Mount Gibson Iron Limited
Annual Report 2017

Plain-text annual report

MOUNT GIBSON IRON LIMITED 2017 Annual Report34MOUNT GIBSON IRON LIMITED 2017 Annual ReportMOUNT GIBSON IRON LIMITED 2017 Annual Report56MOUNT GIBSON IRON LIMITED 2017 Annual ReportMOUNT GIBSON IRON LIMITED 2017 Annual Report78MOUNT GIBSON IRON LIMITED 2017 Annual ReportMOUNT GIBSON IRON LIMITED 2017 Annual Report9Resources and Reserves Total Mineral Resources and Ore Reserves by Project as at 30 June 2017 Koolan Island Mineral Resources, above 50% Fe Measured Indicated Inferred Total at 30 June 2017 Total at 30 June 2016 Ore Reserves, above 50% Fe Proved Probable Total at 30 June 2017 Total at 30 June 2016 Extension Hill Mineral Resources, above 50% Fe Measured Indicated Inferred Total at 30 June 2017 Total at 30 June 2016 Ore Reserves, above 50% Fe Proved Probable Total at 30 June 2017 Total at 30 June 2016 Iron Hill Mineral Resources, above 50% Fe Measured Indicated Inferred Total at 30 June 2017 Total at 30 June 2016 Tallering Peak Mineral Resources, above 50% Fe Measured Indicated Inferred Total at 30 June 2017 Total at 30 June 2016 Shine Tonnes millions 7.69 41.93 10.89 60.51 60.51 0.04 12.77 12.82 Nil 1.27 0.31 0.20 1.79 2.64 Nil Nil Nil 1.15 Nil 1.23 6.84 8.07 8.80 0.41 1.03 0.20 1.65 1.65 Fe % 59.1 64.4 60.2 63.0 63.0 63.49 66.03 66.02 Nil 55.32 57.29 56.61 55.81 56.80 Nil Nil Nil 58.0 Nil 60.56 57.87 58.28 58.3 58.9 58.1 54.7 57.9 57.9 SiO 2 % 13.53 6.36 12.48 8.38 8.38 6.68 3.70 3.71 Nil 9.16 10.42 10.49 9.53 8.59 Nil Nil Nil 7.21 Nil 8.64 8.72 8.71 8.60 6.26 11.70 17.89 11.10 11.10 Al O 3 2 % 1.16 0.76 0.79 0.82 0.82 1.31 0.92 0.93 Nil 2.76 1.62 1.66 2.44 2.25 Nil Nil Nil 2.09 Nil 0.94 1.74 1.62 1.62 3.50 1.66 1.93 2.15 2.15 P % 0.018 0.014 0.015 0.015 0.015 0.014 0.009 0.009 Nil 0.077 0.076 0.055 0.074 0.078 Nil Nil Nil 0.088 Nil 0.050 0.071 0.068 0.065 0.082 0.066 0.056 0.069 0.069 Mineral Resources, above 50% Fe 5.73 Measured 6.57 Indicated 3.59 Inferred 15.89 Total at 30 June 2017 15.89 Total at 30 June 2016 Discrepancies may appear due to rounding. Mineral Resources are reported inclusive of Ore Reserves. All tonnages have been estimated as dry tonnages. 9.04 10.01 9.61 9.57 9.57 58.9 58.0 56.8 58.1 58.1 1.81 1.35 1.18 1.48 1.48 0.076 0.070 0.063 0.071 0.071 10MOUNT GIBSON IRON LIMITED 2017 Annual ReportMOUNT GIBSON IRON LIMITED 2017 Annual Report1112MOUNT GIBSON IRON LIMITED 2017 Annual ReportDirectors’ Report Your Directors submit their report for the year ended 30 June 2017 for Mount Gibson Iron Limited (“Company” or “Mount Gibson”) and the consolidated entity incorporating the entities that it controlled during the financial year (“Group”). DIRECTORS The names and details of the Company’s Directors in office during the financial period and until the date of this report are set out below. Directors were in office for the entire period unless otherwise stated. Names, Qualifications, Experience and Special Responsibilities Lee Seng Hui LLB (Hons) Chairman, Non-Executive Director Mr Lee was appointed as a Non-Executive Director on 29 January 2010, Non-Executive Deputy Chairman on 14 December 2012, and Chairman on 18 February 2014. Mr Lee graduated with Honours from the University of Sydney Law School. Mr Lee is the Chief Executive and an Executive Director of Allied Group Limited and Allied Properties (H.K.) Limited both of which are listed on the Hong Kong Stock Exchange. He is also the Chairman and a Non-Executive Director of Tian An China Investments Company Limited and Asiasec Properties Limited, and a Non-Executive Director of APAC Resources Limited, one of Mount Gibson’s substantial shareholders. Alan Jones CA Independent Non-Executive Director Mr Jones was appointed as an Independent Non-Executive Director on 28 July 2006 and is the current Chairman of the Nomination, Remuneration and Governance Committee. Mr Jones is a Chartered Accountant with extensive senior management and board experience in listed and unlisted Australian public companies, particularly in the construction, engineering, finance and investment industries. Mr Jones has been involved in the successful merger and acquisition of a number of public companies in Australia and internationally. He is a Non-Executive Director of Mulpha Australia Ltd, Sun Hung Kai & Co Ltd (Hong Kong), Allied Group Ltd (Hong Kong), Allied Properties (H.K.) Limited and Air Change International Limited. Li Shaofeng B.Automation Non-Executive Director Mr Li was appointed as a Non-Executive Director on 23 February 2012. Mr Li has extensive experience in the management of and investments in various listed companies, sino-foreign joint ventures and steel industry entities. He holds a bachelor degree in Automation from University of Science and Technology Beijing. He is the managing director of Shougang Holding (Hong Kong) Limited. Mr Li is an executive director and the managing director of Shougang Concord International Enterprises Company Limited, the chairman of each of Shougang Fushan Resources Group Limited, a substantial shareholder of Mount Gibson, Shougang Concord Century Holdings Limited, Shougang, and an executive director of BeijingWest Industries International Limited, all of which are companies listed on the Hong Kong Stock Exchange. Russell Barwick Dip.Min.Eng., FAICD, FAusIMM Independent Non-Executive Director Mr Barwick was appointed as an Independent Non-Executive Director on 16 November 2011 and is Chairman of the Operational Risk and Sustainability Committee. Mr Barwick is a mining engineer with 43 years of technical, operational, managerial and corporate experience in international mining companies covering various commodities. He has worked for Bougainville Copper Limited (CRA), Pancontinental Mining Ltd (Jabiluka Uranium) and CSR Limited (coal). He spent 17 years with Placer Dome Asia Pacific in key development, operational and corporate roles in numerous countries culminating in his appointment as Managing Director of Placer Niugini Ltd. He then served as Managing Director of Newcrest Mining Limited (2000 to 2001). For the four years to the end of 2006, Mr Barwick was the Chief Operating Officer of Wheaton River Minerals Ltd and Goldcorp Inc., based in Vancouver, Canada. He was subsequently the Chief Executive Officer of Canada-based Gammon Gold Inc. before returning to Australia in 2008. He is currently the Chairman of Red Metal Ltd and a Non-Executive Director of Lithium Power International Limited. Simon Bird B.Acc.Science (Hons) FCPA, FAICD Lead Independent Non-Executive Director Mr Bird was appointed as an Independent Non-Executive Director on 23 February 2012. Mr Bird is the Lead Independent Director and Chairman of the Audit and Financial Risk Management Committee. Mr Bird has 30 years of international corporate experience, including holding the positions of General Manager Finance at Stockland Limited, Chief Financial Officer of GrainCorp Limited, and Chief Financial Officer of Wizard Mortgage Corporation. He was also Chief Executive Officer of ASX-listed King Island Scheelite Limited, a former Managing Director of Sovereign Gold Limited, a former Chairman of Rawson Resources Limited and a former Director of CPA Australia Limited. Mr Bird is currently a director of ASX-listed company Pacific American Coal Limited. MOUNT GIBSON IRON LIMITED 2017 Annual Report13 Professor Paul Dougas B.Eng (Chem), M.Eng.Science, FAICD, CEng., Hon Fellow Engineers Australia Independent Non-Executive Director Professor Dougas was appointed as an Independent Non-Executive Director on 16 November 2011 and is Chairman of the Contracts Committee. He has 40 years of design, process, project engineering, managerial, commercial and corporate experience having commenced his career in the Melbourne & Metropolitan Board of Works before joining engineering firm Sinclair Knight Merz ("SKM") in 1978. From initial technical roles, he assumed leadership roles in Sydney before returning to Melbourne as Associate Director and Victorian Branch Manager in 1985. In 1995 he was appointed Managing Director Elect and Director of Marketing before becoming Chief Executive Officer and Managing Director in 1996. For the following 15 years, he led a significant expansion of SKM locally and internationally involving more than 50 local and international acquisitions. Professor Dougas was a Non-Executive Director of ConnectEast Ltd from 2009 until its takeover in September 2011 and was also on the SKM Board from 1990 until 2011. He is currently Chairman of the Global Carbon Capture and Storage Institute, Non-Executive Director of Epworth Healthcare and a former Non-Executive Director of Beacon Foundation and Calibre Group Limited. Kin Chan Independent Non-Executive Director Mr Chan was appointed a director on 22 September 2016. Mr Chan has more than 25 years’ experience in international capital markets, investment banking, corporate advisory and major transactions, particularly in Asia. He is the founding shareholder of successful Hong Kong-based investment institution Argyle Street Management Limited (Argyle), and has been the Chief Investment Officer since inception in 2002. Mr Chan is also the Chairman of TIH Limited and Non-Independent Non-Executive Director of OUE Limited, both listed in Singapore. Through Argyle, Mr Chan has invested in mines in Asia and Australia and most recently has had a central role in the acquisition and planned recapitalisation of PT Berau Coal, a major Indonesian mining interest. Prior to founding Argyle, Mr Chan was Chief Executive and Managing Director of Lazard Asia Limited from 2000 to 2001 and managed the firm’s advisory business in Asia outside of Japan. Prior to joining Lazard, Mr Chan was an Executive Director at Goldman, Sachs & Co. where he worked in Hong Kong, New York and Singapore from 1992 to 1999. Mr Chan holds an A.B. degree from Princeton University and an MBA degree from the Wharton School of the University of Pennsylvania where he was a Palmer Scholar. Andrew Ferguson Alternate Director to Lee Seng Hui Mr Ferguson was appointed Alternate Director to Lee Seng Hui on 24 September 2012. Mr Ferguson is Chief Executive Officer and an Executive Director of APAC Resources Ltd, one of Mount Gibson’s substantial shareholders. Mr Ferguson holds a Bachelor of Science Degree in Natural Resource Development and worked as a mining engineer in Western Australia in the mid 1990’s. He has 15 years of experience in the finance industry specialising in global natural resources. In 2003, Mr Ferguson co-founded New City Investment Managers in the United Kingdom. He was the former co-fund manager of City Natural Resources High Yield Trust, and managed New City High Yield Trust Ltd and Geiger Counter Ltd. He has also worked as Chief Investment Officer for New City Investment Managers CQS Hong Kong. Mr Ferguson is a former Non-Executive Director of Metals X Limited and ABM Resources NL, both of which are listed on the Australian Securities Exchange. COMPANY SECRETARY David Stokes B.Bus, LLB, ACIS Company Secretary & General Counsel Mr Stokes was appointed Company Secretary and General Counsel on 2 April 2012. He is a corporate lawyer with a diverse range of mining and governance experience having worked at a corporate and operational level in the energy and resources sectors for over 20 years. Prior to joining Mount Gibson, Mr Stokes was General Counsel and Company Secretary at Gindalbie Metals Limited, Corporate Counsel for Iluka Resources Limited and Resolute Mining Limited, and has also worked in private practice for a number of years. 14MOUNT GIBSON IRON LIMITED 2017 Annual Report CORPORATE INFORMATION Corporate Structure Mount Gibson is a company limited by shares that is incorporated and domiciled in Australia. It is the ultimate parent entity and has prepared a consolidated financial report incorporating the entities that it controlled during the financial year. The structure of the Group as at 30 June 2017 was as follows: Nature of Operations and Principal Activities The principal activities of the entities within the Group during the year were:  mining of hematite iron ore at the Extension Hill and Iron Hill mine sites in the Mid-West region of Western Australia and haulage of the ore via road and rail for sale from the Geraldton Port; construction of the seawall in Koolan Island; and exploration and development of hematite iron ore deposits at Koolan Island and in the Mid-West region of Western Australia.   Employees The Group employed 168 employees (excluding contractors) as at 30 June 2017 (2016: 126 employees). OPERATING AND FINANCIAL REVIEW Introduction The Board presents the 2016/17 Operating and Financial Review which has been prepared to provide shareholders with a clear and concise overview of Mount Gibson’s operations, financial position, business strategies and prospects. This review also provides a summary of the impact of key events which occurred in 2016/17 and the material business risks so that shareholders can make an informed assessment of the results and prospects of the Group. The review complements Mount Gibson’s financial statements for the year ended 30 June 2017 and has been prepared in accordance with Regulatory Guidance 247 published by the Australian Securities and Investments Commission (“ASIC”). MOUNT GIBSON IRON LIMITED 2017 Annual Report15 Overview of the 2016/17 Financial Year The Group’s financial performance for the year ended 30 June 2017 reflected a solid operating performance by the Company’s continuing Mid-West operations during a period of volatile iron ore pricing and significant operational transformation. Pricing was particularly volatile over the 12 month period. At the beginning of the financial year, the Platts Index for delivery of 62% Fe iron ore fines to northern China was approximately US$55 per dry metric tonne (“dmt”) and, after a period of relative stability, rose strongly between November 2016 and February 2017 at which time it peaked at just over US$90/dmt. The price subsequently declined sharply over the ensuing four months, hitting a low of US$54/dmt in mid-June 2017 to average US$70/dmt for the 12 month period. More significantly, the price differential between the benchmark Platts 62% Fe and 58% Fe indices widened significantly over the course of the year. After peaking at US$62/dmt in November 2016, the Platts 58% Fe index price dipped below US$32/dmt in June 2017, having a significant adverse impact on sales revenue from the Company’s Mid-West operations. Group ore sales totalled 3.2 million wet metric tonnes (“Mwmt”) for the 12 month period reflecting the completion of mining in the Extension Hill pit in late 2016, after which all sales were sourced from remaining standard grade and low grade stockpiles at Extension Hill prior to the commencement of sales from the nearby Iron Hill deposit in June 2017. Sales were also augmented by the sale of remnant low grade stockpiled material at the closed Tallering Peak mine site. Total sales revenue for the year was $173,128,000 comprising $162,043,000 from continuing operations at Extension Hill, and $11,085,000 from the discontinued Tallering Peak operation. Mount Gibson achieved an average realised price for standard iron ore fines product from Extension Hill of approximately US$44/dmt Free on Board (“FOB”), after grade and provisional pricing adjustments and penalties for impurities, compared with an average of US$34/dmt in the 2015/16 financial year. The weighted average realised price received for all products sold, on a wet tonnes basis, was $55/wmt FOB in 2016/17 compared with $48/wmt FOB in the prior financial year. Cash reserves, including term deposits and tradeable investments, increased by $46,692,000 over the year, including receipt of the $34,558,000 balance of the property damage component of the Koolan Island insurance claim agreed in the prior financial year, to a total of $446,779,000 as at 30 June 2017. This does not include the $64,288,000 cash proceeds from the settlement of the business interruption component of the insurance claim which was reached and paid subsequent to the end of the financial year in July 2017. Operating Results for the Financial Year The summarised operating results for the Group for the year ended 30 June 2017 are tabulated below: Year ended: 30 June 2017* 30 June 2016* 30 June 2015* 30 June 2014 30 June 2013 Net profit/(loss) before tax Taxation benefit/(expense) Net profit/(loss) after tax $’000 $’000 $’000 24,841 1,481 26,322 85,536 (1,008,505) 163,698 128,440 761 97,083 (67,345) 28,902 86,297 (911,422) 96,353 157,342 Earnings/(loss) per share cents/share 2.41 7.91 (83.56) 8.84 14.45 * The figures for net profit/(loss) before tax and taxation benefit/(expense) for the years ended 30 June 2017, 2016 and 2015 are shown inclusive of discontinued operations. Refer the attached financial statements for further details. Consolidated quarterly operating and sales statistics for the 2016/17 financial year are tabulated below: Consolidated Group Mining & Crushing Total waste mined Total ore mined# Total ore crushed Shipping/Sales Standard DSO Lump Standard DSO Fines Low Grade DSO Total Ave. Platts 62% Fe CFR northern China price MGX Free on Board (FOB) average realised fines price^ kwmt = thousand wet metric tonnes US$/dmt = USD per dry metric tonne Unit kwmt kwmt kwmt kwmt kwmt kwmt kwmt US$/dmt US$/dmt Sept Quarter 2016 Dec Quarter 2016 Mar Quarter 2017 Jun Quarter 2017 2016/17 2015/16 328 862 773 417 294 175 887 59 37 28 207 728 362 295 239 896 71 49 6 49 915 180 176 425 782 86 46 295 782 876 300 - 303 603 63 -* 658 1,899 3,292 1,259 766 1,142 3,167 70 44 5,295 5,976 5,180 2,770 2,076 125 4,971 51 34 * # No fines material was sold during the June 2017 quarter. Includes low-grade ore at Extension Hill with grading 50-55% Fe that is considered to be saleable. This material is being stockpiled for future sale but continues to be treated as waste for accounting purposes. ^ Reflects the realised fines price for standard DSO fines ore only, after adjustments for shipping freight, grade, provisional invoicing adjustments and penalties for impurities. Contract pricing in the year was based on a mix of lagging-monthly and month-of-shipment averages. Minor discrepancies may appear due to rounding. 16MOUNT GIBSON IRON LIMITED 2017 Annual Report Extension Hill/Iron Hill The Extension Hill mine and adjacent Iron Hill Deposit are located in the Mount Gibson Ranges, 85km east of Perenjori and 260km east south east of Geraldton in the Mid-West region of Western Australia. Ore is mined, crushed and screened on-site, transported by sealed road 85km to Perenjori, where it is loaded onto rail wagons and railed 240km to the Geraldton Port. Mining commenced at Extension Hill in the 2011/12 financial year. After five years of continuous production, mining was finally completed in the Extension Hill pit during November 2016. Material mined in the latter stages of the Extension Hill open pit was stockpiled for sale while the Company worked to secure final approvals to develop the nearby Iron Hill Deposit, located 3km south of the Extension Hill pit. The sales of stockpiled Extension Hill ore were augmented in the 2016/17 year by sales from existing low grade stockpiles. In December 2016, the planned development of the Iron Hill deposit was approved by Western Australia’s Environment Minister, and the Company received the final required regulatory approvals in February 2017, following which a development decision was made. Life-of-mine sales from Iron Hill are anticipated to total 5.5 to 6.0 million tonnes through to the expected end of production in late 2018, at an average site cash cost of $46-$48/wmt. Iron Hill has a Total Mineral Resource of 8.8Mt @ 58.3% Fe (refer ASX release dated 31 August 2016). Iron Hill’s proximity to Extension Hill enabled the Company to utilise the existing Extension Hill workforce of approximately 160 staff and contractors, and existing camp, processing and transport infrastructure, with minimal capital expenditure. Mining commenced at Iron Hill in March 2017, and the first ore sales occurred in June 2017. Combined ore sales from the Extension Hill/Iron Hill operations, exported through Geraldton Port, totalled 2,751,000 wmt in the 2016/17 year. Sales comprised 1,259,000 wmt of lump ore (including 118,000 wmt from Iron Hill), 766,000 wmt of fines ore and 726,000 wmt of low grade lump material from existing stockpiles at Extension Hill. At the end of June 2017, approximately 78,000 wmt of crushed high grade product was stockpiled at the mine. Stockpiles of uncrushed high grade Iron Hill material totalled 205,000 wmt and stockpiles of both crushed and uncrushed lower grade material totalled 2.9 Mwmt grading 50-55% Fe. Crushed ore stockpiles at the Perenjori rail siding totalled approximately 214,000 wmt of high grade ore and 197,000 wmt of low grade lump products. The Extension Hill operation was strongly cashflow positive over the year, despite the volatility of iron ore pricing and widening differential between the Platts 58% Fe and Platts 62% Fe pricing indices, reflecting the Company’s ongoing focus on cost control and operational efficiency. Prior to commencing the Iron Hill development, in December 2016 Mount Gibson entered into three 12 month offtake agreements with customers for Iron Hill which each represented approximately 25% of planned available production in the first year of the operation. In late June and early July 2017 Mount Gibson terminated two of these offtake agreements after the relevant customers failed to comply with a fundamental term of their respective agreements. The Company has reserved its rights to pursue the former offtake customers for any losses resulting from the termination of these agreements. Mount Gibson has commenced selling this material to alternative customers, and expects to be able to continue doing so as product becomes available. Production and shipping statistics for Extension Hill for the 2016/17 financial year are tabulated below: Extension Hill Production Summary Unit Sept Quarter 2016 ’000 Dec Quarter 2016 ’000 Mar Quarter 2017 ’000 Jun Quarter 2017 ’000 Year 2016/17 ’000 Year 2015/16 ’000 % Incr/ (Decr) Mining Waste mined* Standard Ore mined Low Grade Ore mined* Total Ore Mined Crushing Lump Fines Transported to Perenjori Railhead Lump Fines Transported to Geraldton Port Lump (Rail) Fines (Rail) Shipping Lump Fines Low Grade Lump wmt wmt wmt wmt wmt wmt wmt wmt wmt wmt wmt wmt wmt 328 669 192 862 452 321 773 399 348 747 416 309 725 417 294 - 711 28 171 36 207 438 290 728 440 265 705 441 235 676 362 295 118 775 6 28 21 49 558 357 915 607 8 615 521 176 697 180 176 305 662 295 640 142 782 530 346 876 535 201 736 561 81 642 300 - 303 603 658 1,973 (67) 1,508 391 1,899 1,978 1,313 3,292 1,981 822 2,803 1,939 801 2,740 1,259 766 726 2,751 3,864 731 4,595 2,303 1,592 3,895 2,207 1,498 3,705 1,985 1,360 3,345 1,963 1,419 - 3,382 (61) (46) (59) (14) (18) (15) (10) (45) (24) (2) (41) (18) (36) (46) - (19) * Low grade ore is material grading 50-55% Fe considered to be potentially saleable. This material is being stockpiled for future sale but continues to be treated as waste for accounting purposes. Minor discrepancies may appear due to rounding. MOUNT GIBSON IRON LIMITED 2017 Annual Report17 Koolan Island The Koolan Island mine was placed on care and maintenance in the June 2016 quarter pending completion of the Company’s evaluation of the potential to reinstate the Main Pit seawall and resume high grade ore production. Evaluation and planning work was successfully completed in April 2017. A decision to proceed was announced on 27 April 2017, following confirmation of a safe and viable seawall design and construction method, re-establishment of Ore Reserves, attractive viable capital and operating cost estimates, and receipt of necessary regulatory approvals (refer ASX release dated 27 April 2017). As reported, seawall reconstruction and pit dewatering costs are estimated at $97,000,000, including $10,000,000 in contingencies, with estimated peak cash draw prior to cashflow of $145,000,000. Ore Reserves totalling 12.8Mt grading 66.0% Fe were re-established for Main Pit, giving an initial mine life of 3.5 years. A potential Stage Two pit extension is under evaluation to convert an additional 7Mt of Mineral Resources at the eastern end of Main Pit to Ore Reserves. Life of mine all-in cash costs are projected at $53/wmt FOB, including development capex and final closure costs, resulting in an estimated breakeven Platts 62% Fe price of US$46/dmt including capital and closure costs. First ore sales are targeted for early 2019, with project payback estimated at 28 months after the commencement of sales. Cash expenditure on the Koolan Island restart project totalled approximately $5,000,000 in the June 2017 quarter, related primarily to equipment purchases, labour and equipment mobilisation, and waste rock placement. Preferred suppliers were identified for key contracts, including for seepage barrier construction, geotechnical drilling, cement supply, and specialist instrumentation supply and installation. Material site works started in mid-June 2017 with the commencement of truck and barge dumping of waste rock to reinstate the starter embankment for the seawall. By end of June 2017, approximately 100,000 cubic metres of waste rock had been placed. The Koolan Island labour force increased to 64 personnel by end of June 2017, representing the bulk of the anticipated workforce required during the construction phase. No production or shipping occurred at Koolan Island for the 2016/17 financial year. Tallering Peak In the 2016/17 financial year, Mount Gibson monetised some remnant low grade stockpiled material remaining at the mine site. These opportunistic sales, totalling 417,000 wmt of low grade lump and fines material, generated a modest cash margin and assisted with environmental rehabilitation at the Tallering Peak mine site. Production and shipping statistics for Tallering Peak in the 2016/17 financial year are tabulated below: Tallering Peak Production Summary Unit Sept Quarter 2016 ’000 Dec Quarter 2016 ’000 Mar Quarter 2017 ’000 Jun Quarter 2017 ’000 Year 2016/17 ’000 Year 2015/16 ’000 % Incr/ (Decr) Transported to Geraldton Port - Lump - Fines Shipping - Low Grade DSO Lump - Low Grade DSO Fines wmt wmt wmt wmt 19 141 160 58 117 175 - 159 159 - 122 122 - 59 59 - 120 120 - - - - - - 19 359 378 58 359 417 159 - 159 125 - 125 (88) - 138 (54) - 234 Minor discrepancies may appear due to rounding. EXPLORATION AND DEVELOPMENT Shine Project The Total Mineral Resources at the Shine Project, located 85km north of Extension Hill, comprise 15.9 Mt @ 58.1% Fe (refer ASX release dated 31 August 2016). The Shine Project remains a potentially viable development opportunity when iron ore market conditions improve. CORPORATE Financial Position The Group’s cash, term deposit and tradeable investments balances totalled $446,779,000 at 30 June 2017, an increase of $46,692,000 from the balance of $400,087,000 as at 30 June 2016. The increase reflected business cashflow generated during the financial year and receipt of the $34,558,000 balance of the property damage component of the Koolan Island insurance claim agreed in the prior financial year. As at the balance date, the Company’s current assets totalled $479,337,000 and its current liabilities totalled $38,094,000. As at the date of this report, the Group has sufficient funds in addition to access to further equity and debt funding to maintain its existing operations and to advance its exploration and growth objectives. 18MOUNT GIBSON IRON LIMITED 2017 Annual Report Derivatives As at 30 June 2017, the Group held foreign exchange collar option contracts covering the conversion of US$12,000,000 into Australian dollars over the period July 2017 to September 2017 with a cap price of A$1.00/US$0.7550 and floor price of A$1.00/US$0.7205. These collar contracts had a marked-to-market value at balance date of $341,000. Mount Gibson also took advantage of higher iron ore prices earlier in the financial year to enter into forward sales contracts covering 360,000 tonnes of anticipated iron ore sales in the June half of 2017. The contracts were settled during the period with the final contract at the end of June 2017 having a cash settlement value of $1,104,000 which was received in July 2017. Koolan Island Seawall Insurance Claim Following the $86,000,000 cash settlement of the property damage component of the Company’s insurance claim reached with the insurers in June 2016, discussions continued during 2016/17 between Mount Gibson and its insurers in relation to the separate business interruption component of the claim. Subsequent to the end of the financial year in July 2017, the Company announced it had reached final agreement with 14 insurers, representing 92.5% of the Company’s insurance cover for business interruption suffered as a result of the seawall failure, for a cash settlement of the claim for $64,288,000. Proceeds of the settlement have since been received, further strengthening the Company’s cash position as it continues to evaluate resource investment opportunities and progresses activities to recommence production from the Main Pit at Koolan Island. Negotiations will continue separately with one further insurer representing the remaining 7.5% of the Company’s business interruption coverage. The business interruption settlement takes total cash proceeds received from Mount Gibson’s insurance claim relating to the seawall failure to just over $150,000,000. Likely Developments and Expected Results Mount Gibson’s overall objective is to maintain and grow long-term profitability through the discovery, development, operation and acquisition of mineral resources. As an established producer and seller of hematite iron ore, Mount Gibson’s strategy is to grow its profile as a successful and profitable supplier of raw materials. Key influences on the success of Mount Gibson are not only iron ore prices and foreign exchange rates but also consistency in government policy, the continued attainment of regulatory approvals, the ability to delineate new mineral resources and ore reserves, and the continued control of operating and capital costs. The Board’s corporate objective is to grow the Company’s cash reserves and continue to pursue an appropriate balance between the retention and utilisation of cash reserves for value-accretive investments. The Board has determined the following key business objectives for the 2017/18 financial year: • Extension Hill/Iron Hill – continue to mine the Iron Hill deposit while optimising production rates and controlling costs, to extend the life of the Extension Hill operation and prepare the site for its ultimate closure in the following year. • Koolan Island – successfully rebuild the Main Pit seawall, dewater the pit and prepare the site for commencement of commercial production, with initial ore sales anticipated in early 2019. • Cost reductions - continue to drive for sustainable cost improvements across the existing business. • Treasury returns – maintain the increased yield on the Group’s cash reserves. • Growth projects - continuation of the search for business development opportunities in the resources sector. Extension Hill Outlook As previously reported, during the 2016/17 year the Group secured the final outstanding approvals for development of the Iron Hill deposit and commenced initial ore sales. Life-of-mine sales from Iron Hill are anticipated to total 5.5-6.0Mwmt through to the expected end of production in late 2018, at an average site cash cost of $46-48/wmt sold. Iron Hill sales will be augmented by sales from existing Extension Hill low grade stockpiles when suitable prices can be attained. Koolan Island Outlook Activity at Koolan Island is now focused on the rebuild of the Main Pit seawall and the recommencement of commercial production, with first ore sales targeted for early 2019. As reported, seawall reconstruction and pit dewatering costs are estimated at $97,000,000, with estimated peak cash draw prior to cashflow of $145,000,000. Ore Reserves totalling 12.8Mt grading 66.0% Fe were re-established for Main Pit (refer ASX release dated 27 April 2017), giving an initial mine life of 3.5 years. A potential Stage Two pit extension is under evaluation to convert an additional 7Mt of Mineral Resources at the eastern end of Main Pit to Ore Reserves. Life of mine all-in cash costs are projected at $53/wmt FOB, including development capex and final closure costs, resulting in an estimated breakeven Platts 62% Fe price of US$46/dmt including capital and closure costs. Group Sales Guidance and Cash Costs Guidance Mount Gibson expects its annual sales for the 2017/18 financial year to be between 3.5 and 3.8 Mwmt of iron ore at an average all-in group cash cost of $47-52/wmt. All-in group cash costs are reported FOB and include cash operating expenditure, royalties, sustaining capital expenditure and corporate costs, and exclude project capital expenditure. MOUNT GIBSON IRON LIMITED 2017 Annual Report19 SIGNIFICANT EVENTS AFTER BALANCE DATE On 7 July 2017, the Company announced it had reached final agreement with 14 insurers, representing 92.5% of the Company’s underwriting cover for business interruption in relation to the Company’s insurance claim for the late 2014 seawall failure at Koolan Island. No amount has been recognised in the year ended 30 June 2017. Proceeds of the cash settlement amounting to $64,288,000 have since been received. Negotiations will continue separately with one further insurer representing the remaining 7.5% of the Company’s business interruption coverage. On 15 August 2017, the Company declared a final dividend on ordinary shares in respect of the 2016/17 financial year of $0.02 per share fully franked. The total amount of the dividend is $21,931,000. The dividend has not been provided for in the 30 June 2017 financial statements. Apart from the above, as at the date of this report there are no significant events after balance date of the Company or of the Group that require adjustment of or disclosure in this report. DIVIDENDS There were no dividends paid during the financial year ended 30 June 2017. A final dividend of 2.0 cents per share fully franked has been declared for the year ended 30 June 2017. Refer “Significant Events After Balance Date” above. INDEMNIFICATION AND INSURANCE OF DIRECTORS, OFFICERS AND AUDITORS The Company has, during current or previous financial periods, entered into deeds of access and indemnity with certain Directors. These deeds provide access to documentation and indemnification against liability for loss suffered, as a result of any act or omission, to the extent permitted by the Corporations Act 2001, from conduct of the Group’s business. During the financial year, the Company paid a premium in respect of a contract insuring the Directors of the Company, the Company Secretary and all Executive Officers of the Company and of any related body corporate against a liability incurred as such a Director, Company Secretary or Executive Officer to the extent permitted by the Corporations Act 2001. The Directors have not included details of the nature of the liabilities covered or the amount 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 contracts. The Company has agreed to indemnify its auditors, Ernst & Young, to the fullest extent possible as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young during or since the financial year. The Company has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify an officer or auditor of the Company or any related body corporate against a liability incurred as such an officer or auditor. SHARE OPTIONS, PERFORMANCE RIGHTS AND RESTRICTED SHARES There were no options exercised or forfeited during the financial year or prior to the date of this Report. There are no options over ordinary shares in the Company on issue as at balance date and as at the date of this Report. There were 533,625 Performance Rights vested and exercised during the year. In addition, 177,875 Performance Rights were forfeited during the financial year. There are no Performance Rights on issue as at balance date and as at the date of this Report. There were 4,749,456 restricted shares issued during the year under the Company’s Loan Share Plan, and these shares remain on issue at balance date and as at the date of this report. Refer to the Remuneration Report for further details of options, Performance Rights and restricted shares outstanding. DIRECTORS’ INTERESTS IN THE SHARES, OPTIONS AND PERFORMANCE RIGHTS OF THE COMPANY As at the date of this report, the interests of the Directors in the Shares and Options of the Company were: Lee Seng Hui(i) A Jones Li Shaofeng R Barwick S Bird P Dougas K Chan(ii) A Ferguson (Alternate for Mr Lee) Ordinary Shares Options over Shares Performance Rights over Shares - 300,000 - - 20,000 284,944 - - - - - - - - - - - - - - - - - - (i) For the purposes of Corporations Act Regulation 2M.3.03(1)-Item 18, Mr Lee does not have a disclosable shareholding. However, we note that for purposes of ASX Listing Rule 3.19A.2, Mr Lee has previously declared an indirect “relevant interest” in 323,780,748 ordinary shares in the Company through his association with Allied Group Limited, a substantial shareholder of the Company – refer ASX announcement dated 27 June 2016. (ii) For the purposes of Corporations Act Regulation 2M.3.03(1)-Item 18, Mr Chan does not have a disclosable shareholding. However, we note that for purposes of ASX Listing Rule 3.19A.1, Mr Chan has previously declared an indirect “relevant interest” in 54,718,470 ordinary shares in the Company through his association with investment fund manager Argyle Street Management Limited, a substantial shareholder of the Company – refer ASX announcement dated 23 September 2016. 20MOUNT GIBSON IRON LIMITED 2017 Annual Report DIRECTORS’ MEETINGS The number of meetings of Directors (including meetings of Committees of Directors) held during the year and the number of meetings attended by each Director were as follows: Directors’ Meetings Audit and Risk Management Committee Meetings Nomination, Remuneration and Governance Committee Operational Risk and Sustainability Committee Contracts Committee Number of Meetings Held Lee Seng Hui A Jones Li Shaofeng R Barwick S Bird P Dougas K Chan A Ferguson (Alt. for Mr Lee) 11 9 11 8 11 11 11 9 1 4 4 4 - 1 4 2 1 - ENVIRONMENTAL REGULATION AND PERFORMANCE 4 3 4 - 4 - 1 1 - 6 - 1 - 6 6 6 1 - 4 2 3 - 4 4 4 2 - The Group has developed Environmental Management Plans for its various operating and development sites. The Environmental Management Plans have been approved by the Western Australian Government Departments of Mines and Petroleum, Environmental Protection Authority and, where applicable, Department of Parks and Wildlife and the Department of Health. In addition, plans associated with specific species have been approved by the Federal Department of the Environment. The Environmental Protection Authority has also granted approval for the sites’ management systems and plans. In addition, the Department of Environmental Regulation has granted approval of works to allow construction and operation of “prescribed” facilities and the Department of Mines and Petroleum has granted approval for Mining Proposals at each of the mine sites. The Group holds various environmental licences and authorities, issued under both State and Federal law, to regulate its mining and exploration activities in Australia. These licences include conditions and regulations in relation to specifying limits on activities in the environment, rehabilitation of areas disturbed during the course of mining, exploration activities, tenement conditions associated with exploration and mining and the storage of hazardous substances. There have been no material breaches of the Group’s licences, permits and approvals. The Group continues to report under the National Greenhouse and Energy Reporting (NGER) Act 2009. Diesel combustion is the largest source of greenhouse gas emissions. PROCEEDINGS ON BEHALF OF THE COMPANY There are no proceedings on behalf of the Company under section 237 of the Corporations Act 2001 in the financial year or at the date of this report. ROUNDING Amounts in this report and the accompanying financial report have been rounded to the nearest thousand dollars ($’000) unless otherwise stated under the option available to the Company under ASIC Corporations (Rounding in Financial/Directors’ Report) Instrument 2016/191. The Company is an entity to which the instrument applies. CURRENCY Amounts in this report and the accompanying financial report are presented in Australian dollars unless otherwise stated. CORPORATE GOVERNANCE The Company’s Corporate Governance Statement is contained in the Additional ASX Information section of the Annual Report. AUDITOR’S INDEPENDENCE DECLARATION In accordance with section 307C of the Corporations Act 2001, the Directors received the attached Independence Declaration from the auditor of the Company on page 29 which forms part of this Report. NON-AUDIT SERVICES The Directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. EY received $3,605 for the provision of non-audit service in relations to a Traditional Owner royalty audit during the financial year ended 30 June 2017. MOUNT GIBSON IRON LIMITED 2017 Annual Report21 REMUNERATION REPORT (AUDITED) This Remuneration Report outlines the remuneration arrangements in place for Directors and Key Management Personnel of the Group in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of this report Key Management Personnel of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Group, directly or indirectly, including any directors of the Company. Nomination, Remuneration and Governance Committee (“NRGC”) The NRGC comprises two independent Non-Executive Directors, being Messrs Jones (Chairman) and Barwick, and one non-independent Non-Executive Director, being Mr Lee, the Chairman of the Board. The NRGC of the Board of Directors of the Company is responsible for determining and reviewing remuneration arrangements for the Board and Key Management Personnel. The NRGC assesses the appropriateness of the nature and amount of remuneration of Key Management Personnel on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality, high performing Board and executive team. Remuneration Policy The Remuneration Policy of the Group has been put in place to ensure that:    remuneration policies and systems support the Company’s wider objectives and strategies; Directors’ and senior executives’ remuneration is aligned to the long-term interests of shareholders within an appropriate control framework; and there is a clear relationship between the executives’ performance and remuneration. Remuneration Structure In accordance with best practice corporate governance, the structure of Non-Executive Director and senior executive management remuneration is separate. Non-Executive Director Remuneration Objective The Board seeks to set aggregate remuneration at a level which provides the Company with the ability to attract and retain Directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders. Structure The Constitution and the ASX Listing Rules specify that the aggregate remuneration of Non-Executive Directors shall be determined from time to time by a general meeting of shareholders. An amount not exceeding the amount determined is then divided between the Non-Executive Directors as agreed. The latest determination was at the Annual General Meeting held on 16 November 2011 when Shareholders approved an aggregate remuneration of $1,250,000 per year. Total Non-Executive Director fees of $632,125 were paid/payable in the 2016/17 financial year. Each Non-Executive Director receives a fee for being a Director of the Company. Non-Executive Directors should be adequately remunerated for their time and effort and the risks involved. Non-Executive Directors are remunerated to recognise the responsibilities, accountabilities and associated risks of Directors. Each Non-Executive Director’s performance and remuneration is reviewed on an annual basis by the Chairman and NRGC. Non-Executive Directors’ fixed remuneration will comprise the following elements:   cash remuneration; and superannuation contributions made by the Company. Board operating costs do not form part of Non-Executive Directors’ remuneration. Senior Executives’ Remuneration Objective The Company aims to reward senior executives with a level and mix of remuneration commensurate with their position and responsibilities within the Company and so as to:     reward senior executives for Company and individual performance against targets set by reference to appropriate benchmarks; align the interests of senior executives with those of shareholders; link reward with the strategic goals and performance of the Company; and ensure total remuneration is competitive by market standards. Use of Remuneration Consultants The NRGC from time to time seeks advice from independent remuneration consultants regarding senior executives’ remuneration structures and levels. Such consultants are engaged by, and report directly to, the NRGC, and are required to confirm in writing their independence from the Group’s senior and other executives. No remuneration consultants were appointed for this purpose during the 2016/17 financial year. 22MOUNT GIBSON IRON LIMITED 2017 Annual Report Fixed Remuneration The components of the senior executives’ fixed remuneration are determined individually and may include:    cash remuneration; superannuation; accommodation and travel benefits;  motor vehicle, parking and other benefits; and  reimbursement of entertainment, home office and telephone expenses. The senior executives’ remuneration is reviewed on an annual basis by the Chief Executive Officer, whose remuneration is reviewed annually by the NRGC. In determining the remuneration package, the NRGC reviews the individual’s remuneration with the use of market data for positions with comparable companies. Where appropriate, the package is adjusted so as to keep pace with market trends and ensure continued remuneration competitiveness. In conducting a comparative analysis, the Company’s expected performance for the year is considered in the context of the Company’s capacity to fund remuneration budgets. Variable Remuneration Short-term Incentives (“STI”) Senior executives may receive variable remuneration in the form of STI of up to 30-50% of their annual salary package. STI payments are linked to defined performance measures and provide rewards for completing actions and objectives that are expected to materially improve Company performance. The total potential STI available for award is ultimately at the Board’s discretion and is measured to provide sufficient incentive to the senior executives to achieve the objectives set, such that the cost to the Group is reasonable in the circumstances. The performance measures typically comprise a combination of group and individual measures, chosen to align the interests of senior executives with shareholders, representing the key drivers for short term success of the business and providing a framework for delivering long term value. On an annual basis, the performance of each senior executive is reviewed immediately prior to or just after the reporting date. The NRGC then determines the amount of STI to be allocated to each executive. Payments are made in cash after the reporting date. The Board exercised its discretion to make an award for the 2016/17 financial year based on the achievement of a number of milestones including receipt of all regulatory approvals for, and commencement of mining operations within, the Iron Hill deposit, completion of the feasibility study for reinstatement of the Koolan Island Main Pit seawall and commencement of site activities, advancement of the Koolan Island seawall insurance claim and, subsequent to year end, settlement of the business interruption component thereof, continued cost control within the business and evaluation of a number of business development opportunities. Accordingly, for the 2017 financial year, a total STI cash incentive of $862,796 was awarded to Key Management Personnel, representing 100% of the total STI cash incentives available to each of Messrs Beyer, Kerr, de Kruijff and Stokes. The amount of the STI is included in the Company’s financials for the year and was paid after year-end. Long-term Incentives (“LTI”) The Company previously established the Mount Gibson Iron Limited Performance Rights Plan (“PRP”) in the 2008 financial year. Under the PRP, the Board may invite eligible executives to apply for Performance Rights, which are an entitlement to receive ordinary shares in the Company, subject to satisfaction by the executive of specified performance hurdles set by the Board. The rights are granted at no cost to the executives and convert into ordinary shares on completion by the executive of approximately three years’ continuous service, subject to satisfaction of specified performance hurdles, unless such conditions are waived by the Board exercising its discretion. LTI awards are issued and tested for vesting against the Company's Total Shareholder Return relative to a comparator group of iron ore companies over a 2-3 year period. The comparator group of companies comprised Rio Tinto Limited, Fortescue Metals Group Limited, Grange Resources Limited, Arrium Limited, Atlas Iron Limited, BC Iron Limited, Gindalbie Metals Limited and Western Desert Resources Limited. The employment contracts for the Chief Executive Officer, Mr Beyer, the Company Secretary & General Counsel, Mr Stokes, and the Chief Financial Officer, Mr Kerr, incorporate payment of a LTI. Under their employment contracts and subject to Board discretion, these executives may each year be the invited to apply for, and the Company will grant, a number of Performance Rights equivalent to up to one third of their respective base salaries (including superannuation) divided by the volume weighted average price of the Company’s shares as traded on ASX for the 30 day period prior to 30 June for the relevant year. On 1 July 2016, 533,625 Performance Rights issued under the PRP in the 2013/14 financial year vested into ordinary shares in accordance with their terms, reflecting 75% of the Performance Rights that were available to vest at that time. The remaining 177,875 Performance Rights, representing 25% of those issued in the 2013/14 financial year, did not vest and were cancelled. No new Performance Rights were issued under the PRP in the 2016/17 financial year as the Board decided to establish a new LTI plan. This new LTI plan, known as the Loan Share Plan (“LSP”), was established in August 2016. Under the LSP, ordinary shares in the Company may be issued to eligible participants, with vesting of the shares being subject to the satisfaction of stipulated performance conditions. The shares are issued at their market value with the recipient required to pay this market value in order to take up the share offer. The Company or any of its subsidiaries will provide a loan to fund the acquisition price. The loan is interest-free and is secured against the shares in the form of a holding lock preventing all dealing in the shares. The loan is limited recourse such that if the shares do not ultimately vest and are therefore forfeited, this is treated as full repayment of the loan balance. While the loan balance remains outstanding, any dividends paid on the shares will be automatically applied towards repayment of the loan. In making the loan in respect of the newly issued shares, there is no cash cost to the Company as the shares are newly issued. MOUNT GIBSON IRON LIMITED 2017 Annual Report23 On 24 August 2016 the Company issued a total of 4,749,456 shares to Messrs Beyer, Kerr and Stokes under the LSP, representing their full entitlement for LTI awards equating to one third of their base salaries (including superannuation). In accordance with the terms of the LSP, the shares were issued at a market price of $0.316 per share with the participants responsible for associated limited recourse loans totalling $1,500,828. In order for the shares to vest, the participants must remain continuously employed by the Group to at least the end of the financial year and the Company’s share price, as measured by a rolling five day volume weighted average price of the Company’s shares traded on the ASX, must on 1 July 2017 or at any time in the following four year period be above a 10% premium to the issue price of the shares. The award has been accounted for as an in-substance option award, with the fair value at grant date assessed at $0.104 per share. The Company has a policy restricting executives from entering into arrangements to protect the value of unvested LTI entitlements under equity-based remuneration plans. Employment Contracts As at the date of this report, the Group had entered into employment contracts with the following executives: Jim Beyer The key terms of his contract include:      Commenced as Chief Operating Officer on 2 November 2011 and was appointed as Chief Executive Officer on 14 May 2012, with no set term; Annual Salary Package increase by minimum of CPI from 1 July every year; STI Bonus of up to one half of Annual Salary Package; LTI Bonus of up to one third of Annual Salary Package; and If the Company wishes to terminate the contract other than if Mr Beyer is guilty of any grave misconduct, serious or persistent breach of the terms of the contract or wilful neglect in the discharge of his duties, the Company is obliged to pay out 12 months Annual Salary Package plus any other accrued entitlements and bonuses. If Mr Beyer wishes to terminate the contract, he must provide six months’ notice. Peter Kerr The key terms of his contract include:      Commenced 19 September 2012 with no set term; Annual Salary Package increase by minimum of CPI from 1 July every year; STI Bonus of up to one half of Annual Salary Package; LTI Bonus of up to one third of Annual Salary Package; and If the Company wishes to terminate the contract other than if Mr Kerr is guilty of any grave misconduct, serious or persistent breach of the terms of the contract or wilful neglect in the discharge of his duties, the Company is obliged to pay out 12 months Annual Salary Package plus any other accrued entitlements and bonuses. If Mr Kerr wishes to terminate the contract, he must provide six months’ notice. David Stokes The key terms of his contract include:      Commenced 2 April 2012 with no set term; Annual Salary Package increase by minimum of CPI from 1 July every year; STI Bonus of up to one half of Annual Salary Package; LTI Bonus of up to one third of Annual Salary Package; and If the Company wishes to terminate the contract other than if Mr Stokes is guilty of any grave misconduct, serious or persistent breach of the terms of the contract or wilful neglect in the discharge of his duties, the Company is obliged to pay out 12 months Annual Salary Package plus any other accrued entitlements and bonuses. If Mr Stokes wishes to terminate the contract, he must provide six months’ notice. Scott de Kruijff The key terms of his contract include:     Commenced as General Manager Koolan Island on 17 September 2013 and subsequently appointed as General Manager – Operations on 1 July 2015 with no set term; Annual Salary review subject to performance; Operational incentive of up to 30% of Annual Salary Package; Employee can terminate upon one month’s notice and the Company upon six weeks’ notice, or immediately for any serious misconduct. 24MOUNT GIBSON IRON LIMITED 2017 Annual Report Details of directors and key management personnel disclosed in this report [i] Directors Lee Seng Hui A Jones Li Shaofeng R Barwick S Bird P Dougas K Chan A Ferguson Chairman Non-Executive Director Non-Executive Director Non-Executive Director Lead Non-Executive Director Non-Executive Director Non-Executive Director (from 22 September 2016) Alternate Director to Mr Lee [ii] Key Management Personnel J Beyer P Kerr D Stokes S de Kruijff Chief Executive Officer Chief Financial Officer Company Secretary and General Counsel General Manager - Operations Remuneration of Key Management Personnel for the year ended 30 June 2017 Short Term Post Employment Long Term Share Based Payment Salary & Fees $ Non Monetary(a) $ Cash Incentives(b) $ Accrued Annual Leave(c) $ Super- annuation $ Long Service Leave(d) $ Restricted Shares(e) $ 30 June 2017 Directors Lee Seng Hui A Jones Li Shaofeng R Barwick S Bird P Dougas K Chan A Ferguson (Alt) 102,854 105,479 - 105,479 112,329 101,875 57,534 - Sub-total 585,550 - - - - - - - - - - - - - - - - - - - - - - - - - - - Other KMP J Beyer P Kerr D Stokes S de Kruijff Sub-total Totals 627,776 424,500 320,645 371,245 15,618 11,219 9,401 8,507 338,350 227,250 175,322 121,874 1,744,166 44,745 862,796 2,329,716 44,745 862,796 28,444 9,552 - 1,423 39,419 39,419 Total $ 112,625 115,500 - 115,500 123,000 102,500 63,000 - 632,125 - - - - - - - - - - - - - - - - - - 20,282 225,564 1,304,958 5,099 4,230 2,045 151,498 859,118 116,881 656,479 - 540,094 31,656 493,943 3,360,649 31,656 493,943 3,992,774 9,771 10,021 - 10,021 10,671 625 5,466 - 46,575 48,924 30,000 30,000 35,000 143,924 190,499 % Perform- ance Related - - - - - - - - 43 44 45 23 (a) Non-Monetary include the value (where applicable) of benefits such as group life insurance that are available to all employees of Mount Gibson and car parking, and are inclusive of Fringe Benefits Tax where applicable. (b) Cash incentives represent short term incentives awarded during the year and was paid after year-end. (c) Annual leave has been separately categorised and is measured on an accrual basis and reflects the movement in the accrual over the twelve-month period. Any reduction in accrued leave reflects more leave taken or cashed out than that which accrued in the period. (d) Represents the accrual for long service leave over the twelve-month period. (e) The fair values of the restricted shares were calculated as at the grant date and represent the accounting expense incurred by the Company for the stated financial period, reflecting the terms of the particular Performance Rights or restricted shares. The amount included as remuneration is not related to or indicative of the benefit (if any) that individual executives may in fact receive. Options granted as part of remuneration for the year ended 30 June 2017 There were no options granted to Directors and Executives during the year ended 30 June 2017 and there are no options outstanding as at 30 June 2017. Shares granted as part of remuneration for the year ended 30 June 2017 On 24 August 2016, a total of 4,749,456 restricted shares were granted under the LSP. The award has been accounted for as an in-substance option award with the fair value assessed at grant date as $0.104 per LSP share. Refer the section above titled “Long Term Incentives” for details of the shares issued under the LSP. MOUNT GIBSON IRON LIMITED 2017 Annual Report25 Grant Date 24-Aug-16 24-Aug-16 24-Aug-16 LSP Shares Granted (#) 2,168,889 1,456,716 1,123,851 4,749,456 Fair Value at Grant Date1 ($/LSP share) Value of LSP Shares Granted ($) Vesting Date & Condit- ions LSP Loan ($) $0.104 $0.104 $0.104 $225,564 $151,498 $116,881 $685,369 $460,322 $355,137 Note 2 Note 2 Note 2 $493,943 $1,500,828 LSP Shares Vested in Year (#) Value of LSP Shares Vested in Year3 ($) - - - - - - - - Expiry Date 1-Jul-21 1-Jul-21 1-Jul-21 J Beyer P Kerr D Stokes Total 1. Determined at the time of grant per AASB 2, refer note 24(d) in the financial statements. 2. In order for the LSP shares to vest, participants must remain continuously employed by the Group to at least the end of the financial year and the Company’s share price, as measured by a rolling 5-day volume weighted average price of the Company’s shares traded on the ASX, must on 1 July 2017 or at any time prior to expiry, be above a 10% premium to the issue price of the LSP shares. 3. Determined at the time of exercise at the intrinsic value of the LSP share. During the year ended 30 June 2017, there were no alterations to the terms and conditions of LSP shares after their grant date. Performance Rights granted as part of remuneration for the year ended 30 June 2017 There were no performance rights granted as part of remuneration during the year ended 30 June 2017. Performance Rights vested The following Performance Rights vested during the financial year: J Beyer P Kerr D Stokes 30 June 2017 30 June 2016 258,075 161,625 113,925 243,450 121,340 109,560 A total of 533,625 Performance Rights vested and were exercised during the financial year ended 30 June 2017 in accordance with their terms. In accordance with the PRP, no amounts were paid, or remain unpaid, on the exercise of these Performance Rights. Performance Rights benefits For each grant of Performance Rights, the percentage of the available grant that vested, in the financial year, and the percentage that was forfeited because the person did not meet the service and performance criteria is set out below. The Performance Rights vest after two to three years, providing the vesting conditions are met (refer above). J Beyer J Beyer P Kerr P Kerr D Stokes D Stokes Year Granted 2012/13 2013/14 2012/13 2013/14 2012/13 2013/14 Vested % 100 75 100 75 100 75 Forfeited/ Lapsed % - 25 - 25 - 25 Financial Years Performance Rights May Vest - - - - - - Performance Rights holdings by Key Management Personnel as at 30 June 2017 Balance 30 June 2016 Granted as Remuneration Exercised during the year Lapsed/ forfeited during the year Balance 30 June 2017 Directors Lee Seng Hui A Jones Li Shaofeng R Barwick S Bird P Dougas K Chan A Ferguson (Alt. for Mr Lee) Other KMP J Beyer P Kerr D Stokes S de Kruijff Total - - - - - - - - 344,100 215,500 151,900 - 711,500 At 30 June 2017, there were no Performance Rights on issue. - - - - - - - - - - - - - - - - - - - - - - - - - - - (258,075) (161,625) (113,925) - (86,025) (53,875) (37,975) - - (533,625) (177,875) - - - - - - - - - - - - - 26MOUNT GIBSON IRON LIMITED 2017 Annual Report Shares issued on exercise of Options and Performance Rights for the year ended 30 June 2017 There were no shares issued on the exercise of options during the year ended 30 June 2017 (2016: nil). There were 533,625 shares issued on the exercise of 533,625 Performance Rights on 1 July 2016 in accordance with their terms. Shareholdings of Key Management Personnel as at 30 June 2017 Directors Lee Seng Hui(i) A Jones Li Shaofeng R Barwick S Bird P Dougas K Chan(ii) A Ferguson (Alt. for Mr Lee) Other KMP J Beyer P Kerr D Stokes S de Kruijff Total Balance 1 July 2016 Ord Granted as Remuneration Ord^ Exercise of Performance Rights Ord Net Change Other Ord Balance 30 June 2017 Ord - 300,000 - - 20,000 284,944 - - 484,104 121,340 109,560 - - - - - - - - - - - - - - - - - 2,168,889 1,456,716 1,123,851 - 258,075 161,625 113,925 - 1,319,948 4,749,456 533,625 - - - - - - - - - - - - - - 300,000 - - 20,000 284,944 - - 2,911,068 1,739,681 1,347,336 - 6,603,029 ^ Restricted ordinary shares granted during the year under the Company’s LSP. Refer the section above titled “Long Term Incentives” for details of the shares issued under the LSP. (i) For the purposes of Corporations Act Regulation 2M.3.03(1)-Item 18, Mr Lee does not have a disclosable shareholding. However, we note that for purposes of ASX Listing Rule 3.19A.2, Mr Lee has previously declared an indirect “relevant interest” in 323,780,748 ordinary shares in the Company through his association with Allied Group Limited, a substantial shareholder of the Company – refer ASX announcement dated 27 June 2016. (ii) For the purposes of Corporations Act Regulation 2M.3.03(1)-Item 18, Mr Chan does not have a disclosable shareholding. However, we note that for purposes of ASX Listing Rule 3.19A.1, Mr Chan has previously declared an indirect “relevant interest” in 54,718,470 ordinary shares in the Company through his association with investment fund manager Argyle Street Management Limited, a substantial shareholder of the Company – refer ASX announcement dated 23 September 2016. Remuneration of Key Management Personnel for the year ended 30 June 2016 Short Term Post Employment Long Term Share Based Payment(c) Termination Payment Salary & Fees $ Non Monetary $ Cash Incentives(a) $ Accrued Annual Leave(b) $ Super- annuation $ Long Service Leave $ Options and Performance Rights $ 85,617 80,937 - 80,937 87,786 69,064 - - - - - 9,102 - - - - - - - - - - - - - - - - - - 508,372 363,333 317,173 371,245 24,561 24,087 11,989 13,155 144,779 136,971 138,869 40,000^ 39,897 15,763 6,080 - 8,134 7,689 - 7,689 8,340 6,561 - 38,413 48,295 33,253 30,120 35,245 - - - - - - - - 8,859 2,684 1,918 1,474 1,560,123 73,792 460,619 61,740 146,913 14,935 1,964,464 82,894 460,619 61,740 185,326 14,935 - - - - - - - - 31,026 19,430 13,696 - 64,152 64,152 30 June 2016 Directors Lee Seng Hui A Jones Li Shaofeng R Barwick S Bird P Dougas A Ferguson (Alt) Other KMP J Beyer P Kerr D Stokes S de Kruijff Sub-total Totals Sub-total 404,341 9,102 % Perform- ance Related - - - - - - - 22 26 29 9 Total $ 93,751 88,626 - 88,626 105,228 75,625 - 451,856 805,789 595,521 519,845 461,119 2,382,274 2,834,130 $ - - - - - - - - - - - - - - (a) Cash incentives for Messrs Beyer and Kerr are shown net of the reversal of the Conditional Deferred Bonuses disclosed for the prior year ended 30 June 2015. These Conditional Deferred Bonuses were not paid by the Company. The gross STI cash incentives for the year ended 30 June 2016 were $268,000 for Mr Beyer and $180,000 for Mr Kerr. (b) Annual leave has been separately categorised and is measured on an accrual basis and reflects the movement in the accrual over the twelve-month period. Any reduction in accrued leave reflects more leave taken or cashed out than that which accrued in the period. (c) Share based payments represent the accounting expense incurred by the Company for the stated financial period, reflecting the terms of the particular Options or Performance Rights. ^ Deferred cash incentive related to the Group’s Koolan Island main pit seawall insurance claim. MOUNT GIBSON IRON LIMITED 2017 Annual Report27 Loans to Key Management Personnel There were no loans to key management personnel during the year ended 30 June 2016. Limited recourse loans totalling $1,500,828 were made to Key Management Personnel during the year ended 30 June 2017 under the terms of the Company’s LSP. Other Transactions and Balances with Key Management Personnel There were no other transactions and balances with key management personnel during the years ended 30 June 2017 and 30 June 2016. Company Performance The table below shows the performance of the Group over the last 5 years: 30 June 2017 30 June 2016 30 June 2015 30 June 2014 30 June 2013 Net profit/(loss) after tax $’000 Earnings/(loss) per share $/share Closing share price $ 26,322 0.0241 0.33 86,297 0.0791 0.26 (911,422) (0.8356) 0.20 96,353 0.0884 0.69 157,342 0.1445 0.47 End of remuneration report. Signed in accordance with a resolution of the Directors. LEE SENG HUI Chairman Sydney, 15 August 2017 Competent Persons Statement: Mineral Resources: The information in this report relating to Mineral Resources for the Iron Hill and Shine deposits is based on information compiled by Elizabeth Haren, a Competent Person who is a member and Chartered Professional of the Australasian Institute of Mining and Metallurgy and a member of the Australian Institute of Geoscientists. Ms Haren was previously a full-time employee of, and is now a consultant to, Mount Gibson Iron Limited, and has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the activity being undertaken to qualify as a Competent Person as defined in the 2012 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’. Ms Haren consents to the inclusion in this report of the matters based on her information in the form and context in which it appears. Ore Reserves: The information in this report relating to Ore Reserves at Koolan Island is based on information compiled by Brett Morey, a Competent Person who is a member of the Australasian Institute of Mining and Metallurgy. Mr Morey is a full-time employee of Mount Gibson Iron Limited and has sufficient experience that is relevant to the style of mineralisation and type of deposit under consideration and to the activity being undertaken to qualify as a Competent Person as defined in the 2012 Edition of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’. Mr Morey consents to the inclusion in the report of the matters based on his information in the form and context in which it appears. 28MOUNT GIBSON IRON LIMITED 2017 Annual Report Auditor's Independence Declaration GB:EH:MGI:230 MOUNT GIBSON IRON LIMITED 2017 Annual Report29Consolidated Income Statement For the year ended 30 June 2017 CONTINUING OPERATIONS Sale of goods Interest revenue TOTAL REVENUE Cost of sales Impairment write-back/(loss) on ore inventories GROSS PROFIT Other income Impairment reversal/(impairment) of consumables inventories Impairment of mine properties Impairment of property, plant and equipment Impairment reversal/(impairment) of deferred acquisition, exploration and evaluation Exploration expenses Net unrealised fair value gain/(loss) Administration and other expenses PROFIT FROM CONTINUING OPERATIONS BEFORE TAX AND FINANCE COSTS Finance costs PROFIT FROM CONTINUING OPERATIONS BEFORE TAX Tax benefit Notes 3[a] 2017 $’000 2016 $’000 162,043 12,113 235,188 9,667 174,156 244,855 4[a] 10[iii] (134,545) (213,681) (3,153) 3,442 36,458 34,616 3[b] 10 16 16 14 14 4[c] 4[d] 4[b] 5 5,866 2,479 - - 2,507 (90) (137) 91,848 (8,142) (2,135) (12,377) (3,037) (77) 512 (21,831) (19,903) 25,252 (1,134) 24,118 1,481 81,305 (1,760) 79,545 761 PROFIT AFTER TAX FROM CONTINUING OPERATIONS 25,599 80,306 DISCONTINUED OPERATIONS Profit after tax for the year from discontinued operations 31[a] 723 5,991 PROFIT AFTER TAX ATTRIBUTABLE TO MEMBERS OF THE COMPANY 26,322 86,297 Earnings per share (cents per share) basic earnings per share  diluted earnings per share  Earnings per share (cents per share) for continuing operations   basic earnings per share diluted earnings per share 25 25 25 25 2.41 2.40 2.34 2.34 7.91 7.91 7.36 7.36 30MOUNT GIBSON IRON LIMITED 2017 Annual Report Consolidated Statement of Comprehensive Income For the year ended 30 June 2017 PROFIT FOR THE PERIOD AFTER TAX OTHER COMPREHENSIVE INCOME Items that may be subsequently reclassified to profit or loss Change in fair value of cash flow hedges Reclassification adjustments for gain/(loss) on cash flow hedges transferred to the Income Statement Deferred income tax on cash flow hedges OTHER COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX 2017 $’000 2016 $’000 26,322 86,297 341 (109) - 232 (231) 231 - - TOTAL COMPREHENSIVE INCOME FOR THE YEAR 26,554 86,297 MOUNT GIBSON IRON LIMITED 2017 Annual Report31 Consolidated Balance Sheet As at 30 June 2017 Notes 2017 $’000 2016 $’000 ASSETS Current Assets Cash and cash equivalents Term deposits and subordinated notes Financial assets held for trading Trade and other receivables Inventories Prepayments Derivative financial assets Income tax receivable Total Current Assets Non-Current Assets Property, plant and equipment Mine properties Total Non-Current Assets TOTAL ASSETS LIABILITIES Current Liabilities Trade and other payables Interest-bearing loans and borrowings Employee benefits Provisions Total Current Liabilities Non-Current Liabilities Employee benefits Provisions Total Non-Current Liabilities TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Accumulated losses Reserves TOTAL EQUITY 6 7 8 9 10 11 13 15 17 18 19 19 20 22 21 48,756 365,500 32,523 9,528 20,736 1,953 341 - 43,316 337,000 19,771 41,546 20,017 1,887 231 50 479,337 463,818 5,919 10,891 16,810 8,744 - 8,744 496,147 472,562 31,477 - 2,966 3,651 38,094 334 38,736 39,070 77,164 36,229 421 2,708 3,083 42,441 191 37,995 38,186 80,627 418,983 391,935 568,328 568,328 (1,131,178) (1,157,500) 981,833 418,983 981,107 391,935 32MOUNT GIBSON IRON LIMITED 2017 Annual Report Consolidated Cash Flow Statement For the year ended 30 June 2017 Notes 2017 $’000 2016 $’000 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers and employees Interest paid Income tax refund received NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 6[b] CASH FLOWS FROM INVESTING ACTIVITIES Interest received Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Payment for term deposits and subordinated notes Proceeds from sale of financial assets held for trading Payment for financial assets held for trading Proceeds from sale of exploration and evaluation assets Payment for deferred exploration and evaluation expenditure Payment for mine properties Proceeds from seawall property insurance 167,906 245,957 (163,866) (240,670) (191) 1,532 5,381 11,484 2,586 (3,863) (28,500) 10,344 (22,863) - (663) (2,126) 34,558 (345) 711 5,653 9,834 4,530 (2,643) (94,000) - (19,467) 650 (840) - 51,142 NET CASH FLOWS PROVIDED BY/(USED IN) INVESTING ACTIVITIES 957 (50,794) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of lease liabilities Proceeds from/(repayment of) insurance premium funding facility Payment of borrowing costs - (421) (303) (2,162) 317 (306) NET CASH FLOWS (USED IN) FINANCING ACTIVITIES (724) (2,151) NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Net foreign exchange difference Cash and cash equivalents at beginning of year 5,614 (174) 43,316 (47,292) (395) 91,003 CASH AND CASH EQUIVALENTS AT END OF YEAR 6[a] 48,756 43,316 MOUNT GIBSON IRON LIMITED 2017 Annual Report33 Consolidated Statement of Changes in Equity For the year ended 30 June 2017 Attributable to Equity Holders of the Parent Total Equity Issued Capital Accumulated Losses Share Based Payments Reserve Net Unrealised Gains / (Losses) Reserve Dividend Distribution Reserve $’000 $’000 $’000 $’000 $’000 Other Reserves $’000 At 1 July 2015 Profit for the period Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners Share-based payments At 30 June 2016 At 1 July 2016 Profit for the period Other comprehensive income Total comprehensive income for the year Transactions with owners in their capacity as owners Share-based payments At 30 June 2017 568,328 (1,243,797) 19,973 - - - - 86,297 - 86,297 - 568,328 (1,157,500) - - - 64 20,037 568,328 (1,157,500) 20,037 - - - 26,322 - 26,322 - 568,328 (1,131,178) - - - 494 20,531 - - - - - - - - 232 232 - 232 $’000 305,574 86,297 - 86,297 64 964,262 (3,192) - - - - - - - - 964,262 (3,192) 391,935 964,262 (3,192) 391,935 - - - - - - - - 26,322 232 26,554 494 964,262 (3,192) 418,983 34MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report For the year ended 30 June 2017 1. Introduction (a) Corporate information The consolidated financial statements of the Group, comprising the Company and the entities that it controlled during the year ended 30 June 2017, were authorised for issue in accordance with a resolution of the Directors on 15 August 2017. The Company is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange. The nature of operations and principal activities of the Group are the mining of hematite iron ore deposits at Koolan Island and Extension Hill, the exploration and development of hematite deposits in Western Australia and elsewhere, treasury management and the pursuit of mineral resources acquisitions and investments. The address of the registered office is Level 1, 2 Kings Park Road, West Perth, Western Australia, 6005, Australia. (b) Basis of preparation The financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, applicable Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has also been prepared on a historical cost basis, except for derivative financial instruments and financial assets held for trading that have been measured at fair value. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated, under the option available to the Company under Australian Securities and Investment Commission (“ASIC”) (Rounding in Financial/Directors’ Report) Instrument 2016/191. The Company is an entity to which the instrument applies. For the purposes of preparing the consolidated financial statements, the Company is a for-profit entity. (c) Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its controlled entities. The financial statements of controlled entities are prepared for the same reporting period as the Company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Controlled entities are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Where there is loss of control of a controlled entity, the consolidated financial statements include the results for the part of the reporting period during which the Company has control. MOUNT GIBSON IRON LIMITED 2017 Annual Report35 Notes to the Consolidated Financial Report (continued) 2. Other Significant Accounting Policies (a) Foreign currency The functional currency of the Company and its controlled entities is Australian dollars (A$). Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All such exchange differences are taken to the income statement in the consolidated financial report. (b) Other taxes Revenues, expenses and assets are recognised net of the amount of GST except:  where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and  receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Cash flows are included in the Cash Flow Statement on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (c) Other accounting policies Other significant accounting policies that summarise the measurement basis used and are relevant to an understanding of the financial statements are provided throughout the notes to the financial statements. (d) Key accounting judgements, estimates and assumptions In the process of applying the Group’s accounting policies, management has made a number of judgements and applied estimates of future events. Significant judgements and estimates which are material to the financial statements are provided throughout the notes to the financial statements. Other significant accounting judgements, estimates and assumptions not provided in the notes to the financial statements are as follows: Determination of mineral resources and ore reserves The Group estimates its mineral resources and ore reserves in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves 2012 (the “JORC Code”). The information on mineral resources and ore reserves was prepared by or under the supervision of Competent Persons as defined in the JORC Code. The amounts presented are based on the mineral resources and ore reserves determined under the JORC Code. There are numerous uncertainties inherent in estimating mineral resources and ore reserves and assumptions that are valid at the time of estimation may change significantly when new information becomes available. Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of reserves and may, ultimately, result in the ore reserves being restated. Such changes in the ore reserves could impact on depreciation and amortisation rates, asset carrying values, deferred stripping costs and provisions for decommissioning and restoration. 36MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 3. Revenue and Other Income [a] Revenue Sale of ore – continuing operations Realised gain on foreign exchange hedges [b] Other income Net realised gain on foreign exchange transactions Net gain on disposal of property, plant and equipment Net gain on sale of financial assets held for trading Arbitration settlement income Insurance proceeds – seawall property damage Insurance proceeds – other Other income Notes 2017 $’000 2016 $’000 161,882 161 162,043 - 2,201 246 - - 9 3,410 5,866 234,806 382 235,188 603 3,486 23 25 86,000 117 1,594 91,848 [i] [i] In the 2015/16 financial year, the Company reached agreement with its insurers for a cash settlement of $86,000,000 for the property damage component of its insurance claim relating to the failure of the Koolan Island Main Pit seawall in late 2014. The cash settlement amount comprised $300,000 received in the 2014/15 year, $51,142,000 received in the 2015/16 year and the remaining balance of A$34,558,000 received in the 2016/17 year. Subsequent to 30 June 2017, the Company reached final agreement with 14 insurers, representing 92.5% of the Company’s underwriting cover for the business interruption component of the insurance claim. Proceeds of the cash settlement amounting to $64,288,000 were received and recognised after balance date. Negotiations will continue separately with one further insurer representing the remaining 7.5% of the Company’s business interruption coverage. Recognition and measurement Revenue Revenue is recognised and measured at the fair value of consideration received or receivable to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Sale of goods The Group generates a significant proportion of revenue from the sale of iron ore. Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and can be measured reliably. Interest Revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. 4. Expenses [a] Cost of sales – continuing operations Mining and site administration costs Depreciation – mining and site administration Amortisation of mine properties Crushing costs Depreciation – crushing Transport costs Depreciation – transport Port costs Depreciation – port Royalties Net ore inventory movement Rehabilitation revised estimate adjustments Notes 2017 $’000 2016 $’000 15 31,702 3,780 402 4,135 762 70,952 399 15,215 97 12,078 (2,571) (2,406) 134,545 69,834 6,545 1,070 11,174 1,212 90,686 1,410 17,697 2,055 18,520 (4,377) (2,145) 213,681 MOUNT GIBSON IRON LIMITED 2017 Annual Report37 Notes to the Consolidated Financial Report (continued) Notes 2017 $’000 2016 $’000 4. Expenses (Continued) [b] Finance costs Finance charges on banking facilities Finance charges payable under finance leases Non-cash interest accretion on rehabilitation provision [c] Net unrealised fair value gain/(loss) Foreign exchange derivatives marked-to-market gain/(loss) Financial assets held for trading marked-to-market gain/(loss) [d] Administration and other expenses include: Depreciation Share-based payments expense Impairment of debtors Net realised loss on foreign exchange transactions Net unrealised loss on foreign exchange balances Koolan seawall insurance claim and related site works expenses Insurance premiums (net of refunds) Business development expenses Koolan restart feasibility study 495 - 495 639 1,134 (123) (14) (137) 593 494 3,142 39 174 502 26 2,281 2,124 661 82 743 1,017 1,760 231 281 512 700 64 1,278 - 395 1,300 1,666 1,852 - 24 [e] Cost of sales and Administration and other expenses above include: Salaries, wages expense and other employee benefits Operating lease rental – minimum lease payments 23,549 1,667 29,789 1,476 Recognition and measurement Employee benefits expense Wages, salaries, sick leave and other employee benefits Liabilities for wages and salaries, including non-monetary benefits and other employee benefits expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees' services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for sick leave are recognised when the leave is taken and are measured at the rates paid or payable. Annual leave and long service leave The Group expects its annual leave benefits to be settled wholly within 12 months of each reporting date. They are measured at the amount expected to be paid when the liabilities are settled. The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to future wage and salary levels, experience of employee departures, and periods of service. Future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows. The policy relating to share-based payments is set out in note 24. Superannuation Contributions made by the Group to employee superannuation funds, which are defined contribution plans, are charged as an expense when incurred. Borrowing costs Borrowing costs are recognised as an expense when incurred except when borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. Operating Leases The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as an expense in the income statement on a straight-line basis over the lease term. Contingent rentals are recognised as an expense in the financial year in which they are incurred. Depreciation and amortisation Refer to notes 13 and 15 for details on depreciation and amortisation. Impairment Impairment expenses are recognised to the extent that the carrying amounts of assets exceed their recoverable amounts. Refer to note 16 for further details on impairment. 38MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 5. Taxation Major components of tax benefit for the years ended 30 June 2017 and 2016 are: Income Statement Current tax Current income tax charge Refund in respect of previous return Adjustments in respect of current income tax of previous year Deferred tax Relating to origination and reversal of temporary differences: Income tax Tax benefit reported in Income Statement Tax benefit relating to continuing operations Tax benefit relating to discontinued operations Statement of Changes in Equity Deferred income tax Remeasurement of foreign exchange contracts Deferred income tax (benefit)/liability reported in equity Reconciliation of tax benefit A reconciliation of tax benefit applicable to accounting profit before tax at the statutory income tax rate to tax expense at the Group’s effective tax rate for the years ended 30 June 2017 and 2016 is as follows: Accounting profit before tax At the statutory income tax rate of 30% (2016: 30%)  Expenditure not allowed for income tax purposes  Recognition of previously unrecognised deferred tax assets  Adjustments in respect of current income tax of previous year  Adjustments in respect of deferred tax  Other  Tax benefit Effective tax rate Tax benefit reported in Income Statement 2017 $’000 2016 $’000 - (1,481) - - (1,481) (1,481) - (1,481) - (761) - - (761) (761) - (761) - - - - 24,841 7,452 266 (8,548) (654) - 3 (1,481) (6.0%) (1,481) 85,536 25,661 214 (36,016) - 7,601 1,779 (761) (0.9%) (761) MOUNT GIBSON IRON LIMITED 2017 Annual Report39 Notes to the Consolidated Financial Report (continued) 5. Taxation (Continued) Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: CONSOLIDATED Accrued liabilities Capital raising costs Deferred expense Deferred income Donations Foreign exchange contracts Inventory Prepaid expenditure Fixed assets, mine properties and exploration expenditure Provisions Borrowing cost Research and development carried forward tax offset Tax losses Tax (assets)/liabilities Derecognition of deferred tax asset Net tax (assets)/liabilities Assets Liabilities Net 2017 $’000 (1,743) (1,015) - (1) (10) (89) (1,211) - 2016 $’000 (547) (294) (445) - - (49) (2,745) - (23,545) (35,793) (15,416) (298) (1,063) (69,818) (114,209) 114,209 - (16,429) (510) - (66,698) (123,510) 123,510 - 2017 $’000 2016 $’000 - - - - - - - 53 - - - - - 53 (53) - - - - 783 - - - 23 - - - - - 806 (806) - 2017 $’000 (1,743) (1,015) - (1) (10) (89) (1,211) 53 2016 $’000 (547) (294) (445) 783 - (49) (2,745) 23 (23,545) (35,793) (15,416) (298) (1,063) (69,818) (114,156) 114,156 - (16,429) (510) - (66,698) (122,704) 122,704 - Balance 1 July 2016 $’000 Recognised in Income $’000 Recognised in Equity $’000 Balance 30 June 2017 $’000 Movement in temporary differences during the financial year ended 30 June 2017 Accrued liabilities Capital raising costs Deferred expense Deferred income Donations Foreign exchange contracts Inventory Prepaid expenditure Fixed assets, mine properties and exploration expenditure Provisions Borrowing cost Research and development carried forward tax offset Tax losses Derecognition of deferred tax asset (547) (294) (445) 783 - (49) (2,745) 23 (35,793) (16,429) (510) - (66,698) 122,704 - (1,196) (721) 445 (784) (10) (40) 1,534 30 12,248 1,013 212 (1,063) (3,120) (8,548) - - - - - - - - - - - - - - - - (1,743) (1,015) - (1) (10) (89) (1,211) 53 (23,545) (15,416) (298) (1,063) (69,818) 114,156 - 40MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 5. Taxation (Continued) Movement in temporary differences during the financial year ended 30 June 2016 Accrued liabilities Capital raising costs Deferred expense Deferred income Foreign exchange contracts Inventory Prepaid expenditure Fixed assets, mine properties and exploration expenditure Provisions Borrowing cost Tax losses Derecognition of deferred tax asset Balance 1 July 2015 $’000 Recognised in Income $’000 Recognised in Equity $’000 Balance 30 June 2016 $’000 (7,299) (4) - 592 (300) (2,891) 7 (70,748) (19,215) (797) (58,065) 158,720 - 6,752 (290) (445) 191 251 146 16 34,955 2,786 287 (8,633) (36,016) - - - - - - - - - - - - - - (547) (294) (445) 783 (49) (2,745) 23 (35,793) (16,429) (510) (66,698) 122,704 - 2017 $’000 2016 $’000 44,338 69,818 114,156 56,006 66,698 122,704 Unrecognised deferred tax assets (calculated at 30%) Deferred tax assets have not been recognised in respect of the following items: Temporary differences Tax losses MOUNT GIBSON IRON LIMITED 2017 Annual Report41 Notes to the Consolidated Financial Report (continued) 5. Taxation (Continued) Recognition and measurement Income Tax Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable differences: • • except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised: • • except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in controlled entities, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement. Tax consolidation Mount Gibson and its wholly-owned Australian controlled entities have formed an income tax consolidated group under the Tax Consolidation Regime. Using the Group allocation approach, each entity in the group recognises its own current and deferred tax liabilities, except for any deferred tax liabilities resulting from unused tax losses and tax credits, which are immediately assumed by the parent entity in addition to its own current and deferred tax amounts. The current tax liability of each group entity is then subsequently assumed by the parent entity. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group. Details of the tax funding agreement are disclosed below. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. Members of the tax consolidated group have entered into a tax sharing agreement that provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement on the basis that the possibility of default is remote. The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. The current and deferred tax amounts are measured in a systematic manner that is consistent with the broad principles in AASB 112 Income Taxes. The nature of the tax funding agreement is discussed further below. In addition to its own current and deferred tax amounts, the head entity also recognises current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Members of the tax consolidated group have entered into a tax funding agreement. Under the funding agreement, the funding of tax within the Group is based on accounting profit. The tax funding agreement requires payments to/from the head entity to be recognised via an inter-entity receivable (payable) which is at call. To the extent that there is a difference between the amount charged under the tax funding agreement and the allocation under the accounting policy, the head entity accounts for these as equity transactions with the subsidiaries. The amounts receivable or payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. Key estimate: recoverability of potential deferred tax assets The Group recognises deferred tax assets in respect of tax losses to the extent that the future utilisation of these losses is considered probable. Assessing the future utilisation of these losses requires the Group to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecast cash flows from operations and the application of existing tax laws. To the extent that future cash flows and taxable income differ significantly from estimates, this could result in significant changes to the deferred tax assets recognised, which would in turn impact future financial results. 42MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 6. Cash and Cash Equivalents [a] Reconciliation of cash For the purposes of the Cash Flow Statement, cash and cash equivalents comprise the following at 30 June: Cash at bank and on hand Short-term deposits 2017 $’000 2016 $’000 33,756 15,000 48,756 43,316 - 43,316 Cash at bank earns interest at floating daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group, and earn interest at short-term deposit rates. Recognition and measurement Cash and short-term deposits in the balance sheet comprise cash at bank and on hand and short-term deposits with an original maturity period of three months or less. For the purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts, if any. [b] Reconciliation of the net profit after tax to the net cash flows from operations Net profit after tax Adjustments to reconcile profit after tax to net cash flows: 26,322 86,297 Depreciation of non-current assets Amortisation of other mine properties Net (gain) on disposal of property, plant and equipment Interest received Exploration expenses written off Share based payments Borrowing costs Net ore inventory movement Impairment of debtors Impairment/(write-back) and obsolescence of consumables inventories Impairment of ore inventories Impairment of mine properties Impairment of property, plant and equipment Impairment/(write-back) of deferred acquisition, exploration and evaluation Unrealised loss on foreign exchange balances Unrealised marked-to-market (gain)/loss on foreign exchange derivatives Unrealised marked-to-market (gain)/loss on financial assets held for trading Realised gain on sale of financial assets held for trading Proceeds from seawall property insurance Capitalised expenses Changes in assets and liabilities: (Increase)/decrease in trade and other receivables (Increase)/decrease in inventory Decrease in prepayments and deposits (Increase)/decrease in income tax receivable (Decrease) in trade and other payables Increase/(decrease) in employee benefits (Decrease) in provisions Net Cash Flow from Operating Activities 5,674 402 (2,201) (12,113) 90 494 304 2,240 3,142 (2,479) (225) - - (2,507) 174 123 14 (246) - - (5,053) (255) 492 50 (8,185) 401 (1,277) 5,381 11,971 1,070 (3,486) (9,667) 77 64 398 1,005 1,278 8,122 (10,258) 2,135 12,377 3,037 395 (231) (281) (23) (86,000) (730) 7,087 2,193 1,417 (50) (13,135) (1,267) (8,142) 5,653 [c] Non-cash financing activities The Group did not acquire property, plant and equipment by means of finance leases or hire purchase agreements during the financial year ended 30 June 2017 (2016: nil). The Group disposed of items of property, plant and equipment with an aggregate fair value of $nil (2016: $99,120) which were originally financed by means of hire purchase agreements. MOUNT GIBSON IRON LIMITED 2017 Annual Report43 Notes to the Consolidated Financial Report (continued) 7. Term Deposits and Subordinated Notes Current Term deposits – receivables Subordinated notes at fair value – available for sale investment Notes 2017 $’000 2016 $’000 [i] [ii] 268,500 97,000 365,500 250,000 87,000 337,000 [i] Term deposits are made for varying periods of between three and twelve months depending on the term cash requirements of the Group, and earn interest at market term deposit rates. [ii] Subordinated notes comprise tradeable floating interest rate instruments with maturities of up to ten years. These instruments are held in order to supplement the Group’s treasury returns, and the Group intends and is able to realise these instruments as and when the Group’s cash needs require. Term deposits and subordinated notes are with various financial institutions with credit ratings from BBB+ to AA- (S&P) to minimise the risk of default of counterparties. Recognition and measurement Term deposits and subordinated notes are classified as receivables and are recorded at amortised cost using the effective interest method less impairment, with revenue recognised on an effective yield basis. 8. Financial Assets Held for Trading Current Tradeable corporate bonds at fair value Share investments at fair value 2017 $’000 2016 $’000 31,217 1,306 32,523 19,771 - 19,771 Financial assets held for trading comprise corporate bonds and equity securities which are traded in active markets. The portfolio of bond investments is managed by a professional funds management entity, and Mount Gibson is able to vary or terminate the portfolio management mandate at any time, with applicable notice periods. Recognition and measurement Financial assets held for trading are acquired principally for the purpose of selling or repurchasing in the short term. These are managed as part of a portfolio of identified financial instruments and are measured at fair value through the income statement. Gains or losses from the sale of the financial assets are recognised in the income statement. Interest earned at market bond rates is recognised in the income statement on an effective yield basis. 9. Trade and Other Receivables Current Trade debtors Allowance for impairment Sundry debtors Other receivables Notes [a][i] [b] [a][ii] 2017 $’000 2016 $’000 9,176 (5,384) 3,792 4,486 1,250 9,528 5,404 (2,242) 3,162 37,120 1,264 41,546 [a] Terms and conditions Terms and conditions relating to the above financial instruments: [i] Details of terms and conditions of trade debtors and credit sales are set out in the “recognition and measurement” note below. [ii] Sundry debtors are non-interest bearing and have repayment terms between 30 and 90 days. 44MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 9. Trade and Other Receivables (Continued) [b] Impaired or past due financial assets An allowance for impairment loss is recognised when there is objective evidence that an individual trade receivable is impaired. The table below reconciles the allowance for impairment loss for the years ended 30 June 2017 and 2016. Balance at the beginning of the year Impairment loss Balance at the end of the year 2017 $’000 2,242 3,142 5,384 2016 $’000 964 1,278 2,242 At 30 June 2017, trade debtors of $789,000 (2016: $52,000) in the Group were past due but not impaired. These relate to a number of customers for whom there is no recent history of default or other indicators of impairment. At 15 August 2017, $347,000 of this amount remains outstanding. With respect to trade debtors that are neither impaired nor past due, there are no indications as at the reporting date that the relevant debtors will not meet their payment obligations. The ageing of trade debtors past due but not impaired is as follows: Less than 30 days overdue Between 30 and 60 days overdue Between 60 and 90 days overdue Greater than 90 days overdue Trade debtors not impaired and not past due Recognition and measurement Trade receivables 2017 $’000 - 413 245 131 789 3,003 3,792 2016 $’000 - 28 23 1 52 3,110 3,162 Trade receivables are recognised and carried at amortised cost less any allowance for impairment. Collectability of trade receivables is reviewed on an ongoing basis at an operating unit level. Individual debts that are known to be uncollectible are written off when identified. An allowance for impairment of trade receivables is made when there is objective evidence that the Group will not be able to collect the debts. Indicators of impairment would include financial difficulties of the debtor, likelihood of the debtor’s insolvency and default in payment. Any impairment is recognised in the income statement. The vast majority of sales revenue is invoiced and received in US dollars (US$). The balance is invoiced and received in Australian dollars (A$). Generally, on presentation of shiploading documents and the provisional invoice, the customer settles 90-95% of the provisional sales invoice value within 10 days of receipt of shiploading documents and provisional invoice, and the remaining 5-10% is settled within 30 days of presentation of the final invoice. The final value is subject to adjustments for final pricing and other minor adjustments based on the final analyses of weight, chemical and physical composition, and moisture content. Other receivables Other receivables are recorded at amortised cost, using the effective interest rate method, less any impairment. Interest is recognised by applying the effective interest rate method. MOUNT GIBSON IRON LIMITED 2017 Annual Report45 Notes to the Consolidated Financial Report (continued) 10. Inventories Consumables – at cost Allowance for obsolescence and impairment of consumables inventories Ore – at cost Allowance for impairment of ore inventories At net realisable value Notes [i],[ii] [iii] 2017 $’000 2016 $’000 12,813 (7,604) 5,209 18,680 (3,153) 15,527 20,736 19,445 (16,970) 2,475 27,992 (10,450) 17,542 20,017 [i] During the year, the Group wrote back $2,613,000 of previously recorded stock obsolescence allowance to the income statement. This relates primarily to consumables inventories that are now considered not obsolete as a result of the Koolan Island restart project. Additionally, obsolete consumables inventories totalling $5,618,000 which had been fully provided for in prior periods, were written off against the associated provision. [ii] Consumables inventories held at Koolan Island and Extension Hill which are not considered obsolete have been assessed and written down to their recoverable values. In determining the recoverable value, factors such as current market pricing from suppliers, current location and condition have been considered. A net impairment loss of $134,000 was recognised during the year (2016: $8,111,000). Additionally, consumables inventories totalling $1,269,000 which had been impaired in prior periods, were written off against the associated provision. [iii] At 30 June 2017, the Group assessed the carrying values of ore inventories stockpiled at each of the three mine sites. Assumptions used in the assessment include prevailing and anticipated iron ore prices and exchange rates, ore specifications, estimated costs to make the ore inventories available for sale, and associated sales and shipping freight costs. Based on these assumptions, the following impairment write-backs/(loss) on ore inventories were recorded during the financial period: Tallering Peak – discontinued operation Extension Hill Koolan Island Total write-backs on impairment Recognition and measurement Inventories are valued at the lower of cost and net realisable value. 2017 $’000 3,378 (3,153) - 225 2016 $’000 6,816 - 3,442 10,258 Cost comprises direct material, labour and expenditure in getting such inventories to their existing location and condition, based on weighted average costs incurred during the period in which such inventories were produced. Consumable materials for plant and equipment are recognised as inventory. Consumable stocks are carried at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Key estimate Inventories are written down to net realisable value if considered damaged, have become wholly or partially obsolete, or if their selling prices have declined. A new assessment is made of net realisable value in each subsequent period. 11. Derivative Financial Assets Current Foreign currency option contracts Refer note 34 for details on derivative financial instruments. Notes 2017 $’000 2016 $’000 34[b][i] 341 341 231 231 46MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 12. Interest in Subsidiaries Name Country of Incorporation Percentage of Equity Interest Held by the Group Mount Gibson Mining Limited Geraldton Bulk Handling Pty Ltd Gibson Minerals Ltd (incorporated 18 November 2016) Aztec Resources Limited    Koolan Shipping Pty Ltd Brockman Minerals Pty Ltd Koolan Iron Ore Pty Ltd  KIO SPV Pty Ltd Entities subject to Class Order relief Australia Australia Australia Australia Australia Australia Australia Australia 2017 % 100 100 100 100 100 100 100 100 2016 % 100 100 - 100 100 100 100 100 Pursuant to ASIC Instrument 2016/785, relief has been granted to Mount Gibson Mining Limited, Aztec Resources Limited and Koolan Iron Ore Pty Ltd from the Corporations Act 2001 requirements for the preparation, audit and lodgement of financial reports. As a condition of the Class Order, Mount Gibson Iron Limited, Mount Gibson Mining Limited, Aztec Resources Limited and Koolan Iron Ore Pty Ltd (“Closed Group”) entered into a Deed of Cross Guarantee on 1 May 2009. The effect of this deed is that Mount Gibson Iron Limited has guaranteed to pay any deficiency in the event of winding up of these controlled entities or if they do not meet their obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities have also given a similar guarantee in the event that Mount Gibson Iron Limited is wound up or if it does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The Consolidated Income Statement and Balance Sheet of the Closed Group are set out below: Consolidated Income Statement of the Closed Group CONTINUING OPERATIONS Sale of goods Interest revenue TOTAL REVENUE Cost of sales Impairment of ore inventories GROSS PROFIT Other income Impairment reversal/(impairment) of consumables inventories Impairment of mine properties Impairment of property, plant and equipment Impairment reversal/(impairment) of deferred acquisition, exploration and evaluation Impairment of non-current other receivables Net unrealised marked-to-market gain/(loss) Exploration expenses Administration and other expenses PROFIT/(LOSS) FROM CONTINUING OPERATIONS BEFORE TAX AND FINANCE COSTS Finance costs PROFIT/(LOSS) FROM CONTINUING OPERATIONS BEFORE TAX Tax expense PROFIT/(LOSS) AFTER TAX FROM CONTINUING OPERATIONS 2017 $’000 2016 $’000 162,043 12,113 174,156 (119,042) (3,153) 51,961 5,760 2,497 - - 2,507 (12,204) (296) (90) (21,824) 28,311 (1,134) 27,177 (1,578) 25,599 235,188 9,667 244,855 (195,448) 3,442 52,849 91,783 (7,750) (2,135) (7,955) (3,037) (150,808) 512 (77) (19,906) (46,524) (1,760) (48,284) (5,496) (53,780) DISCONTINUED OPERATIONS Profit after tax for the year from discontinued operations PROFIT/(LOSS) AFTER TAX ATTRIBUTABLE TO MEMBERS OF THE COMPANY 723 26,322 5,991 (47,789) MOUNT GIBSON IRON LIMITED 2017 Annual Report47 Notes to the Consolidated Financial Report (continued) Consolidated Balance Sheet of the Closed Group Notes 2017 $’000 2016 $’000 ASSETS CURRENT ASSETS Cash and cash equivalents Term deposits Financial assets held for trading Trade and other receivables Inventories Prepayments Derivative financial assets Income tax receivable TOTAL CURRENT ASSETS NON-CURRENT ASSETS Property, plant and equipment Mine properties TOTAL NON-CURRENT ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Trade and other payables Interest-bearing loans and borrowings Employee benefits Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Other payables Employee benefits Provisions TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Accumulated losses Reserves TOTAL EQUITY 48,612 365,500 31,217 9,380 20,592 1,815 341 - 477,457 5,679 10,891 16,570 494,027 29,532 - 2,778 3,651 35,961 38 309 38,736 39,083 75,044 418,983 42,419 337,000 19,771 41,176 19,940 1,742 231 50 462,329 8,595 - 8,595 470, 924 31,062 421 2,546 3,083 37,112 3,701 181 37,995 41,877 78,989 391,935 [i] 568,328 (1,131,178) 981,833 418,983 568,328 (1,157,500) 981,107 391,935 [i] Accumulated losses Balance at the beginning of the year Net profit/(loss) attributable to members of the closed group Balance at the end of the year (1,157,500) 26,322 (1,131,178) (1,109,711) (47,789) (1,157,500) 48MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 13. Property, Plant and Equipment Land Plant and equipment Plant and equipment under lease Buildings Capital works in progress Total 2017 2016 $’000 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 Gross carrying amount at cost Accumulated depreciation and impairment Net carrying amount Reconciliation Carrying amount at the beginning of the year Additions Transfers Disposals Depreciation expense – continuing operations Depreciation expense – discontinued operations Depreciation capitalised Impairment loss 649 (549) 100 105 - - (5) - - - - Carrying amount at the end of the year 100 654 273,180 293,444 24,427 57,050 139,926 138,708 (549) (268,387) (284,934) (24,419) (57,022) (139,027) (138,607) 105 4,793 8,510 8 28 899 101 135 - - - - - - (30) 105 8,510 2,523 - (372) (5,205) (43) (620) - 4,793 23,840 515 757 (883) (9,534) (49) - (6,136) 8,510 1,071 - - (99) (567) - - (377) 28 101 1,213 - - 5,366 386 60 - (409) (1,821) - (6) - 899 - - (3,890) 101 28 - - - (17) - (3) - 8 8 119 - 119 - 119 - - - - - - 119 2,166 438,301 492,022 (2,166) (432,382) (483,278) - 5,919 8,744 1,082 1,679 (817) - - - - 8,744 3,855 - (377) 31,494 2,580 - (982) (5,631) (11,922) (43) (629) (49) - (1,944) - (12,377) - - 5,919 8,744 5,919 8,744 Assets pledged as security 100 105 4,793 8,510 Refer note 16 for details of impairment and note 18 for details of security arrangements. 28 899 101 119 MOUNT GIBSON IRON LIMITED 2017 Annual Report49 Notes to the Consolidated Financial Report (continued) 13. Property, Plant and Equipment (Continued) Recognition and measurement Plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation and amortisation The cost of owned property, plant and equipment directly engaged in mining operations is written off over its expected economic life on a units- of-production method, in the establishment of which due regard is given to the life of the related area of interest. Plant and equipment under hire purchase or finance lease directly engaged in mining operations is written down to its residual value over the lesser of the hire purchase or finance lease term or useful life. Other assets which are depreciated or amortised on a basis other than the units-of-production method typically are depreciated on a straight-line basis over the estimated useful life of the asset as follows: Buildings Motor vehicles Office equipment Leasehold improvements Impairment 5 - 20 years 4 - 5 years 3 - 5 years Shorter of lease term and useful life of 5 – 10 years The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. Refer note 16 for further details on impairment. Derecognition An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the period the item is derecognised. Key judgement, estimates and assumptions Units of production method of depreciation and amortisation The Group applies the units of production method of depreciation and amortisation of its mine assets based on ore tonnes mined. These calculations require the use of estimates and assumptions. Significant judgement is required in assessing the available ore reserves, mineral resources and the production capacity of the operations to be depreciated under this method. Factors that are considered in determining ore reserves, mineral resources and production capacity include the Group’s history of converting mineral resources to ore reserves and the relevant timeframes, the complexity of metallurgy, markets and future developments. The Group uses economically recoverable mineral resources (comprising proven and probable ore reserves) to depreciate assets on a units of production basis. However, where a mineral property has been acquired and an amount has been attributed to the fair value of mineral resources not yet designated as ore reserves, the additional mineral resources may be taken into account. When these factors change or become known in the future, such differences will impact pre-tax profit and carrying values of assets. Impairment of property, plant and equipment The carrying value of property, plant and equipment is reviewed for impairment if there is any indication that the carrying amount may not be recoverable. Where a review for impairment is conducted, the recoverable amount is assessed by reference to the higher of ‘value-in-use’ (being the net present value of expected future cash flows of the relevant cash generating unit) and ‘fair value less costs to sell’. In determining value-in-use, future cash flow forecasts for each cash generating unit (i.e. each mine) are prepared utilising management’s latest estimates of mine life, mineral resource and ore reserve recovery, operating and development costs, royalties and taxation, and other relevant cash inflows and outflows. Cash flow scenarios for a range of commodity prices and foreign exchange rates are assessed using internal and external market forecasts, and the present value of the forecast cash flows is determined utilising a discount rate based on industry weighted average cost of capital. The Group’s cash flows are most sensitive to movements in iron ore prices, the discount rate and key operating costs. Variations to the expected future cash flows, and the timing thereof, could result in significant changes to any impairment assessment or losses recognised, if any, which could in turn impact future financial results. Refer note 16 for further details on impairment. 50MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 14. Deferred Acquisition, Exploration and Evaluation Costs Deferred acquisition, exploration and evaluation – at cost Allowance for impairment Reconciliation Carrying amount at beginning of the year Additions Transferred to mine properties Net impairment reversal/(loss) Disposals Exploration expenditure written off Carrying amount at the end of the year Notes 2017 $’000 2016 $’000 18,162 (18,162) - - 1,010 (3,427) 2,507 - (90) - 20,669 (20,669) - 2,924 840 - (3,037) (650) (77) - 15 [i] [i] On 9 February 2017, the Company announced it had received final statutory approvals for development of the Iron Hill deposit and, subsequently, commenced mining operations. Accordingly, the carrying amount for the Iron Hill Project of $2,966,000 which was fully impaired at 30 June 2016 was written back during the year ended 30 June 2017. Also during the year, additional transaction and other holding costs totalling $459,000 were incurred on the Shine Project. An assessment of the Shine Project indicated that the carrying amount of the asset was unlikely to be recovered from its development or sale at current iron ore prices and exchange rates and accordingly, the carrying amount for the Shine Project was fully impaired as at 30 June 2017. Recognition and measurement Acquisition costs Exploration and evaluation costs arising from acquisitions are carried forward where exploration and evaluation activities have not, at balance date, reached a stage to allow a reasonable assessment regarding the existence of economically recoverable reserves. Exploration and evaluation costs Costs arising from exploration and evaluation activities are capitalised if activities in the area of interest have not yet reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves. To the extent that it is determined in the future that this capitalised expenditure should be written off, this will reduce profits and net assets in the period in which this determination is made. 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. Where uncertainty exists as to the future viability of certain areas, the value of the area of interest is written off to the income statement or provided against. Key estimates and assumptions : impairment of capitalised exploration and evaluation expenditure The future recoverability of capitalised exploration and evaluation expenditure is dependent on a number of factors, including whether the Group decides to exploit the related lease itself or, if not, whether it successfully recovers the related exploration and evaluation asset through sale. Factors which could impact the future recoverability include the level of mineral resources and ore reserves, future technological changes which could impact the cost of mining, future legal changes (including changes to environmental restoration obligations) and changes to commodity prices. To the extent that capitalised exploration and evaluation expenditure is determined not to be recoverable in the future, this will reduce profits and net assets in the period in which this determination is made. MOUNT GIBSON IRON LIMITED 2017 Annual Report51 Notes to the Consolidated Financial Report (continued) 15. Mine Properties Gross carrying amount at cost Accumulated amortisation and impairment Reconciliation Deferred waste Carrying amount at the beginning of the period Deferred waste capitalised Amortisation expensed Impairment loss (note 16) Carrying amount at the end of the period Other mine properties Carrying amount at the beginning of the period Additions 4,988 Mine rehabilitation – revised estimate adjustment Transferred from deferred acquisition, exploration and evaluation costs (note 14) Amortisation expensed Impairment loss (note 16) Carrying amount at the end of the period Net carrying amount - - - - 4,988 4,988 2017 $’000 2016 $’000 1,548,630 (1,537,739) 10,891 1,537,337 (1,537,337) - Koolan Island Extension Hill Total 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 - - - - - - - - - - - - - - - - - - - - - - - - - 411 2,467 3,427 (402) - 5,903 5,903 - - - - - 3,205 - - - (1,070) (2,135) - - - - - - - - 5,399 2,467 3,427 (402) - 10,891 10,891 - - - - - 3,205 - - - (1,070) (2,135) - - The security pledged for financing facilities includes mining mortgages over the mining tenements and contractual rights to mine hematite deposits owned by the Group (refer note 18). 52MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 15. Mine Properties (Continued) Recognition and measurement Deferred stripping As part of its mining operations, the Group incurs mining stripping (waste removal) costs both during the development and production phase of its operations. When stripping costs are incurred in the development phase of a mine before the production phase commences (development stripping), such expenditure is capitalised as part of the cost of constructing the mine and subsequently amortised over its useful life using a units of production method, in accordance with the policy applicable to mine properties. The capitalisation of development stripping costs ceases when the mine or relevant component thereof is commissioned and ready for use as intended by management. Waste development costs incurred in the production phase creates two benefits, being either the production of inventory or improved access to the ore to be mined in the future. Where the benefits are realised in the form of inventory produced in the period, the production stripping costs are accounted for as part of the cost of producing those inventories. Where production stripping costs are incurred and the benefit is improved access to ore to be mined in the future, the costs are recognised as a stripping activity asset within mine properties. If the costs of the inventory produced and the stripping asset are not separately identifiable, the allocation is undertaken based on the waste-to- ore stripping ratio for the particular ore component concerned. If mining of waste in a period occurs in excess of the expected life-of-component waste-to-ore strip ratio, the excess is recognised as part of the stripping asset. Where mining occurs at or below the expected life-of-component stripping ratio in a period, the entire production stripping cost is allocated to the cost of the ore inventory produced. Amortisation is provided on the units-of-production method over the life of the identified orebody component. The units-of-production method results in an amortisation charge proportional to the depletion of the economically recoverable mineral resources (comprising proven and probable reserves). Other mine properties Other mine properties represent the accumulation of all acquisition, exploration, evaluation and development expenditure incurred by or on behalf of the Group in relation to areas of interest in which the mining of mineral resources has commenced. When further development expenditure is incurred in respect of a mine property after the commencement of production, such expenditure is carried forward as part of the cost of that mine property only when substantial future economic benefits are established, otherwise such expenditure is classified as part of the cost of production. Amortisation is provided on the units-of-production method over the life of the mine, with separate calculations being made for each mineral resource. The units-of-production method results in an amortisation charge proportional to the depletion of the economically recoverable mineral resources (comprising proven and probable reserves). 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. Impairment expenses are recognised to the extent that the carrying amount of the mine properties asset exceeds its estimated recoverable amount. Refer to note 16 for further details on impairment. Key judgement and estimate Deferred waste Significant judgement is required in determining the waste capitalisation ratio for each component of the mine. Factors that are considered include:  Any proposed changes in the design of the mine;       Estimates of the quantities of ore reserves and mineral resources for which there is a high degree of confidence of economic extraction; Identifiable components of orebody; Future production levels; Impacts of regulatory obligations and taxation legislation; Future commodity prices; and Future cash costs of production. Impairment of capitalised mine development expenditure The future recoverability of capitalised mine development expenditure is dependent on a number of factors, including the level of mineral resources and ore reserves, future technological changes which could impact the cost of mining, future legal changes (including changes to environmental restoration obligations) and changes to commodity prices. The Group regularly reviews the carrying values of its mine development assets in the context of internal and external consensus forecasts for commodity prices and foreign exchange rates, with the application of appropriate discount rates for the assets concerned. To the extent that capitalised mine development expenditure is determined not to be recoverable in the future, this will reduce profits and net assets in the period in which this determination is made. Capitalised mine development expenditure is assessed for recoverability along with property, plant and equipment as described below. MOUNT GIBSON IRON LIMITED 2017 Annual Report53 Notes to the Consolidated Financial Report (continued) 16. Impairment of Assets The Group reviews the carrying value of the assets of each Cash Generating Unit (“CGU”) at each balance date. During the year ended 30 June 2017, the following material events occurred which were considered potential indicators of impairment or reversals thereof:     as at 30 June 2017, the market capitalisation of the Group was below the book value of its equity; the benchmark price of iron ore (in CFR terms for delivery in northern China) commenced the year at US$55 per dry metric tonne (dmt) and, after being stable for much of the first half of the year, increased to above US$90/dmt early in the second half before falling substantially to under US$55/dmt and finishing the year at US$63/dmt; the Group ceased mining in the Extension Hill open pit and restricted activities to the processing and sale of low grade stockpiled material while awaiting the receipt of statutory approvals for commencement of mining in the Iron Hill open pit, with these approvals received in the second half of the year; and the Group in April 2017 made a decision to rebuild the Koolan Island main pit seawall and recommence operations in due course. Accordingly, the Group has performed an impairment assessment of both the Koolan Island and Extension Hill CGUs. As both of these CGUs have previously been fully impaired, the assessment focused on the potential for any reversal of impairment recorded in prior periods. Based on this assessment: (i) $2,966,000 representing the carrying amount of the previously impaired Iron Hill project which forms part of the Extension Hill CGU was reversed (note 14). No amounts previously impaired relating to the Extension Hill CGU are available for reversal. (ii) No impairment expenses or reversals have been recognised during the reporting period for the Koolan Island CGU. Details of the impairments/(write-backs) recognised are tabulated below: Koolan Island Extension Hill Total impairment loss/(write-back) of non-current assets 2017 $’000 - (2,966) (2,966) 2016 $’000 2,893 14,585 17,478 The above impairment values have been allocated proportionately to each CGU’s non-current assets as follows: Koolan Island Extension Hill Total Deferred acquisition, exploration and evaluation costs (Iron Hill) Other mine properties Property, plant and equipment Total impairment/(write-back) of non-current assets - - - - 2017 $’000 2016 $’000 2017 $’000 - (2,966) - 2,893 - - 2016 $’000 2,966 2,135 9,484 2017 $’000 (2,966) - - 2016 $’000 2,966 2,135 12,377 2,893 (2,966) 14,585 (2,966) 17,478 The Group assessed the recoverable amount of the Extension Hill and Koolan Island CGUs as at 30 June 2017 using the Fair Value Less Costs to Dispose (“FVLCD”) approach. The FVLCD is assessed as the present value of the future cash flows expected to be derived from the operation, utilising the following key assumptions for each CGU:  Cashflow forecasts were made based on recent actual performance, budgets and anticipated revenues and estimated operating and capital costs over the remaining life of the mine;  Discount rate of 12% (nominal, before and after tax);  Market consensus iron ore price forecasts for the 62% Fe benchmark fines CFR prices (northern China), expressed in real 2017 terms, of US$55/dmt in the first year, approximately US$45/dmt in the following three years, and US$49/dmt thereafter, at an exchange rate of A$1.00/US$0.75, with sensitivities undertaken for a range of these inputs; and  Revenue and cost inflation estimates of 2.0% per year. 54MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 16. Impairment of Assets (Continued) Recognition and measurement Recoverable amount of assets At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value-in-use. Recoverable amount is determined for an individual asset, unless the asset’s value-in-use cannot be estimated to be close to its fair value less cost to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs. 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. In allocating an impairment loss, the carrying amount of an individual asset is not taken below the highest of: (a) (b) Its fair value less costs of disposal (if measurable); and Its value-in-use (if determinable). An assessment is also made at each reporting date as to whether there is any indication that a previously recognised impairment loss may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only where there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. 17. Trade and Other Payables Current Trade creditors Accruals and other payables Notes 2017 $’000 2016 $’000 [i] [i] 10,102 21,375 31,477 13,734 22,495 36,229 [i] Current trade creditors and other payables are non-interest bearing and are normally settled on 30 day terms. Recognition and measurement Trade payables and other payables are carried at amortised costs and represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. MOUNT GIBSON IRON LIMITED 2017 Annual Report55 Notes to the Consolidated Financial Report (continued) 18. Interest-Bearing Loans and Borrowings Current Insurance premium funding facility Financing facilities available Notes [a] 2017 $’000 2016 $’000 - - 421 421 At reporting date, the following financing facilities had been negotiated and were available: Total facilities:   Insurance premium funding facility Performance bonding facility Facilities used at reporting date:   Insurance premium funding facility Performance bonding facility Facilities unused at reporting date:   Insurance premium funding facility Performance bonding facility [a] [b] - 20,000 20,000 - 11,608 11,608 - 8,392 8,392 421 55,000 55,421 421 25,829 26,250 - 29,171 29,171 Terms and conditions relating to the above financial facilities: [a] Insurance Premium Funding Facility Insurance premium arrangements were entered into by the Group in the 2015/16 reporting period to fund its annual insurance premiums. Interest was charged at 1.86% pa. The final instalment of the loan was fully paid in July 2016. The Company did not renew the funding facility in the 2016/17 reporting period and accordingly there is no liability as at balance date. [b] Performance Bonding Facility In May 2011, the Company entered into a Facility Agreement comprising a Corporate Loan facility and a Performance Bonding facility. The undrawn Corporate Loan facility was cancelled in April 2013. The Performance Bonding facility was reduced in size from $55.0 million to $20.0 million in June 2017 and extended to 30 June 2021. As at balance date, bonds and guarantees totalling $11.6 million were drawn under the Performance Bond Facility. The security pledge for the Performance Bonding Facility is a fixed and floating charge over all the assets and undertakings of Mount Gibson Iron Limited, Mount Gibson Mining Limited, Geraldton Bulk Handling Pty Ltd, Koolan Iron Ore Pty Ltd and Aztec Resources Limited, together with mining mortgages over the mining tenements owned by Mount Gibson Mining Limited and Koolan Iron Ore Pty Ltd and the contractual rights of Mount Gibson Mining Limited to mine hematite iron ore at Extension Hill. Recognition and measurement Finance leases Leases which effectively transfer substantially all the risks and benefits incidental to ownership of the leased item to the Group are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the income statement. Capitalised leased assets are depreciated over the estimated useful life of the asset or where appropriate, over the estimated life of the mine. The cost of improvements to or on leasehold property is capitalised, disclosed as leasehold improvements, and amortised over the unexpired period of the lease or the estimated useful lives of the improvements, whichever is the shorter. Interest-bearing loans and borrowings All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Fees paid on the establishment of loan facilities are included as part of the carrying amount of the loans and borrowings. Gains and losses are recognised in the profit or loss when the liabilities are derecognised. 56MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 19. Provisions Current Non-Current Reconciliation Carrying amount at the beginning of the year Provision for period Amounts utilised during the period Unused amounts reversed Interest accretion on rehabilitation provision - expensed Interest accretion on rehabilitation provision - capitalised Revised estimate adjustment – continuing operations Revised estimate adjustment – discontinued operations Revised estimate adjustment – mine properties asset Road Resealing Restructure 2017 2016 2017 2016 $’000 $’000 $’000 $’000 Decommissioning Rehabilitation Other Provisions Total 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2,536 1,878 - - 2,536 1,878 1,878 1,112 (454) 2,111 96 (329) - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,115 1,100 38,736 37,917 39,851 39,017 3,520 39,017 43,226 - - - (3,520) (257) (663) - - - - - - - - 639 120 - 1,017 - (2,406) (2,145) 271 (2,418) 2,467 - 39,851 39,017 - - - 183 - (87) (96) - - - - - - 105 78 3,651 3,083 38,736 37,995 183 42,387 41,078 363 - (80) - - - 41,078 49,220 1,112 (798) (96) 639 120 96 (4,592) - 1,017 - (100) (2,406) (2,245) - - 271 (2,418) 2,467 - 183 42,387 41,078 Carrying amount at the end of the year 2,536 1,878 Road resealing This provision relates to the forecast cost of roadworks associated with the Tallering Peak and Extension Hill mine sites. Payments to the relevant local government authorities are made annually. Restructure This provision relates to the forecast costs associated with release of personnel on the wind down and/or closure of mining sites where a detailed formal plan has been approved and communicated to the relevant mine site workforce. Decommissioning rehabilitation This provision represents the present value of decommissioning and rehabilitation costs for the Tallering Peak, Koolan Island and Extension Hill sites. The cost estimates forming the basis of the provisions were prepared as at the balance date by independent consultants specialising in mine closure planning and mine rehabilitation cost estimates. The timing of decommissioning and rehabilitation expenditure is dependent on the life of the mines and on the timing of the rehabilitation requirements, which may vary in the future. Based on current estimates, the bulk of expenditure on decommissioning rehabilitation is expected to occur at Tallering Peak and Extension Hill within the next 1-3 years, and at Koolan Island between 5-7 years from balance date. MOUNT GIBSON IRON LIMITED 2017 Annual Report57 Notes to the Consolidated Financial Report (continued) 19. Provisions (Continued) The following table summarises the decommissioning rehabilitation provision by mine site: Tallering Peak Koolan Island Extension Hill Recognition and measurement Rehabilitation costs 2017 $’000 2016 $’000 1,115 27,331 11,405 39,851 1,100 29,115 8,802 39,017 Long-term environmental obligations are based on the Group’s environmental management plans, in compliance with current environmental and regulatory requirements. Full provision is made based on the net present value of the estimated cost of restoring the environmental disturbance that has occurred up to the balance sheet date. Increases due to additional environmental disturbances, relating to the development of an asset, are capitalised and amortised over the remaining lives of the area of interest. Annual increases in the provision relating to the change in the net present value of the provision are accounted for in the income statement as borrowing costs. The estimated costs of rehabilitation are reviewed annually and adjusted as appropriate for changes in legislation, technology or other circumstances. Cost estimates are not reduced by potential proceeds from the sale of assets. Restructuring provision Restructuring provisions are recognised by the Group only when a detailed formal plan identifies the business or part of the business concerned, the location and number of employees affected, a detailed estimate of the associated costs, and an appropriate timeline, and the employees affected have been notified of the plan’s main features. Other Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects the current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. A provision for dividends is not recognised as a liability unless the dividends have been declared, determined or publicly recommended on or before the balance date. Key estimate : mine rehabilitation provision The Group assesses its mine rehabilitation provision annually in accordance with the accounting policy stated above. Significant judgement is required in determining the provision for mine rehabilitation as there are many transactions and other factors that will affect the ultimate liability payable to rehabilitate the mine site. Factors that will affect this liability include future development, changes in anticipated rehabilitation activities and costs, changes in technology, commodity price changes and changes in interest rates. When these factors change or become known in the future, such difference will impact the mine rehabilitation provision in the period in which they change or become known. 58MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 20. Issued Capital [a] Ordinary shares Issued and fully paid [b] Movement in ordinary shares on issue Beginning of the financial year Exercise of Performance Rights Restricted shares – executive loan share plan issues End of the financial year [i] [ii] 2017 $’000 2016 $’000 568,328 568,328 2017 Number of Shares 1,091,279,435 533,625 1,091,813,060 4,749,456 1,096,562,516 $’000 568,328 - 568,328 - 568,328 2016 Number of Shares 1,090,805,085 474,350 1,091,279,435 - 1,091,279,435 $’000 568,328 - 568,328 - 568,328 [i] On 1 July 2016, 533,625 shares were issued as a result of the vesting and exercise of the equivalent number of Performance Rights. [ii] On 24 August 2016, 4,749,456 shares were issued under the Company’s Loan Share Plan. These have been accounted for as an in-substance option award. Refer note 24(d) for further details. [c] Terms and conditions of contributed equity Ordinary shares have the right to receive dividends as declared, and in the event of winding up the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the Company. Effective from 1 July 1998, the Corporations legislation abolished the concept of authorised capital and par values. Accordingly, the Company does not have authorised capital nor a par value in respect of its issued shares. [d] Share options As at 30 June 2017, there were no options on issue (2016: nil) – see note 24(b). Share options carry no right to dividends and no voting rights. [e] Performance rights During the year ended 30 June 2017, no Performance Rights were issued. A total of 533,625 Performance Rights vested during the year and accordingly, 533,625 ordinary shares were issued on 1 July 2016. As at 30 June 2017, there were no Performance Rights on issue (2016: 711,500) – see note 24(c). [f] Capital management The primary objectives of the Group’s capital management program are to safeguard the Group’s ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares or other securities. No changes were made in the objectives, policy or processes for managing capital during the years ended 30 June 2017 and 30 June 2016. MOUNT GIBSON IRON LIMITED 2017 Annual Report59 Notes to the Consolidated Financial Report (continued) 21. Reserves Share based payments reserve Net unrealised gains reserve Dividend distribution reserve Other reserves Notes 2017 $’000 2016 $’000 [a] [b] [c] [d] 20,531 232 964,262 (3,192) 20,037 - 964,262 (3,192) 981,833 981,107 [a] Share based payments reserve This reserve is used to record the value of equity benefits provided to employees and directors as part of their remuneration. Balance at the beginning of the year Share based payments Balance at the end of the year [b] Net unrealised gains reserve This reserve records movement for available-for-sale financial assets to fair value and gains and losses on hedging instruments classified as effective cash flow hedges. Balance at the beginning of the year Net gains on cash flow hedges Deferred income tax on cash flow hedges Balance at the end of the year [c] Dividend distribution reserve This reserve is used to record profits from prior income years for the purpose of future dividend distribution by the Company. Balance at the beginning of the year Movement during the period Balance at the end of the year [d] Other reserves 20,037 494 20,531 19,973 64 20,037 - 232 - 232 - - - - 964,262 - 964,262 964,262 - 964,262 This reserve is used to record the gain or loss arising from the sale or acquisition of non- controlling interests to or from third party investors. Balance at the beginning of the year Movement during the period Balance at the end of the year (3,192) - (3,192) (3,192) - (3,192) 22. Accumulated Losses Balance at the beginning of the year Dividends paid during the period Net profit attributable to members of the Company Balance at the end of the year 26[a] (1,157,500) - 26,322 (1,243,797) - 86,297 (1,131,178) (1,157,500) 60MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) Notes 2017 $’000 2016 $’000 23. Expenditure Commitments [a] Exploration Expenditure Commitments Minimum obligations not provided for in the financial report and are payable:    Not later than one year Later than one year but not later than five years Later than five years [b] Operating Lease Commitments Minimum lease payments    Not later than one year Later than one year but not later than five years Later than five years [c] Property, plant and equipment commitments Commitments contracted for at balance date but not recognised as liabilities   Not later than one year Later than one year but not later than five years [d] Contractual commitments Commitments for the payment of other mining and transport contracts:   Not later than one year Later than one year but not later than five years [i] [ii] [iii] [iv] 520 1,011 863 2,394 1,817 3,125 946 5,888 1,326 - 1,326 8,282 600 8,882 886 1,423 1,042 3,351 1,814 1,982 - 3,796 264 - 264 24,764 - 24,764 [i] In order to maintain current rights to explore and mine the tenements at its various mines and projects, the Group is required to perform minimum exploration work to meet the expenditure requirements specified by the Department of Mines and Petroleum. [ii] Operating leases relate to leases for office space and land lease with an initial term of 5 years, and leases for equipment which have an average term of 1.5 years. [iii] The Group has contractual commitments to purchase property, plant and equipment at Koolan Island and Extension Hill. [iv] Amounts disclosed as contractual commitments relate primarily to supplier arrangements at the Group’s Extension Hill and Koolan Island sites where financial obligations, including minimum notice periods, apply in the case of early termination. In previous years, the Group has also had early termination commitments in relation to its Extension Hill transport arrangements, and these commitments were removed in the current reporting period when certain pre-defined cumulative transport volume thresholds were reached. MOUNT GIBSON IRON LIMITED 2017 Annual Report61 Notes to the Consolidated Financial Report (continued) Notes 2017 $’000 2016 $’000 24. Share-Based Payment Plans (a) Recognised share-based payment expense Expense arising from equity-settled share-based payment transactions 4[d] 494 64 The share-based payment plans are described below. There have been no cancellations of any of the plans during 2017 and 2016. (b) Employee Option Scheme An Employee Option Scheme has been established where the Company may, at the discretion of the Board, grant options over the ordinary shares of the Company. The options, issued for nil consideration, are granted in accordance with performance guidelines established by the Directors of the Company. All Directors, officers and employees are eligible for this scheme. No options were issued during the years ended 30 June 2017 or 2016. As at balance date, no options over unissued shares were on issue. (c) Performance Rights Plan The Company has established a Performance Rights Plan. Rights are granted at no cost to recipients and convert (vest) into ordinary shares on completion by the recipient of minimum periods of continuous service and the satisfaction of specified performance hurdles related to the Company's Total Shareholder Return ("TSR") measured against a comparator group of companies over specified periods. The vesting scale applicable to the Company’s TSR performance is as follows: Percentile Rank Achieved Proportion of Target Award Vesting >76th percentile > 51st percentile and ≤76th percentile 51st percentile <51st percentile 100% Pro rata allocation 50% 0% Information with respect to the number of performance rights granted and issued is as follows: Balance at beginning of year - granted - exercised - lapsed/forfeited Balance at year end 2017 2016 No. of Performance Rights No. of Performance Rights 711,500 - (533,625) (177,875) - 1,185,850 - (474,350) - 711,500 A total of 533,625 Performance Rights vested on 1 July 2016 in accordance with the terms of the vesting conditions. At 30 June 2017, there were no Performance Rights on issue. (d) Loan Share Plan The Company established a Loan Share Plan (“LSP”) during the reporting period. Under the LSP, ordinary shares in the Company may be issued to eligible participants, with vesting of the shares being subject to the satisfaction of stipulated performance conditions. The shares are issued at their market value with the recipient required to pay this market value in order to take up the share offer. The Company or any of its subsidiaries will provide a loan to fund the acquisition price. The loan is interest-free and is secured against the shares in the form of a holding lock preventing all dealing in the shares. The loan is limited recourse such that if the shares do not ultimately vest and are therefore forfeited, this is treated as full repayment of the loan balance. While the loan balance remains outstanding, any dividends paid on the shares will be automatically applied towards repayment of the loan. In making the loan in respect of the newly issued shares, there is no cash cost to the Company as the shares are newly issued. On 24 August 2016 the Company issued 4,749,456 shares under the LSP. In accordance with the terms of the LSP, the shares were issued at a market price of $0.316 per share with the participants responsible for associated limited recourse loans totalling $1,500,828. In order for the shares to vest, the participants must remain continuously employed by the Group to at least the end of the financial year and the Company’s share price, as measured by a rolling five day volume weighted average price of the Company’s shares traded on the ASX, must on 1 July 2017 or at any time in the following four year period be above a 10% premium to the issue price of the shares. The award has been accounted for as an in-substance option award, with the fair value at grant date assessed at $0.104 per share. In calculating this fair value, a Monte Carlo simulation model was utilised over several thousand simulations to predict the share price at each vesting test date and whether the 10% hurdle was satisfied, with the resultant values discounted back to the grant date. The underlying share price and the exercise price were assumed at $0.31 per share, the period to exercise was assumed as three years (being half way between the first possible vesting date and the expiry of the LSP shares), the risk free rate was 1.40% based on Australian Government bond yields with three year lives, the estimated volatility was 50% based on historical share price analysis, and the dividend yield was assumed as nil. 62MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 24. Share-Based Payment Plans (Continued) Recognition and measurement Share-based payment transactions The Group provides benefits to employees (including directors) of the Group in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (“equity-settled transactions”). Options There is currently a Directors, Officers, Employees and Other Permitted Persons option plan. The cost of any options issued under this plan is measured by reference to their fair value at the date at which they are granted. The fair value is typically determined by using a binomial model. No account is taken of any performance conditions, other than conditions linked to the price of the shares of the Company. Performance rights There is a Mount Gibson Iron Limited Performance Rights Plan (“PRP”). The PRP enables the Company to provide its executives with long term incentives which create a link between the delivery of value to shareholders, financial performance and rewarding and retaining the executives. The cost of Performance Rights issued under the PRP is measured by reference to their fair value at the date at which they are granted. The fair value is determined using either a Black-Scholes or Monte Carlo option valuation model. Loan share plan There is a Mount Gibson Iron Limited Loan Share Plan (“LSP”). The LSP enables the Company to provide its executives with long term incentives which create a link between the delivery of value to shareholders, financial performance and rewarding and retaining the executives. The cost of these share rights is measured by reference to the fair value at the date at which they are granted. The fair value is measured by reference to the quoted market price on the Australian Stock Exchange and using a Monte Carlo simulation model. Equity-Settled Transactions Generally The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (“vesting date”). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the number of awards that, in the opinion of the Directors of the Group, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition. 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 for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect, if any, of outstanding options and Performance Rights is reflected as additional share dilution in the computation of earnings per share. MOUNT GIBSON IRON LIMITED 2017 Annual Report63 Notes to the Consolidated Financial Report (continued) 25. Earnings Per Share Basic earnings per share is calculated by dividing net profit for the year attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts is calculated by dividing the net profit attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. The following reflects the income and share data used in the calculations of basic and diluted earnings per share: Profit used in calculating basic and diluted earnings per share: Continuing operations Discontinued operations Profit attributable to ordinary equity holders of the Company Weighted average number of ordinary shares used in calculating basic earnings per share Effect of dilution - Performance rights - Restricted shares (in-substance options) Weighted average number of ordinary shares used in calculating diluted earnings per share Earnings per Share (cents per share): Basic earnings per share Diluted earnings per share 2017 $’000 25,599 723 26,322 2016 $’000 80,306 5,991 86,297 Number of Shares Number of Shares 1,091,813,060 1,091,037,076 - 4,037,038 533,625 - 1,095,850,098 1,091,570,701 2.41 2.40 7.91 7.91 Conversions, calls, subscriptions or issues after 30 June 2017 There have been no issues of shares or exercises, conversions or realisations of options, performance rights or restricted LSP shares under any of the Company’s share-based payment plans since 30 June 2017. Recognition and measurement Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to exclude any costs of servicing equity (other than dividends) and preference share dividends, divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted earnings per share is calculated as net profit attributable to members of the company, adjusted for:   costs of servicing equity (other than dividends) and preference share dividends; the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and  other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares; divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. 64MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 2017 $’000 2016 $’000 26. Dividends Paid and Proposed Declared and paid during the year: [a] Dividends on ordinary shares: No dividends were declared and paid during the reporting period. [b] Dividends not recognised at the end of the reporting period: On 15 August 2017, the Company declared a final dividend on ordinary shares in respect of the 2016/17 financial year of $0.02 per share fully franked. The total amount of the dividend is $21,931,000. The dividend has not been provided for in the 30 June 2017 financial statements. [c] Franked dividends: The amount of franking credits available for the subsequent financial year are: Franking account balance as at the end of the financial year at 30% Franking credits that will arise from the payment of income tax payable as at the end of the financial year The amount of franking credits available for future reporting periods: Impact on the franking account of dividends proposed or declared before the financial report was authorised for issue but not recognised as a distribution to equity holders during the period Tax rates The tax rate at which paid dividends have been franked is 30%. 27. Contingent Liabilities 59,243 60,774 - - 59,243 60,774 - - 59,243 60,774 1. The Group has a Performance Bonding facility drawn to a total of $11,608,000 as at balance date (2016: $25,829,000). The performance bonds secure the Group’s obligations relating primarily to environmental matters and infrastructure assets. 2. Certain claims arising with customers, employees, consultants, and contractors have been made by or against certain controlled entities in the ordinary course of business, some of which involve litigation or arbitration. The Directors do not consider the outcome of any of these claims will have a material adverse impact on the financial position of the consolidated entity. MOUNT GIBSON IRON LIMITED 2017 Annual Report65 Notes to the Consolidated Financial Report (continued) 28. Key Management Personnel [a] Compensation of Key Management Personnel Short-term Post employment Long-term Share-based payment Termination payment 2017 $ 3,276,676 190,499 31,656 493,943 - 3,992,774 2016 $ 2,569,717 185,326 14,935 64,152 - 2,834,130 [b] Loans to Specified Key Management Personnel Limited recourse loans totalling $1,500,828 were made to key management personnel during the reporting period under the terms of the Company’s Loan Share Plan (“LSP”). The issue of shares under the LSP and the associated limited recourse loans are accounted for as an in-substance option award. Refer to note 24 for details of the LSP and shares issues made thereunder during the reporting period. [c] Other Transactions and Balances with Key Management Personnel There were no other transactions and balances with key management personnel during the year. 29. Related Party Transactions Ultimate parent Mount Gibson Iron Limited is the ultimate Australian parent company. Director-related entity transactions Sales During all or part of the year Mr Li was a director of Shougang Concord International Trading Pty Ltd (SCIT), and Mr Lee and Mr Ferguson were directors of APAC Resources Limited (APAC). The following sale agreements were in place with director-related entities during the period:    The sale to SCIT of 80% of iron ore from Koolan Island’s available mined production over the life of mine. The sale to a subsidiary of APAC of 20% of iron ore from Koolan Island’s available mined production of the life of mine. Three ad hoc spot sales of iron ore from Extension Hill. Pursuant to these sales agreements, during the financial year, the Group:   Sold 182,167 WMT (2016: 290,196 WMT) of iron ore to APAC; and Sold nil WMT (2016: 1,234,131 WMT) of iron ore to SCIT. 66MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) Amounts recognised at the reporting date in relation to director-related entity transactions: Assets and Liabilities Current Assets Trade receivables – APAC Trade receivables – SCIT Total trade receivables Total Assets Current Liabilities Trade payables – APAC Trade payables – SCIT Total trade payables Total Liabilities Net Sales Revenue Net sales revenue – APAC Net sales revenue – SCIT Total Net Sales Revenue Apart from the above, there are no director-related entity transactions other than those specified in note 28. 2017 $’000 2016 $’000 2,566 - 2,566 2,566 - - - - 819 - 819 819 - - - - 8,901 - 8,901 14,281 48,559 62,840 2017 $ 2016 $ 30. Auditor’s Remuneration Amounts received or due and receivable by EY for:  An audit or review of the financial report of the entity and any other entity in the consolidated entity 192,095 202,395  Other services in relation to the entity and any other entity in the consolidated entity 3,605 3,600 195,700 205,995 MOUNT GIBSON IRON LIMITED 2017 Annual Report67 Notes to the Consolidated Financial Report (continued) 31. Discontinued Operations The Tallering Peak operation is reported as a discontinued operation in this financial report. Mining was completed in June 2014 and the final shipment of remnant low grade ore occurred in March 2017. 2017 $’000 2016 $’000 [a] Profit from discontinued operations The financial results of Tallering Peak operation for the year are presented below: Revenue Cost of sales Impairment write-back on ore inventories Gross profit Impairment/obsolescence write-back on consumables inventories Profit before tax and finance costs from discontinued operations Finance costs Profit before tax from discontinued operations Income tax benefit/(expense) Net profit after tax from discontinued operations Earnings per share (cents per share):  basic earnings per share  diluted earnings per share [b] Cash flow from discontinued operations The net cash flows incurred by Tallering Peak operation are as follows: Operating Investing Financing Net cash inflow from discontinued operations 11,085 (13,740) 3,378 723 - 723 - 723 - 723 0.07 0.07 5,346 (6,191) 6,816 5,971 20 5,991 - 5,991 - 5,991 0.55 0.55 2,399 1,568 - - - - 2,399 1,568 68MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 32. Segment Information The Group has identified its operating segments based on the internal reports that are reviewed and used by the Chief Executive Officer and the executive management team in assessing performance and in determining the allocation of resources. For management purposes, the Group has organised its operating segments into two reportable segments as follows:  Extension Hill segment – this segment includes the mining, crushing, transportation and sale of iron ore from the Extension Hill and Iron Hill iron ore deposits.  Koolan Island segment – this segment was on care and maintenance until the end of April 2017, at which time the Group commenced the Koolan Island restart project. Operating results for each reportable segment are reviewed separately by management for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements. The accounting policies applied for internal reporting purposes are consistent with those applied in the preparation of the financial statements. There have been no inter-segment revenues. Items that are managed on a Group basis and are not allocated to segments as they are not considered part of core operations of any segment are as follows: Finance costs and revenue on investments Interest revenue Foreign exchange gains / (losses)     Corporate costs Operating results for discontinued operations have been excluded from the segment results below. During the year ended 30 June 2017, revenue received from the sale of iron ore comprised purchases by the following buyers who each on a proportionate basis equated to greater than 10% of total sales for the period: Customer # 1 # 2 Other 2017 $’000 53,669 38,672 69,541 161,882 During the year ended 30 June 2016, revenue received from the sale of iron ore comprised purchases by the following buyers who each on a proportionate basis equated to greater than 10% of total sales for the period: Customer # 1 # 2 # 3 Other 2016 $’000 85,757 48,613 33,845 66,591 234,806 Revenue from external customers by geographical location is based on the port of delivery. All iron ore has been shipped to China during the year ended 30 June 2017. All segment assets are located within Australia. MOUNT GIBSON IRON LIMITED 2017 Annual Report69 Notes to the Consolidated Financial Report (continued) 32. Segment Information (Continued) Extension Hill Koolan Island Unallocated* Consolidated Segment revenue Revenue from sale of iron ore Interest revenue Segment revenue Segment result Earnings/(loss) before impairment, interest, tax, depreciation and amortisation Impairment (loss)/reversal Earnings/(loss) before interest, tax, depreciation and amortisation Depreciation and amortisation Segment result Finance costs Profit before tax and discontinued operations Items included in segment result: Impairment/(write-backs) of consumables inventories Impairment (write-backs)/loss on ore inventories Impairment of property, plant and equipment Impairment of mine development Impairment/(write-backs) of exploration and evaluation expenditure 2017 $’000 2016 $’000 2017 $’000 162,043 175,214 - - 162,043 175,214 36,092 32 36,124 (2,373) 33,751 25,558 (16,409) 9,149 (7,068) 2,081 - - - (3,154) 2,260 (894) (3,067) (3,961) 2016 $’000 59,974 - 59,974 8,210 (5,738) 2,472 (5,224) 2017 $’000 - 12,113 12,113 (3,486) (459) (3,945) (593) 2016 $’000 - 9,667 9,667 82,747 (71) 82,676 (700) (2,752) (4,538) 81,976 (219) 3,153 - - (2,966) (32) 1,824 - 9,484 2,135 2,966 (2,260) - - - - 6,287 (3,442) 2,893 - - 16,409 (2,260) 5,738 - - - - 459 459 - - - - 71 71 * ‘Unallocated’ includes interest revenue ($12,113,000) and corporate expenses such as head office salaries and wages. Segment assets Current financial assets Other current assets Property, plant and equipment Mine properties Total assets Segment liabilities Financial liabilities Other liabilities Total liabilities 9,504 17,289 2,637 5,903 5,838 17,747 1,752 - 2,152 4,249 2,580 4,988 4,932 1,839 5,912 - 444,992 431,094 1,151 702 - 2,368 1,080 - 35,333 25,337 13,969 12,683 446,845 434, 542 496,147 472,562 19,136 13,944 33,080 23,958 11,179 35,137 4,184 27,762 31,946 1,652 29,397 31,049 8,157 3,981 12,138 11,040 3,401 14,441 31,477 45,687 77,164 36,650 43,977 80,627 Net assets/(liabilities) 2,253 (9,800) (17,977) (18,366) 434,707 420,101 418,983 391,935 2017 $’000 162,043 12,113 174,156 29,452 1,833 31,285 (6,033) 25,252 (1,134) 24,118 (2,479) 3,153 - - (2,507) (1,833) 456,648 22,689 5,919 10,891 2016 $’000 235,188 9,667 244,855 116,515 (22,218) 94,297 (12,992) 81,305 (1,760) 79,545 8,111 (3,442) 12,377 2,135 3,037 22,218 441,864 21,954 8,744 - 70MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 33. Events After the Balance Sheet Date Following the end of the reporting period, on 7 July 2017 the Company announced that it had reached final agreement with 14 insurers, representing 92.5% of the Company’s insurance cover for business interruption suffered from the late 2014 failure of the Koolan Island seawall, for a cash settlement of the claim for $64,288,000. Proceeds of the settlement have been received and recognised after balance date. Negotiations will continue separately with one insurer representing the remaining 7.5% of the Company’s business interruption coverage. On 15 August 2017, the Company declared a final dividend on ordinary shares in respect of the 2016/17 financial year of $0.02 per share fully franked. The total amount of the dividend is $21,931,000. The dividend has not been provided for in the 30 June 2017 financial statements. Apart from the above, as at the date of this report there are no significant events after balance date of the Company or of the Group that require adjustment of or disclosure in this report. 34. Financial Instruments [a] Financial risk management objectives The Group’s principal financial instruments, other than derivatives, comprise bank and equipment finance arrangements, cash and short- term deposits, and financial assets held for trading. The main purpose of these financial instruments is to raise finance for the Group’s operations. The Group has various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations. The Group also enters into derivatives transactions, principally forward currency contracts, and from time to time also enters into foreign currency collar options and interest rate swaps. The purpose is to manage the currency and interest rate risks arising from the Group’s operations and its sources of finance. The main risks arising from the Group’s financial instruments are foreign currency risk, interest rate risk, credit risk, commodity price risk and liquidity risk. The Board reviews and agrees management’s recommended policies for managing each of these risks, as summarised below and in accordance with the Company’s Financial Risk Management Policy. [b] Foreign currency risk The Group is exposed to the risk of adverse movement in the A$ compared to the US$ as its iron ore sales receipts are predominantly denominated in US$. The Group has used derivative financial instruments to manage specifically identified foreign currency exposures by hedging a proportion of forecast US$ sales transactions in accordance with its risk management policy. The primary objective of using derivative financial instruments is to reduce the volatility of earnings and cashflows attributable to changes in the A$/US$ exchange rate and to protect against adverse movements in this rate. The Group recognises derivative financial instruments at fair value at the date the derivative contract is entered into. The Group applies hedge accounting to forward foreign currency contracts and collar option contracts that meet the criteria of cash flow hedges. During the year ended 30 June 2017, there were no US dollar foreign exchange forward contract deliveries. At 30 June 2017, the notional amount of the foreign exchange hedge book totalling US$12,000,000 is made up exclusively of collar option contracts with maturity dates due in the 3 months ended 27 September 2017 and with a cap price of A$1.00/US$0.7550 and a floor price of A$1.00/US$0.7205. As at 30 June 2017, the marked-to-market unrealised gain on the total outstanding US dollar foreign exchange hedge book of US$12,000,000 was A$341,000. It is the Group’s policy to negotiate the terms of the hedge derivatives to match the terms of the hedged item to maximise hedge effectiveness. The Group uses the following derivative instruments to manage foreign currency risk from time to time as business needs and conditions dictate: Instrument Type of Hedging Objective Forward exchange contracts Cash flow hedge Collar options Cash flow hedge To hedge sales receipts against cash flow volatility arising from the fluctuation of the A$/US$ exchange rate. To hedge sales receipts against cash flow volatility arising from the fluctuation of the A$/US$ exchange rate by limiting exposure to exchange rates within a certain range of acceptable rates. MOUNT GIBSON IRON LIMITED 2017 Annual Report71 Notes to the Consolidated Financial Report (continued) 34. Financial Instruments (Continued) [i] Foreign exchange contracts – cash flow hedges At balance date, the following foreign exchange contracts designed as a hedge of anticipated future receipts that will be denominated in US$ were outstanding: 2017 2016 Average Contract Rate A$/US$ Contract Amount US$ $’000 Contract Amount A$ $’000 Fair Value A$ $’000 Average Contract Rate A$/US$ Contract Amount US$ $’000 Contract Amount A$ $’000 Fair Value A$ $’000 Collar Option Contracts - within one year call strike price 0.7500 put strike price 0.6850 - within one year call strike price 0.7550 put strike price 0.7205 Total 0.7500 15,000 20,000 231 0.7550 12,000 15,894 341 - - - - 0.7550 12,000 15,894 341 0.7500 15,000 20,000 231 As balance date, the following foreign exchange contracts were recognised on the balance sheet and income statement: Current assets Total collar option contracts Movement in foreign exchange contract cash flow hedge reserve: Opening balance Change in fair value of cash flow hedges net of tax Transferred from/(to) revenue in Income Statement net of tax - Continuing operations - Discontinued operations Closing balance Cash flow hedge ineffectiveness recognised immediately in profit and loss [ii] Foreign currency sensitivity Notes 11 2017 $’000 341 341 - 341 (109) - 232 (123) 2016 $’000 231 231 - (231) 231 - - 231 The following table details the effect on profit and other comprehensive income after tax of a 10% change in the A$ against the US$ from the spot rates at 30 June 2017 and 30 June 2016 due to changes in the fair value of monetary assets and liabilities. Net Profit Other Comprehensive Income 2017 $’000 2016 $’000 2017 $’000 2016 $’000 10% appreciation in the A$ spot rate with all other variables held constant 10% depreciation in the A$ spot rate with all other variables held constant (767) (580) 1,167 938 710 (526) - - The sensitivity analysis of the Group’s exposure to the foreign currency risk at balance date has been determined based on the change in value due to foreign exchange movement based on exposures at balance sheet date. A positive number indicates an increase in profit and other comprehensive income. 72MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 34. Financial Instruments (Continued) At balance date, the Group’s exposure to foreign currency risks on financial assets and financial liabilities, excluding derivatives, are as follows: Financial Assets Cash (included within note 6) Trade receivables (included within note 9) Financial Liabilities Trade payables Net exposure [c] Interest rate risk (included within note 17) 2017 $’000 6,729 6,440 (1,116) 12,053 2016 $’000 7,164 2,862 (901) 9,125 The Group’s exposure to market interest rates relates primarily to the Group’s cash and cash equivalents, term deposits and subordinated notes, and financial assets held for trading (tradeable corporate bonds). The Group’s policy is to manage its interest costs using a mix of fixed and variable rate debt (as appropriate). The Group regularly analyses its interest income rate exposure. Within this analysis, consideration is given to potential renewals of existing positions and alternative financing arrangements. At balance date, the Group’s exposure to interest rate risks on financial assets and financial liabilities was as follows: MOUNT GIBSON IRON LIMITED 2017 Annual Report73 Notes to the Consolidated Financial Report (continued) 34. Financial Instruments (Continued) Floating interest rate 1 year or less Over 1 to 5 years Non-interest bearing Fixed interest rate maturing in: Total carrying amount per balance sheet Weighted Average Interest 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 % 2016 % CONSOLIDATED i) Financial assets Cash Short-term deposits (< 3 months maturity) Term deposits – receivables 33,755 43,315 - - - - - 15,000 - - 268,500 250,000 Subordinated notes – available-for-sale 97,000 87,000 - - Financial assets held for trading Trade and other receivables Derivative financial assets Total financial assets ii) Financial liabilities Trade and other payables Insurance premium funding Total financial liabilities - - - - - - 31,217 19,771 - - - - 130,755 130,315 314,717 269,771 - - - - - - - - - - 421 421 - - - - - - - - - - - - - - - - - - - - - - 1 - - - 1,306 9,528 341 1 - - - - 41,546 231 33,756 15,000 43,316 - 268,500 250,000 97,000 32,523 9,528 341 87,000 19,771 41,546 231 11,176 41,778 456,648 441,864 31,477 36,229 31,477 36,229 - - - 421 31,477 36,229 31,477 36,650 0.47 2.23 2.62 3.14 4.17 - - - - 0.78 - 2.94 3.74 4.78 - - - 1.86 74MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 34. Financial Instruments (Continued) [i] Interest rate sensitivity The following table details the effect on profit and other comprehensive income after tax of a 0.25% change in interest rates, in absolute terms.   0.25% increase in interest rate with all other variables held constant 0.25% decrease in interest rate with all other variables held constant Net Profit Other Comprehensive Income 2017 $’000 721 (721) 2016 $’000 624 (624) 2017 $’000 2016 $’000 - - - - The sensitivity analysis of the Group’s exposure to Australian variable interest rates at balance date has been determined based on exposures at balance sheet date. A positive number indicates an increase in profit and equity. [d] Credit risk The Group’s maximum exposures to credit risk at balance date in relation to each class of recognised financial assets, other than derivatives, is the carrying amount of those assets as indicated in the balance sheet. In relation to derivative financial instruments, whether recognised or unrecognised, credit risk arises from the potential failure of counterparties to meet their obligations under the contract or arrangement. The Group’s maximum credit risk exposure in relation to forward exchange contracts is the full amount of the foreign currency it will be required to pay or purchase when settling the forward exchange contract, should the counterparty not pay the currency it is committed to deliver to the Group. The Group minimises concentrations of credit risk in relation to trade receivables by undertaking transactions with a number of customers and by the use of advance payments and letters of credit which effectively protect at least 90% of the estimated receivable amount at the time of sale. Credit risk from balances with banks and financial institutions is managed in accordance with a Board approved policy. Investments of surplus funds are made only with approved counterparties with an acceptable Standard & Poors credit rating and within credit limits assigned to each counterparty. Counterparty credit limits are reviewed by the Board on an annual basis, and may be updated throughout the year. The limits are set to minimise the concentration of risks and therefore mitigate financial loss through potential counterparty failure. No material exposure is presently considered to exist by virtue of the possible non-performance of the counterparties to financial instruments. There are no significant concentrations of credit risk within the Group. [e] Commodity price risk The Group’s operations are exposed to commodity price risk as the Group sells iron ore to its customers. The majority of the Group’s sales revenue is derived under long term sales contracts for each of its operations. The pricing mechanism in these contracts reflects a market based clearing index. The pricing mechanism adopts the Platts Iron Ore Index Price (“Platts Index”) which is published daily for iron ore “fines” with Fe content ranging from 52% to 65% and is quoted on a US$ per dry metric tonne “Cost and Freight” North China basis. “Lump” iron ore typically receives a premium to the published Platts Index “fines” price. During the period, the Group entered into forward sales agreements covering six shipments each of 60,000 tonnes of iron ore, with maturity dates spread over the period January to June 2017. The contracts were stated in US$ per dry metric tonne and were cash settled against the average daily CFR benchmark price for 62% Fe fines ores for delivery to northern China. The average price of the forward contracts at each maturity date was between US$70 and US$76 per tonne. Movements in the market value of the forward sale contracts are taken to the income statement. There were no outstanding iron ore forward contracts as at 30 June 2017, however a receivable of $1,104,000 was recorded at balance date in relation to the contract that matured in June 2017 which will be cash settled in July 2017. MOUNT GIBSON IRON LIMITED 2017 Annual Report75 Notes to the Consolidated Financial Report (continued) 34. Financial Instruments (Continued) [f] Liquidity risk The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of its cash reserves and equipment financing arrangements. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching maturity profiles of financial assets and liabilities. The Group’s capital risk management objectives are to safeguard the business as a going concern, to provide appropriate returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure in order to reduce the cost of capital (being equity and debt). Mount Gibson does not have a target debt/equity ratio but has a policy of maintaining a flexible financing structure so as to be able to take advantage of new investment opportunities that may arise. At 30 June 2017, the Group had unutilised performance bonding facilities totalling $8,392,000 (2016: $29,171,000). Refer note 18. Tabulated below is an analysis of the Group’s financial liabilities according to relevant maturity groupings based on the remaining period from the balance sheet date to the contractual maturity date. As the amounts disclosed in the table are the contractual undiscounted cash flows, these balances will not necessarily agree with the amounts disclosed in the balance sheet. Financial Liabilities Trade and other payables Insurance premium funding Derivatives – inflow Derivatives – outflow Less than 6 months $’000 31,477 - (16,235) 15,894 31,136 30 June 2017 30 June 2016 6 to 12 months $’000 1 to 5 years $’000 Over 5 years $’000 Total $’000 Less than 6 months $’000 6 to 12 months $’000 1 to 5 years $’000 Over 5 years $’000 Total $’000 - - - - - - - - - - - - - - - 31,477 36,229 - 423 (16,235) (20,231) 15,894 20,000 31,136 36,421 - - - - - - - - - - - - - - - 36,229 423 (20,231) 20,000 36,421 [g] Fair value of financial assets and financial liabilities All financial instruments for which fair value is recognised or disclosed are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 – quoted market prices in an active market (that are unadjusted) for identical assets or liabilities Level 2 – valuation techniques (for which the lowest level of input that is significant to the fair value measurement is directly or indirectly observable) Level 3 – valuation techniques (for which the lowest level of input that is significant to the fair value measurement is unobservable) The fair values of derivative financial instruments are determined using the Level 2 method requiring fair value to be calculated using short and long term observable market inputs. The Group’s fair values under the Level 2 method are sourced from an independent valuation by the Group’s treasury advisors. The valuation techniques use prevailing market inputs sourced from Reuters/Bloomberg to determine an appropriate mid price valuation. The fair values of quoted notes and bonds (classified as either financial assets held for trading or available-for-sale) are determined using Level 1 method based on market price quotations at the reporting date. The fair values of cash, short-term deposits, trade and other receivables, trade and other payables and other interest-bearing borrowings approximate their carrying values, as a result of their short maturity or because they carry floating rates of interest. 76MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 34. Financial Instruments (Continued) The carrying amounts and fair values of the financial assets and financial liabilities for the Group as at 30 June 2017 are shown below. 2017 2016 Carrying Amount $’000 Fair Value $’000 Carrying Amount $’000 Fair Value $’000 33,756 15,000 268,500 97,000 32,523 9,528 341 456,648 31,477 - 31,477 425,171 33,756 15,000 268,500 97,000 32,523 9,528 341 456,648 31,477 - 31,477 425,171 43,316 - 250,000 87,000 19,771 41,546 231 441,864 36,229 421 36,650 405,214 43,316 - 250,000 87,000 19,771 41,546 231 441,864 36,229 421 36,650 405,214 Financial assets – current Cash Short-term deposits Term deposits – receivables Subordinated notes – available-for-sale Financial assets held for trading Trade debtors and other receivables Derivatives Financial liabilities – current Trade and other payables Insurance premium funding Net financial assets Recognition and measurement Derivative financial instruments and hedging The Group uses foreign currency to hedge its risks associated with foreign currency and commodity price fluctuations. Such derivative financial instruments are initially recognised at fair value on the date the derivative contract is entered into and are subsequently remeasured to fair value. Any gains and losses arising from changes in the fair value of derivatives, except those that qualify as cash flow hedges, are taken directly to net profit or loss for the year. The fair value of forward exchange contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. For the purpose of hedge accounting, hedges are classified as either fair value hedges when they hedge the exposure to changes in the fair value of a recognised asset or liability, or cash flow hedges where they hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a forecasted transaction. All hedges are currently classified as cash flow hedges. In relation to cash flow hedges to hedge firm commitments which meet the conditions for hedge accounting, the portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity and the ineffective portion is recognised in the income statement. When the hedged firm commitment results in the recognition of an asset or a liability, then, at the time the asset or liability is recognised, the associated gains or losses that had previously been recognised in equity are included in the initial measurement of the acquisition cost or other carrying amount of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in equity are transferred to the income statement in the same year in which the hedged firm commitment affects the net profit and loss, for example when the future sale actually occurs. Effectiveness is tested at inception of each hedge and monthly thereafter until the hedge expires. The cumulative dollar offset method is applied in the measurement of effectiveness. The cumulative approach involves comparing the cumulative change (to date from inception of the hedge) in the hedging instrument’s fair values to the cumulative change in the hedged item’s (or USD cash flow) attributable to the risk being hedged. Effectiveness of the forward exchange contracts is monitored by comparing the forward net present value of the underlying cash flows to the forward net present value of the fair value associated with the hedging instrument. Prospective and retrospective testing is undertaken by the Group’s treasury advisors. At each balance date, the Group measures ineffectiveness using the ratio offset method. For foreign currency cash flow hedges if the risk is over hedged, the ineffective portion is taken immediately to other income or expense in the income statement. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the income statement. MOUNT GIBSON IRON LIMITED 2017 Annual Report77 Notes to the Consolidated Financial Report (continued) 35. Parent Entity Information [a] Information relating to Mount Gibson Iron Limited: Current assets Total assets Current liabilities Total liabilities Issued capital Issued capital – restricted shares under Loan Share Plan Accumulated losses Dividend distribution reserve Share based payments reserve Total Shareholder’s Equity Net profit after tax of the parent entity Total comprehensive profit of the parent entity 2017 $’000 2016 $’000 17,134 799,833 2,095 380,850 568,328 1,501 47,701 759,577 464 367,642 568,328 - (565,683) (590,736) 394,306 20,531 418,983 25,053 25,053 394,306 20,037 391,935 86,296 86,296 [b] Details of any guarantees entered into by the parent entity There are cross guarantees given by Mount Gibson Iron Limited in relation to the debts of its subsidiaries as described in note 12 and note 18. The parent entity has further provided bank guarantees in respect of obligations to various authorities. Refer to note 18. [c] Details of any contingent liabilities of the parent entity The parent entity had contingent liabilities as at reporting date as set out in note 27. For information about guarantees given by the parent entity, refer [b] above. Mount Gibson Iron Limited guarantees the performance of Mount Gibson Mining Limited’s obligations to Aurizon entities under the Transport Agreement made on 26 June 2008 as amended and restated on 30 June 2009. In accordance with this agreement, Mount Gibson Mining Limited agrees to reimburse Aurizon for track access charges properly due and payable to Brookfield, the rail infrastructure owner. [d] Details of any contractual commitments by the parent entity for the acquisition of property, plant and equipment There are no contractual commitments by the parent entity for the acquisition of property, plant and equipment as at reporting date. [e] Tax Consolidation The Company and its 100%-owned entities have formed a tax consolidated group. Members of the Group entered into a tax sharing arrangement in order to allocate income tax expense to the wholly owned controlled entities. The agreement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At balance date, the possibility of default is remote. The head entity of the tax consolidated group is Mount Gibson Iron Limited. 78MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) 36. New Accounting Standards The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. From 1 July 2016 the Group has adopted all new and amended accounting standards mandatory for annual periods beginning on or after 1 July 2016 including: Reference Title Summary AASB 2015-1 Amendments to The amendments clarify certain requirements in: Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012- 2014 Cycle ► AASB 5 Non-current Assets Held for Sale and Discontinued Operations – Changes in methods of disposal ► AASB 7 Financial Instruments: Disclosures - servicing contracts; applicability of the amendments to AASB 7 to condensed interim financial statements ► AASB 119 Employee Benefits - regional market issue regarding discount rate ► AASB 134 Interim Financial Reporting - disclosure of information ‘elsewhere in the interim financial report’ AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101 This Standard amends AASB 101 Presentation of Financial Statements to clarify existing presentation and disclosure requirements and to ensure entities are able to use judgement when applying the Standard in determining what information to disclose, where and in what order information is presented in their financial statements. For example, the amendments make clear that materiality applies to the whole of financial statements and that the inclusion of immaterial information can inhibit the usefulness of financial disclosures. Application date of standard Application date for Group 1 January 2016 1 July 2016 1 July 2016 1 July 2016 Changes to accounting policies due to adoption of these standards and interpretations are not considered significant for the Group. MOUNT GIBSON IRON LIMITED 2017 Annual Report79 Notes to the Consolidated Financial Report (continued) Other Australian Accounting Standards and Interpretations relevant to the Group that have recently been issued or amended, are not yet effective and have not been adopted by the Group for the period ended 30 June 2017 are outlined in the table below: Reference Title Summary Application date of standard Application date for Group AASB 2016-1 AASB 2016-2 AASB 2016-5 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107 Amendments to Australian Accounting Standards – Classification and Measurement of Share-based Payment Transactions This Standard amends AASB 112 Income Taxes to clarify the accounting for deferred tax assets for unrealised losses on debt instruments measured at fair value. 1 January 2017 1 July 2017 1 January 2017 1 July 2017 1 January 2018 1 July 2018 The amendments to AASB 107 Statement of Cash Flows are part of the IASB’s Disclosure Initiative and help users of financial statements better understand changes in an entity’s debt. The amendments require entities to provide disclosures about changes in their liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses). This standard amends to AASB 2 Share-based Payment, clarifying how to account for certain types of share-based payment transactions. The amendments provide requirements on the accounting for: ► The effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments ► Share-based payment transactions with a net settlement feature for withholding tax obligations ► A modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled AASB 2017-1 Amendments to Australian Accounting Standards – Transfers of Investments Property, Annual Improvements 2014- 2016 Cycle and Other Amendments The amendments clarify certain requirements in: ► AASB 1 First-time Adoption of Australian Accounting Standards – deletion of exemptions for first-time adopters and addition of an exemption arising from AASB Interpretation 22 Foreign Currency Transactions and Advance Consideration ► AASB 12 Disclosure of Interests in Other Entities – clarification of scope ► AASB 128 Investments in Associates and Joint Ventures – measuring an associate or joint venture at fair value AASB 140 Investment Property – change in use. 1 January 2018 1 July 2018 AASB 2017-2 AASB 2014- 10 Amendments to Australian Accounting Standards – Further Annual Improvements 2014- 2016 Cycle Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture This Standard clarifies the scope of AASB 12 Disclosure of Interests in Other Entities by specifying that the disclosure requirements apply to an entity’s interests in other entities that are classified as held for sale or discontinued operations in accordance with AASB 5 Non-current Assets Held for Sale and Discontinued Operations. 1 January 2017 1 July 2017 The amendments clarify that a full gain or loss is recognised when a transfer to an associate or joint venture involves a business as defined in AASB 3 Business Combinations. Any gain or loss resulting from the sale or contribution of assets that does not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture. AASB 2015-10 defers the mandatory effective date (application date) of AASB 2014-10 so that the amendments are required to be applied for annual reporting periods beginning on or after 1 January 2018 instead of 1 January 2016. 1 January 2018 1 July 2018 80MOUNT GIBSON IRON LIMITED 2017 Annual Report Notes to the Consolidated Financial Report (continued) Reference Title Summary Application date of standard Application date for Group AASB 15 Revenue from Contracts with Customers AASB 15 replaces all existing revenue requirements in Australian Accounting Standards (AASB 111 Construction Contracts, AASB 118 1 January 2018 1 July 2018 Revenue, AASB Interpretation 13 Customer Loyalty Programmes, AASB Interpretation 15 Agreements for the Construction of Real Estate, AASB Interpretation 18 Transfers of Assets from Customers and AASB Interpretation 131 Revenue – Barter Transactions Involving Advertising Services) and applies to all revenue arising from contracts with customers, unless the contracts are in the scope of other standards, such as AASB 117 (or AASB 16 Leases, once applied). The core principle of AASB 15 is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. An entity recognises revenue in accordance with the core principle by applying the following steps: (a) (b) Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. (c) Step 3: Determine the transaction price. (d) (e) Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation. AASB 9 Financial Instruments AASB 9 replaces AASB 139 Financial Instruments: Recognition and Measurement. 1 January 2018 1 July 2018 Except for certain trade receivables, an entity initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Debt instruments are subsequently measured at fair value through profit or loss (FVTPL), amortised cost, or fair value through other comprehensive income (FVOCI), on the basis of their contractual cash flows and the business model under which the debt instruments are held. There is a fair value option (FVO) that allows financial assets on initial recognition to be designated as FVTPL if that eliminates or significantly reduces an accounting mismatch. Equity instruments are generally measured at FVTPL. However, entities have an irrevocable option on an instrument-by-instrument basis to present changes in the fair value of non-trading instruments income (OCI) without subsequent reclassification to profit or loss. in other comprehensive For financial liabilities designated as FVTPL using the FVO, the amount of change in the fair value of such financial liabilities that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation in OCI of the fair value change in respect of the liability’s credit risk would create or enlarge an accounting mismatch in profit or loss. All other AASB 139 classification and measurement requirements for financial liabilities have been carried forward into AASB 9, including the embedded derivative separation rules and the criteria for using the FVO. The incurred credit loss model in AASB 139 has been replaced with an expected credit loss model in AASB 9. The requirements for hedge accounting have been amended to more closely align hedge accounting with risk management, establish a more principle-based approach to hedge accounting and address inconsistencies in the hedge accounting model in AASB 139. MOUNT GIBSON IRON LIMITED 2017 Annual Report81 Notes to the Consolidated Financial Report (continued) Application date of standard Application date for Group 1 January 2019 1 July 2019 Reference Title Summary AASB 16 Leases AASB 16 requires lessees to account for all leases under a single on balance sheet model in a similar way to finance leases under AASB 117 Leases. The standard includes two recognition exemptions for lessees – leases of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessees will be required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset. is substantially unchanged Lessor accounting today’s accounting under AASB 117. Lessors will continue to classify all leases using the same classification principle as in AASB 117 and distinguish between two types of leases: operating and finance leases. from AASB Int 22 Foreign Currency Transactions and Advance Consideration The Interpretation clarifies that in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. 1 January 2018 1 July 2018 The Group has elected not to early adopt any of these new standards or amendments in these financial statements. In view of the current state of operations, the Group has yet to fully assess the full impact of the below accounting standards, when applied in future periods:  AASB 15 Revenue from Contracts with Customers changes the timing (and in some case, the quantum) of revenue recognised from customers. The standard does not apply mandatorily before 1 January 2018. The Group has made a preliminary assessment of the potential impacts of AASB 15 as at the reporting date and formed an initial view that the new standard may operate to require the deferral of the recognition of revenues apportioned to the remaining sea voyages of “in transit” vessels to their destination ports where iron ore cargoes are discharged and “cost and freight” (CFR) sales revenues fully earned. Based on the limited number of vessels expected to be in transit at any reporting date, the new standard is considered unlikely to have a material impact on the Group’s financial results when it is first adopted for the year ending 30 June 2019.  AASB 16 Leases eliminates the distinction between operating and finance leases, and brings all leases (other than short term leases) onto the balance sheet. The standard does not apply mandatorily before 1 January 2019. While in early stages of assessment, the Group has yet to fully assess the impact on the Group’s financial results when it is first adopted for the year ending 30 June 2020. 82MOUNT GIBSON IRON LIMITED 2017 Annual Report Directors’ Declaration In accordance with a resolution of the directors of Mount Gibson Iron Limited, I state that: 1. In the opinion of the Directors: a. the financial statements, notes and the additional disclosures included in the Directors Report designated as audited of the Group are in accordance with the Corporations Act 2001, including: i) giving a true and fair view of the financial position of the Group as at 30 June 2017 and of its performance for the year ended on that date; and ii) complying with Accounting Standards and the Corporations Regulations 2001; and b. c. the financial statements and notes also comply with International Reporting Standards as disclosed in Note 1; and 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. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2017. Signed in accordance with a resolution of the directors. LEE SENG HUI Chairman Sydney, 15 August 2017 MOUNT GIBSON IRON LIMITED 2017 Annual Report83 Independent Audit Report GB:ET:MOUNTGIBSON:195 84MOUNT GIBSON IRON LIMITED 2017 Annual ReportGB:EH:MGI:229 MOUNT GIBSON IRON LIMITED 2017 Annual Report85GB:EH:MGI:229 86MOUNT GIBSON IRON LIMITED 2017 Annual ReportGB:EH:MGI:229 MOUNT GIBSON IRON LIMITED 2017 Annual Report87GB:EH:MGI:229 88MOUNT GIBSON IRON LIMITED 2017 Annual ReportGB:EH:MGI:229 MOUNT GIBSON IRON LIMITED 2017 Annual Report89The Company's Board is committed to protecting and enhancing shareholder value and conducting the Company's business ethically and in accordance with high standards of corporate governance. In determining those standards the Company has had reference to the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations recently released 3rd Edition (“ASX Recommendations”) during the reporting period. The Company believes that its practices are substantially consistent with the ASX Recommendations and will continue to adapt its governance practices to be consistent with them and make changes as appropriate, having regard to the nature and scale of the Company's business. A description of the Company's main corporate governance practices is set out in its Corporate Governance Statement available online at www.mtgibsoniron.com.au. The practices reflect the Company's existing corporate governance policies and is current as at 30 September 2016. The Corporate Governance Statement has been approved by the Board. 90MOUNT GIBSON IRON LIMITED 2017 Annual ReportMOUNT GIBSON IRON LIMITED 2017 Annual Report9192MOUNT GIBSON IRON LIMITED 2017 Annual ReportMOUNT GIBSON IRON LIMITED 2017 Annual Report9394MOUNT GIBSON IRON LIMITED 2017 Annual ReportMOUNT GIBSON IRON LIMITED 2017 Annual Report9596MOUNT GIBSON IRON LIMITED 2017 Annual ReportMOUNT GIBSON IRON LIMITED 2017 Annual Report9798MOUNT GIBSON IRON LIMITED 2017 Annual Report

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