DIAMO ND COMPANY ANNUAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2018 ASX Code: LOM Contents Chairman’s Letter Review of Operations Directors’ Report Resource Statement Corporate Governance Statement Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 1. Corporate information 2. Basis of preparation 3. Significant accounting policies 4. Segment reporting 5. Income 6. Expenses 7. Income tax 8. (Loss)/ earnings per share 9. Cash and cash equivalents 10. Trade and other receivables 11. Inventories 12. Financial assets 13. Property plant and equipment 14. Investment in associate 15. Trade and other payables 16. Provisions 17. Borrowings 18. Share capital 19. Financial risk management 20. Commitments and contingencies 21. Parent entity information 22. Related party disclosures 23. Group information 24. Events subsequent to reporting date Directors’ Declaration Auditor’s Report ASX Additional Information 1 2 9 19 21 27 28 29 30 31 31 31 31 39 40 40 41 42 42 43 43 43 44 45 46 46 47 48 50 52 53 53 54 54 55 56 60 Chairman’s Letter Dear Shareholders, I am pleased to report that Lucapa delivered on all the operational goals set and within management’s control in 2018 to further the Company’s strategy of growing as a diamond producer with two of the highest- quality mines in the world. Topping the list of operational achievements was the successful design, financing, construction, commissioning and ramp-up of our At our Brooking project in Western Australia, our early exploration work was successful in discovering primary source lamproite with high concentrations of diamonds. While the bulk sampling results from the Little Spring Creek prospect did not meet our commercial hurdles, we believe Brooking remains highly-prospective for further lamproite discoveries, with multiple targets still to be tested. At a corporate level, management also delivered on cost saving initiatives. new 1.1Mtpa Mothae kimberlite mine in the diamond-rich southern Frustratingly, the achievements we made throughout 2018 were against African Kingdom of Lesotho. The decades of global diamond industry a backdrop of external economic forces affecting the financial climate, experience, contacts and tenacity to deliver which we have within our which in turn impacted on investor sentiment in the global rough Lucapa management team made this possible. diamond sector. Whether listed in London, Canada or Australia, diamond While commercial diamond production commenced on 1 January 2019 at equities around the world simply weren’t seeing any love in 2018. our new mine, Mothae is already producing some beautiful diamonds, According to leading international analyst Paul Zimnisky, global including top-colour white Type IIa gems and fancy pinks. diamond mining equities were down 29% across the board in 2018 The high-quality production from Mothae complements that from our alluvial mine in Angola, Sociedade Mineira Do Lulo (“SML”), which for following a 17% decline in 2017. Despite our major operational achievements, Lucapa has not been immune from that global trend. a fourth year running has delivered the world’s highest US$ per carat But as history has taught us, commodities move in cycles. And as a alluvial production. SML has now achieved total sales of ~US$140m at Board, we believe we have the right strategy in place to maximise an extraordinary average price per carat of more than US$2,000. The shareholder value, along with the team to deliver it. US$8m loan repayment and distribution declared to Lucapa, Endiama and Rosas & Petalas in late 2018 was the third successive year in which distributions have been made, in one form or another. The loan The central pillar of this strategy in these times is prioritising production and cash generation from our two diamond mines. repayment will reduce to ~US$28m the loans payable to Lucapa for As I have touched on earlier, Lucapa is in the sweet spot of the diamond the development of the Lulo alluvial mining operations, including the sector. Not only do our Lulo and Mothae mines produce high-quality 1.1Mtpa treatment plant, mining fleet, camp and infrastructure. diamonds, both also have capacity for expansion and production increases. Significantly, both our Lulo and Mothae mines are scalable – with And while searching for kimberlite diamond sources is a gradual and expansion plans in place for both to further increase our production of methodical process which can test the patience of investors, your large and premium-quality diamonds. Board remains confident that the ultimate prize of a global hard-rock Apart from the commissioning of Mothae, there have been plenty of other discovery at Lulo justifies the effort. achievements along the way for Lucapa in 2018. At Lulo, the search for the Pleasingly, our strategy has won plaudits from one of the world’s hard-rock source of the alluvial diamonds has grown into the largest stand- leading diamond analysts, Kieron Hodgson from London broker alone kimberlite drilling campaign, with drilling now completed across 90 Panmure Gordon. In a recent Lucapa research note, Kieron stated: “We targets, of which some 68 have been confirmed as kimberlites. believe the propensity for large high-value diamonds to be recovered Additionally, our first testing of the extensive flood plains along the Cacuilo River valley proved that like the terrace deposits, these “leziria” areas have the potential to significantly expand the Lulo diamond field and our mining footprint. The political winds of change in Angola’s diamond sector, which were strongly advocated for, delivered a quite remarkable outcome in January 2019, when SML became the first Angolan producer to sell diamonds at international tender. The seven Specials SML tendered achieved US$16.7m through the new sales channel, representing an exceptional average price from Mothae, as well as the potential for a significant expansion of resources, can complement the existing Lulo production perfectly, creating a globally significant producer of large high-value diamonds.” I wish to reflect and thank retired Non-Executive Directors Gordon Gilchrist and Albert Thamm for the invaluable contributions both have made. We too in 2018 were delighted to welcome a new major shareholder and Non- Executive Director to the Company in experienced mining industry figure Ross Stanley. Ross’s confidence and support has seen Lucapa strengthen its position in 2018, setting up 2019 to be a top year. per carat of US$33,530. While the timing of this sale reduced the 2018 We also look forward to a change in our accounts in 2019, when Mothae‘s profit results reported by both SML and Lucapa, the decision to hold over the sale of these diamonds was vindicated by the premiums achieved. production results will be consolidated as part of the Lucapa group. Finally, it has taken a tremendous amount of hard work from an extremely Building on record throughput of more than 285,000 bulk cubic metres dedicated and committed management team, headed by Chief Executive in 2018, these landmark changes in Angola’s diamond marketing Stephen Wetherall, for Lucapa to achieve its operational goals in 2018, regulations have given Lucapa and its partners the confidence to further especially against the somewhat difficult backdrop noted earlier. I would expand our alluvial mining operations in 2019 by an estimated 25%. like to thank them deeply, along with our very many loyal shareholders. MILES KENNEDY Chairman Annual Report for the year ended 31 December 2018 | 1 Annual Report for the year ended 31 December 2018 | 1 Review of Operations for the year ended 31 December 2018 Lucapa Diamond Company Limited (ASX: LOM) (“Lucapa” or “the Company”) is a global diamond mining and exploration company with a strategic Lucapa, with its respective project partners, made significant advancements across its suite of diamond projects and in corporate activities during focus on growing as a diamond producer in the high-value sector of the 2018. These included: diamond market, where demand and pricing remain robust. • The design, financing, construction and commissioning of the new Lucapa operates two of the world’s highest quality diamond mines – the Lulo alluvial mine in Angola (“SML”) and the recently-commissioned Mothae kimberlite mine in Lesotho (“Mothae”). Lucapa is also advancing an extensive drilling program on the Lulo concession to locate the hard- rock kimberlite source. Diamonds recovered from the new Mothae mine in Lesotho Mothae 1.1Mtpa kimberlite diamond mine in Lesotho • First commercial diamond recoveries from Mothae, including Specials of up to 78 carats and intense coloured gems • Continued production of large and premium-value diamonds at record annual throughput rates at the Lulo mine in Angola - the world’s highest US$ per carat alluvial diamond production – including three more +100 carat stones • Selling select Lulo production via an inaugural international competitive bid process which produced a total highest bid value of A$22.9m at an exceptional price per carat of US$33,530 • Successful Lulo alluvial exploration program including the discovery of a new alluvial source of large and premium-value diamonds within the extensive flood plains along the Cacuilo River valley and a 90% increase in in-situ resource carats in the updated Lulo Diamond Resource • Securing a new five-year Mineral Investment Contract for the Lulo kimberlite exploration licence • Identification of 68 confirmed kimberlites at Lulo in the current systematic drilling campaign, including 11 warranting follow-up work • Declaration of a US$4m loan repayment to Lucapa from Lulo mining company SML and a pro-rata US$4m distribution to Lulo partners • Discovery of source lamproite with high concentrations of diamonds at the Brooking project in Western Australia • Successful implementation of cost reduction initiatives at corporate office 2 | Lucapa Diamond Company Limited The new 1.1Mtpa Mothae diamond plant Mothae, Lesotho Kimberlite Diamond Mine – (Mothae Diamonds (Pty) Ltd - Lucapa 70%; Government of the Kingdom of Lesotho 30%) Mothae is a high-quality kimberlite resource located in diamond-rich Prior to the commissioning of the new 1.1Mtpa commercial diamond Lesotho, southern Africa. In 2018 Lucapa completed construction of the plant, Lucapa refurbished and upgraded the existing sampling plant new mine at Mothae to complement production from the high-quality and infrastructure at Mothae for a bulk sampling program, primarily to Lulo alluvial mine in Angola. test areas of the kimberlite pipe which had not previously been sampled The commissioning phase for the 1.1Mtpa Mothae treatment plant or where previous sampling had been inadequate. was successfully completed in Q4 enabling commercial production to Approximately 4,000 carats of diamonds were recovered from the bulk commence in January 2019. While the Mothae plant layout was originally sampling program, including Specials of up to 89 carats. These bulk designed with the intention of doubling throughput to 2.2Mtpa in sampling diamonds were subsequently sold in Antwerp via tender, Phase 2 in 2021, management believes the capacity of the 1.1Mtpa plant achieving gross proceeds of ~US$1.5m at individual sale prices of up to can be increased earlier with relatively minor modifications. US$15,000 per carat. The plant was progressively ramped up in Q4 using kimberlite material Lucapa completed a financing package for Mothae late in the year from the South East domain of the Mothae kimberlite pipe. when the term sheet for a ZAR100m (US$7m) project development By 31 December 2018, 3,089 carats of diamonds had been recovered from the processing of 78,426 tonnes of kimberlite material during the ramp-up phase1. The diamonds recovered included six Specials (diamonds weighing >10.8 carats) of up to 78 carats, along with fancy coloured gems. Significantly, these recoveries produced a recovered grade of 3.94 carats per 100 tonnes (“cpht”) – which was more than double the resource and forecast grades from the areas mined. facility was finalised with the Industrial Development Corporation of South Africa Limited (“IDC”), one of the largest development financiers in southern Africa. This followed the completion of extensive legal, technical and financial due diligence by the IDC on the Mothae mine. 1 The production and recoveries up to the end of December 2018, under International Financial Reporting Standards, are accounted for as part of the commissioning or pre-production phase of the mine and, as such, the operating costs and related revenues from this phase will be recognised as part of the mine development asset. Annual Report for the year ended 31 December 2018 | 3 Review of Operations for the year ended 31 December 2018 The Mothae diamond mine, Lesotho Exceptional diamonds from Lucapa’s new Mothae mine in Lesotho 4 | Lucapa Diamond Company Limited Lulo, Angola Alluvial Diamond Mine – (Sociedade Mineira Do Lulo - Lucapa 40% associate and operator) Lulo alluvial diamond mining company SML treated a record 285,704 The results from the first of these flood plain areas tested – adjacent to bulk cubic metres (“bcm”) of alluvial gravels during 2018, the fourth Mining Block 31 – clearly demonstrated the potential to open additional successive year in which gravel treated increased. Diamond production and expansive new mining areas at Lulo. By the end of 2018, a total totalled 19,196 carats, up 3% on the previous year. of 22 Specials had been recovered from this new area, including an Lulo continued to regularly produce large and premium-value diamonds exceptional 55 carat Type IIa D-colour stone (Figure 1). throughout the year, including 214 Specials (>10.8 carats). The Specials Exploration was also undertaken during the year to define additional included three +100 carat diamonds, taking to 11 the number of +100 alluvial gravels within the high-quality Mining Block 8 area. carat diamonds recovered at Lulo by year end. In addition, 2018 also saw Lulo produce the two largest coloured diamonds – a 46 carat pink and a 43 carat yellow. Apart from mining and processing gravels from established mining blocks, exploration was also undertaken during the year to test new alluvial areas with potential to add to the Lulo resource. While the diamonds mined at Lulo have been sourced predominantly from the terrace deposits along the Cacuilo River valley, exploration was undertaken for the first time along the extensive flood plains (leziria areas) to determine whether these areas also hosted diamonds of similar grade, size and quality to the terraces. Run of mine Lulo diamonds Figure 1: Map showing the extent of the flood plain (leziria) areas along the Cacuilo River adjacent to the mining areas (alluvial terraces). Annual Report for the year ended 31 December 2018 | 5 Review of Operations for the year ended 31 December 2018 Alluvial Diamond Sales SML achieved gross diamond sale revenues of US$26.4m in 2018 at an average price per carat of US$1,313/carat (Table 1). These sales figures excluded seven large and premium-value diamonds which were produced in 2018 but set aside for sale via the inaugural international tender under Angola’s new diamond marketing policy. These diamonds included six Type IIa D-colour diamonds of up to 114 carats and a 46 carat pink diamond (Figure 2). The international tender was successfully completed on 31 January 2019, with the seven Lulo Specials achieving a total highest bid price of US$16.7m ($A22.9m), representing an exceptional average price per carat of US$33,530. The exceptional sale prices achieved for the Lulo diamonds reflected the highly-competitive bidding from more than 30 leading international diamantaires and large stone manufacturers from eight countries who participated in the tender. The sale marked the beginning of a new era for the Angolan diamond mining industry, being the first Angolan production offered for sale via competitive tender under the new diamond marketing policy enacted by the Angolan President, His Excellency Joao Lourenco. SML has achieved an EBITDA (earnings before interest, tax, depreciation & amortisation, fair value adjustments and other non-trading items) loss for the year of US$2.0m (2017: profit of US$7.6m). Had the above Specials’ tender taken place in 2018, SML’s EBITDA for 2018 would have been a profit of US$8.2m, an 8% increase over 2017’s equivalent result. SML uses the cash generated from the sale of Lulo diamonds to fund the Lulo alluvial mining, processing and alluvial exploration activities and employs a workforce of approximately 390 staff and contractors. Free cash generated by SML is partly used to repay the investment or capital loans to Lucapa and to make pro-rata distributions to Lucapa and its Lulo partners. In December 2018, SML declared a pro-rata US$4m distribution to the Lulo partners and a US$4m loan repayment to Lucapa. This followed an US$8m loan repayment and distribution declared to Lucapa and its partners in March 2017 and marked the third consecutive year of distributions from Lulo. Figure 2: The seven Special Lulo diamonds in the historic Angolan tender organised by Sodiam Lucapa CEO Stephen Wetherall (third from left) with Board members and representatives from our Angolan partners Endiama and Rosas and Petalas, Sodiam and Ministry representatives at the historic inaugural sale of Lulo diamonds via international tender in January 2019 6 | Lucapa Diamond Company Limited Table 1: Lulo production and sales for 2018 and comparative years Treated m3 (bulked) Carats Recovered Grade Recovered (cphm3) Number of Specials Recovered Sales (carats) Sales (US$m) Sales Price per Carat (US$)* Diamond Inventory (carats) Calendar 2017 251,968 18,706 7.4 238 18,941 31.6 1,669 2,711 Calendar 2018 285,704 19,196 6.7 214 20,121 26.4 1,313 1,935 % Var 2018 to 2017 13% 3% -9% -10% 6% -16% -21% -29% *2018 excludes the seven special diamonds held over for the tender sale on 31 January 2019 Diamond Value-Adding Strategy The introduction of Angola’s new diamond marketing regulations, Lulo Kimberlite Exploration (Projecto Lulo – Lucapa 39% JV partner and operator) coupled with the commissioning of the new Mothae mine, now In parallel with the alluvial mining operations, Lucapa and its Lulo enables Lucapa to further a value-adding strategy, with the aim of partners continued a systematic kimberlite exploration program generating additional revenue streams through cutting and polishing throughout 2018 with the aim of identifying the primary hard-rock partnerships with leading manufacturers and/ or diamantaires on source, or sources, of the exceptional alluvial diamonds being recovered select high-value diamonds. along the Cacuilo River valley. This is an area in which Lucapa has significant expertise, with Managing In September 2018, a new Mineral Investment Contract (“MIC”) for Director Stephen Wetherall having previously established the Antwerp the Lulo kimberlite exploration licence was gazetted by the Angolan diamond marketing and manufacturing division for London-listed Gem Ministry of Mineral Resources and Petroleum. The MIC covers a five- Diamonds, which included partnering arrangements. year period through to 30 April 2023. Lucapa has received multiple partnership approaches from leading large A drilling campaign to test more than 90 targets proximal to, and/or diamantaires since announcing its intention to develop this strategy upstream of, the alluvial mining blocks was close to completion by year and especially following the inaugural tender in Angola in January 2019. end. Of those targets, 68 had been confirmed as kimberlites. Drill core from the confirmed kimberlites is progressively logged and exported in batches to laboratories in South Africa and Canada for mineral chemistry analysis. By year end, mineral chemistry results had been progressively received from 32 of the 68 targets confirmed as kimberlites in the current drilling program. Eight additional kimberlites were highlighted for follow-up work in 2018 based on their mineral chemistry results. Diamond-associated G3D, G4D and G10D garnets were recovered from kimberlites L050, L048, L232, E192, L103, L028 and L104 – from which a 2.05 carat diamond was also recovered from a 614 bcm bulk sample. In addition, a micro-diamond was also recovered from a pit sample at kimberlite L204, which also recorded a strong lherzolitic garnet chemistry signature, which is also closely associated with diamonds. The Lulo partners continually review all kimberlite drilling and sampling results to guide follow-up programs on selected kimberlites. Annual Report for the year ended 31 December 2018 | 7 Review of Operations for the year ended 31 December 2018 Brooking Diamond Project, Western Australia Lamproite exploration – (Brooking Diamonds (Pty) Ltd - Lucapa 100%. Project tenements owned 80% Lucapa; 20% Leopold Diamond Company) Lucapa’s Brooking project is located in the West Kimberley region of Western Australia within 50km of the Ellendale mine which, until its recent Orapa Area F Project, Botswana Kimberlite exploration – (Lucapa Diamonds (Botswana) Pty Ltd - Lucapa 100% subsidiary) Lucapa’s Orapa Area F project is located ~40km east of the prolific Orapa diamond mine in Botswana. Previous exploration programs completed by Lucapa at Orapa Area F were successful in defining kimberlite drilling targets. closure, produced more than 50% of the world’s fancy yellow diamonds. Lucapa received a two-year extension to the Orapa Area F licence in late 2018, along with environmental approvals for drilling (Refer Subsequent events and Likely developments sections). In early 2018, Lucapa received exceptional micro- and macro-diamond counts from the first two holes drilled at the Little Spring Creek prospect, including: • 119 micro- and macro-diamonds from an 87kg sample of drill core from discovery hole LSC/DH001; and • 1,100 micro- and macro-diamonds from a 178kg sample of drill core from follow-up hole LSC/DH002 These results prompted a follow-up exploration program later in 2018 which included excavating a ~100 tonne bulk sample of lamproite material from Little Spring Creek to test for macro-diamond population, value and grade at the Nagrom metallurgical and analytical laboratory in Perth. This follow-up program also included drilling other lamproite targets defined within the broader Brooking project; re-evaluating the known Big Spring Creek lamproite cluster and stream sampling other targets, including near Little Spring Creek (Refer Subsequent events and Likely developments sections). Schedule of Tenements Schedule of Tenements as at 31 December 2018 Country Type Angola Angola Lesotho Exploration (primary) Kimberlite Mining (secondary) and Exploration Alluvial Mining Licence Botswana Reconnaissance Australia Australia Australia Australia Exploration Licence Exploration Licence Exploration Licence Exploration Licence Size (km2) 3,000 1,500 47 8 72 13 29 3 Period 5 years 10 years 10 years 2 years 5 years 5 years 5 years 5 years Interest (%) 39 40 70 100 80 80 80 80 End date 04/2023 07/2025 01/2027 09/2020 12/2020 03/2019 06/2022 06/2023 8 | Lucapa Diamond Company Limited Directors’ Report for the year ended 31 December 2018 The directors present their report together with the financial report of Lucapa Diamond Company Limited and its subsidiaries (collectively “the Group”) for the financial year ended 31 December 2018 and independent auditor’s report thereon. 1. Directors The directors of the Company at any time during or since the end of the financial period are: Name M Kennedy S Wetherall N Selby G Gilchrist A Thamm R Stanley Position Non-Executive Chairman Chief Executive Officer/Managing Director Chief Operating Officer/Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Period of directorship Appointed 12 September 2008 Appointed 13 October 2014 Appointed 4 September 2017 Appointed 27 March 2012, resigned 26 July2018 Appointed 9 May 2014, resigned 26 July 2018 Appointed 26 July 2018 The qualifications, experience and other directorships of the directors in office at the date of this report are: Miles Kennedy Non-Executive Chairman Nick Selby Chief Operating Officer/ Executive Director Mr Kennedy has held directorships of Australian listed companies for more Mr Selby is an extraction metallurgist with over 35 years’ experience in than 30 years. He was previously Chairman of companies including Sandfire the mining industry. He began his career with De Beers, where he spent 19 Resources, Kimberley Diamond Company, Blina Diamonds, Macraes Mining years in a range of technical roles. Mr Selby joined Gem Diamonds in 2005, Company, MOD Resources and RNI. He has extensive experience in the where he was responsible for establishing diamond projects in various management of public companies with specific emphasis in the resources countries including Angola, Australia, DRC, Central African Republic, industry. He lives in Quedjinup, Western Australia. Indonesia, Lesotho and Botswana. He lives in Perth, Western Australia. Stephen Wetherall Chief Executive Officer/Managing Director Ross Stanley Non-Executive Director Mr Wetherall is a qualified chartered accountant and member of the Mr Stanley has an extensive background in the resources industry in South African Institute of Chartered Accountants with more than 20 Australia and Africa, specialising in drilling and related exploration years’ experience in financial and operational management, corporate and mining services. He was the founder and Managing Director of transactions and strategic planning, most of which has been in the ASX-listed Stanley Mining Services prior to its merger with Layne diamond industry. He has held senior financial and executive roles with Christensen in 1997. Mr Stanley was also a major shareholder and non- diamond major De Beers and London-listed Gem Diamonds. He lives in executive director of Perth-based gold miner Equigold NL, which was Perth, Western Australia. taken over by Lihir Gold for A$1.1 billion in 2008. He is a non-executive director of emerging Cambodian gold miner Emerald Resources. He lives in Perth, Western Australia. Annual Report for the year ended 31 December 2018 | 9 Directors’ Report for the year ended 31 December 2018 2. Company Secretary Mr Mark Clements was appointed to the position of Company Secretary Review of financial condition The Group was predominately focused on its Angolan diamond mining, on 2 July 2012. Mr Clements holds a Bachelor of Commerce degree from evaluation and exploration interests at the Lulo Project, together with the University of Western Australia and is a Fellow of the Institute of the development of the Mothae project in Lesotho which was acquired Chartered Accountants of Australia. Mr Clements is also a member of during 2017 and exploration on its Brooking Project in Western Australia. the Australian Institute of Company Directors and an affiliated member These projects together with the other early stage exploration asset in of the Institute of Chartered Secretaries in Australia. 3. Directors’ meetings The number of directors’ meetings and the number of meetings attended by each of the directors of the Company during the financial year are: M Kennedy S Wetherall N Selby G Gilchrist* A Thamm* R Stanley* Board Meetings A 6 6 6 4 5 1 B 6 6 6 4 5 1 A: number of meetings attended; B: number of meetings held during the time the directors were in office during the year. * Mr Gilchrist and Mr Thamm resigned from the Board on 26 July 2018 and Mr Stanley joined the Board on 26 July 2018. 4. Nature of operations and principal activities The Group’s principal activities during the course of the financial period were the exploration, development and mining of diamond projects in Angola, Lesotho, Botswana and Australia. 5. Operating and financial review The Group reported a loss after tax for the year ended 31 December 2018 of US$7.1m (2017: US$3.4m) after accounting for it’s share of a loss in SML associate, amounting to U$2.7m (2017: profit of US$6.5m). SML has achieved an EBITDA (earnings before interest, tax, depreciation & amortisation, fair value adjustments and other non-trading items) loss for the year of US$2m (2017: profit of US$7.6m). SML’s 2018 results were Botswana require ongoing development, evaluation and exploration work and funding to the extent mining operations do not produce sufficient cash flows to sustain the development activities. Based on (i) the potential of the Lulo diamond concession (alluvial mining, exploration expenditure and the projected cash flows), (ii) the potential of the now completed Mothae diamond mine and its projected cash flows and (iii) the Company’s other strategic initiatives and previous success in accessing capital or finance, the directors are satisfied that the going concern basis of preparation is appropriate. Significant changes in the state of affairs Angola During the year, the Group continued to focus on the mining of large and premium-value alluvial diamonds at Lulo as well as continuing the kimberlite drilling program aimed at identifying the primary hard-rock source or sources. In September 2018, a new Mineral Investment Contract (“MIC”) for the Lulo kimberlite exploration licence was gazetted by the Angolan Ministry of Mineral Resources and Petroleum covering a five-year period through to 30 April 2023. During the year, the Angolan Government introduced a new diamond marketing policy which enabled the international tender of Lulo diamonds to take place in January 2019. Lesotho During the year, the Group completed construction and commissioning of the new 1.1Mtpa Mothae processing plant, which enabled commercial diamond production to commence on 1 January 2019. Diamonds were also recovered and sold from a bulk sampling program at Mothae. A financing facility agreement with the Industrial Development Corporation of South Africa Limited at Mothae for ZAR100m (US$6.9m) materially affected by a decision to postpone the sale of several high-value was secured during the year. diamonds to 2019 in anticipation of a significant change to the diamond marketing policy in Angola as a result of strong and positive initiatives being driven by President Joao Lourenco. These Special diamonds were Western Australia The Group completed a number of exploration programs at Brooking subsequently sold under the new marketing policy via electronic tender in during the year, which included the discovery of source lamproite with January 2019 for US$16.7m (refer to ASX announcement 1 February 2019). high concentrations of diamonds. The profits on these diamonds will be reflected in the 2019 financial year. Had the Specials tender taken place in 2018, SML’s EBITDA for 2018 would have been a profit of US$8.2m, an 8% increase over 2017’s equivalent result. Botswana During the year, the Group received a two-year extension of the Orapa Area F tenements containing the previously-defined kimberlite targets, Corporate expenses include costs for technical expertise engaged as a result along with environmental approvals for drilling. of the increased exploration, development and mining activities across the group. Comparatively, the Lucapa Corporate expenses were reduced by in excess of US$2m in 2018, when compared to 2017. This was primarily as a result of cost saving initiatives and the ability to allocate technical overhead across a larger number of programs on the Company’s projects. The Group had net assets of U$67.2m as at 31 December 2018 (2017: U$59.7m). 10 | Lucapa Diamond Company Limited Corporate The Company completed the following share capital and option transactions during the period. Transaction Issue of shares Issue of shares Issue of shares Issue of shares Issue of shares on exercise of performance rights Issue of options Issue of options Issue of performance rights Number Issue/ exercise price (A$) Funds raised (US$) Option expiry 71,739,131 3,010,070 3,439,962 3,939,541 4,172,498 2,500,000 1,301,000 3,090,000 0.230 0.230 0.252 0.228 - 0.350 0.436 0.000 12,504,079 530,937 641,395 646,894 - - - - n/a n/a n/a n/a n/a 20-Apr-20 07-Jun-21 07-Jun-21 6. Dividends No dividends were paid or declared by the Company during the current or prior financial year. In December 2018, the Lulo alluvial mining company, Sociedade Mineira Do Lulo, declared a distribution of US$4m to the partners and a capital repayment of US$4m to the Company, both of which are to be received in 2019. 7. Environmental regulation The Group’s mining and exploration activities are subject to various environmental regulations. The Company, subsidiary and associate boards are responsible for the regular monitoring of environmental exposures and compliance with environmental regulations. The Group is committed to achieving a high standard of environmental performance and conducts its activities in a professional and environmentally conscious manner and in accordance with applicable laws and permit requirements. The Board believes that the Group has adequate systems in place for the management of its environmental requirements and is not aware of any material breach of those environmental requirements as they apply to the projects. 8. Events subsequent to reporting date On 4 January 2019, Lucapa announced the first repayment of principal in the amount of US$1.875m under the loan facility with Equigold. On 14 January 2019, Lucapa announced the first historic tender of Lulo diamonds under Angola’s new diamond marketing policy, which was scheduled to close on 31 January 2019. On 1 February 2019, Lucapa announced that the diamonds sold in the historic first tender had achieved total highest bids of US$16.7m (A$22.9m), representing an average price per carat of US$33,530. On 4 February 2019, Lucapa released its presentation for the Mining Indaba 2019 conference, which included plans to scale up diamond mining operations at Lulo in mid-2019. On 20 February 2019, Lucapa announced the outcome of a review of the Company’s diamond asset portfolio to maximise shareholder value, which included prioritising cash generation through the expansion of the Lulo and Mothae mining operations; advancing the Lulo kimberlite exploration program; and cutting and polishing select Specials to accrete additional value. On 27 February 2019, Lucapa announced the first Antwerp tender of diamonds from the new 1.1Mtpa Mothae plant in Lesotho had achieved total revenues of US$3.8m (A$5.3m), including prices of up to US$36,664 per carat for individual diamonds. On 15 March 2019, Lucapa announced the recovery of an 83.9 carat diamond from the new Mothae kimberlite diamond mine. 9. Likely developments As outlined in the “Review of Operations” and “Events subsequent to reporting date” sections of this Directors’ Report, the directors consider the following as a summary of the likely developments and expected results for the next 12 months. Lulo, Angola Lucapa and its partners plan to increase throughput by >25% at the Lulo alluvial diamond mine in 2019, while continuing the kimberlite and alluvial exploration programs. Further sales of Lulo diamonds via international tender are planned. Mothae, Lesotho Diamond mining will continue at Mothae in 2019 in parallel with the scoping of modifications to increase the capacity of the 1.1Mtpa plant with relatively minor modifications. Regular sales of Mothae diamonds are expected to take place in Antwerp. Brooking, Western Australia As a result of prioritising producing assets to maximise cash flows and On 18 February 2019, Lucapa announced an exploration update from the Brooking project in Western Australia. The update included bulk shareholder value, the timing of future exploration programs at the Brooking project is being reviewed. sampling results from Little Spring Creek which were below the Company’s commercial hurdle, with micro-diamond results awaited from the Big Spring Creek lamproite samples. The update also included information on drilling targets and stream sampling targets. On 19 February 2019, Lucapa announced the recovery of a 128 carat top- colour white Type IIa Lulo diamond – the 12th +100 carat diamond recovered from Lulo to date, along with a 7.5 carat fancy purple pink diamond. Orapa Area F As a result of prioritising producing assets to maximise cash flows and shareholder value, the timing of future exploration programs at the Orapa Area F project is being reviewed. Annual Report for the year ended 31 December 2018 | 11 Directors’ Report for the year ended 31 December 2018 10. Directors’ interests The relevant interest of each director in the shares and options over such instruments issued by the Company and other related bodies corporate, as notified by the directors to the ASX in accordance with S205G(1) of the Corporations Act 2001, at the date of this report is as follows. Director Fully paid ordinary shares M Kennedy 2,572,502 S Wetherall 2,560,000 N Selby G Gilchrist (4) A Thamm (4) 1,647,083 1,338,624 437,083 R Stanley 40,000,436 Options over ordinary shares expiring 2 June 2019(1) Performance rights expiring 2 June 2019(1) Options over ordinary shares expiring 31 May 2020(2) Performance rights expiring 31 May 2020(2) Options over ordinary shares expiring 7 June 2021(3) Performance rights expiring 7 June 2021(3) 500,000 500,000 500,000 250,000 250,000 - - - - 62,500 62,500 - 230,000 400,000 300,000 190,000 190,000 - 90,000 62,500 37,500 70,000 70,000 - 130,000 210,000 165,000 105,000 105,000 - 169,583 632,500 380,417 132,917 132,917 - Note (1) Options granted to directors following shareholder approval at the annual general meeting held 26 May 2016; (2) Options and performance rights granted to directors following shareholder approval at the annual general meeting held 30 May 2017; (3) Options and performance rights granted to directors following shareholder approval at the annual general meeting held 24 May 2018. (4) Interest held at resignation date. 11. Share Options and Performance Rights Unissued shares under options and performance rights At the date of this report unissued ordinary shares of the Company under option and performance rights are: Expiry date Share options 2 June 2019 15 May 2019 2 May 2020 20 April 2020 31 May 2020 7 June 2021 Performance rights 31 May 2020 7 June 2021 Exercise price (A$) Number of securities Quoted $0.53 $0.53 $0.45 $0.35 $0.46 $0.44 $0.00 $0.00 2,925,000 500,000 250,000 2,500,000 2,250,000 1,301,000 585,000 2,832,502 - - - - - - - - These options and performance rights over unissued shares do not entitle the holder to participate in any share issue of the Company or any other body corporate. 12 | Lucapa Diamond Company Limited 12. Remuneration report – audited 12.1 Principles of compensation Use of remuneration consultants The Group did employ the services of a remuneration consultant during the financial year ended 31 December 2018 and the recommendations Key management personnel (KMP) have authority and responsibility for will be implemented in 2019. planning, directing and controlling the activities of the Group, including directors of the Company and other executive management. Currently, KMP comprises the directors and operations management of the Company. Compensation levels for KMP are competitively set to attract and retain appropriately qualified and experienced directors and executives. The directors of the Company obtain independent advice on the appropriateness of compensation packages of KMP given trends in comparative companies both locally and internationally, and the objectives of the Group’s compensation strategy. The compensation structures are designed to attract suitably qualified industry experts and candidates, reward the achievement of strategic objectives, and achieve the broader outcome of creation of value for shareholders. Compensation packages include a mix of fixed compensation, equity-based compensation as well as employer contributions to superannuation funds. Equity-based compensation (Long term incentive) The Company has an Equity-based incentive plan in place under which directors and management are awarded share options and performance rights. The purpose of the plan is to assist in the incentivisation, reward and retention of directors and management, align their interest with those of the Shareholders of the Company and to focus on the Company’s longer term goals. Short-term and long-term incentive structure and consequences of performance on shareholder wealth Given the Group’s principal activities during the course of the financial period consisting of mining, development, exploration and evaluation of mineral resources, the Board has again for 2018 given significance to service criteria and performance over market related criteria in setting the Group’s incentive and retention schemes. Accordingly, at this stage the Board does not consider the Group’s current earnings or earning Shares, options and performance rights may only be issued to directors measures to be the only appropriate key performance indicator. The subject to approval by shareholders in general meeting. issue of options and performance rights as part of the remuneration Fixed compensation Fixed compensation consists of base compensation, determined from a market review, to reflect core performance requirements and expectations of the relevant position and statutory employer contributions to superannuation funds. Compensation levels are reviewed annually by the Board through a process that considers individual, segment and overall performance of the Group. package of directors, management, employees and contractors is an established practice for listed exploration and development companies and has the benefit of conserving cash whilst appropriately rewarding the recipient. In circumstances where cash flow permits, the Board may approve the payment of a discretionary cash bonus as a reward for performance. During the current year, the Board resolved the payment of a bonus to the Managing Director of US$214,763 (2017: US$225,675) and Directors’ fees Total compensation for directors and non-executive directors is set US$74,700 (2017: US$27,731) to the Chief Operating Officer following securing all funding requirements and significantly advancing the based on advice from external advisors with reference to fees paid to Group’s operations during the year. other directors of comparable companies. Non-executive directors’ fees are presently limited to an aggregate total of US$500,000 per annum, excluding the fair value of any options or performance rights granted. Directors’ fees cover all main Board activities and membership of any committee and subsidiary boards. The Board has no established retirement or redundancy schemes in relation to directors. In considering the relationship between the Group’s remuneration policy and the consequences for the Company’s shareholder wealth, changes in the Company’s share price are considered. Annual Report for the year ended 31 December 2018 | 13 Directors’ Report for the year ended 31 December 2018 Service contracts (as at the date of these financial statements) Stephen Wetherall Mr Wetherall has been engaged to act as the Company’s Chief Miles Kennedy Mr Kennedy has been engaged to act as the Company’s Non-Executive Chairman. Mr Kennedy is entitled to receive director fees of US$105,887 Executive Officer/Managing Director. Mr Wetherall is entitled to receive (gross) per annum, which is subject to review by the Board from time remuneration of US$451,001 (gross, including superannuation) per to time. He will be eligible to participate in any future incentive and annum which is subject to review by the Board from time to time. He retention plans implemented by the Board. Shareholder approval will will be eligible to participate in any future incentive and retention plans be sought for his participation in any incentive plan involving equity of implemented by the Board. Shareholder approval will be sought for his the Company. The appointment may be terminated for various causes participation in any incentive plan involving equity of the Company. The of a standard nature. Upon termination, no benefits are due unless appointment may be terminated for various causes of a standard nature. approved by shareholders. Upon termination, no benefits are due unless approved by shareholders. Nick Selby Mr Selby has been engaged to act as the Company’s Chief Operating Ross Stanley Mr Stanley has been engaged to act as a Non-Executive Director of the Company. Mr Stanley is entitled to receive director fees of US$70,592 Officer/Executive Director. Mr Selby is entitled to receive remuneration (gross) per annum, which is subject to review by the Board from time of US$341,192 (gross, including superannuation) per annum which is to time. He will be eligible to participate in any future incentive and subject to review by the Board from time to time. He will be eligible to retention plans implemented by the Board. Shareholder approval will participate in any future incentive and retention plans implemented by be sought for his participation in any incentive plan involving equity of the Board. Shareholder approval will be sought for his participation in the Company. The appointment may be terminated for various causes any incentive plan involving equity of the Company. The appointment of a standard nature. Upon termination, no benefits are due unless may be terminated for various causes of a standard nature. Upon approved by shareholders. termination, no benefits are due unless approved by shareholders. 12.2 KMP remuneration Details of the nature and amount of each major element of remuneration (in US$) of each KMP of the Company are: Key management personnel Executive Directors Stephen Wetherall, Chief Executive Officer / Managing Director Mr Nick Selby, Chief Operating Officer / Executive Director(2) Non-Executive Directors Miles Kennedy, Non-Executive Chairman Gordon Gilchrist, Non-Executive Director Albert Thamm, Non-Executive Director Mr Ross Stanley, Non-Executive Director Total Short-term benefits Period ended Salary & fees Bonus Post employment benefits Equity-settled share based payments Super- annuation benefits Options and performance rights(1) Dec 18 Dec 17 Dec 18 Dec 17 Dec 18 Dec 17 Dec 18 Dec 17 Dec 18 Dec 17 Dec 18 Dec 17 Dec 18 Dec 17 432,326 214,763 418,837 225,675 322,517 309,824 105,887 103,275 37,606 62,877 37,606 62,877 27,901 - 74,700 27,731 50,423 - 5,116 - 5,116 - - - 963,843 350,118 957,690 253,406 18,675 21,038 18,675 206,989 298,345 137,110 22,950 210,246 74,470 107,374 54,876 72,799 54,876 72,799 - - - - 4,059 5,973 4,059 5,973 2,651 - 48,118 55,934 Total (US$) 872,752 963,895 553,002 570,751 230,780 210,649 101,657 141,649 101,657 141,649 30,552 - 528,322 1,890,400 761,563 2,028,593 1 These options issued have been valued in accordance with the methodology listed in Note 18 to these financial statements. 2 Mr Selby’s remuneration has been included in full for the both periods, including remuneration received prior to his appointment as director in 2017. 14 | Lucapa Diamond Company Limited 12.3 Equity instruments All options refer to options and performance rights over ordinary shares of the Company, which are exercisable on a one-for-one basis. 12.3.1 Analysis of movements in options, performance rights and shares Options and performance rights over equity instruments The movement during the reporting period in the number of options and performance rights over ordinary shares in the Company held, directly, indirectly or beneficially, by each KMP, including their related parties, is as follows: Directors 2018 M Kennedy S Wetherall N Selby G Gilchrist (1) A Thamm (1) R Stanley (2) 2017 M Kennedy S Wetherall N Selby G Gilchrist A Thamm Held at 1 January or date of appointment Options acquired Exercise of options and performance rights Expired without exercise Options and performance rights granted Held at 31 December or date of resignation Vested & exercisable 1,125,000 1,900,000 1,437,500 712,500 712,500 - 1,750,000 2,250,000 687,500 875,000 937,500 - - - - - - - - - - - (320,417) (995,000) (634,583) (152,083) (152,083) - - - - - - - 315,000 900,000 580,000 250,000 250,000 - 1,119,583 696,667 1,805,000 836,666 1,382,917 755,000 810,417 810,417 - 411,666 411,666 - (625,000) (500,000) 500,000 (1,000,000) (750,000) 1,400,000 (75,000) (562,500) - - 825,000 400,000 (148,030) (476,970) 400,000 1,125,000 1,900,000 535,001 716,667 1,437,500 620,834 712,500 712,500 292,500 292,500 (1) Resigned 26 July 2018. (2) Appointed 26 July 2018. Movements in shares The movement during the reporting period in the number of ordinary shares in the Company held, directly, indirectly or beneficially, by each KMP, including their related parties, is as follows. Directors 2018 M Kennedy S Wetherall N Selby G Gilchrist (1) A Thamm (1) R Stanley (2) 2017 M Kennedy S Wetherall N Selby G Gilchrist A Thamm Held at 1 January or date of appointment Received upon exercise of options and performance rights Sales Purchases Held at 31 December or date of resignation 2,252,085 1,565,000 1,012,500 1,186,541 285,000 40,000,436 1,627,085 565,000 - 624,041 136,970 320,417 995,000 634,583 152,083 152,083 - 625,000 1,000,000 1,012,500 562,500 148,030 - - - - - - - - - - - - - - - - - - - - - - 2,572,502 2,560,000 1,647,083 1,338,624 437,083 40,000,436 2,252,085 1,565,000 1,012,500 1,186,541 285,000 (1) Resigned 26 July 2018. (2) Appointed 26 July 2018. No shares were granted to KMP during the reporting period as compensation in 2018 or 2017. END OF AUDITED SECTION. Annual Report for the year ended 31 December 2018 | 15 Directors’ Report for the year ended 31 December 2018 13. Indemnification and insurance of officers and auditors The Company has entered into deeds of indemnity, insurance and access (“Deeds”) with each of its directors. Under these Deeds, the Company indemnifies each director or officer to the maximum extent permitted by the Corporations Act 2001 from liability to third parties and in successfully defending legal and administrative proceedings and applications for such proceedings. The Company must use its best endeavours to insure a director or officer against any liability, which does not arise out of conduct constituting a wilful breach of duty or a contravention of the Corporations Act 2001. The Company must also use its best endeavour to insure a director or officer against liability for costs and expenses incurred in defending proceedings whether civil or criminal. The Company has during and since the end of the year, in respect of any person who is an officer of the Company or a related body corporate, paid a premium in respect of Directors and Officer liability insurance which indemnifies directors, officers and the Company of any claims made against the directors, officers of the Company and the Company, subject to conditions contained in the insurance policy. The directors have not included details of the premium paid in respect of the directors’ and officers’ liability and legal expenses’ insurance contracts, as such disclosure is prohibited under the terms of the contract. The Company has not entered into any agreement to indemnify the auditors against any claims by third parties arising from their reports on the Financial Report for the year ended 31 December 2018 and prior period ended 31 December 2017. 16 | Lucapa Diamond Company Limited 14. Auditor independence and Non-audit services The directors received the following declaration from the Company’s auditors, Greenwich & Co: Greenwich & Co Audit Pty Ltd | ABN 51 609 542 458 Level 2, 35 Outram St, West Perth WA 6005 PO Box 983, West Perth WA 6872 T 08 6555 9500 | F 08 6555 9555 www.greenwichco.com To those charged with the governance of Lucapa Diamond Company Limited Auditor’s Independence Declaration As auditor for the audit of Lucapa Diamond Company Limited for the year ended 31 December 2018, I declare that, to the best of my knowledge and belief, there have been: i. no contraventions of the independence requirements of the Corporations Act 2001 in relation to the audit; and ii. no contraventions of any applicable code of professional conduct in relation to the audit. GREENWICH & CO AUDIT PTY LTD RAFAY NABEEL Audit Director 22 March 2019 Perth Annual Report for the year ended 31 December 2018 | 17 Directors’ Report for the year ended 31 December 2018 During the period Greenwich & Co have not performed any other services for the Company in addition to their statutory audit and as a result the directors are satisfied that auditors have not compromised the auditor independence requirements of the Corporations Act 2001. Details of the amounts paid to the current auditor of the Company, Greenwich & Co are set out below: 31 Dec 2018 US$ 31 Dec 2017 US$ 31,201 - 31,201 31,051 - 31,051 Auditors Remuneration Audit services Other services Signed in accordance with a resolution of the directors, on behalf of the directors. MILES KENNEDY Chairman Dated this 22 March 2019. 18 | Lucapa Diamond Company Limited Resource Statement for the year ended 31 December 2018 Lulo alluvial diamond resource LULO CLASSIFIED DIAMOND RESOURCE - 31 December 2018, LOM 40% attributable Resource Classification Date Area (m2) lnsitu volume (m3) Grade (stns/m3) cts/stn Stones Carats ln-situ grade (cphm3) Modelled value (US$/carat) Inferred Inferred Notes: 31-Dec-18 1,313,900 31-May-17 1,158,100 454,400 603,700 0.15 0.06 1.14 1.13 70,400 80,400 37,370 42,200 17.70 6.99 1,420 1,215 (i) Cphm3: carats per 100 cubic metres; Stns/m3: stones per cubic metre (ii) Average realised sales may be significantly higher in value than the modelled values shown above (iii) Bottom screen size: effective 1.5mm (iv) Undiluted grade at 31 December 2018. Diluted grade at 31 May 2017 The Lulo Classified Inferred Diamond Resource has been independently estimated and reconciled by external consultants, Z Star Mineral Resource Consultants (Pty) Ltd, of Cape Town, South Africa (Z Star). The estimation methodology has been changed by Z Star, compared to 31 May 2017, as a result of information derived from the extensive auger drilling program. Diamond quantities have been estimated utilising diamond recoveries per unit area, as opposed to a volumetric grade. Gravel volume is calculated from the gravel area and gravel thickness determined by auger drilling. This has allowed elimination of the impact of normal mining dilution and variable bulking factors from the grade estimate, giving an improved estimate of in-situ resources. Consequently, this has increased the estimated grade for the available gravel. Mining dilution is a necessary part of the mining process, ensuring that all potentially diamondiferous material is recovered from the thin gravel beds making up the majority of the deposits at Lulo. This ensures all the Special diamonds (>10.8 carat stones), which have been achieving average sales values of >US$100,000 per stone, are recovered by mining for processing. Production grades are based on treated volumes inclusive of the required mining dilution, not in-situ volumes. The quantity of dilution has been estimated by Z Star, based on historical mining production data, and an Inferred, Diluted Diamond Resource is shown in the table below: Inferred diluted resource Area (m2) Resource volume incl. dilution (m3) Stones Carats Diluted grade (cphm3) Modelled value (US$/carat) 31-Dec-18 1,313,900 1,132,700 70,400 80,400 7.1 1,420 The Lulo partners are conducting an expanded pitting and auger drilling program around the highest-value diamond areas at Lulo, to expand the Lulo Diamond Resource. The program consisting of over 4,200 additional auger holes (>36km drilled metres) from 31 May 2017 to 31 December 2018 has allowed the definition of alluvial channels with much higher confidence. The exploration program is expected to further expand during the coming year, with exploration targets consisting of 250k – 300k bank cubic metres of gravel already identified. As set out in the ASX announcement of 5 November 2018, the auger drilling program was successful in defining new alluvial sources of gravels in the flood plains (leziria areas) along the Cacuilo River valley within the Lulo concession. While exploration has continued in these extensive flood plain areas throughout Q1 2019, only the portion of alluvial gravels defined by drilling in these new areas up to 31 December 2018 has been included by Z Star in the updated Lulo Diamond Resource. Changes in the resource volumes reflect mining depletion from 31 May 2017 and additional resources defined by drilling and mining from 31 March 2017 to 31 December 2018. The Lulo Diamond Resource has been reconciled and depleted as at 31 December 2018 and relies on drone photogrammetry to reflect accurate and precise survey information. lnformation included in this report on the Lulo Diamond Resource is based on and fairly represents information and supporting documentation prepared, compiled and supervised by Richard Price MAuslMM, who is a Member of the Australasian lnstitute of Mining and Metallurgy. Mr. Price is an employee of Lucapa Diamond Company Limited. Mr. Price has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined in the 2012 Edition of the Joint Ore Reserves Committee (JORC) Code. Mr. Price consents to the inclusion in this report of the matters based on this information in the form and context in which it appears. lnformation included in this report that relates to the stone frequency, grade and size frequency valuation and validation in the alluvial resource estimate is based on and fairly represents information and supporting documentation prepared and compiled by Sean Duggan (Pri.Sci.Nat 400035/01) and David Bush (Pri.Sci.Nat 400071/00). Messers. Duggan and Bush are directors and employees of Z Star Mineral Resource Consultants (Pty) Ltd, of Cape Town, South Africa. Both hold qualifications and experience such that both qualify as members of a Recognised Overseas Professional Organisation (ROPO) under relevant ASX listing rules. Mr. Duggan and Mr. Bush have sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which they are undertaking to qualify as a Competent Person as defined in the 2012 Edition of the Joint Ore Reserves Committee (JORC) Code. Both Mr. Duggan and Mr. Bush consent to the inclusion in this report of the matters based on this information in the form and context in which it appears. Annual Report for the year ended 31 December 2018 | 19 Resource Statement for the year ended 31 December 2018 Mothae kimberlite diamond resource MOTHAE CLASSIFIED DIAMOND RESOURCE - 31 December 2018, LOM 70% attributable To 300m Below Surface; 2mm Bottom Screen Resource Classification Indicated Inferred TOTAL Indicated Inferred TOTAL Date 31-Dec-18 21-Mar-17 Tonnes (Mt) 2.38 36.44 38.82 2.39 36.57 38.96 Grade (cpht) Carats (million) Modelled value (US$/ carat) 3.0 2.7 2.7 3.0 2.7 2.7 0.07 0.97 1.04 0.07 0.97 1.04 1,196 1,053 1,063 1,196 1,053 1,063 Notes: (i) Table contains rounded figures (ii) Grade figures are based on recovery factors derived from total content curves for each geological domain, and actual plant recoveries achieved (iii) The Diamond Resource estimate was originally reported in accordance with Canadian NI 43-101 standard in February 2013 and has been re- stated in accordance with JORC 2012 guidelines (iv) The estimate is global in nature (v) Unclassified kimberlite exists from 300m to 500m below surface and in the neck zone (vi) Changes in the resource reflect mining depletion from 21 March 2017 to 31 December 2018, as a result of bulk sampling and ramping up of production lnformation included in this report on the Mothae Classified Diamond Information included in this table that relates to the stone frequency, Resource is based on and fairly represents information and supporting grade and size frequency valuation and validation in the resource documentation prepared, compiled and supervised by Richard Price estimate is based on and fairly represents information and supporting MAuslMM, who is a Member of the Australasian lnstitute of Mining documentation prepared and compiled by Dr Friedrich Johannes and Metallurgy. Mr. Price is an employee of Lucapa Diamond Company Reichhardt, Pri.Sci.Nat and Dr Johannes Ferreira, Pri.Sci.Nat. Both are Limited. Mr. Price has sufficient experience which is relevant to the employees of the MSA Group (Pty) Ltd, Johannesburg, South Africa. style of mineralisation and type of deposit under consideration and to Both hold qualifications and experience such that both qualify as the activity which he is undertaking to qualify as a Competent Person as members of a Recognised Overseas Professional Organisation (ROPO) defined in the 2012 Edition of the Joint Ore Reserves Committee (JORC) under relevant ASX listing rules. Dr Reichhardt and Dr Ferreira have Code. Mr. Price consents to the inclusion in this report of the matters sufficient experience which is relevant to the style of mineralisation based on this information in the form and context in which it appears. and type of deposit under consideration and to the activity which they are undertaking to qualify as a Competent Person as defined in the 2012 Edition of the Joint Ore Reserves Committee (JORC) Code. 20 | Lucapa Diamond Company Limited Corporate Governance Statement for the year ended 31 December 2018 In fulfilling its obligations and responsibilities to its various stakeholders, the Board of Lucapa Diamond Company Limited is a strong advocate of good corporate governance. The Board has adopted corporate governance policies and practices consistent with the ASX Corporate Governance Council’s “Corporate Governance Principles and Recommendations” (Recommendations) where considered appropriate for a Company of Lucapa’s size and complexity. The 3rd edition of the ASX Corporate Governance Principles and Recommendations was introduced on 27 March 2014 and took effect Principle 1 - Lay solid foundations for management and oversight - role and responsibilities of the Board and Management The main function of the Board is to lead and oversee the management and strategic direction of the Group. The Board regularly measures the performance of management in implementation of the strategy through regular Board meetings. for a listed entity’s first full financial year ending on or after 1 July Lucapa has adopted a formal Board charter delineating the roles, 2014. Accordingly, this Corporate Governance Statement has been responsibilities, practices and expectations of the Board collectively, prepared on the basis of disclosure under the 3rd edition of these the individual directors and management. principles. Details of the Company’s compliance with these principles are summarised in the Appendix 4G announced to ASX in conjunction with the Annual Report. The Board of Lucapa ensures that each member understands their roles and responsibilities and ensures regular meetings so as to retain full and effective control of the Company. This statement describes how Lucapa has addressed the Council’s guidelines and eight corporate governance principles and where Role of the Board the Company’s corporate governance practices depart from the The Board responsibilities are as follows: Recommendations, the Company discloses the reason for adoption of • Setting the strategic aims of Lucapa and overseeing management’s its own practices on an “if not, why not” basis. performance within that framework; Given the size and development nature of the Group and the cost of strict compliance with all the Recommendations, the Board has adopted a range of modified procedures and practices which it considers appropriate to enable it to meet the principles of good corporate governance. At the end of this statement is a checklist setting out the Recommendations with which the Company does or does not comply. The information in this statement is current as at 22 March 2019. • Making sure that the necessary resources (financial and human) are available to the Group and management to meet its objectives; • Overseeing and measuring management’s performance of the Company’s strategic plan; • Selecting and appointing a Managing Director with the appropriate experience and skills to help the Group in the pursuit of its objectives; • Controlling and approving financial reporting, capital structures and material contracts; The following governance-related documents can be found on the • Ensuring that a sound system of risk management and internal Company’s website at www.lucapa.com.au under the section marked controls is in place; “Corporate Governance”. Charters • Board Policies and procedures • Code of Conduct • Policy and Procedure for Selection and (Re)Appointment of Directors • Policy on Assessing the Independence of Directors • Securities Trading Policy • Risk Management Policy • Procedure for the Selection, Appointment and Rotation of External Auditor • Policy on Continuous Disclosure • Shareholder Communication Policy • Diversity Policy • Setting the Company’s values and standards; • Undertaking regular review of the corporate governance policies to ensure adherence to the ASX Corporate Governance Council principles; • Ensuring that the Company’s obligations to shareholders are understood and met; • Ensuring the health, safety and well-being of employees in conjunction with management, developing, overseeing and reviewing the effectiveness of the Group’s occupational health and safety systems to assure the well-being of all employees; • Ensuring an adequate system is in place for the proper delegation of duties for the effective day to day running of the Group without the Board losing sight of the direction that the Group is taking; • Establishing a diversity policy and setting objectives for achieving diversity. Annual Report for the year ended 31 December 2018 | 21 Corporate Governance Statement for the year ended 31 December 2018 Delegation to Management Role of Company Secretary Other than matters specifically reserved for the Board, responsibility for The Company Secretary is accountable to the Board for: the operation and administration of the Company has been delegated • Advising the Board and committees on corporate governance matters; to the Managing Director. This responsibility is subject to an approved • The completion and distribution of Board and committee papers; delegation of authority which is reviewed regularly and at least annually. • Completion of Board and committee minutes; and Internal control processes are designed to allow management to operate within the parameters approved by the Board and the Managing • The facilitation of director induction processes and ongoing professional development of directors. Director cannot commit the Group to additional activities or obligations All directors have access to the Company Secretary who has a direct in excess of these delegated authorities without specific approval of reporting line to the Chairman. the Board. Election of Directors Diversity The Board values diversity in all aspects of its business and is committed The Board is responsible for overseeing the selection process of new to creating a working environment that recognises and utilizes the directors, and undertakes appropriate checks before appointing a new contribution of its employees. The purpose of this is to provide director, or putting forward a candidate for election as a director. All relevant information is to be provided in the Notice of Meeting seeking the election or re-election of a director including: • Biographical details including qualifications and experience; • Other directorships and material interests; • Term of office; • Statement by the Board on independence of the director; • Statement by the Board as to whether it supports the election or re-election; and • Any other material information. Terms of appointment Non-Executive Directors To facilitate a clear understanding of roles and responsibilities all non- executive directors have signed letter of appointment. This letter of appointment letter includes acknowledgement of: • Director responsibilities under the Corporations Act, Listing Rules, the Company’s Constitution and other applicable laws; • Corporate governance processes and Group policies; • Board and Board committee meeting obligations; • Conflicts and confidentiality procedures; • Securities trading and required disclosures; • Access to independent advice and employees; • Confidentiality obligations; • Directors fees; • Expenses reimbursement; • Directors and officers insurance arrangements; • Other directorships and time commitments; and • Board performance review. Executive Directors The Executive Directors have a signed executive services agreement. For further information refer to the Remuneration Report. diversity and equality relating to all employment matters. The Group’s policy is to recruit and manage on the basis of experience, ability and qualification for the position and performance, irrespective of gender, age, marital status, sexuality, nationality, race/cultural background, religious or political opinions, family responsibilities or disability. The Group opposes all forms of unlawful and unfair discrimination. The Board comprises four directors, all of whom are male. The Board has determined that the composition of the current Board represents the best mix of directors that have an appropriate range of qualifications and expertise in the jurisdictions in which the Group operates, can understand and competently deal with current and emerging business issues and can effectively review and challenge the performance of management. The Company has disclosed measurable diversity objectives for the current period in the Remuneration Report included in the Annual Report for the year ended 31 December 2018. The Group is continuing to assess and proactively monitor gender diversity at all levels of Lucapa’s business and recognizes that it operates in a very competitive labour market where positions are sometimes difficult to fill. However, every candidate suitably qualified for a position has an equal opportunity of appointment regardless of gender, age, ethnicity or cultural background. 31 December 2018 31 December 2017 Gender representation Female Male Female Male No % No % No % No % Board representation - - 4 100 - - 5 100 Group representation 85 14.7 493 85.3 39 9.3 384 90.7 The Company, together with its subsidiaries and associates currently has 582 full-time employees of which 497 who are male and 85 who are female. 22 | Lucapa Diamond Company Limited Performance review Directors’ and officers’ liability insurance Board and Board committees A review of the Board’s performance and effectiveness is conducted annually and the performance of individual directors is undertaken regularly. The Board has the discretion for these reviews to be conducted either independently or on a self-assessment basis. The review focuses on: • Strategic alignment and engagement; • Board composition and structure; • Processes and practices; Directors’ and officers’ liability insurance is maintained by the Company for the directors and senior executives at the Company’s expense. Board meetings The frequency of Board meetings and the extent of reporting from management at Board meetings are as follows: • A minimum of four scheduled meetings are to be held per year; • Other meetings will be held as required; • Meetings can be held where practicable by electronic means; • Information provided to the Board includes all material information • Culture and dynamics; relationship with management; and related to the operations of the Group including exploration, • Personal effectiveness. A review of the Board’s performance and effectiveness in respect of the year ended 31 December 2018 was conducted. Managing Director and senior executives Performance evaluation of the Managing Director, senior executives development and production operations, budgets, forecasts, cash flows, funding requirements, investment and divestment proposals, business development activities, investor relations, financial accounts, taxation, external audits, internal controls, risk assessments, people and health, safety and environmental reports, statistics and new business; and employees is undertaken annually through a performance appraisal • Once established, the Chairman of the appropriate Board process which involves reviewing and assessment of performance committee will report to the subsequent Board meeting the against agreed corporate objectives and individual key performance outcomes of that meeting and the minutes of those committee indicators and deliverables. meetings are also tabled. For further information refer to the Remuneration Report. Retirement and rotation of directors Retirement and rotation of directors are governed by the Corporations Act 2001 and the Constitution of the Company. Each year, one third of directors must retire and may offer themselves for re-election. Any casual vacancy filled will be subject to shareholder vote at the next Annual General Meeting of the Company. It is intended that Mr Ross Stanley having been appointed since the 2018 Annual General meeting will retire and offer himself for The number of directors’ meetings (including meetings of committees of directors where applicable) and the number of meetings attended by each of the directors of the Company during the financial year are set out in the Directors’ Report. Principle 2 - Structure the Board to add value - composition of the Board The names of the directors of the Company and their qualifications are set out in the section headed “Information on Directors” in the re-election and Mr Nick Selby will stand for re-election by rotation at the Director’s Report. Company’s Annual General Meeting in May 2019. Independent professional advice Each director of the Company or a controlled entity has the right to seek independent professional advice at the expense of the Company or the controlled entity. However prior approval of the Chairman is required which will not be unreasonably withheld. Access to employees Directors have the right of access to any employee. Any employee shall report any breach of corporate governance principles or Company policies to the Chairman who shall remedy the breach. If the breach is not rectified to the satisfaction of the employee, they shall have the right to report any breach to an independent director without further reference to senior executives of the Company. The ASX Corporate Governance Council guidelines recommend that the Board should constitute of a majority of independent directors and that the Chairperson should be independent. The Board consists of four directors of whom one is considered independent, being Mr Miles Kennedy (Non-executive Chairman - appointed as a director on 12 September 2008 and served as Executive Director until 11 December 2014). The Board considers that whilst Mr Kennedy has served as a director for a long period, he remains independent from management and substantial shareholders and is therefore able to bring an independent judgement to bear on issues before the Board and to act in the best interests of the Company as a whole rather than in the interests of an individual shareholder or other party. Mr Ross Stanley (Non-Executive Director – appointed 26 July 2018) has a substantial shareholding in the company and therefore does not meet the criteria for an independent director. Mr Stephen Wetherall (appointed 13 October 2014) is Managing Director and therefore does not meet the criteria for an independent director due to his executive role. Mr Nick Selby (appointed 4 September 2017) is an Executive Director and therefore does not meet the criteria for an independent director due to his executive role. Annual Report for the year ended 31 December 2018 | 23 Corporate Governance Statement for the year ended 31 December 2018 Board skills and experience Director induction and ongoing professional development The Company objective is to have an appropriate mix of experience The Company does not have a formal induction program for directors but and expertise on the Board and Committees so that the Board is does provide directors with an information pack detailing policies, corporate able to effectively discharge its corporate governance and oversight governance and various other corporate requirements of being a director responsibilities. The composition of the Board has been structured so as to provide Lucapa with an adequate mix of directors with industry knowledge, technical, commercial, capital markets and financial skills together with integrity and judgment considered necessary to represent shareholders and fulfil the business objectives of the Group. The Board comprises directors who each have extensive technical, financial, capital markets and commercial expertise. The Board will address the skills commensurate with the growth and development of the Group’s activities to ensure those skill sets are complemented by additional industry expertise in the sector pursued as required. This mix is described in the Board skills matrix as follows: NUMBER OF DIRECTORS HOLDING THIS SKILL SKILL Resources industry experience Diamond industry experience Strategy Mergers and acquisitions Finance Risk Management Government relations Capital projects; financing/project management Sustainable development Previous board experience Governance Policy Executive leadership Remuneration Nomination of other Board members of an ASX listed company. Due to the size and nature of the business, directors are expected to already possess a level of both industry, technical and commercial expertise before being considered for a directorship of the Company. Directors are provided with the opportunity to access employees of the business and any information as they require on the business including being given access to regular operational updates, industry news articles and publications where considered relevant. Principle 3 - Promote ethical and responsible decision-making - Code of Conduct Directors, officers, employees and consultants to the Group are required to observe high standards of behaviour and business ethics in conducting business on behalf of the Group and they are required to maintain a reputation of integrity on the part of both the Group and themselves. The Group does not contract with or otherwise engage any person or party where it considers integrity may be compromised. Conflicts of interest Directors are required to disclose to the Board actual or potential conflicts of interest that may or might reasonably be thought to exist between the interests of the director or the interests of any other party in so far as it affects the activities of the Group and to act in accordance with the Corporations Act if the conflict cannot be removed or if it persists. That involves taking no part in the decision making process or discussions where a conflict does arise. Trading in Company securities Directors are required to make disclosure of any trading in the Company’s shares. The Company policy in relation to share trading is that officers are prohibited to trade whilst in possession of unpublished price sensitive information concerning the Group or within a period of the release of results i.e. the blackout period. That is information which a reasonable person would expect to have a material effect on the price or value of the Company’s shares. An officer must receive authority to acquire or sell shares with the directors or the Company Secretary prior to doing so to ensure that there is no price sensitive information of 4 3 4 4 4 4 4 4 4 4 4 4 4 4 Membership of the Board of directors is reviewed on an on-going basis which that officer might not be aware. The undertaking of any trading by the Chairperson of the Board to consider diversity and to determine in shares must be notified to the ASX. if additional core strengths are required to be added to the Board in light of the nature of the Group’s businesses and its objectives. The Board does not have a separate Nomination Committee and does not believe it is necessary in a Group of Lucapa’s size. 24 | Lucapa Diamond Company Limited Principle 4 - Safeguard integrity in financial reporting Lucapa has a financial reporting process which includes half year and full-year results which are signed off by the Board before they are released to the market. The Board does not have a separate Audit Committee and does not believe it is necessary in a Group of Lucapa’s size. Instead, the four Board members, who each have extensive commercial and financial expertise, manage the financial oversight as well as advise on the modification and maintenance of the Group’s financial reporting, internal control structure, external audit functions, and appropriate ethical standards for the management of the Group. In discharging its oversight role, the Board is empowered to investigate any matter brought to its attention with full access to all books, records, facilities, and personnel of the Group and the authority to engage independent counsel and other advisers as it determines necessary to carry out its duties. The Managing Director reports on the propriety of compliance on internal controls and reporting systems and ensures that they are working efficiently and effectively in all material respects. The Company has established procedures for the selection, appointment and rotation of its external auditor. The Board is responsible for the initial appointment of the external auditor and the appointment of a new external auditor when any vacancy arises. Candidates for the position of external auditor must demonstrate complete independence from the Company through the engagement period. The Board may otherwise select an external auditor based on criteria relevant to the Company’s business and circumstances. The performance of the external auditor is reviewed on an annual basis by the Board. The Company’s external auditor attends each Annual General meeting and is available to answer questions from shareholders relevant to the conduct of the external audit, the preparation and content of the The Managing Director has ultimate authority and responsibility for recommending market disclosure to the Board which, in practice, is exercised in conjunction with the Board and Company Secretary. In addition, the Board will also consider whether there are any matters requiring continuous disclosure in respect of each and every item of business that it considers. Principle 6 - Respect the rights of shareholders The Board’s fundamental responsibility to shareholders is to work towards meeting the Company’s objectives so as to add value for them. The Board maintains an investor relation program which will inform shareholders of all major developments affecting the Group by: • Preparing half yearly and yearly financial reports; • Preparing quarterly cash flow reports and reports as to activities; • Making announcements in accordance with the listing rules and the continuous disclosure obligations; • Posting all of the above on the Company’s website; • Annually, and more regularly if required, holding a general meeting of shareholders and forwarding to them the annual report, if requested, together with notice of meeting and proxy form; and • Voluntarily releasing other information which it believes is in the interest of shareholders. The Annual General Meeting enables shareholders to discuss the annual report and participate in the meetings either by attendance or by written communication. The Company provides all shareholders with a Notice of Meeting so they can be fully informed and be able to vote on all resolutions at the Annual General Meeting. Shareholders are able to discuss any matter with the directors and/or the auditor of the Company who is also invited to attend the Annual General Meeting. Shareholders have the option to receive all Company and share registry communications electronically and may also communicate with the Company by emailing the Company via its website. All shareholders have the ability to request copies of ASX releases, all of which are published and available on the Company’s website immediately after Auditor’s Report, the accounting policies adopted by the Company and they are released to ASX. the independence of the auditor. Principle 5 - Make timely and balanced disclosure Lucapa has adopted a formal policy dealing with its disclosure responsibilities. The Board has designated the Company Secretary as the person responsible for overseeing and coordinating disclosure of information to the ASX as well as communicating with the ASX. In accordance with the ASX Listing Rules the Company immediately notifies the ASX of information: • Concerning the Group that a reasonable person would expect to have a The Company regularly reviews its stakeholder communication policy and endeavours to maintain a program appropriate for a company of its size and complexity. Principle 7 - Recognise and manage risk The Board has adopted a Risk Management Policy, which sets out the Group’s risk profile. Under the policy, the Board is responsible for approving the Group’s policies on risk oversight and management and satisfying itself that management has developed and implemented a sound system of risk management and internal control. material effect on the price or value of the Company’s securities; and • That would, or would be likely to, influence persons who commonly Under the policy, the Board delegate’s day-to-day management of risk to the Managing Director, who is responsible for identifying, assessing, invest in securities in deciding whether to acquire or dispose of the monitoring and managing risks with the Executive. The Executive is Company’s securities. The policy also addresses the Company’s obligations to prevent the also responsible for updating the Group’s material business risks to reflect any material changes, with the approval of the Board. creation of a false market in its securities. Lucapa ensures that all information necessary for investors to make an informed decision is In fulfilling the duties of risk management, the Executive has unrestricted access to Group employees, contractors and records and may obtain also made available on its website. independent expert advice on any matter they believe appropriate. Annual Report for the year ended 31 December 2018 | 25 Corporate Governance Statement for the year ended 31 December 2018 The Board does not have a separate Risk Management Committee as the Board monitors and reviews the integrity of financial reporting and the Group’s internal financial control systems. Management assess the effectiveness of the internal financial control on an annual basis and table concerns and recommendations at Board meetings were required. In addition, the following risk management measures have been adopted by the Board to manage the Group’s material business risks: • Establishment of financial control procedures and authority limits for management; • Approval of an annual budget; • Adoption of a compliance procedure for the purpose of ensuring compliance with the Company’s continuous disclosure obligations; and • Adoption of a corporate governance manual which contains other policies to assist the Group to establish and maintain its governance practices; Principle 8 - Remunerate fairly and responsibly The Company does not have a Remuneration Committee. Instead, the Board monitors and reviews the remuneration policy of the Group. The Board does engage an independent remuneration consultant to review the Group’s policy on remuneration as and when required. Details of the remuneration policy are contained in the Remuneration Report included in the Directors’ Report. The Company’s policy is to remunerate non-executive directors at a fixed fee for time, commitment and responsibilities. Remuneration for non-executive directors is not linked to individual performance. The Company may grant options and performance rights to non-executive directors. The grant of options and performance is designed to recognise and reward efforts as well as to provide non-executive directors with additional incentive to continue those efforts for the benefit of the Group. • Compilation, maintenance and review of a risk register to identify The maximum aggregate amount of fees (including superannuation the Group’s material business risks and risk management strategies payments) that can be paid to non-executive directors is subject to for these risks. The risk register is reviewed half yearly and updated approval by the shareholders at general meeting. as required. The Executive reports to the Board on material business risks at each Board meeting. Pay and rewards for executive directors and senior executives consists of a base salary, performance and retention incentives. Medium The Board has required the Executive to design, implement and maintain and long term performance incentives may include options and/or risk management and internal control systems to manage the material performance rights granted at the discretion of the Board and subject business risks of the Group. The Board also requires management to to obtaining the relevant approvals. The grant of options and/or report to it confirming that those risks are being managed effectively. performance rights is designed to recognise and reward efforts as well The Chief Financial Officer has provided a declaration to the Board in accordance with section 295A of the Corporations Act and has assured the Board that such declaration is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial risks. Internal audit as to provide additional incentives and retentions and may be subject to the successful completion of performance hurdles. Executives are offered a competitive level of base pay at market rates (for comparable companies and industry) and are reviewed annually to ensure market competitiveness. The Company’s policy is not to allow transactions in associated products which limit the risk of participating in unvested elements of equity-based compensation plans. The Group does not have an internal audit function as the Board believes There are currently no termination or retirement benefits for non- the business is neither the size nor complexity that requires such a function. executive directors (other than for superannuation). The Board is currently responsible for monitoring the effectiveness of internal controls, risk management procedures and governance. Sustainability risks The Group has a detailed risk matrix which it regularly reviews and which highlights critical risk factors the Group faces at any particular time. The principal risks highlighted are what would typically be expected for a small listed mining and exploration company and include; • Reliance on key executives; • Inability to access new exploration and development capital; • Unsuccessful mining operations or exploration results; • Exposure to other operators, be it through Joint Venture agreements or actions of those operators in an operational sense; • Legislature changes in the jurisdiction the Group operates in. As the Group expands its activities either within existing projects or with the addition of new projects, it is expected that the sustainability risks will change accordingly. The Board reviews the overall sustainability of both the diamond business and more specifically, the Group, in its normal course of business and therefore does not produce a separate sustainability report. 26 | Lucapa Diamond Company Limited Consolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2018 Share of (loss)/ profit of associate Fair value adjustments Finance income Professional fees Depreciation expense Employee benefits expenses Director and employee options Finance expense Foreign exchange gain Other income/ (expenses) Loss before income tax from continuing operations Income tax expense Loss after income tax for the year Other comprehensive (loss)/ income Total comprehensive loss for the year Loss per share Basic loss per share (cents) Diluted loss per share (cents) Note 14 31 Dec 2018 31 Dec 2017 US$ US$ (2,740,107) 6,457,022 5 6 6 7 8 8 (96,575) 76,934 (538,512) (182,807) (3,318,172) 70,265 (767,905) (181,688) (2,826,987) (2,776,740) (793,840) (1,595,424) (52,972) 60,619 181,953 (565,377) 140,435 (816,219) (6,912,294) (3,353,803) (163,566) - (7,075,860) (3,353,803) (337,259) 248,395 (7,413,119) (3,105,408) (1.63) (1.62) (0.98) (0.94) The consolidated statement of profit or loss and other comprehensive income is to be read in conjunction with the accompanying notes. Annual Report for the year ended 31 December 2018 | 27 Consolidated Statement of Financial Position as at 31 December 2018 Assets Cash and cash equivalents Trade and other receivables Inventories Financial assets Total current assets Property plant and equipment Non-current financial assets Investment in associate Total non-current assets Total assets Liabilities Trade and other payables Borrowings Total current liabilities Non-current provisions Non-current borrowings Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Share capital Reserves Accumulated losses Total equity 31 Dec 2018 31 Dec 2017 Note US$ US$ 9 10 11 12 13 12 14 15 17 16 17 7 8,200,090 8,296,887 1,950,361 212,832 113,927 512,409 29,304 809,444 10,477,210 9,648,044 58,271,608 34,370,797 23,087,130 25,778,095 6,167,300 8,907,407 87,526,038 69,056,299 98,003,248 78,704,343 5,995,451 8,300,735 9,500,299 1,742,900 15,495,750 10,043,635 860,115 935,600 14,455,339 8,074,185 42,189 - 15,357,643 9,009,785 30,853,393 19,053,420 67,149,855 59,650,923 18 112,920,199 96,981,417 (3,943,651) 13,421 (41,826,693) (37,343,915) 67,149,855 59,650,923 The consolidated statement of financial position is to be read in conjunction with the accompanying notes. 28 | Lucapa Diamond Company Limited Consolidated Statement of Changes in Equity for the year ended 31 December 2018 Share based payments reserve Foreign currency translation reserve Accumulated losses Issued capital US$ US$ US$ US$ Total US$ Balance at 1 January 2017 89,114,329 3,613,674 (5,537,255) (34,261,854) 52,928,894 Comprehensive income for the period Loss for the period Other comprehensive income Total comprehensive loss for the period Transactions with owners, in their capacity as owners Issue of share capital Issue of options Expiry of options Share issue expenses Total transactions with owners Balance at 1 January 2018 Comprehensive income for the period Loss for the period Other comprehensive loss Total comprehensive loss for the period Transactions with owners, in their capacity as owners Issue of share capital Issue of options Expiry of options Transfer of reserves on exercise of options Share issue expenses Total transactions with owners Balance at 31 December 2018 - - - 8,859,565 - - - - - - 1,960,349 (271,742) (992,477) - 7,867,088 1,688,607 - (3,353,803) (3,353,803) 248,395 - 248,395 248,395 (3,353,803) (3,105,408) - - - - - - - 8,859,565 1,960,349 271,742 - - (992,477) 271,742 9,827,437 96,981,417 5,302,281 (5,288,860) (37,343,915) 59,650,923 - - - 14,323,305 - - - - - - 981,523 (2,593,082) 2,008,254 (2,008,254) (392,777) - 15,938,782 (3,619,813) - (7,075,860) (7,075,860) (337,259) - (337,259) (337,259) (7,075,860) (7,413,119) - - - - - - - - 14,323,305 981,523 2,593,082 - - - - (392,777) 2,593,082 14,912,051 112,920,199 1,682,468 (5,626,119) (41,826,693) 67,149,855 The consolidated statement of changes in equity is to be read in conjunction with the accompanying notes. Annual Report for the year ended 31 December 2018 | 29 Consolidated Statement of Cash Flows for the year ended 31 December 2018 Cash flows from operating activities Cash paid to suppliers and employees Interest and finance cost Interest received Net cash used in operating activities Cash flows from investing activities Payments for exploration costs Payments for development Proceeds from/ (payments to) associate Payments for property plant and equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital Share issue costs Repayment of borrowings Proceeds from borrowings Borrowing transaction costs Net cash generated from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of period Exchange loss on foreign cash balances Cash and cash equivalents at end of period 31 Dec 2018 31 Dec 2017 Note US$ US$ (4,493,559) (4,215,079) (6,634) 78,045 (550,999) 70,265 (4,422,148) (4,695,813) (1,197,188) - - (19,364,266) (20,561,454) (1,337,434) (940,701) 3,706,255 (9,749,821) (8,321,701) 12,504,079 8,085,479 (213,593) (34,453) (455,015) (4,624,587) 13,231,947 14,089,860 (380,227) - 25,107,753 17,095,737 124,151 8,296,887 (220,948) 4,078,223 4,349,142 (130,478) 9 8,200,090 8,296,887 The consolidated statement of cash flows is to be read in conjunction with the accompanying notes. 30 | Lucapa Diamond Company Limited Notes to the Consolidated Financial Statements for the year ended 31 December 2018 1. Corporate information Lucapa Diamond Company Limited (“Lucapa” or “the Company”) is a company domiciled and incorporated in Australia. The address of the Company’s registered office is 34 Bagot Road, Subiaco WA 6008. The Company, its subsidiaries and associates (collectively “the Group”) are primarily involved in the mining and exploration of diamond projects in Africa and Australia. 2. Basis of preparation (a) Statement of compliance The ability of the Group to continue to pay its debts as and when they fall due for a 12-month period from the date the financial report is signed is dependent upon: • continued success of the Lulo alluvial mine to generate forecast cashflows to repay its loans to Lucapa and make distributions to the partners; • successfully bringing Mothae into commercial production to generate forecast cashflows to repay its loans to Lucapa and the IDC and pay dividends; and • continued successful cash management and project/debt finance sourcing. The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (AASBs) In addition, Lucapa has the capacity to place securities under ASX Listing Rule 7.1. (including Australian Interpretations) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The financial report of the Group complies with International Financial Reporting Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board (IASB). The financial statements were authorised for issue by the Board of Directors on the date of the directors’ report. (b) Basis of measurement The financial statements have been prepared on the going concern basis, which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. Whilst the Group has achieved diamond exploration, alluvial development and mining success at the Lulo Diamond Project and anticipates cashflows to be received from Mothae following the completion of the mine development, the directors recognise that the Group may have to seek funding in the future in order to continue to exploit and develop its four diamond projects. For the year ended ended 31 December 2018, the Group recorded a loss after tax of US$7.1m (2017: US$3.3m). The result was affected by postponing the sale at SML of 7 large and high-value diamonds recovered during 2018 to January 2019 . As at 31 December 2018 the Group had net assets of US$67.2m (Dec 2017: US$59.6m). During the current period, the Group received funding from the following sources: • U$5m drawdown from the borrowing facility with Equigold Pte Ltd for the purposes of funding the Phase 1 development of Mothae; • US$12.5m (before costs) from the issue of shares at no discount to the prevailing market price as per the ASX announcement of 9 April 2018; • US$6.9m from the borrowing facility with the Industrial Development Corporation of South Africa Limited (“IDC”) for the purposes of funding the Phase 1 development of Mothae as per the ASX announcement of 20 December 2018; and • US$1.2m from the short term borrowing facility with New Azilian Pty Ltd, an entity associated with non-executive director Ross Stanley. Future funding sources include anticipated loan repayments and distributions/ dividends from both SML and Mothae. The Directors believe that the above funding strategies can be achieved and the going concern basis is appropriate for the following reasons: • The Group operates on a program of income and expenditure and cash flow projections designed to ensure that there are at all times sufficient funds on hand or anticipated to continue operations for the foreseeable future, whilst at the same time continuing alluvial and kimberlite mining, and furthering its exploration projects in an effective manner; and • The successful historical ability of the Group to raise capital via debt and/or equity placements and capital raisings given the current cash generating ability and prospectivity of the Lulo Diamond Project and forecast future cash flows from the Mothae Kimberlite Project. However, should the Group activities not eventuate as planned or be unable to obtain sufficient funding as advised above, there is a material uncertainty which may cast doubt as to whether or not the Group will be able to continue as a going concern and whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial statements. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that might be necessary should the Company not continue as a going concern. 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) New or revised accounting policies The Group has applied the following standards and amendments for the first time for the annual reporting period commencing 1 January 2018: • AASB 9 Financial Instruments; - The revised standard introduced new classification and measurement models for financial instruments as summarised in the accounting policy notes below. None of the new requirements had a material impact on the Group’s financial instruments; • AASB 15 Revenue from contracts with customers; • AASB 2017-1 Amendments to Australian Accounting Standards – Transfers to Investment Property, Annual Improvements 2017-2016 Cycle and other Amendments; • AASB 2016-5 Amendments to Australian Accounting Standards - Classification and Measurement of Share-based Payment Transactions; • Interpretation 22 Foreign Currency Transactions and Advance Consideration. The adoption of these standards has not resulted in any material changes to the Group’s financial statements. Annual Report for the year ended 31 December 2018 | 31 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 The following new/ amended standards have been issued but are not When a foreign operation is disposed of in part or in full, the relevant yet effective: • AASB 16 Leases; • AASB 17 Insurance contracts; • AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture; • AASB 1059 Service Concession Arrangements: Grantors; • AASB 2017-1 Amendments to Australian Accounting Standards – Transfers of Investment Property, Annual Improvements 2014-2016 Cycle and Other Amendments; • AASB 2017-4 Amendments to Australian Accounting Standards – Uncertainty over Income Tax Treatments; • AASB 2017-6 Amendments to Australian Accounting Standards – Prepayment Features with Negative Compensation; • AASB 2017-7 Amendments to Australian Accounting Standards – Long-term Interests in Associates and Joint Ventures; • AASB 2018-1 Annual Improvements to IFRS Standards 2015–2017 Cycle; • ASB 2018-2 Amendments to Australian Accounting Standards – Plan Amendment, Curtailment or Settlement • AASB 2018-6 Amendments to Australian Accounting Standards – Definition of a Business; • AASB 2018-7 Amendments to Australian Accounting Standards – Definition of Material; • Interpretation 23 Uncertainty Over Income Tax Treatments. The requirements of these standards are currently being reviewed but it is not currently expected to have a material impact on the Group’s financial statements. amount in equity is transferred to the statement of profit or loss and other comprehensive income. Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of the net investment in a foreign operation and are recognised directly in equity. (d) Financial instruments Recognition, initial measurement and derecognition Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument and are measured initially at fair value adjusted by transactions costs, except for those carried at fair value through profit or loss, which are measured initially at fair value. Subsequent measurement of financial assets and financial liabilities are described below. Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and all substantial risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires. Subsequent measurement of financial assets For the purpose of subsequent measurement, financial assets of the Group are classified into either the amortised cost or fair value through profit or loss (“FVPL”) categories. Classifications are determined by both the Group’s business model for managing the financial asset and the contractual cash flow characteristics of the financial assets. (b) Functional and presentation currency All income and expenses relating to financial assets that are recognised An entity’s functional currency is the currency of the primary economic in profit or loss are presented within finance costs, finance income or environment in which it operates. All items included in the financial other financial items, except for impairment of trade receivables which statements of entities in the Group are measured and recognised in the is presented within other expenses. functional currency of the entity. The Group’s presentation currency is US dollars, which is also the functional currency of the Company. (c) Foreign currency Foreign currency transactions and balances Transactions in foreign currencies are translated to the respective functional currencies of the Group at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. Foreign exchange differences arising on retranslation are recognised in the statement of profit or loss and other comprehensive income. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to US dollars at foreign exchange rates ruling at the reporting date. The Financial assets at amortised cost Financial assets are measured at amortised cost if the assets meet the following conditions (and are not designated as FVPL): • they are held with the objective is to hold the assets and collect its contractual cash flows; • the contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding. After initial recognition, these are measured at amortised cost using the effective interest method. Discounting is omitted where the effect of discounting is immaterial. The Group’s cash and cash equivalents, trade and most other receivables fall into this category of financial instruments. Financial assets at fair value through profit or loss Financial assets that are held within a different business model other income and expenses of foreign operations are translated to US dollars than ‘hold to collect’ or ‘hold to collect and sell’ are categorised at fair at exchange rates approximating the foreign exchange rates ruling at value through profit and loss. Further, irrespective of business model the dates of the transactions. Foreign exchange differences arising on financial assets whose contractual cash flows are not solely payments retranslation are recognised directly in a separate component of equity. of principal and interest are accounted for at FVPL. All derivative financial instruments fall into this category. 32 | Lucapa Diamond Company Limited Subsequent measurement of financial liabilities The Group’s financial liabilities include borrowings, trade and other Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal payables and derivative financial instruments. Subsequent to initial with the carrying amount of property, plant and equipment and are recognition, financial liabilities are measured at amortised cost using recognised net within “other income” in the Statement of profit or loss the effective interest method except for derivatives and financial and other comprehensive income. liabilities designated at FVPL, which are carried subsequently at fair value with gains or losses recognised in profit or loss. All interest-related charges and, if applicable, changes in an instrument’s fair value that are reported in profit or loss are included within finance costs or finance income. (e) Share capital Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of an item if it is probable that the future economic benefits embodied within the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other costs are recognised in the statement of profit or loss and other comprehensive Equity instruments, including preference shares, issued by the income as an expense incurred. Company are recorded at the proceeds received. Incremental costs directly attributable to the issue of equity instruments are recognised as a deduction from equity, net of any tax effects. (f) Principles of consolidation The Group financial statements consolidate those of the Company and all its subsidiaries as the end of the period. The Company controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. All transactions and balances between Group companies are eliminated on consolidation, including unrealised gains and losses on transactions between Group companies. Where unrealised losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a group perspective. Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. Depreciation Depreciation is recognised in the statement of profit or loss and other comprehensive income on a reducing balance basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives in the current and comparative periods are as follows: Computer equipment Office equipment 3-5 years 5-10 years Mine development Lesser of life of mine or period of lease Mine infrastructure and plant facilities Based on resources on a unit of production basis Depreciation methods, useful lives and residual values are reviewed at each reporting date. Mine development Once a mining project has been established as commercially viable and Profit or loss and other comprehensive income of subsidiaries acquired technically feasible, expenditure other than that on land, buildings, plant or disposed of during the year are recognised from the effective date of and equipment is capitalised as Mine development. Development includes acquisition, or up to the effective date of disposal, as applicable. previously capitalised exploration and evaluation costs, pre-production Non-controlling interests, presented as part of equity, represent the portion of a subsidiary’s profit or loss and net assets that is not held by the Group. The Group attributes total comprehensive income or loss of subsidiaries between the owners of the parent and the non-controlling interests based on their respective ownership interests. (g) Property, plant and equipment development costs, certain mining assets, development studies and other subsurface expenditure pertaining to that area of interest. On completion, development cost is deprecated as per above. If, after having commenced the development activity, a judgement is made that a development asset is impaired, the appropriate amount is written off to profit and loss. Deferred exploration and evaluation Exploration and evaluation expenditure incurred is accumulated in Recognition and measurement Items of property, plant and equipment are measured at cost less respect of each identifiable area of interest. These costs are only carried forward to the extent that the right to tenure of each identifiable area accumulated depreciation and accumulated impairment losses. of interest are current, and either the costs are expected to be recouped Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the through successful development of the area, or activities in the area have not yet reached a stage that permits reasonable assessment of the existence of economically recoverable reserves. Exploration assets that are not available for use are not amortised. costs of dismantling and removing the items and restoring the site on Exploration and evaluation assets are initially measured at cost and include which they are located. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. acquisition of mining tenements, studies, exploratory drilling, trenching and sampling and associated activities and an allocation of depreciation of assets used in exploration activities. General and administrative costs are only included in the measurement of exploration costs where they are related directly to operational activities in a particular area of interest. Annual Report for the year ended 31 December 2018 | 33 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 Deferred exploration and evaluation costs in relation to an abandoned An impairment loss is recognised if the carrying amount of an asset or area are written off in full against profit or loss in the period in which its cash-generating unit exceeds its recoverable amount. Impairment the decision to abandon that area is made. losses are recognised in the statement of profit or loss and other A regular review is undertaken of each area of interest to determine the appropriateness of continuing to carry forward costs in relation to that area of interest. (h) Inventories comprehensive income. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to cash-generating units (group of units) and then, to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. Inventories are measured at the lower of cost and net realisable value. Impairment losses recognised in prior periods are assessed at each The cost of inventories is based on the first-in first-out principle, and reporting date for any indications that the loss has decreased or no longer includes expenditure incurred in acquiring the inventories, production exists. An impairment loss is reversed if there has been a change in the or conversion costs and other costs incurred in bringing them to their estimates used to determine the recoverable amount. An impairment existing location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. loss is reversed only to the extent that the asset’s carrying amount dies not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (i) Impairment Financial assets A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. (j) Employee benefits Short-term employee benefits Liabilities for employee benefits for wages, salaries and annual leave that are expected to be settled within 12 months of the reporting date represent present obligations resulting from employees’ services provided to reporting date and are calculated at undiscounted amounts based on remuneration wage and salary rates that the Group expects to pay as at reporting date including related on-costs, such as workers An impairment loss in respect of a financial asset measured at compensation insurance and payroll tax. amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in the statement of profit or loss and other comprehensive income. Long-term employee benefits The Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods plus related on-costs: that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on government bonds that have maturity dates approximating the terms of the Group’s obligations. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For Termination benefits Termination benefits are recognised as an expense when the Group is financial assets measured at amortised cost the reversal is recognised demonstrably committed, without realistic possibility of withdrawal, in the statement of profit or loss and other comprehensive income. to a formal detailed plan to either terminate employment before the Non-financial assets The carrying amounts of the Group’s non-financial assets, other than normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. inventories, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the Share-based payment transactions The fair value of options and rights granted is measured using the asset’s recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). Black-Scholes or binomial option pricing models, taking into account the terms and conditions upon which the instruments were granted. The fair value is recognised in employee benefits expense together with a corresponding increase in equity (share-based payment reserve), over the period in which the service and, where applicable, the performance conditions are fulfilled. The cumulative expense recognised at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The expense or credit in profit or loss for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. 34 | Lucapa Diamond Company Limited Service and non-market performance conditions are not taken into account when determining the grant date fair value of awards, but the Environmental liabilities Environmental expenditures that relate to current operations are likelihood of the conditions being met is assessed as part of the Group’s expensed or capitalized as appropriate. Expenditures that relate to an best estimate of the number of equity instruments that will ultimately existing condition caused by past operations and which do not contribute vest. Market performance conditions are reflected within the grant to current or future revenue generation are expensed. Liabilities are date fair value. Any other conditions attached to an award, but without recorded when environmental assessments and/or remedial efforts are an associated service requirement, are considered to be non-vesting probable, and the costs can be reasonably estimated. conditions. Non-vesting conditions are reflected in the fair value of an award and lead to an immediate expensing of an award unless there are (l) Revenue also service and/or performance conditions. No expense is recognised for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied. Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised The Group’s revenue arises mainly from the sale of diamonds. To determine whether to recognise revenue, the following 5-step process is followed: • Identifying the contract with a customer; • Identifying the performance obligations; • Determining the transaction price; • Allocating the transaction price to the performance obligations; • Recognising revenue when/as performance obligation(s) are satisfied. The total transaction price for a contract is allocated amongst the various performance obligations based on their relative stand-alone selling prices. The transaction price for a contract excludes any amounts collected on behalf of third parties. Revenue is recognised either at a point in time or over time, when (or as) the Group satisfies performance obligations by transferring the promised goods or services to its customers. for the award is recognised immediately. However, if a new award is If the Group satisfies a performance obligation before it receives the substituted for the cancelled award and designated as a replacement consideration, either a contract asset or a receivable is recognised in the award on the date that it is granted, the cancelled and new award are statement of financial position, depending on whether something other treated as if they were a modification of the original award, as described than the passage of time is required before the consideration is due. in the previous paragraph. The amounts carried under share-based payment reserves are allocated to share capital when underlying shares are issued upon the conversion of options or rights, and to accumulated income/ losses upon the expiry of option or rights. (k) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, when appropriate, the risks specific to the liability. Asset retirement obligations The Group recognizes a liability for an asset retirement obligation on long-lived assets when a present legal or constructive obligation exists, as a result of past events and the amount of the liability is reasonably determinable. Asset retirement obligations are initially recognized and (m) Leases Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to the initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and the leased assets are not recognised in the Group’s balance sheet. Payments made under operating leases are recognised in the statement of profit or loss and other comprehensive income on a straight-line basis over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. recorded as a liability based on estimated future cash flows discounted at (n) Finance income and expenses a credit adjusted risk free rate. This is adjusted at each reporting period for changes to factors including the expected amount of cash flows required to discharge the liability, the timing of such cash flows and the credit adjusted risk free discount rate. Corresponding amounts and adjustments are added to the carrying value of the related long-lived asset and amortized or depleted to operations over the life of the related asset. Finance income and expenses comprises interest income on funds invested, interest expense on borrowings calculated using the effective interest method and unwinding of discounts on provisions. Annual Report for the year ended 31 December 2018 | 35 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 Interest income is recognised in the statement of profit or loss and other (p) Goods and services tax/ value added tax comprehensive income as it accrues, using the effective interest method. All borrowing costs are recognised in the statement of profit or loss and other comprehensive income using the effective interest method. Revenues, expenses and assets are recognised net of the amount of goods and services tax (“GST”) or value added tax (“VAT”), except where the amount of GST or VAT incurred is not recoverable from the General and specific borrowing costs that are directly attributable to the taxation authority, it is recognised as part of the cost of acquisition of acquisition, construction or production of a qualifying asset are capitalised an asset or as part of an item of expense. Receivables and payables are during the period of time that is required to complete and prepare the stated with the amount of GST or VAT included. asset for its intended use or sale. Exchange differences arising from foreign currency borrowings used to acquire qualifying assets are regarded as an adjustment to the interest cost and included in the capitalised amount. The net amount of GST and VAT recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Qualifying assets are assets that necessarily take a substantial period of Cash flows are included in the statement of cash flows on a gross time to get ready for their intended use or sale. (o) Income tax basis. The GST and VAT component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit/(loss) (q) Investments in associates and joint arrangements for the period. Taxable profit differs from net profit as reported in the Associates are those entities over which the Group is able to exert statement of profit or loss and other comprehensive income because it significant influence but which are not subsidiaries. excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. A joint venture is an arrangement that the Group controls jointly with one or more other investors, and over which the Group has rights to a share of the arrangement’s net assets rather than direct rights to underlying assets and obligations for underlying liabilities. A joint Deferred tax is the tax expected to be payable or recoverable on arrangement in which the Group has direct rights to underlying assets differences between the carrying amount of assets and liabilities in and obligations for underlying liabilities is classified as a joint operation. the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill (or negative goodwill) or from the initial recognition (other than in a business combination) of other assets and liabilities in a Investments in associates and joint ventures are accounted for using the equity method. Interests in joint operations are accounted for by recognising the Group’s assets (including its share of any assets held jointly), its liabilities (including its share of any liabilities incurred jointly), its revenue from the sale of its share of the output arising from the joint operation, its share of the revenue from the sale of the output by the joint operation and its expenses (including its share of any expenses incurred jointly). transaction that affects neither the tax profit nor the accounting profit. Any goodwill or fair value adjustment attributable to the Group’s share Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal in the associate or joint venture is not recognised separately and is included in the amount recognised as investment. The carrying amount of the investment in associates and joint ventures of the temporary difference and it is probable that the temporary is increased or decreased to recognise the Group’s share of the profit difference will not reverse in the foreseeable future. or loss and other comprehensive income of the associate and joint The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that venture, adjusted where necessary to ensure consistency with the accounting policies of the Group. sufficient taxable profit will be available to allow all or part of the asset Unrealised gains and losses on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in those entities. Where unrealised losses are eliminated, the underlying asset is also tested for impairment. to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited in the statement of profit or loss and other comprehensive income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. 36 | Lucapa Diamond Company Limited (r) Segment reporting The Group determines and presents operating segments based on the information that internally is provided to the Board of directors, which is the Group’s chief decision making body. Trade and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, Financial liabilities Fair value, which is determined for disclosure purposes, is calculated including revenues and expenses that relate to transactions with any based on the present value of future principal and interest cash flows, of the Group’s other components. All operating segments’ operating discounted at the market rate of interest at the reporting date. results are reviewed by the Group’s Managing Director to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. (s) Earnings/ loss per share Basic earnings per share is calculated by dividing the net profit/ loss attributable to the ordinary shareholders of the Company by the weighted average number of ordinary shares of the Company during the period. Diluted loss per share is determined by adjusting the net profit/loss attributable to the ordinary shareholders and the number of shares outstanding for the effects of all dilutive potential shares, which comprise share options. (t) Determination of fair values When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either in the principal market or, in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are Share-based payment transactions The fair value of options issued is measured using the Black-Scholes or binomial option pricing models. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. (u) Significant accounting judgements, estimates and assumptions The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Judgements made by management in the application of Australian Accounting Standards that have significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed below. available to measure fair value, are used, maximising the use of relevant Management discusses with the Board the development, selection observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data and disclosure of the Group’s critical accounting policies and estimates and the application of these policies and estimates. The estimates and judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Asset useful lives and residual values Property, plant and equipment are depreciated over its useful life taking into account residual values where appropriate. The actual useful lives of the assets and residual values are assessed annually and may vary depending on a number of factors. In re–assessing asset useful lives, factors such as technological innovation, product life cycles and maintenance programmes are taken into account. Residual value assessments consider issues such as future market conditions, the remaining life of the asset and projected disposal values. Annual Report for the year ended 31 December 2018 | 37 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 Valuation of mineral properties The Group carries the acquisition of its mineral properties at cost less Impairment The Group assesses impairment at the end of each reporting year by any provision for impairment. The Group undertakes a periodic review evaluating specific conditions that may be indicative of impairment of the carrying values of mineral properties and whenever events triggers. Recoverable amounts of relevant assets are reassessed using or changes in circumstances indicate that their carrying values may calculations which incorporate various key assumptions. Future cash flows expected to be generated by the assets are projected, taking into account market conditions and the expected useful lives of the assets. The present value of these cash flows, determined using an appropriate discount rate, is compared to the current net asset value and, if lower, the assets are impaired to the present value. If the information to project future cash flows is not available or could not be reliably established, management uses the best alternative information available to estimate a possible impairment. Financial assets The Group’s financial assets include the receivable in respect of the alluvial project that represents the future reimbursement in US dollars of the Group’s historic alluvial exploration and development costs incurred at Lulo. The recoverable amount of the receivable is reassessed using calculations which incorporate various key assumptions as per note 12. exceed their fair value. In undertaking this review, management of the Group is required to make significant estimates. These estimates are subject to various risks and uncertainties, which may ultimately have an effect on the expected recoverability of the carrying values of the mineral properties and related expenditures. Exploration and evaluation assets The Group assesses the carrying value of exploration and evaluation assets in accordance with the accounting policy noted above. The basis of determining the carrying value involves numerous estimates and judgements resulting from the assessment of ongoing exploration activities, as per the accounting policy note. Development Development activities commence after commercial viability and technical feasibility of the project is established. Judgement is applied in determining when a project is commercially viable and technically feasible. In exercising this judgement, management is required to make certain estimates and assumptions, with inherent uncertainty, as to the future events. Share-based payment transactions The Company measures the cost of equity-settled transactions by reference to the fair value of the equity instruments at the date at which they are granted. Where required, the fair value of options granted is measured using valuation models, taking into account the terms and conditions as set out within Note 19. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and reserves. Provisions for decommissioning/ rehabilitation Included in liabilities at the end of each reporting period is an amount that represents an estimate of the cost to rehabilitate the land upon which the Group has carried out its exploration and evaluation for mineral resources. Provisions are measured at the present value of management’s best estimate of the costs required to settle the obligation at the end of the reporting period. Actual costs incurred in future periods to settle these obligations could differ materially from these estimates. Additionally, future changes to environmental laws and regulations, life of mine estimates, and discount rates could affect the carrying amount of this provision. 38 | Lucapa Diamond Company Limited 4. Segment reporting Mining Exploration & Evaluation Corporate Total 31 Dec 2018 31 Dec 2017 31 Dec 2018 31 Dec 2017 31 Dec 2018 31 Dec 2017 31 Dec 2018 31 Dec 2017 US$ US$ US$ US$ US$ US$ US$ US$ Assets Cash and cash equivalents 3,874,248 25,546 1,810 1,560 4,324,032 8,269,781 8,200,090 8,296,887 Trade and other receivables 1,568,451 369,124 Inventory Financial assets 212,832 29,304 113,927 809,444 - - - - - - 381,910 143,285 1,950,361 512,409 - - - - 212,832 29,304 113,927 809,444 Total current assets 5,769,458 1,233,418 1,810 1,560 4,705,942 8,413,066 10,477,210 9,648,044 Property plant and equipment 40,964,216 21,617,314 17,253,385 12,722,761 54,007 30,722 58,271,608 34,370,797 Non-current financial assets 23,087,130 25,778,095 Investment in associate 6,167,300 8,907,407 - - - - - - - - 23,087,130 25,778,095 6,167,300 8,907,407 Total non-current assets 70,218,646 56,302,816 17,253,385 12,722,761 54,007 30,722 87,526,038 69,056,299 Total assets Liabilities 75,988,104 57,536,234 17,255,195 12,724,321 4,759,949 8,443,788 98,003,248 78,704,343 Trade and other payables 5,450,766 8,029,879 Borrowings 8,217,735 1,742,900 Total current liabilities 13,668,501 9,772,779 Non-current provisions 860,115 935,600 Non-current borrowings 14,455,339 8,074,185 Total non-current liabilities 15,315,454 9,009,785 Total liabilities 28,983,955 18,782,564 - - - - - - - - - - - - - - 544,685 270,856 5,995,451 8,300,735 1,282,564 - 9,500,299 1,742,900 1,827,249 270,856 15,495,750 10,043,635 - - - - - - 860,115 935,600 14,455,339 8,074,185 15,315,454 9,009,785 1,827,249 270,856 30,811,204 19,053,420 Profit or loss (Loss)/ profit before income tax (2,708,402) 2,331,307 862 - (4,204,754) (5,685,110) (6,912,294) (3,353,803) The Group engages in business activities within the following business segments: diamond mining in Africa, diamond exploration & evaluation projects in Africa and Australia and a corporate and administrative office in Western Australia to support and promote the other activities. Annual Report for the year ended 31 December 2018 | 39 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 5. Income Finance income Interest on bank deposits 6. Expenses Auditors remuneration Greenwich & Co (Auditors of parent company & consolidation) Audit services Other services Other group auditors (for subsidiary companies) Audit services Other services Employee benefits expenses Wages, salaries and director remuneration Superannuation costs Share-based payments Other associated employee expenses Operating lease rental 31 Dec 2018 31 Dec 2017 Note US$ US$ 76,934 76,934 70,265 70,265 31,201 - 31,201 2,576 2,364 4,940 31,051 - 31,051 4,387 - 4,387 18 2,493,595 2,385,028 115,197 793,840 218,195 119,484 1,595,424 272,228 3,620,827 4,372,164 170,588 137,548 40 | Lucapa Diamond Company Limited 7. Income tax Current tax expense Current income tax charge Deferred tax expense Relating to origination and reversal of temporary differences Total income tax expense Reconciliation of tax expense and the accounting profit multiplied by Australia’s domestic tax rate Net loss before tax Income tax benefit using the Australian domestic tax rate of 30% Increase in income tax due to tax effect of: Non-deductible expenses Tax rate differential on foreign income Current year tax losses not recognised Impact of movement in unrecognised temporary differences Foreign taxes paid Share of loss of associate Under provision in prior year Decrease in income tax expense due to: Share of profit of associate Impact of movement in unrecognised temporary differences Utilisation of previously unrecognised tax losses Recognition of previously unrecognised prior year tax losses Deductible equity raising costs Income tax expense Recognised deferred tax assets and liabilities Recognised deferred tax assets Tax losses Accruals & provisions Less: Set off of deferred tax liabilities Net deferred tax assets Recognised deferred tax liabilities Property plant and equipment Capitalised interest and foreign exchange adjustments Other Less: Set off of deferred tax assets Net deferred tax liabilities Deferred tax assets not recognised Tax revenue losses Tax capital losses Deductible temporary differences 31 Dec 2018 31 Dec 2017 Note US$ US$ 121,377 42,189 163,566 - - - (6,912,294) (2,073,688) (3,353,803) (1,006,141) 1,496,300 188,510 - - 121,377 822,032 42,189 1,906,138 - 1,016,722 44,714 - - - - (1,937,107) (56,892) (151,367) (197,520) (27,375) 163,566 9,355,672 336,729 9,692,401 (9,692,401) - - - - (24,326) - 4,769,037 245,503 5,014,540 (5,014,540) - (8,424,509) (4,984,849) (1,196,719) (113,362) (9,734,590) 9,692,401 (42,189) 8,870,000 4,659,269 78,834 - (29,691) (5,014,540) 5,014,540 - 9,518,779 5,167,853 147,165 13,608,103 14,833,797 The estimated tax losses above may be available to be offset against taxable income in future years. The availability of these losses is subject to satisfying taxation legislative requirements. The deferred tax asset attributable to tax losses has not been brought to account in these financial statements because the directors believe it is not presently appropriate to regard realisation of the future income tax benefits as probable. Annual Report for the year ended 31 December 2018 | 41 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 8. (Loss)/ earnings per share Basic loss per share (cents per share) Diluted loss per share (cents per share) Loss used in calculating earnings per share Loss attributable to members of the Company used in calculating basic earnings per share Loss attributable to members of the Company used in calculating diluted earnings per share 31 Dec 2018 31 Dec 2017 Cents (1.63) (1.62) US$ Cents (0.98) (0.94) US$ (7,075,860) (3,353,803) (7,075,860) (3,353,803) Number Number Weighted average number of shares used as the denominator Weighted average number of ordinary shares outstanding during the period used in calculation of basic earnings per share 434,320,368 341,078,095 Weighted average number of ordinary shares outstanding during the period used in calculation of diluted earnings per share 437,988,374 357,284,848 9. Cash and cash equivalents Balances on hand Bank balances Cash flow reconciliation Reconciliation of loss after tax to cash flows from operations: Loss for the period Adjustments for: Depreciation expense Director and employee options Exchange gains Interest received Interest and other finance costs paid Fair value loss on financial assets Share of loss/ (profit) of associate Other non cash items Working Capital adjustments: Increase in inventory (Decrease)/ increase in trade and other receivables Decrease in trade and other payables relating to operating activities Net cash used in operating activities Refer note 19 for exposure to interest rate risk. 42 | Lucapa Diamond Company Limited US$ US$ 8,200,090 8,296,887 8,200,090 8,296,887 (7,075,860) (3,353,803) 188,269 793,840 42,639 (62,910) 46,338 181,688 1,595,424 130,479 - 9,794 (553,865) 3,318,172 2,740,107 1,695,072 (6,457,022) 136,854 (183,529) 456,891 (2,509,140) (29,304) (179,616) (48,479) (4,422,148) (4,695,813) 10. Trade and other receivables Current GST/ VAT receivable Prepayments and other receivables Refer note 19 for exposure to credit and currency risk. 11. Inventories Consumables and other inventory 12. Financial assets Current financial assets Foreign currency derivatives Other short term financial assets Total Non current financial assets Receivable in respect of the alluvial project At 1 January Investment during the period Repayment received Transferred to Deferred exploration and evaluation costs (note 13) Fair value adjustment due to discounting At end of period 31 Dec 2018 31 Dec 2017 Cents Cents 1,474,859 475,502 1,950,361 330,741 181,668 512,409 212,832 212,832 29,304 29,304 - 113,927 113,927 650,440 159,004 809,444 25,778,095 33,285,531 101,218 293,745 - (4,000,000) (3,450,300) - 22,429,013 29,579,276 658,117 (3,801,181) 23,087,130 25,778,095 The receivable in respect of the alluvial project was transferred from Alluvial development in 2016 and represents the future reimbursement in US dollars of the Company’s historic alluvial exploration and development costs incurred at Lulo. The receivable has been re-measured to its estimated fair value using the Income approach, which is a valuation technique that converts future cash flow into a single discounted present value, and is classified as level 3 in the fair value hierarchy due to the use of unobservable inputs. Significant unobservable inputs are the timing and amounts of future repayments which are based on the expected cash flows per the Company’s forecast model for SML. Sensitivity factors which could impact the valuation include operational recoveries and delays in the timing of repayments which will decrease the fair value estimate. A discount rate of 14.55% has been applied in the fair value calculation. Annual Report for the year ended 31 December 2018 | 43 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 13. Property plant and equipment Deferred exploration and evaluation Mine development Plant and equipment Decommissioning assets Computer equipment Office equipment US$ US$ US$ US$ US$ US$ Total US$ Cost Balance at 1 January 2017 9,667,065 1,987,842 - Additions 3,047,159 11,270,153 7,954,970 Foreign currency movements 8,537 65,332 603,297 Balance at 31 December 2017 12,722,761 13,323,327 8,558,267 - - - - 23,182 17,341 11,695,430 70,336 11,928 22,354,546 5,008 427 682,601 98,526 29,696 34,732,577 Additions Reclassifications 7,524,386 3,742,457 15,601,197 58,896 199,090 6,340 27,132,366 552,935 (54,351) (492,660) - (5,212) (712) - Foreign currency movements (298,150) (422,941) (2,294,685) (4,849) (22,221) (1,105) (3,043,951) Balance at 31 December 2018 20,501,932 16,588,492 21,372,119 54,047 270,183 20,230 58,807,003 Accumulated depreciation Balance at 1 January 2017 Amortisation/ depreciation charge for the year Foreign currency movements Balance at 31 December 2017 Amortisation/ depreciation charge for the year Disposals Foreign currency movements Balance at 31 December 2018 Net carrying amounts At 31 December 2017 At 31 December 2018 - - - - - - - - 166,749 170,896 - 337,645 - - - - 154,874 1,365 - - - (112) 492,519 1,253 - - - - - - - - 4,228 8,878 179,855 8,348 2,444 181,688 202 35 237 12,778 11,357 361,780 22,321 4,247 182,807 - (7,548) (7,548) (1,315) (217) (1,644) 33,784 7,839 535,395 12,722,761 12,985,682 8,558,267 - 85,748 18,339 34,370,797 20,501,932 16,095,973 21,370,866 54,047 236,399 12,391 58,271,608 Deferred exploration costs represent the cumulative expenditure incurred in relation to the Lulo, Mothae, Orapa Area F and Brooking projects on diamond exploration and evaluation including plant and equipment. The Company continues to explore for the primary kimberlite sources of the alluvial diamonds being recovered on the Lulo concession, explore the neck, north and south east areas of the Mothae kimberlite resource, explore for kimberlite in Botswana and for lamproite in Australia. During 2017 the Group acquired 70% of Mothae in Lesotho. The acquisition and development cost are recognised under Mine Development and Plant and equipment. The Group has a 39% interest in the Project Lulo Venture (“the JV”), an unincorporated entity classified as a joint operation that operates under the terms of a Mineral Investment Contract entered into between the partners. Accordingly, the Group’s interest in the assets, liabilities, revenues and expenses attributable to the JV have been included in the appropriate line items in the consolidated financial statements. Deferred exploration costs of US$15,360,546 in the schedule above are related to the JV. 44 | Lucapa Diamond Company Limited 14. Investment in associate Summarised financial information of SML Current assets Non-current assets Current liabilities Non-current liabilities Equity Group’s carrying amount of the investment Revenue Cost of sales Administrative and selling expenses Fair value adjustments (Loss)/ profit before tax Income tax expense (Loss)/ profit for the period Total comprehensive (loss)/ income for the period Group’s share of (loss)/ profit for the period SML EBITDA* SML Contingent liabilities SML Capital commitments Payable within one year - Approved, not yet contracted - Approved and contracted 31 Dec 2018 31 Dec 2017 US$ US$ 12,674,945 21,245,644 27,712,565 31,323,195 7,582,425 7,665,769 23,015,859 28,263,577 9,789,226 16,639,493 6,167,300 8,907,407 26,417,657 31,602,817 (24,972,395) (21,672,736) (6,773,821) 1,827,362 (3,501,197) (3,349,071) (3,681,774) 9,941,930 16,190,237 (47,682) (6,850,268) 16,142,555 (6,850,268) 16,142,555 (2,740,107) (2,012,964) - 2,891,100 6,925,140 6,457,022 7,602,126 - - - The Group has a 40% interest in SML and has recognised its share of SML’s results since its formal incorporation in May 2016. In accordance with the Group’s accounting policy the 2017 dividend declared by SML of US$1.6m has been netted off the carrying amount of the investment. The current year earnings of SML include fair value adjustments in relation to the discounting of the financial asset of Lucapa reflected under note 12. The result was affected by postponing the sale at SML of 7 large and high-value diamonds recovered during 2018 to January 2019. *Earnings before interest, tax, depreciation & amortisation, fair value adjustments and other non-trading items. Annual Report for the year ended 31 December 2018 | 45 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 15. Trade and other payables Trade payables Mothae deferred purchase consideration Accruals and other payables Total Refer note 19 for exposure to currency and liquidity risk. The Mothae deferred purchase consideration is payable in six equal instalments during 2019. 16. Provisions Provision for environmental rehabilitation At 1 January (Decrease)/ increase during the year Unwinding of discount rate Foreign exchange difference At end of period 31 Dec 2018 31 Dec 2017 US$ US$ 1,474,243 3,509,910 3,375,000 4,500,000 1,146,209 290,825 5,995,452 8,300,735 935,600 (7,949) 66,845 (134,381) 860,115 - 858,910 - 76,690 935,600 The provision for rehabilitation has been recognised in respect of the Mothae kimberlite project. It is based on the expected rehabilitation cost over the life of the mine and discounted back to present value using a pre-tax discount rate that reflect current market assessments. Assumptions include an estimated rehabilitation timing of 12 to 18 years, an annual inflation rate of 5.4% (2017: 5.26%) and a discount rate of 9.18% (2017: 7.61%). 46 | Lucapa Diamond Company Limited 17. Borrowings Current borrowings Finance lease liabilities Other short-term loans Total Non-current borrowings Finance lease liabilities Other non-current loans Other non-current loans - Embedded derivative Total Finance lease commitments Minimum payments Payable within one year Payable after one year but less than five years Payable after more than five years Total minimum lease payments Less: finance charges Present value of minimum lease payments Present value of payments Payable within one year Payable after one year but less than five years Payable after more than five years Present value of minimum lease payments 31 Dec 2018 31 Dec 2017 US$ US$ 4,818 9,495,481 9,500,299 20,113 12,959,771 1,475,455 3,765 1,739,135 1,742,900 24,263 8,049,922 - 14,455,339 8,074,185 7,452 23,803 - 31,255 (6,324) 24,931 4,818 20,113 - 24,931 6,814 30,136 - 36,950 (8,922) 28,028 3,766 24,262 - 28,028 The loan amounts reflect the current and non-current portions due to Equigold, IDC and New Azilian Pty Ltd. The terms of the loans include the following: Equigold: • Total loan facility of US$15m, fully utilised at the end of the period (2017: US$5m unutilised); • The capital balance is repayable in eight quarterly payments commencing January 2019; IDC: • Total loan facility of ZAR100m (US$6.9m), fully utilised at the end of the period; • The capital balance is repayable in nine quarterly payments commencing January 2020; • Interest is payable quarterly based on the Johannesburg Interbank Average Rate (JIBAR) plus 8.6%; • The loan is secured by way of: - Bonds over Mothae’s movable assets, diamond treatment facility • Market related fees are payable on draw down and with interest and ancillary equipment; payments; - Mortgage over the mining right and the land right granted under • Equigold, at its election, can convert the last two quarterly payments the mining agreement; into ordinary shares in the Company at the then market price; - A 70% proportional guarantee by Lucapa of all amounts due and • Interest is payable at 13% pa; • Lucapa, at its election, can convert fees and quarterly interest into ordinary shares in the Company at the then market price; • The loan is secured by way of a General Security Deed granted by Lucapa in favour of the lender over collateral consisting of all of the Company’s present and after acquired property, undertaking and rights. Equigold embedded derivative: • Recognised at fair value, using a Black Scholes valuation with the following inputs: - LOM share price at measurement date (31 December 2018): A$0.205 - Exercise price: A$0.193; Estimated volatility: 75% - Expiry date: 1 September 2020; Risk-free interest rate: 2.19% payable; - A subordination of Lucapa’s shareholder claims in and loans to Mothae, back ranking to the Equigold loan agreement; - A pledge and session by Lucapa of its shares in Mothae and a cession of all its loans and claims against Mothae, once such are released by Equigold; - A cession of insurance policies and proceeds thereof with the Lender’s interest noted thereon; - Certain negative pledges. • Certain financial covenants to be maintained. New Azilian: • New Azilian is an entity associated with non executive director Ross Stanley; • Unsecured loan facility of A$1.8m (US$1.3m), fully utilised at the end of the period; • The loan is repayable in full in February 2019, together with accrued interest at 10% pa. Annual Report for the year ended 31 December 2018 | 47 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 18. Share capital Listed securities Movement in ordinary shares On issue at beginning of period Issue of shares Issue of shares on exercise of options and performance rights Transaction costs On issue at end of period 31 Dec 2018 31 Dec 2018 Number US$ 380,887,431 96,981,417 82,128,704 14,323,305 4,172,498 2,008,254 - (392,777) 467,188,633 112,920,199 Terms and conditions The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. Share-based payments Weighted average remaining contractual life of share options and performance rights in issue (years) Weighted average Lucapa share price during the period/ year (A$) Share-based payment recognised Profit or Loss Director and employee options Non cash financing and investing activities Share issue expenses Loan funding Deferred exploration and evaluation costs 31 Dec 2018 31 Dec 2017 1.45 0.25 US$ 1.33 0.31 US$ 793,840 1,595,424 179,184 1,819,226 8,499 537,462 500,000 110,471 2,800,749 2,743,357 48 | Lucapa Diamond Company Limited - 2 3 0 . 1 2 . 0 d e t h g i e W e g a r e v a ) $ A ( e c i r p 4 3 0 . 2 0 5 , 2 3 8 , 2 0 0 0 , 5 8 5 - - - - - - - 0 0 0 , 1 0 3 , 1 , 0 0 0 0 5 2 , 2 , 0 0 0 0 0 5 , 2 0 0 0 0 5 2 , 0 0 0 0 0 5 , 0 0 0 , 5 2 9 , 2 6 6 6 3 3 4 , , 0 0 0 0 0 5 , 1 , 0 0 0 0 0 5 2 , 0 0 0 0 5 2 , 0 0 0 0 0 5 , , 0 0 0 5 2 9 2 , ) 8 9 4 , 7 5 2 ( , ) 0 5 2 6 4 8 2 ( , ) 0 5 7 , 8 6 0 , 1 ( , 0 0 0 0 9 0 3 , - - 0 0 0 , 1 0 3 , 1 - - - - - - - , 0 0 0 0 0 5 2 , - - - - - - - - - - 0 5 2 , 1 3 4 3 , 0 5 7 , 8 6 0 , 1 - , 0 0 0 0 5 2 2 , - 0 0 0 0 5 2 , 0 0 0 0 0 5 , , 0 0 0 5 2 9 2 , - - , 0 0 0 0 0 6 , 1 1 i d o i r e p f o g n n n g e b t a e u s s i i n o r e b m u N s t h g i r e c n a m r o f r e p / s n o i t p o f o e s i c r e x E s t h g i r e c n a m r o f r e p / s n o i t p o f o e u s s I , ) 0 0 0 0 0 6 , 1 1 ( s n o i t p o f o y r i p x E - - d o i r e p f o d n e t a e b a s i c r e x E l d o i r e p f o d n e t a e u s s i n O * s t h g i r e c n a m r o f r e P s n o i t p o e r a h S 0 0 0 $ . 0 0 0 $ . 0 0 0 $ . 5 5 3 4 0 $ . . 6 4 0 $ 5 3 . 0 $ . 5 4 0 $ 3 5 . 0 $ 3 5 . 0 $ 5 3 . 0 $ 1 2 - n u J - 7 0 0 2 - y a M - 1 3 9 1 - n u J - 2 0 1 2 - n u J - 7 0 0 2 - y a M - 1 3 0 2 - r p A - 0 2 0 2 - y a M - 4 2 9 1 - y a M - 5 1 9 1 - n u J - 2 0 8 1 - p e S - 0 3 e u s s i n i s t h g i r e c n a m r o f r e P d n a s n o i t p o e r a h S ) d e u n i t n o c ( l a t i p a c e r a h S . 8 1 ) $ A ( e c i r p e s i c r e x E e t a d y r i p x E 5 6 2 . 0 % 0 8 % 3 8 . 2 5 6 2 . 0 8 1 - n u J - 7 0 5 6 2 0 . % 0 8 % 3 8 2 . 9 0 1 . 0 0 6 2 0 . % 0 8 % 5 7 . 2 4 9 0 0 . 8 1 - n u J - 7 0 8 1 - r p A - 8 1 : d o i r e p t n e r r u c n i s t n a r g f o e u l a v r i a f g n i t a m i t s e n i d e s u s n o i t p m u s s A ) $ A ( e t a d t n a r g t a e c i r p e r a h s M O L ) $ A ( t h g i r / n o i t p o r e p e u a v r i a F l e t a r t s e r e t n i e e r f - k s i R l y t i l i t a o v d e t a m i t s E e t a d t n a r G . t r o p e r ’ s r o t c e r i d e h t f o 2 1 n o i t c e s n i d e s o l c s i d e r a l e n n o s r e p t n e m e g a n a m y e k o t d e u s s i 0 2 0 2 y a M 1 3 d n a 9 1 0 2 n u J 2 n o g n i r i p x e s t h g i r e c n a m r o f r e P * Annual Report for the year ended 31 December 2018 | 49 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 19. Financial risk management The Group has exposure to market, credit and liquidity risks from the use of financial instruments. This note presents information about the Group’s exposure to each of the above risks, their objectives, policies and processes for measuring and managing risk, and the management of capital. Further quantitative disclosures are included throughout this financial report. The Board of directors has overall responsibility for the establishment and oversight of the risk management framework. Risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. Market risk Commodity price risk The Group is focused on its diamond mining and exploration interests in Africa and Australia. Accordingly, the Group is exposed to the global pricing structures of the diamond market. Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar, Australian dollar and South African rand. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations that are not in the individual business unit’s functional currency. The Group manages its foreign exchange risk by monitoring its net exposures, maintaining an appropriate balance between foreign currency assets and liabilities and making use of hedging instruments. The Group does not speculate with the use of hedging instruments and derivatives. The Group’s exposure to foreign currency risk at balance date was as follows, based on notional amounts: Financial assets Cash and cash equivalents Trade and other receivables Financial liabilities Trade and other payables Provisions 31 Dec 2018 31 Dec 2017 US$ US$ 914,331 303,012 655,412 68,334 501,787 270,854 - - Cash flow interest rate risk Cash flow interest rate risk, is the risk that a financial instrument’s value will fluctuate as a result of changes in the market interest rates on interest- bearing financial instruments. The Group does not currently use derivatives to mitigate these exposures. 50 | Lucapa Diamond Company Limited Interest rate risk exposure Financial assets Variable interest rates Cash and cash equivalents Average rate for 2018: 2.6% (2017: 1.18%) Fixed interest rates Trade and other receivables Average rate for 2018: 2.95% (2017: 2.95%) Non-interest bearing Trade and other receivables Financial liabilities Variable interest rates Borrowings Average rate for 2018: 18.3%* (2017: n/a) * 3 month Jibar + 8.6% Fixed interest rates Borrowings Average rate for 2018: 12.5% (2017: 13% ) Non-interest bearing Trade and other payables 31 Dec 2018 31 Dec 2017 US$ US$ 8,200,090 8,295,327 113,927 159,003 25,037,491 26,290,503 6,883,088 - 17,072,550 9,817,085 5,995,452 8,300,733 Cash flow sensitivity analysis for variable rate instruments A sensitivity analysis has been prepared to demonstrate the sensitivity to a reasonably possible change in interest rates, with all other variables held constant through the impact on floating rate interest rates. A change of 100 basis points in interest rates at the reporting date would not have an estimated impact of US$0.2m before tax on the statement of profit of loss and other comprehensive income. There would be no effect on the equity reserves other than those directly related to statement of profit of loss and other comprehensive income. The analysis is performed on the same basis as for the prior period. Credit risk Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in a financial loss to the Group. The Group’s potential concentration of credit risk mainly relates to amounts advanced to the Lulo Diamond Project (Notes 12 & 13). The Group’s short term cash surpluses are placed with banks that have investment grade ratings. The maximum credit risk exposure relating to the financial assets is represented by their carrying values as at the balance sheet date. Annual Report for the year ended 31 December 2018 | 51 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 19. Financial risk management (continued) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. Ultimate responsibility for liquidity risk management rests with the Board of directors. The Group manages liquidity risk by maintaining adequate cash reserves from funds raised in the market and by continuously monitoring forecast and actual cash flows. The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements. Trade and other payables Payable within one year Borrowings Payable within one year Payable after one year but less than five years Payable after more than five years Capital risk mangement 31 Dec 2018 31 Dec 2017 US$ US$ 5,995,452 8,300,733 12,083,103 17,079,861 - 1,739,135 12,021,016 - The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so as to maintain a strong capital base sufficient to maintain future exploration and development of its projects. In order to maintain or adjust the capital structure, the Group may return capital to shareholders, issue new shares, raise debt finance or sell assets to reduce debt. The Group’s focus has been to raise sufficient funds through equity and debt finance to fund exploration, mine development and evaluation activities. Fair value hierarchy Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which revenues and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in Note 3 to the financial statements. The financial assets and liabilities are clasified as follows in terms of the fair value hierarchy: • the alluvial project receivable (note 12): level 3 due to the use of unobservable inputs; • the Equigold embedded derivative (note 14): level 1 due to the use of market based and observable inputs; • other financial assets and liabilities approximate net fair value, determined in accordance with the accounting policies. 20. Commitments and contingencies Operating lease commitments Minimum lease payments under non-cancellable operating lease agreements Payable within one year Payable after one year but less than five years Payable after more than five years Capital commitments Payable within one year Approved, not yet contracted Approved and contracted Contingencies The Group did not have any contingent liabilities as at 31 December 2018 (31 December 2017: Nil). 52 | Lucapa Diamond Company Limited 31 Dec 2018 31 Dec 2017 US$ US$ 90,500 374,856 371,085 836,441 108,940 467,159 614,268 1,190,367 4,206,407 6,113,787 354,959 3,950,531 21. Parent entity information Current assets Total assets Current liabilities Total liabilities Share capital Reserves Accumulated losses (Loss)/ profit for the period Total comprehensive (loss)/ income for the period 22. Related party disclosures Key management personnel compensation (refer note 6) Short-term employee benefits Post-employment benefits Share-based payments Other related party transactions The following payments, relating to office rent and associated costs were made to entities associated with director Miles Kennedy: Kennedy Holdings (WA) Pty Ltd The following payments, relating to professional services supplied were made to director Albert Thamm: Competent Person services Loan facility agreement with an entity associated with non executive director Ross Stanley: 31 Dec 2018 31 Dec 2017 US$ US$ 4,771,045 9,222,508 92,372,737 66,953,332 13,419,984 4,770,854 20,992,235 7,626,367 112,920,198 96,981,417 (3,849,921) (230,108) (37,689,776) (37,424,344) 71,380,502 59,326,965 (3,263,477) (3,029,269) (3,263,477) (3,029,269) 1,313,960 1,211,096 48,118 528,322 55,934 761,563 1,890,400 2,028,593 62,832 74,305 6,350 36,720 Amount due to New Azilian Pty Ltd (refer note 17) 1,282,564 - Individual directors’ and executives’ compensation disclosures Information regarding individual directors’ and executives’ compensation and some equity instruments disclosures as required by Corporations Regulations 2M.3.03 is provided in the remuneration report section of the directors’ report. Apart from the details disclosed in this note, no director has entered into a material contract with the Company since the end of the previous financial year and there were no other material contracts involving director’s interests at period-end. Key management personnel and director transactions A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. A number of these entities transacted with the Company in the reporting period. The terms and conditions of the transactions with management persons and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-director related entities on an arm’s length basis. Annual Report for the year ended 31 December 2018 | 53 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 23. Group information The consolidated financial statements of the Group include the following subsidiaries: Lucapa Diamonds (Botswana) (Proprietary) Limited Incorporated in Botswana Equity interest held Brooking Diamonds Pty Ltd Incorporated in Australia Equity interest held Mothae Diamonds (Pty) Ltd Incorporated in the Kingdom of Lesotho Equity interest held Lucapa (Mauritius) Holdings Limited Incorporated in Mauritius Equity interest held 31 Dec 2018 31 Dec 2017 % % 100 100 70 100 100 100 70 n/a 24. Events subsequent to reporting date On 4 January 2019, Lucapa announced the first repayment of principal in the amount of US$1.875m under the loan facility with Equigold. On 14 January 2019, Lucapa announced the first historic tender of Lulo diamonds under Angola’s new diamond marketing policy, which was scheduled to close on 31 January 2019. On 1 February 2019, Lucapa announced that the diamonds sold in the historic first tender had achieved total highest bids of US$16.7m (A$22.9m), representing an average price per carat of US$33,530. On 4 February 2019, Lucapa released its presentation for the Mining Indaba 2019 conference, which included plans to scale up diamond mining operations at Lulo in mid-2019. On 18 February 2019, Lucapa announced an exploration update from the Brooking project in Western Australia. The update included bulk sampling results from Little Spring Creek which were below the Company’s commercial hurdle, with micro-diamond results awaited from the Big Spring Creek lamproite samples. The update also included information on drilling targets and stream sampling targets. On 19 February 2019, Lucapa announced the recovery of a 128 carat top-colour white Type IIa Lulo diamond – the 12th +100 carat diamond recovered from Lulo to date, along with a 7.5 carat fancy purple pink diamond. On 20 February 2019, Lucapa announced the outcome of a review of the Company’s diamond asset portfolio to maximise shareholder value, which included prioritising cash generation through the expansion of the Lulo and Mothae mining operations; advancing the Lulo kimberlite exploration program; and cutting and polishing select Specials to accrete additional value. On 27 February 2019, Lucapa announced the first Antwerp tender of diamonds from the new 1.1Mtpa Mothae plant in Lesotho had achieved total revenues of US$3.8m (A$5.3m), including prices of up to US$36,664 per carat for individual diamonds. On 15 March 2019, Lucapa announced the recovery of an 83.9 carat diamond from the new Mothae kimberlite diamond mine. 54 | Lucapa Diamond Company Limited Directors’ Declaration for the year ended 31 December 2018 1. In the opinion of the directors of Lucapa Diamond Company Limited: (a) the financial statements and notes, and the remuneration report in the Directors’ Report, as set out on pages 9 to 54, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 31 December 2018 and of its performance for the financial period ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 2; and (c) there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. 2. The directors have been given the declarations required by section 295A of the Corporations Act 2001 for the financial year ended 31 December 2018. Signed in accordance with a resolution of the directors. MILES KENNEDY Chairman Dated this 22 March 2019 Annual Report for the year ended 31 December 2018 | 55 Auditor’s Report for the year ended 31 December 2018 Greenwich & Co Audit Pty Ltd | ABN 51 609 542 458 Level 2, 35 Outram St, West Perth WA 6005 PO Box 983, West Perth WA 6872 T 08 6555 9500 | F 08 6555 9555 www.greenwichco.com Independent Auditor’s Report To the members of Lucapa Diamond Company Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Lucapa Diamond Company Limited (“Lucapa” or “the Company”) and its subsidiaries (“the Group”), which comprises the consolidated statement of financial position as at 31 December 2018, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group's financial position as at 31 December 2018 and of its financial performance for the year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatements. Our responsibilities under those standards are further described as in the Auditor's Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board's APES 110 Code of Ethics for Professional Accountants (“the Code”) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor's report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Material uncertainty related to going concern We draw attention to Note 2.b) to the financial report, which describes that the ability of the Group to continue as a going concern is dependent on cash generation from its mining projects, cash management, and/or the use of debt finance. Without such sources, further equity issues to the market may be required. As a result, there is material uncertainty related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern, and therefore whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report. Our opinion is not modified in respect of this matter. 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 of the current period. These 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. In addition to the matter described in the Emphasis of matter – material uncertainty regarding continuation as a going concern section, we have determined the matters described below to be key audit matters to be communicated in our report. 56 | Lucapa Diamond Company Limited Valuation of receivable from Sociedade Mineira do Lulo, Lda Refer to Note 12 Financial Assets and accounting policy Notes 3d, 3t and 3u Key Audit Matter How our audit addressed the key audit matter The Group has a balance receivable as at 31 December 2018 of Our audit work included, but was not restricted to, the following: US$23,087,130 from its associated entity, Sociedade Mineira • We obtained a loan confirmation of the gross value receivable from SML to Lucapa; do Lulo, Lda (“SML”). This balance has been presented at its • We obtained the Group’s calculation of the discounted cashflows from SML to fair value, in accordance with the provisions of AASB 13 Fair Lucapa, and re-tested the workings to ensure the discounting process had been Value Measurement. To take account of this requirement, accurately performed; Management of the Group has discounted the gross value • We obtained third party verification of the discount rate applied by Management, receivable at an annual discount rate of 14.55%, taking and evaluated the reliability of the source data; and account of the time value of money, based on estimated • We evaluated the board’s application of estimates and judgements, with reference dates of cashflows from SML to Lucapa. to AASB 13, to ensure that the accounting applied was fully compliant with Deferred Exploration and Evaluation Costs Refer to Note 13 Property Plant and Equipment and accounting policy Notes 3g, 3i and 3u accounting standards. Key Audit Matter How our audit addressed the key audit matter At 31 December 2018, the Group has incurred significant exploration and evaluation expenditure which has been capitalised. As the carrying value of exploration and evaluation expenditures represents a significant asset of the Group, we considered it necessary to assess whether facts and circumstances existed to suggest that the carrying amount of this asset may exceed its recoverable amount. Management of the Group considered whether there were any indicators of impairment. The Group capitalises exploration and evaluation expenditure in line with AASB 6 Exploration for and Evaluation of Mineral Resources. The assessment of each asset’s future perspectivity requires significant judgement. There is a risk that amounts are capitalised which no longer meet the recognition criteria of AASB 6. Our audit work included, but was not restricted to, the following: • We obtained evidence that the Group has valid rights to explore in the areas represented by the capitalised exploration and evaluation expenditures by obtaining independent searches of a sample of the company’s tenement holdings; • We enquired with management and reviewed budgets to ensure that substantive expenditure on further exploration for and evaluation of the mineral resources in the Group’s area of interest were planned; • We enquired with management, reviewed announcements made and reviewed minutes of directors’ meetings to ensure that the company had not decided to discontinue activities in any of its areas of interest; • We enquired with management to ensure that the Group had not decided to proceed with development of a specific area of interest, yet the carrying amount of the exploration and evaluation asset was unlikely to be recovered in full from successful development or sale. Decentralized Operations Refer to Note 23 Group Information and 13 Property Plant and Equipment Key Audit Matter How our audit addressed the key audit matter Lucapa is a group with subsidiaries in Lesotho, Botswana Our audit work included, but was not restricted to, the following: and Mauritius and a joint arrangement in Angola. These • We have evaluated the group’s internal controls, including centralized monitoring decentralized operations require adequate monitoring controls that exist at both group and segment level. activities from an internal control perspective. Also in our role • In our audit approach we have specifically focused on risks in relation to as group auditor it is essential that we obtain an appropriate decentralised structure and we have been closely involved in the audit performed level of understanding of the subsidiaries and the joint operation and the component auditor’s work. at Mothae, being the most significant subsidiary outside of Australia. • We also performed tests on consolidation adjustments and manual journal entries, both at group and component level to obtain an understanding of significant entries made. • Tested a sample of expenditure incurred in the joint operation to supporting invoices or other documentation. Annual Report for the year ended 31 December 2018 | 57 Auditor’s Report for the year ended 31 December 2018 Other Information The directors are responsible for the other information. The other information comprises the Review of Operations and Directors Report and other information included in the Group’s annual report for the year ended 31 December 2018 but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express 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 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. Responsibilities of 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 Group’s ability 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 Group 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 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. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. • Obtained sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. 58 | Lucapa Diamond Company Limited We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included on pages 13-15 of the directors' report for the year ended 31 December 2018. In our opinion the Remuneration Report of Lucapa Diamond Company Limited for the year ended 31 December 2018 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. GREENWICH & CO AUDIT PTY LTD RAFAY NABEEL Audit Director 22 March 2019 Perth Annual Report for the year ended 31 December 2018 | 59 ASX Additional Information Additional information current as at 19 March 2019 required by Australia Securities Exchange Limited Rules and not disclosed elsewhere in this 5. Top 20 holders of quoted securities Report. 1. Capital structure Ordinary Share Capital 474,706,564 ordinary fully paid shares held by 6,171 shareholders. Fully Paid Ordinary Shares Name TAZGA TWO PL EQUIGOLD PTE LTD Number of Holders Number of Shares J P MORGAN NOM AUST PL ONE DOG ONE BONE PL Number Held 39,880,436 18,039,921 16,895,102 12,019,583 11,200,000 10,662,117 10,583,314 9,798,367 8,631,000 7,850,000 5,000,000 4,813,953 4,173,913 4,147,790 % of Issued Capital 8.40% 3.80% 3.59% 2.53% 2.36% 2.25% 2.23% 2.06% 1.82% 1.65% 1.05% 1.01% 0.88% 0.87% 0.84% 0.71% 0.65% 0.63% 0.57% 0.55% ZERO NOM PL PULLINGTON INV PL CITICORP NOM PL ILWELLA PL CARRINGTON CORP PL IMPALA SUPER NOM PL COXON ANNA GREGORACH PL ROBINSON P R + T T + HOLM SLADE TECHNOLOGIES PL LAWRENCE CHRISTOPHER P 4,000,000 CADDICK ALFRED RALPH P GREGORACH PL HSBC CUSTODY NOM AUST LTD ROXTEL PL BRUTON DEREK DECLAN 3,359,185 3,080,237 3,011,876 2,700,309 2,620,000 182,467,103 38.44% 6. Unlisted option holders There is 1 holder of A$0.53 unlisted options expiring 15 May 2019. There are 10 holders of A$0.53 unlisted options expiring 2 June 2019. There is 1 holder of A$0.35 unlisted options expiring 20 April 2020. There are 15 holders of A$0.45 unlisted options expiring 24 May 2020. There are 20 holders of A$0.46 unlisted options expiring 31 May 2020. There are 13 holders of A$0.43 unlisted options expiring 7 June 2021. 7. Performance rights There are 10 holders of Performance Rights expiring 2 June 2019. There are 14 holders of Performance Rights expiring 31 May 2020. Spread 1 1,001 5,001 to to to 1,000 5,000 10,000 10,001 to 100,000 108 1,973 1,133 2,385 33,936 6,222,057 9,244,817 82,192,191 100,001 and above 572 377,013,563 As at 19 March 2019 there were 957 fully paid ordinary shareholders holding less than a marketable parcel. 2. Voting rights Ordinary Shares On a show of hands, every member present in person or by proxy shall have one vote and upon a poll each share shall have one vote. Options and Performance Rights Options and performance rights carry no voting rights and convert to one ordinary share upon exercise. 3. On-market buy-back There is no current on-market buy back. 4. Substantial shareholders Fully Paid Ordinary Shares Name Tazga Two Pty Ltd as trustee for Tazga Two Trust Number Held % of Issued Capital 39,250,436 8.58% 60 | Lucapa Diamond Company Limited Competent Person’s Statement Forward-Looking Statements Information included in this announcement that relates to exploration This announcement has been prepared by the Company. This document results and resource estimates is based on and fairly represents contains background information about the Company and its related information and supporting documentation prepared and compiled by entities current at the date of this announcement. This is in summary Richard Price MAusIMM who is a Member of the Australasian Institute form and does not purport to be all inclusive or complete. Recipients of Mining and Metallurgy. Mr Price is an employee of Lucapa Diamond should conduct their own investigations and perform their own analysis Company Limited. Mr Price has sufficient experience which is relevant in order to satisfy themselves as to the accuracy and completeness to the style of mineralisation and type of deposit under consideration of the information, statements and opinions contained in this and to the activity which he is undertaking to qualify as a Competent announcement. This announcement is for information purposes only. Person as defined in the 2012 Edition of the Australasian Code for Neither this document nor the information contained in it constitutes Reporting Exploration Results, Mineral Resources and Ore Reserves. an offer, invitation, solicitation or recommendation in relation to the Mr Price consents to the inclusion in the announcement of the matters purchase or sale of shares in any jurisdiction. based on this information in the form and context in which it appears. No New Information To the extent that announcement contains references to prior exploration results and Mineral Resource estimates, which have been cross referenced to previous market announcements made by the This announcement may not be distributed in any jurisdiction except in accordance with the legal requirements applicable in such jurisdiction. Recipients should inform themselves of the restrictions that apply in their own jurisdiction. A failure to do so may result in a violation of securities laws in such jurisdiction. Company, unless explicitly stated, no new information is contained. The This document does not constitute investment advice and has been Company confirms that it is not aware of any new information or data prepared without taking into account the recipient’s investment that materially affects the information included in the relevant market objectives, financial circumstances or particular needs and the opinions announcements and, in the case of estimates of Mineral Resources and recommendations in this representation are not intended to relating to Mothae that all material assumptions and technical represent recommendations of particular investments to particular parameters underpinning the estimates in the market announcement investments to particular persons. dated 24 March 2017 continue to apply and have not materially changed. Recipients should seek professional advice when deciding if an investment is appropriate. All securities transactions involve risks, which include (among others) the risk of adverse or unanticipated market, financial or political developments. No responsibility for any errors or omissions from this document arising out of negligence or otherwise is accepted. This document does include forward-looking statements. Forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions which are outside the control of the Company. Actual values, results, outcomes or events may be materially different to those expressed or implied in this announcement. Given these uncertainties, recipients are cautioned not to place reliance on forward-looking statements. Any forward-looking statements in this announcement speak only at the date of issue of this announcement. Subject to any continuing obligations under applicable law and ASX Listing Rules, the Company does not undertake any obligation to update or revise any information or any of the forward-looking statements in this document or any changes in events, conditions or circumstances on which any such forward-looking statement is based. Annual Report for the year ended 31 December 2018 | 61 ACN 111 501 663 34 Bagot Road Subiaco WA 6008 Tel +61 8 9381 5995 Fax +61 8 9380 9314 Email general@lucapa.com.au www.lucapa.com.au 62 | Lucapa Diamond Company Limited