership interest in the combined entity, including the Pani IUP tenement, diluting Lion’s ownership to 20% in the larger combined entity. The J Resources agreement remains subject to regulatory approvals and approval from J Resources’ secured lenders. The parties continue to work towards deal completion prior to deal expiry in November 2020 (unless extended by the parties): • Regulatory approvals have been delayed by the COVID-19 pandemic along with changes to Indonesian mining laws enacted in May 2020. • The parties have engaged with J Resources’ secured lenders. • The geological teams from both parties continue to work closely to share and integrate technical data in preparation for further technical work, drilling and development studies. The parties expect conditions precedent to be satisfied in the second half of 2020 after which the new joint venture will commence. Once completed, the combination of the two tenements is anticipated to materially improve the valuation of Lion’s investment in the Pani Joint Venture. As reported previously, the Pani Joint Venture has been drilling a 11,000 metre drill program on the Pani IUP in the area between the Pani IUP and Pani Project where two holes drilled by Utah International in 1982, assayed 406m @ 0.5 g/t Au (GPD-04) and 154m @ 0.57 g/t Au (GPD-05). As reported in Merdeka’s June 2020 quarterly Director’s Report Pani: Unified Ground in North Sulawesi. report, four further holes have been completed or were underway for a total of 1,578.6 metres. This brings total drilling in the current program to 13 holes completed or underway for a total of 3,407.6 metres. The Pani Joint Venture will temporarily pause its on-going drilling program pending completion of the J Resources agreement. It is anticipated that assay results of holes that have been drilled will be progressed and become available after the recommencement of drilling. Preliminary assays and observations from visual geological logging are broadly consistent with mineralisation that is observed within both the Pani CoW and the Pani IUP. Schematic showing Pani proposed and completed drill holes. LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 41 Director’s Report Pani Cross Section KUD/IUP BOUNDARY KUD/IUP BOUNDARY Section 62,000mN West Profile 62,000 mN OPEN Base Oxid a tio n STEP OUT DRILLING Pani CoW (J Resources) Resource & Reserve 72.7Mt @ 0.98g/t Au for 2.30Moz2 (cut off grade 0.4g/t Au) Reported 31/12/2018 Extent of Pani JV drilling GPD-04 406m @ 0.5 g/t Au 18-424m EOH Drill trace Pani IUP (Merdeka/Lion) Mineral Resource Estimate 89.5Mt @ 0.82g/t Au for 2.37 Moz1 (cut off grade 0.2g/t Au) Reported 31/12/2014 388,000mE 389,000mE 250m 750mRL East 500mRL 250mRL or any assurance of an economic development of the project. The combination of the Pani IUP and Pani COW unlocks optimal development of the Pani deposit unrestricted by tenement boundaries, including: • Favourable topography and ore geometries: low strip ratio, open pit operation amenable to large scale bulk mining. • Metallurgical work to date suggests high recoveries are achievable, with conventional CIL assumed for the internal concept study. • Low processing costs anticipated, with grid power available. • Subject to appropriate assessment, initial concepts envisage 7.5 Mtpa to 15 Mtpa processing rates. Dividends No dividend was declared or paid during the year (2019: 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 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. It is expected that unification of technical databases, geological models and integration of new diamond drilling results will ultimately culminate in a unified Resource for the ‘Pani Besar’ (‘Greater Pani’) region which can then be used as the basis of project development studies. The Pani Joint Venture is working on an internal concept study focused on how a combined Pani Besar project might look. The purpose of the concept study is to help scope further work, understand key risks requiring further assessment, and to assess for potential fatal flaws. The study is premised on high level assumptions, including that the Pani deposit is one continuous zone of mineralisation across the two tenements. The Internal Concept Study is being undertaken to determine the potential viability of an open pit mine with conventional milling and CIL processing. The study is a preliminary technical and economic study based on low-level technical and economic assessments that are not sufficient to support the estimation of ore reserves. Further evaluation and appropriate studies are required before any ore reserves estimate 42 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Director’s Report 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 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. In relation to the COVID-19 pandemic, the outlook remains unclear as companies face an extremely difficult operating environment. Recent fiscal and monetary support has provided favourable tailwinds for gold and gold equities, however financial markets remain volatile and, in the case of the broader market, potentially over- valued relative to historical norms as earnings come under pressure. 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 2020 there was 1 full time equivalent employee of the Company (2019: 1 FTE). 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 IUP (Lion 33.3%/Merdeka 66.7%) 0.2g/t cut off1 Category Tonnage (Mt) Grade (g/t Au) Contained Gold (Moz) Measured Indicated Inferred Total 10.8 62.4 16.2 89.5 1.13 0.81 0.67 0.82 0.39 1.63 0.35 2.37 2. 0.4 g/t cut off; refer to J Resources 31 December 2018 Annual Report (http://www.jresources.com/investors/article/final-resources-reserves-compilation-2017-to-2018). Pani CoW Resource (100% J Resources) above a 0.4g/t cut off2 Category Tonnage (Mt) Grade (g/t Au) Contained Gold (Moz) Measured Indicated Inferred Total MRE 15.5 41.3 15.9 72.7 1.03 0.98 0.93 0.98 0.51 1.31 0.48 2.30 LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 43 Voting and Comments at the Company’s 2018 Annual General Meeting The Company received more than 97% of ‘yes’ votes on its Remuneration Report for the previous financial year. The Company did not receive any specific feedback at the Company’s 2019 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 following table. The benefits provided to Key Management Personnel are fixed with no at-risk components of remuneration. Director’s Report 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. 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. 44 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Other Key Management Personnel Director’s Report KEY MANAGEMENT PERSONNEL OF THE COMPANY – REMUNERATION FOR YEAR TO 31 JULY 2020 SHORT TERM BENEFITS SALARIES/ FEES CASH BONUS TERMINATION BENEFITS POST- EMPLOYMENT SUPERANNUATION TOTAL NOTES $ 2020 NAME Directors B J K Sullivan P J Maloney C Melloy R A Widdup C K Smyth J M Rose Total 2019 NAME Directors B J K Sullivan P J Maloney C Melloy R A Widdup (a) (a) (a) 47,475 15,000 15,000 - - 74,581 152,056 47,475 15,000 15,000 - - 86,055 163,530 $ - - - - - - - $ - - - - - - - $ $ 4,525 25,000 25,000 - - 52,000 40,000 40,000 - - 7,085 61,610 81,666 213,666 $ - - - - - - - $ - - - - - - - $ $ 4,525 25,000 25,000 - - 52,000 40,000 40,000 - - 8,175 62,700 94,230 226,230 SHORT TERM BENEFITS SALARIES/ FEES CASH BONUS TERMINATION BENEFITS POST- EMPLOYMENT SUPERANNUATION TOTAL NOTES $ Other Key Management Personnel C K Smyth J M Rose Total (a) (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. Management fees of $915,000 plus GST were paid in the current year, which increased compared to the prior year due to a 45% increase in direct investments under management. 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. These arrangements are reviewed annually and may be terminated without fee. LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 45 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 2019 SHARES ISSUED AS REMUNERATION NET CHANGE OTHER CLOSING BALANCE 31 JULY 2020 2,190,389 5,718,077 16,167,277 813,074 1,411,137 - 26,299,954 - - - - - - - - - - - - - 2,190,389 5,718,077 16,167,277 813,074 1,411,137 - 26,299,954 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 46 | LION SELECTION GROUP LIMITED 2020 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 2019 OPTIONS ISSUED AS REMUNERATION OPTIONS EXPIRED UNEXERCISED CLOSING BALANCE 31 JULY 2020 - - 234,572 - 117,251 - 351,823 - - - - - - - - - (234,572) - (117,251) - (351,823) - - - - - - - BALANCE 1 AUGUST 2018 OPTIONS ISSUED AS REMUNERATION OPTIONS EXPIRED UNEXERCISED CLOSING BALANCE 31 JULY 2019 - - 234,572 - 117,251 - 351,823 - - - - - - - - - - - - - - - - 234,572 - 117,251 - 351,823 LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 47 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 over 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 Non-Executive Chairman for EganStreet Resources, 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. 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 has been Chairman and Non-Executive Director of a number of organisations and ASX mining 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 over 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 has served on many of Lion’s investee boards as a Non-Execuive Director. 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 40 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 Chairman of Celamin Holdings Ltd and a Non- Executive Director of Nusantara Resources and One Asia Resources Limited all Lion investees. 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. 48 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Director’s Report Directors’ Meetings During the year and up until the date of this report, the Company held ten 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 10 10 10 10 10 10 10 10 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 $56,486 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 50. Non-Audit Services No fees for non-audit services were paid/payable to the external auditors during the year ended 31 July 2020. 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 2020 ANNUAL REPORT | 49 Auditor’s Independence Declaration As lead auditor for the audit of Lion Selection Group Limited for the year ended 31 July 2020, 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 7 September 2020 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. 50 | LION SELECTION GROUP LIMITED 2020 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 52 to 73 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 2020 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 2020. 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: 7 September 2020 R A Widdup Director LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 51 Statement of Comprehensive Income for the Year ended 31 July 2020 Gain/(loss) attributable to movement in fair value Interest Income Other Income Exchange (loss)/gain 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 NOTES 4 4 5 2020 $’000 31,834 9 18 (305) (1,071) (209) (412) 29,864 - 29,864 - 29,864 - 29,864 2019 $’000 24,951 7 10 53 (802) (225) (343) 23,651 - 23,651 - 23,651 - 23,651 Cents per share Cents per share 19.9 19.9 15.8 15.8 The above statement of comprehensive income should be read in conjunction with the accompanying notes. 52 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Financial Statements Statement of Financial Position as at 31 July 2020 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 2020 $’000 10,837 11 10,848 89,075 16 89,091 99,939 106 106 - 106 2019 $’000 2,467 1,214 3,681 66,336 21 66,357 70,038 72 72 - 72 99,833 69,966 126,214 1,341 (27,722) 99,833 126,211 1,341 (57,586) 69,966 The above statement of financial position should be read in conjunction with the accompanying notes. LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 53 Financial Statements Statement of Cash Flows for the Year ended 31 July 2020 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 2020 $’000 9 15 (1,655) (1,631) 2019 $’000 7 - (1,374) (1,367) (6,104) (4,185) - 16,413 10,309 - 3 3 8,681 (311) 2,467 10,837 - 6,456 2,271 - - - 904 51 1,512 2,467 The above statement of cash flows should be read in conjunction with the accompanying notes 54 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Financial Statements Statement of Changes in Equity for the Year ended 31 July 2020 ISSUED CAPITAL $’000 RESERVES $’000 ACCUMULATED LOSSES $’000 Balance at 31 July 2019 126,211 1,341 TOTAL $’000 69,966 29,864 (57,586) 29,864 Total comprehensive income/(loss) Transactions with owners in their capacity as owners Issue of new shares Balance at 31 July 2020 - 3 - - 126,214 1,341 (27,722) 99,833 - 3 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 - 46,315 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 2020 ANNUAL REPORT | 55 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 NOTE 1. CORPORATE INFORMATION The financial report of Lion Selection Group Limited (‘Lion’ or ‘the Company’) for the year ended 31 July 2020 was authorised for issue in accordance with a resolution of the directors on 3 September 2020. 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 2019, in particular AASB 16 Leases and AASB Interpretation 23 Uncertainty over Income Tax Treatments. With respect to AASB 16 there was minimal impact to accounting as Lion has nil non-cancellable operating lease commitments. In relation to interpretations on tax treatments, given the nature of the Company’s income tax matters it has not impacted existing amounts recognised in the financial statements upon adoption of the standard. Accounting standards issued but not yet effective There are no 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: (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 a recent 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). 56 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 (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 2020 ANNUAL REPORT | 57 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 (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. 58 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 (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 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 2020 ANNUAL REPORT | 59 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 (j) Investments, Other Financial Assets and Investments in Associates (continued) 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 Financial assets are de-recognised 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. 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. (l) (m) (n) 60 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 (o) 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 2020 ANNUAL REPORT | 61 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 (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 2020 $’000 10,837 89,075 11 99,923 106 106 2019 $’000 2,467 66,336 1,214 70,017 72 72 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 $572,000 higher/lower as a result of foreign exchange gains/losses (2019: $232,000 higher/lower). (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 62 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 NOTE 3. FINANCIAL RISK MANAGEMENT (continued) locations of the portfolio is done in accordance with the limits set by the Company, however from time to 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 $8,907,000 higher/lower (2019: $6,634,000 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 % 5,113 5,724 - - - 376 2,091 - - - - - - - - - - - - - - - 11 5,113 5,724 11 89,075 89,075 106 106 - - 1,214 66,336 376 2,091 1,214 66,336 72 72 0.2 - - - - 2.0 - - - - - - - - - - - - - - 2020 Financial assets Cash – AUD Cash – USD Bank bills and deposits receivable Investment in securities Financial Liabilities: Trade and other creditors 2019 Financial assets Cash – AUD Cash – USD 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. LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 63 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 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 2020 and 31 July 2019. At 31 July 2020 Assets Financial assets at fair value through profit or loss Investments Total Assets At 31 July 2019 Assets LEVEL 1 $’000 LEVEL 2 $’000 LEVEL 3 $’000 TOTAL $’000 27,461 27,461 757 757 60,857 60,857 89,075 89,075 Financial assets at fair value through profit or loss Investments Total Assets 21,081 21,081 6,334 6,334 38,921 38,921 66,336 66,336 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. 64 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 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 2019 and 31 July 2020. 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 2020 $’000 38,921 - - 1,966 19,970 60,857 2019 $’000 16,864 - - - 22,057 38,921 The Level 3 balance primarily relates to Lion’s investment in the Pani Joint Venture. Pani Joint Venture As noted above, Lion valued its 33.3% interest in the Pani Joint Venture at $60.7 million as at 31 July 2020. This increase reflects the sustained escalation in gold prices since November 2018, being the most recent arms- length transaction when PT Merdeka Copper Gold Tbk’s (IDX: MDKA) (Merdeka) acquired its project interest in the Pani Joint Venture. This increase is most notable since mid-March 2020 with spot gold prices strengthening ~US$500/ oz, and the share prices of many market peer companies increasing by more than 100%. This valuation assessed the sustained increase in the gold price on the Pani Joint Venture, without considering the leverage effect from improved margins for the Pani Joint Venture. Further material upside is expected for the Pani gold project once the J Resources transaction announced on 9 December 2019 completes. This upside has not been considered in the fair value for the assessment made at 31 July as the deal has not yet been completed. Until completed, there is an ongoing risk that the conditions precedent are not met and the deal is unable to be completed. In addition to revaluation reflecting the combination of ground positions, the combined project value could improve to the extent that step out drilling on the Pani IUP between the two Resources confirms geological continuity. LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 65 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 NOTE 3. FINANCIAL RISK MANAGEMENT (continued) Lion’s accounting policy for determining the fair value of unlisted investments aims to maximise the use of observable market data where it is available and rely as little as possible on unobservable inputs. Generally an arms-length transaction represents fair value as of the transaction date, with the last such transaction being Merdeka’s acquisition of its stake in the Pani Joint Venture in November 2018. In accordance with valuation guidelines, this valuation was used to calibrate valuation models based on observable inputs. These valuation models have then been assessed for changes in market conditions and project milestones. The determination of fair value at 31 July 2020 has taken into account movements in market comparables taking into account recent developments in relation to progress of activities for Pani, perspectives on long-term commodity price movements and other relevant corporate transactions. The two market-based valuation models used in assessing in line with industry practice are: • Comparable Value method (Implied value per Resource Oz) as the primary valuation method. • Yardstick (Rule of Thumb) method as an alternative method in order to provide a cross-check. The valuation models used rely on a number of related data points from selected comparable companies that are subject to reasonably possible changes. For example, the comparable value method is dependent on gold prices, sentiment to gold equities and declared resources to ultimately determine an implied value per resource ounce. A reasonably possible change in the implied value per resource ounce of 10% would increase/decrease the fair value of the Pani investment by $6.1M, with a corresponding gain or loss attributable to movement in fair value. The table below summarises Lion’s assessment of the fair value of its investment in the Pani Joint Venture. METHODOLOGY VALUATION METRIC PREFERRED VALUATION Comparable Value (Primary method) Yardstick (Secondary method) Pani IUP Resource US$/Resource Oz Pani IUP Project Value (100%) Lion’s Interest Value (33.3%) Pani IUP Project Value (100%) Lion’s Interest Value (33.3%) * The Pani IUP Resource has been applied based on the higher cut off of 0.3g/t.1 2.31 Moz* US$56/Oz US$130M A$60.7M US$133M A$62.2M The Pani Joint Venture represents Lion’s largest investment. Lion’s investment model involves weighting investment towards the best opportunities in the portfolio, which from time to time results in concentration of Lion’s portfolio towards specific investments. The Lion board is conscious of the issues of portfolio balance but is of the view that the potential reward from a concentration of the portfolio in the Pani Joint Venture outweighs the risks if the challenges of developing a mine in Indonesia can be overcome. The valuation methods used for the Pani joint venture are sensitive to both observable and unobservable inputs. The valuation methods are sensitive to the unobservable interrelationship between the spot gold price, outlook for long term gold prices and the movement in gold equities. In addition, consideration is required of the relative progress of activities for the Pani Joint Venture and peer group companies, particularly taking into account the recent level of movement in those comparables. 66 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 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 2020 $’000 2019 $’000 2,284 29,550 31,834 (161) 25,112 24,951 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 9,598 (6,497) 3,101 817 2,284 3,101 69 57 29 5 252 412 137 (510) (373) (212) (161) (373) 72 52 25 5 189 343 LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 67 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 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 temporary differences: 2020 $’000 2019 $’000 - - - - - - 29,864 8,959 23,651 7,095 Accounting mark to market movement in the fair value of investments (9,550) (7,485) Realised gain/(loss) on sale of investments Other non-deductible or non-assessable amounts Previously unrecognised tax losses now recouped to reduce current tax expense Tax benefit not recognised for accounting purposes Total current income tax (benefit)/expense 930 (116) (930) 707 - (112) (19) - 521 - (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% 14,122 67,516 (7,005) 137 74,770 22,431 12,476 70,617 29,411 71 112,575 33,772 Note (i) – Temporary difference – unrealised investments arises from the difference between the fair value and taxable value of the investment. A deferred tax liability has not been recognised in the Statement of Financial Position as this liability can be set off against income tax losses in the same entity and same jurisdiction. NOTE 6. RECEIVABLES (CURRENT) Share sales receivable Distributions receivable Sundry Debtors Total current receivables, net 68 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT - - 11 11 30 1,176 8 1,214 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 NOTE 7. FINANCIAL ASSETS Listed investments (at fair value) Unlisted investments (at fair value) Total non-current financial assets Listed shares are readily saleable with no fixed terms. NOTE 8. OTHER ASSETS (FIXED) Plant, Property and Equipment – Cost Accumulated Depreciation Total other assets NOTE 9. PAYABLES (CURRENT) Sundry creditors and accruals Total current payables 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 – Exercise of options Expenses of Issue of new shares Issued and paid up capital (fully paid) 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) 2020 $’000 27,461 61,614 89,075 2019 $’000 21,081 45,255 66,336 79 (63) 16 106 106 79 (58) 21 72 72 (57,586) 29,864 (27,722) (81,237) 23,651 (57,586) 126,211 126,211 3 - - - 126,214 126,211 2020 SHARES 2019 SHARES 150,134,879 150,134,879 6,392 - - - 150,141,271 150,134,879 LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 69 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 NOTE 11. CONTRIBUTED EQUITY (continued) 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 Option Reserve Options Opening Balance Options exercised Options expired unexercised Options on Issue 2020 $’000 1,341 1,341 2019 $’000 1,341 1,341 2020 OPTIONS 2019 OPTIONS 15,720,958 15,720,958 (6,392) (15,714,566) - - - 15,720,958 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 2020 $’000 10,837 2019 $’000 2,467 Net profit/(loss) after income tax 29,864 23,651 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 70 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT (31,834) 304 (24,951) (53) 2 33 (1,631) - (14) (1,367) Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 NOTE 14. EARNINGS PER SHARE 2020 $’000 2019 $’000 (a) Earnings/(Loss) used in calculating earnings per share – basic and diluted 29,864 23,651 2020 NUMBER 2019 NUMBER (b) Weighted average number of ordinary shares for basic earnings per share 150,136,922 150,134,879 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 (2019: nil). 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 2020 $ 2019 $ 149,429 149,429 104,400 104,400 No fees for non-audit services were paid/payable to the external auditors during the year ended 31 July 2020 (2019: 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) LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 71 Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 NOTE 17. RELATED PARTY DISCLOSURES (continued) (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 $1,966,000 (2019: $3,925,000), with a loan balance of $13,652,000 (2019: $11,686,000). The amount payable was interest free and payable at call. Pani Joint Venture (33% ownership 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 2019 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 2020 $ 152,056 61,610 213,666 2019 $ 163,530 62,700 226,230 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. 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. Management fees of $915,000 plus GST were paid in the current year, which increased compared to the prior year due to a 45% increase in direct investments under management. 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. 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 2020 $’000 622 20 - 7,802 29 16,718 60,700 2019 $’000 6,281 55 7,292 2,358 42 9,514 38,723 2020 % 2019 % 24 100 - 6 100 24 33 24 100 16 6 100 32 33 Each of the above companies is involved in the mining and exploration industry. 72 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Financial Statements Notes to the Financial Statements for the Year ended 31 July 2020 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 2020 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 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 2,247 2,247 - 2,247 - - - - 2,592 2,592 - 2,592 7,568 - - 15 115 5,989 - 90 90 90 - 1,250 381 381 - 381 6,335 - - - - ASIA $’000 29,844 29,844 - 29,844 87,617 - ASIA $’000 22,028 22,028 - 22,028 51,907 - - 209 AMERICAS $’000 CORPORATE $’000 TOTAL $’000 (347) (347) - (347) 179 - - - - - - 27 (1,997) (1,970) 10,893 106 31,834 31,861 (1,997) 29,864 99,939 106 - 6,104 (1,631) - 3 (1,631) 10,309 3 AMERICAS $’000 CORPORATE $’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 54 1,605 Net Cash flow from investing activities 9,539 6,659 (5,889) Net Cash flow from financing activities - - - AUSTRALIA $’000 AFRICA $’000 Net Cash flow from investing activities (15) 2,077 NOTE 20. EVENTS OCCURRING AFTER THE REPORTING PERIOD 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 2020 ANNUAL REPORT | 73 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 2020 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 2020 • 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 (including Independence Standards) (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. 74 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Materiality • For the purpose of our audit we used overall materiality of AU$998,000, 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 - AU27.461 million • Level 2 - AU$0.757 million • Level 3 - AU$60.857 million Total - AU$89.075 million The fair value applied by the Company to listed and unlisted investments was a key audit matter due to the significant impact any movement in the fair value as at 31 July 2020 could have on the net assets. The Level 3 investment in the Pani project is described in the following key audit matter. We obtained the Company’s investment schedule as at 31 July 2020 which includes a listing of each investment held and details the number of shares and options held and value per share or option. We compared the investment schedule to the amounts recorded in the financial statements by the Company as at 31 July 2020. We assessed whether the listed and unlisted investment valuation techniques used by the Company are in accordance with Australian Accounting Standards. We performed the following procedures, amongst others, on the fair value of the investments: • For a selection of listed and unlisted equity investments, we compared the number of shares held against evidence such as holding statements or confir- mations from investees. • For a sample of Level 1 listed investments we utilised an auditor’s expert to compare the Company’s fair value to market quoted prices. • For a sample of Level 2 unlisted investments we obtained and assessed observable market data, if available, such as the most recent transacted price made on an arm’s length basis. Where that information was unavailable, we considered other available financial information. LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 75 Key audit matter How our audit addressed the key audit matter We performed the following procedures, amongst others, on the fair value of the investment in the Pani project: • Considered management’s summary of developments and milestones through the year to 31 July 2020 relating to the Pani project and potential impacts to the fair value of the investment. • Utilised an auditor’s valuation expert to assess the valuation, including the appropriateness of the valuation methodology applied by the Company and consideration of the reasonableness of the selected comparable company data. • Tested selected inputs and mathematical accuracy of the calculation prepared by the Company in determining the fair value of the investment in the Pani project. • Considered external economic factors such as the increase in gold equities and gold prices during the year to consider potential impacts to the fair value of the investment in the Pani project. • 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 the Pani project. • Evaluated whether, in view of the requirements of Australian Accounting Standards, the financial report provided adequate disclosure about the investment in the Pani project and this year’s fair value increase. Fair value measurement of the interest in the Pani project Refer to note 3(d) At 31 July 2020, the Company recognised a fair value of its investment in the Pani project of AU$60.7 million, including an unrealised pre-tax mark to market increase of AU$20.0 million this year. Certain valuation techniques were utilised to determine the fair value of the Company’s investment in the Pani project at 31 July 2020, including: • the comparable value method – this primary method involved an assessment of market comparable companies to consider relative movements in the implied value per resource ounce during the year; and • the yardstick method – a secondary valuation method to provide a cross check of the primary technique. 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 2020, 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 remaining 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. 76 | LION SELECTION GROUP LIMITED 2020 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: https://www.auasb.gov.au/admin/file/content102/c3/ar2_2020.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 44 to 47 of the directors’ report for the year ended 31 July 2020. In our opinion, the remuneration report of Lion Selection Group Limited for the year ended 31 July 2020 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 7 September 2020 LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT | 77 Shareholder Information Top 20 holders of ordinary fully paid shares – 30 September 2020 RANK NAME NO. OF SHARES % OF UNITS 1 2 3 4 5 6 7 8 9 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 Retzos Executive Pty Ltd ‹Retzos Executive S/Fund A/C› HSBC Custody Nominees (Australia) Limited Brigstow Pty Ltd ‹Md & Jl Brook Super Fund A/C› 10 CPAC Melloy Super Pty Ltd ‹Melloy Super Fund A/C› 11 Mrs Pamela Julian Sargood 12 Mr Dominic Paul McCormick 13 Pasias Holdings Pty Ltd 14 Melcor Investments Pty Ltd 15 Bond Street Custodians Limited ‹BBBFS - D69416 A/C› 16 WAL Assets Pty Ltd ‹The L A Wilson Property A/C› 17 Majoli Pty Ltd 18 19 Branjee Farm Pty Ltd Avanteos Investments Limited ‹Clearview S/P A/C› 20 Mr John Joseph Ryan Total Top 20 holders of ORDINARY FULLY PAID SHARES Total Remaining Holders Balance 13,307,713 7,483,653 7,219,369 6,600,191 5,200,000 4,448,976 4,445,000 3,936,371 3,791,841 3,082,259 2,750,000 2,425,324 1,700,000 1,411,020 1,393,073 1,207,802 1,195,651 1,181,642 1,126,910 1,122,212 8.86 4.98 4.81 4.40 3.46 2.96 2.96 2.62 2.53 2.05 1.83 1.62 1.13 0.94 0.93 0.80 0.80 0.79 0.75 0.75 75,029,007 75,112,264 49.97 50.03 Distribution of Shareholdings as at 30 September 2020 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 369 901 269 534 182 2,255 316 78 | LION SELECTION GROUP LIMITED 2020 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 2020 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 2020, 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 2020 ANNUAL REPORT | 79 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.au www.investorcentre.com.au STEP 2 Select address location. STEP 2 Click on ‘Login’ and enter your User ID and follow the prompts to login, or for new users click on the ‘Register Now’ link and follow the prompts to register. STEP 3 Select ’Single Holding’. STEP 4 Enter your Securityholder Reference Number (SRN) or Holder Identification Number (HIN), postcode or country if outside Australia. STEP 5 Enter LSX or Lion Selection Group Limited. STEP 6 Type in the characters shown and click the ‘Agree and Continue’ button to accept the Terms and Conditons. 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 80 | LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT LION SELECTION GROUP LIMITED 2020 ANNUAL REPORT Bayan Khundii, Mongolia | 81 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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