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Soltec PowerN c o n d e z i C o a l C o m p a n y A n n u a l r e p o r t a n d fi n a n c i a l s t a t e m e n t s 2 0 1 2 An emerging Mozambican power development company Ncondezi Coal Company Annual report and financial statements 2012 Overview Our vision Ncondezi is focused on the phased development of its large scale, long life, integrated thermal coal mine and 1,800MW power plant project in northern Mozambique. Ncondezi Coal Company Limited (“Ncondezi”, the “Company” or the “Group”), is a BVI registered publicly listed company on the AIM market of the London Stock Exchange (Ticker: NCCL). Visit www.ncondezicoal.com For regular updates and additional information on the Company and its activities. Contents 01 Highlights 02 At a glance 04 Chairman’s statement 06 Operations review 10 Financial review 11 Resource summary 12 Environmental & Social Responsibility 14 Board of Directors 16 Directors’ report 18 Risk factors 23 Corporate governance statement 26 Report of the Remuneration Committee 28 Statement of Directors’ responsibilities 29 Independent audit report to the members of Ncondezi Coal Company Limited 30 Consolidated income statement 30 Consolidated statement of comprehensive income 31 Consolidated statement of financial position 32 Consolidated statement of changes in equity 33 Consolidated statement of cash flows 34 Notes to the consolidated financial statements 52 Company information Ncondezi Coal CompanyAnnual report and financial statements 2012 Highlights Project achievements 2012 H1 2013 ›› Decision›to›proceed›with›development›of›300MW› Power›Project ›› Ncondezi›transitioning›into›a›Power›Development›Company ›› Power›Framework›Agreement›signed›with›Ministry› ›› Positive›results›of›Power›DFS›published,›independently› of›Energy reviewed›by›STEAG ›› System›Optimisation›Study›completed ›› Power›Evacuation›Study›completed,›route›identified› and›aerial›surveillance›completed ›› Power›regulatory›process›initiated ›› JORC›resource›increased›to›4.7bt ›› Mine›DFS›Completed ›› Mine›Framework›Agreement›signed›with›Ministry› of›Mineral›Resources› ›› Mining›Concession›Application›lodged›with›Ministry› of›Mineral›Resources ›› Infrastructure›Agreement›with›Rio›Tinto›and›Minas› de›Revuboè›for›Ncondezi’s›future›export›grade› coal›production ›› Formal›endorsement›of›the›project›by›the› Mozambican›Government ›› EPC›preselection›process›commenced ›› Power›Purchase›Agreement›negotiations›commenced Corporate highlights ›› Board›and›senior›management›restructured›to› strengthen›team›with›power›expertise ›› Appointment›of›Paul›Venter›as›Executive›Director›and› Chief›Executive›Officer› ›› Appointment›of›Christiaan›Schutte›and›Peter›O’Connor› as›Non-Executive›Directors ›› Funded›for›current›project›activities›until›end›of›Q1›2014 ›› Cash›balance›US$12m,›as›at›31›December›2012 Southern African Power Pool DR Congo Tanzania Angola Malawi Zambia Zimbabwe MOZAMBIQUE Namibia Botswana Swaziland South Africa Lesotho 01 Overview 02Business review 04Corporate governance 15Financial statements 30 At a glance The need for power in Mozambique Ncondezi’s project is located in the Zambezi Coal Basin in the Tete Province, Mozambique. Songo Tete Objective Strategy Develop a credible, financeable power business in Mozambique with strong growth potential 02 Phased›development› minimises›capital›outlay › ›Realistic›in›current› market›conditions › Meets›existing›demand › Utilising›existing› transmission› infrastructure Maximise›Project›Returns › ›Unlock›value›through› delivery›of›project› milestones › ›Power›projects›generate› predictable›revenues › ›Project›finance›available › ›Achieve›attractive›project› IRRs›for›investment Phased›expansion›to› meet›growth› › ›Incremental›units›of› 300MW›units›optimal › ›Strong›demand›for›power › ›Well›positioned›to› capitalise›on›both›current› and›planned›transmission› infrastructure Cahora Bassa Hydro DamMOZAMBIQUEZAMBIALilongweMalawiQuelimaneUapeMomaPort of NacalaPembaNampulaCaiaMarromeuMutareZIMBABWEHararePort of Beira Towards Apollo (South Africa)Bindura95km to pillon supplyElectricity link to ZimbabweElectricity link to South AfricaThe Northern GridThe Central GirdNcondezi Coal CompanyAnnual report and financial statements 2012 Strongest energy demand outlook in the region Mozambique load growth: Medium forecast C A G R 2 0 1 6 – 2 0 2 6 : 4 % › % 0 6 : 2 1 0 2 – 1 1 0 R 2 G A C MW 2,500 2,000 1,500 1,000 500 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Source: Transmission Grid Consulting Regional focus › Established›regional›energy›player› › Second›largest›generator›in›SAPP› › Largest›exporter›to›South›Africa› › Largest›%›energy›demand›growth›in›southern›Africa› › Accelerating›electrification›and›access›to›electricity›is›› a›strategic›imperative›for›Government › Higher›tariffs›trend›in›region›supports›viability›of›IPP›projects,› up›to›50%›increase›in›SAPP › Track›record›of›recent›power›projects› › Only›20%›of›Mozambique›electrified Benefits 300MW integrated mine & power plant project Open pit mine ›› ›+25›year›coal› supply›to›power› plant ›› ›1.2Mtpa›operation ›› ›Truck›and›shovel› mining ›› ›Low›strip›ratios ›› ›DFS›complete ›› ›Mining›licence› application›lodged ›› ›ESIA›due›H1›2013 Power plant ›› ›Proven›CFB1› technology ›› ›Access›to›water ›› ›10km›to›mine ›› ›DFS›complete ›› ›Peer›review› complete ›› ›20%›IRR ›› ›Framework› Agreement›with› MoE2›signed ›› ›ESIA›due›H1›2013 Transmission ›› ›Access›to› Mozambican›grid ›› ›90km›grid› connection ›› ›Evacuation›Study› completed ›› ›MoE2›approval›of› connection›route ›› ›ESIA›due›H2›2013 Footnotes›› 1:››Circulating›Fluidised› Bed›technology. 2:›Ministry›of›Energy. › Closelyalignedto Government electrificationpolicy › Onlydedicatedcoalfired powerplantprojectin Mozambique › Providessustainable powergenerating capacity › Firstphase100%focused onmeetinglocaldemand › Directandindirectjob creationandskills transfer&training › Contributortolocal, nationalandregional development › Improvinglocal Mozambicans'quality oflife 03 Overview 02Business review 04Corporate governance 15Financial statements 30 Business review Chairman’s statement The›Mozambican›Government›is›keen›to› capitalise›on›this›position›and›further› expand›on›its›role›as›an›important›regional› energy›player.›Key›Government›priorities› are›to›increase›electrification›of›the› country,›currently›at›just›20%,›and›to› develop›regional›electricity›generation›and› transmission›infrastructure.›The›country› has›already›secured›the›backing›of›the› World›Bank›and›European›Investment›Bank› to›develop›local›power›projects.›The› Ncondezi›Project›is›closely›aligned›with›the› Government’s›vision.› During›the›second›half›of›2012,›Ncondezi› successfully›completed›Definitive› Feasibility›Studies›(“DFS”)›on›both›its›mine› and›power›projects,›which›confirmed›the› technical›viability›and›economic›robustness› of›the›proposed›projects.›However,›since› initiating›the›Mine›DFS›in›Q3›2010,›the› macro-economic›environment›has›changed› considerably.›Seaborne›thermal›coal›prices› have›weakened›significantly›and›there›are› capital›constraints›for›large,›greenfield› mine›development›projects.›The›developing› coal›basin›around›Tete›has›not›been› immune›to›these›changes›and›the›large,› capital›intensive›export›rail›and›port› infrastructure›projects,›primarily›for›coking› coal›projects,›are›developing›much›more› slowly›than›originally›envisaged. Ncondezi›believes›the›power›opportunity› for›the›Company›is›much›more›attractive.› Adopting›a›phased›development›approach› will›deliver›a›more›achievable,›prudent›and› financeable›path›to›production›than›the› immediate›development›of›a›larger›scale,› higher›capital›intensive›project›as›defined›in› the›Mine›DFS,›which›is›reliant›on›third›party› rail›and›port›infrastructure›development›for› project›operations›to›begin.›Therefore› production›of›an›export›thermal›coal› product›with›associated›capital›expenditure› is›an›option›that›will›be›initiated›only›when› rail›and›port›infrastructure›in›Mozambique› has›sufficiently›advanced.› Ncondezi›is›focused›on›developing›a›base› load›power›plant›and›open›pit›mine›in› phases›of›300›megawatts›(“MW”),›up›to› 1,800MW.›Development›of›the›first›300MW› phase›("300MW›Project")›is›under›way›and› is›targeting›domestic›consumption›in› Mozambique›using›existing›transmission› capacity›to›meet›current›demand.›The›power› plant›is›expected›to›be›commissioned›and› generate›electricity›during›2017.›The› subsequent›roll›out›of›additional›300MW› units›will›be›phased›to›meet›the›projected› growth›in›both›transmission›capacity›and› power›demand›within›Mozambique›and› the›SAPP.› The›300MW›Project›is›expected›to›be›cost› competitive›with›other›sources›of›energy›in› the›southern›African›region.›It›has›unique› advantages›over›other›potential›power› projects›in›the›region›as›it›is›scalable,› has›security›of›fuel›supply›and›can›be› implemented›within›a›24–36›month› timeframe,›utilising›existing›infrastructure› and›transmission›capacity›to›supply›power› to›both›domestic›and›export›markets. Power›plant›projects›are›stable›businesses› as›they›enter›into›long-term›power›offtake› agreements,›usually›for›20–25›years›which› generate›predictable›cash›flows.›Financing› power›projects›is›more›straightforward,› compared›to›greenfield›mine›development› projects,›as›they›can›support›higher›levels› of›debt›financing,›typically›in›the›region›of› 70%–85%.› Ncondezi›has›started›to›explore›a›number› of›potential›funding›options›for›the› development›of›the›300MW›Project.›The› majority›of›the›Project›is›expected›to›be› funded›by›debt,›with›an›equity›contribution› of›between›15%–30%›of›the›Project›cost.› The›equity›contribution›will›only›be›required› at›the›very›end›of›the›development›stage,› when›the›project›has›been›largely›de-risked› with›all›the›key›commercial›agreements› signed›and›potentially›monetised›with›the› debt›financing›in›place.› Ncondezi’s›immediate›focus›for›the›coming› year›is›to›negotiate›the›key›commercial› agreements›for›the›300MW›Project,›namely› the›Power›Purchase,›the›Power› Concession,›the›Coal›Supply›and›the› Transmission›Access›agreements,›and›to› optimise›the›capital›expenditure›for›the› integrated›300MW›power›plant›and›mine. Despite›the›Company's›share›price›under› performance›over›the›past›year,›in›line›with› many›junior›mining›companies,›achievement› of›these›key›project›milestones›will›present› share›price›catalysts›as›the›300MW› Project›is›systematically›de-risked.› Equity›contributions›will›be›supported›by› engineering,›procurement›and›construction› ("EPC")›firms›and›operator›and›maintenance› contractors’›equity›contributions,›further› reducing›the›total›equity›requirement.›As› part›of›the›potential›funding›options,›the› Company›has›already›initiated›discussions› Michael Haworth Non‑Executive Chairman Dear›Shareholder, 2012›was›a›pivotal›year›for›the›Company,›as› it›transitioned›from›a›coal›explorer›to›an› emerging›power›developer.›Following›the› completion›of›the›technical›studies,›which› confirmed›the›viability›of›the›Company’s› project›in›Mozambique,›the›Board›took›the› decision›to›proceed›with›the›phased› development›of›an›integrated›thermal›coal› power›plant›and›mine›(the›“Ncondezi›Project”).› Opportunities›for›independent›power› producers›(“IPPs”)›in›southern›Africa›have› opened›up›as›the›region›struggles›to›meet› the›demand›for›power.›The›liberalisation›of› the›South›African›power›market,›the› continent’s›largest,›as›well›as›the›recent› increases›in›power›tariffs›have›combined›to› make›IPP›projects›financially›attractive›in› the›southern›African›region.› Mozambique›is›uniquely›positioned›with›an› established›and›successful›history›of› generating›and›exporting›power.›The› country›is›strategically›located›bordering› South›Africa,›Zimbabwe,›Zambia,›Malawi› and›Tanzania,›all›of›which›require›additional› power.›It›is›the›largest›exporter›of›power›to› South›Africa,›a›key›member›of›the›South› African›Power›Pool›(“SAPP”)›and›is› currently›the›fastest›growing›electricity› market›in›southern›Africa. 04 Ncondezi Coal CompanyAnnual report and financial statements 2012 with›a›number›of›potential›equity›partners,› ranging›from›private›equity›groups,›African› focused›funds,›IPPs,›project›development› investors›and›power›developers›who›have›all› indicated›an›appetite›for›the›300MW›Project.› 2013›has›started›on›a›highly›encouraging› note›with›the›signing›of›the›Power› Framework›Agreement.›This›is›formal› endorsement›for›the›Project›by›the› Mozambican›Government›and›gives› Ncondezi›the›exclusive›mandate›to› negotiate›a›power›offtake›(also›known›as› the›Power›Purchase›Agreement)›with›the› state›owned›utility›company,›Electricidade› de›Mozambique›(“EdM”)›as›well›as›regional› power›offtakers.›The›application›for›a› Mining›Concession›has›also›been›submitted› and›the›Company›expects›to›receive›it› during›Q3›2013. As›part›of›this›transformation›from›mining› to›power,›we›have›implemented›Board›and› management›changes›and›are›proposing›a› Company›name›change›to›Ncondezi›Energy› Limited,›which›more›accurately›represents› the›nature›of›the›business.›A›resolution›to› propose›the›Company›name›change›will›be› tabled›at›this›year’s›Annual›General›Meeting.› This›year›the›Board›and›management›team› have›been›strengthened›with›power› expertise.›Following›the›successful› completion›of›all›the›mining-related› geological,›technical›and›feasibility›study› work,›Nigel›Walls›decided›it›was›time›to› move›on›from›his›position›as›Chief› Executive›Officer›and›hand›the›reins›over› to›Paul›Venter.›Paul›was›appointed›Chief› Operating›Officer›in›June›last›year›and›has› been›responsible›for›the›Company’s›power› strategy›and›delivering›the›project’s› power-related›milestones›to›date.›He›has› a›wealth›of›coal-fired›power›generation› experience›with›over›30›years›in›the› industry›and›has›worked›for›power› generation›companies›and›independent› power›producers›in›South›Africa,›Russia,› China›and›Mongolia.› The›Company›also›recently›appointed› two›Non-Executive›Directors,›Peter› O’Connor›and›Christiaan›Schutte.›They› bring›with›them›a›significant›amount›of› power›expertise›in›both›generation›and› transmission›in›southern›Africa›that›will› be›invaluable›as›the›300MW›power›project› progresses›through›the›development›stage› and›project›funding›phases. I›would›like›to›take›this›opportunity›to›thank› Nigel›Walls›and›Colin›Harris,›who›recently› resigned›as›a›Non-Executive›Director,›for› their›valuable›contribution›guiding›the› project›over›the›past›few›years›through›the› exploration›and›feasibility›study›stages›to› its›current›development›phase.›I›would›also› like›to›thank›my›fellow›Board›members,›the› Ncondezi›staff›and›project›consultants›for› their›hard›work›over›the›past›year,›which›has› been›a›particularly›intensive›period›with›two› concurrent›feasibility›studies›to›complete. Looking›ahead,›I›believe›Ncondezi›is›well› placed›to›achieve›its›objectives›for›the›year.› The›Company›has›an›experienced›team›in› place›that›has›the›necessary›power› expertise›and›strong›relations›with›the› Mozambican›government.›Turning› Mozambique’s›coal›resources›into› electricity›provides›Shareholders›with›a› more›attractive›business›proposition›in› the›current›climate.›The›300MW›Project› will›also›deliver›significant›benefits›to›local› communities,›as›well›as›the›country›as› a›whole›through›job›creation,›supporting› economic›development›and›providing› Mozambique›with›long-term› sustainable›power. Tariff increases in the last two years 0% 10% 20% 30% 40% 50% South Africa Mozambique Botswana Zambia Tanzania Key Milestones H2 2012 Power›&›Mine›DFSs›completed H1 2013 Power›Framework›Agreement›signed› H2 2013 Mine›Concession›expected› H2 2014 Power›Purchase›Agreement›signed H1 2015 Mine›Construction›targeted H1 2016 Power›Plant›construction›targeted› 2017 Power›Plant›commissioned Southern African Power Pool DR Congo Tanzania Malawi Angola Zambia Zimbabwe Botswana MOZAMBIQUE Namibia Swaziland South Africa Lesotho Major network and direction of flow Minor network and direction of flow 05 Overview 02Business review 04Corporate governance 15Financial statements 30 Business review Operations review Ncondezi project Building›an›exciting›power›business›in› Mozambique›with›strong›growth›potential› through›the›phased›development›of›an› integrated›open›pit›mine›and›power›plant. 2012 in Review During›the›course›of›the›year,›Ncondezi› completed›all›the›major›technical›study› work›on›the›Ncondezi›Project,›including› two›DFSs›on›power›and›mine›projects› and›announced›an›upgraded›resource› statement,›in›accordance›with›JORC.› Based›on›the›outcomes›of›the›feasibility› studies,›Ncondezi›has›decided›to›proceed› with›the›development›of›an›integrated,›long› life,›thermal›coal›power›plant›and›open› pit›mine›in›phases›of›300MW›units,›up› to›1,800MW.› Development›of›the›first›300MW›phase› is›under›way›and›is›targeting›domestic› consumption›in›Mozambique›using›existing› transmission›capacity›to›meet›current› demand.›The›power›plant›is›expected›to› be›operational›and›generate›electricity› during›2017.› The›subsequent›roll-out›of›additional› 300MW›units›will›be›phased›to›meet›the› projected›growth›in›both›transmission› capacity›and›power›demand›within› Mozambique,›as›well›as›the›SAPP.› The›power›plant›is›expected›to›be›cost› competitive›with›other›sources›of›energy› in›the›southern›African›region. Production›of›an›export›thermal›coal› product›and›associated›capital›expenditure› will›be›initiated›only›when›rail›and›port› infrastructure›in›Mozambique›is› sufficiently›advanced. The 300MW Project In›September›2012›Ncondezi›published› the›results›of›a›Power›DFS›by›Parsons› Brinckerhoff,›a›leading›provider›of› engineering›and›project›management› services›to›the›global›power›and›energy› market,›which›confirmed›the›economic›and› technical›viability›of›an›1,800MW›thermal› coal›fired›power›plant,›to›be›built›in› phases›of›300MW.›The›Power›DFS›was› independently›verified›by›STEAG,›one›of› Germany’s›largest›electricity›producers. 06 Ncondezi Coal CompanyAnnual report and financial statements 2012 Ncondezi’s vision is to become the power developer of choice in Mozambique. Power plant location The›proposed›site›for›the›power›plant›is› approximately›5km›from›the›planned›open› pit›coal›mine›and›approximately›90km›from› existing›power›transmission›infrastructure.› The›location›will›reduce›the›costs›of›coal› transportation›and›is›at›a›safe›distance› from›the›mining›areas›to›minimise›any› impact›of›mine›blasting›operations. Captive fuel supply The›power›plant›will›have›a›captive›fuel› supply.›The›mine›will›comprise›a›2›million› tonnes›per›annum›(“Mtpa”)›run-of-mine› (“ROM”)›open›pit›mining›operation›with›an› average›strip›ratio›of›1.0›(tonne›to›tonne)› producing›1.2Mtpa›of›17MJ/kg›(NAR)› domestic›grade›thermal›coal›product›at› an›average›yield›of›+55%›for›supply›to›a› 300MW›mine›mouth›power›plant›over›a›25› year›life.›The›Ncondezi›Project›has›a›coal› resource›of›over›4.7bt›(reported›in› accordance›with›JORC)›which›is›more›than› sufficient›to›supply›up›to›an›1,800MW›power› plant›over›25›years. Technology and technical information The›power›plant›will›be›a›base›load› electricity›provider,›using›Circulating› Fluidised›Bed›(“CFB”)›technology,›and›is› expected›to›operate›at›an›82%›load›factor.› CFB›is›proven›technology›and›has›been› selected›as›it›is›better›suited›to›the›quality› and›composition›of›the›domestic›grade›coal› (compared›to›Pulverised›Fuel›technology),›it› has›proven›unit›capacity,›with›a›number›of› units›successfully›operating›worldwide,›and› it›has›low›NOx›and›SOx›emissions.›The›low› emissions›will›ensure›compliance›with›the› Government›of›Mozambique’s›requirements› for›air›quality,›as›well›as›meet›the›World› Bank›and›IFC’s›standards›for›emissions› from›coal›fired›power›plants.› The›size›of›each›generating›unit›is›currently› envisaged›to›be›300MW›as›it›offers›the›best› efficiency›capability›of›CFB›technology,›the› best›capital›expenditure›per›kilowatt›(“US$/ kW”)›option›and›the›ability›of›the›existing› power›grid›to›absorb›and›evacuate›power. Each›300MW›power›block›will›comprise› a›steam›generator,›a›steam›turbine›and› generator,›a›wet›type›of›cooling›condenser› system›and›electrostatic›precipitators.›The› cooling›system›is›proposed›to›include›wet› mechanical›draft›cooling›towers,›which›will› enable›the›units›to›operate›at›higher› thermal›efficiency.›A›hydrological›study›has› been›completed,›confirming›there›is› sufficient›cooling›water›available›and›a› water›optimisation›study›is›now›under›way. Power transmission and evacuation The›power›plant›site›will›be›located› approximately›90km›from›EdM’s›northern› grid›high›voltage›network.›System› optimisation›and›power›evacuation›studies› were›completed›during›2012›and›confirmed› that›there›is›both›current›transmission› capacity›and›demand›for›the›first›300MW› phase,›as›well›as›forecast›demand›and› transmission›growth›projects›for›the› entire›1,800MW. The›first›phase›is›focused›on›meeting› current›domestic›demand›in›the›Northern› grid.›Of›the›first›300MW,›250–270MW›is› expected›to›be›supplied›to›EdM›via›the› construction›of›a›new›400kV›transmission› line›linking›the›power›plant›to›the›Northern› grid,›at›an›estimated›cost›of›US$50m.›The› balance›of›the›electricity›is›expected›to›be› consumed›by›the›power›plant›and›mine.› A›power›evacuation›feasibility›study›and› accompanying›Environmental›Social›Impact› Assessment›have›commenced›and›the› power›evacuation›aerial›surveillance›route› has›already›been›flown.›These›studies›are› due›for›publication›during›the›second›half› of›2013.› Permitting The›permitting›process›for›the›300MW› Project›has›already›commenced.›A›Mine› Framework›Agreement›was›signed›during› Q2›2012›with›the›Ministry›of›Mineral› Resources.›This›was›followed›by›an› application›for›a›Mining›Concession,›upon› completion›of›the›Mine›DFS,›in›December› 2012.›The›Mining›Concession›is›a›key› prerequisite›to›commencing›construction› and›mining›operations›and›it›is›expected›to› be›issued›during›Q3›2013. Work›on›the›power›regulatory›process›was› initiated›during›H2›2012,›with›the›Company› engaging›with›a›number›of›government› officials›across›key›government› departments,›including›the›Ministry›of› Energy›and›EdM.›Quick›progress›has›been› made›and›the›Power›Framework› Agreement›(“PFA”)›was›signed›in›April›2013.› 07 Overview 02Business review 04Corporate governance 15Financial statements 30 Business review Operations review continued Capital expenditure Capital›expenditure›estimates›and› operating›costs›for›the›integrated›300MW› Project›are›being›optimised,›as›the›Mine› DFS›capital›expenditure›projections›were› based›on›a›larger›mining›operation› producing›both›domestic›and›export› grade›products.› Current›estimates›indicated›that›the› 300MW›power›plant›requires›US$504m› of›capital›expenditure›over›a›24–36›month› construction›period›and›meets›the› +20%›IRR›hurdle›requirements›for› infrastructure›projects.› Excluding›an›export›coal›component›in›the› first›phase›of›the›mine's›development›has› presented›a›number›of›cost›saving› opportunities›through›smaller›mining›and› equipment›requirements›and›higher› average›product›yields.›Ncondezi›has›been› exploring›a›number›of›options›to›minimise› capital›outlay›and›operating›costs›further› during›H1›2013,›including›assessing› contractor›versus›owner-operated›mining› and›evaluating›the›detailed›quotes›from› EPC›firms›based›on›the›power›plant› Minimum›Functional›Specifications,›which› have›been›distributed›for›quotation. The›PFA›is›formal›endorsement›by›the› Mozambican›Government›of›Ncondezi's› Power›Project›and›is›a›key›milestone.›The› Agreement›provides›an›exclusive›platform› from›which›to›negotiate›the›key› commercial,›financial,›legal›and›local› participation›parameters›of›the›Project.› Power offtake and key commercial agreement Work›streams›to›progress›the›power›plant› project›towards›a›fully›financeable›project› have›commenced.›Ncondezi›is›targeting› EdM›as›the›main›offtaker›for›the›first› 300MW.›EdM›is›an›ideal›customer›as›it›can› readily›absorb›power›today,›it›has›existing› transmission›capacity›and›there›is›current› demand,›with›strong›growth›potential.› Negotiations›have›commenced›with›EdM,› beginning›with›Heads›of›Terms›for›a›Power› Purchase›Agreement›(“PPA”)›and›are› expected›to›be›concluded›by›Q4›2013.› Ncondezi›expects›to›sign›the›final›PPA› in›H2›2014›and›is›targeting›a›competitive› electricity›tariff. Heads›of›Terms›on›the›Coal›Supply› Agreement›are›well›advanced›and›are›also› expected›to›be›completed›by›Q4›2013.›The› Agreement›will›be›conducted›at›arm’s› length›and›on›commercial›terms›with› a›minimum›duration›of›25›years.› 08 Construction and timeline The›300MW›power›plant›is›targeting› commercial›operation›in›2017.›Based›on› industry›experience,›the›Company›has› forecast›a›construction›period›of›between› 24›to›36›months,›depending›on›the›selected› EPC›firm.›The›mine›construction›is› expected›to›take›24›months,›with›first› production›targeted›in›2016,›in›order›to› stockpile›coal›supply›for›the›power›plant. Power›Plant›Minimum›Functional› Specifications›have›been›distributed›to› selected›EPC›firms›for›tender›and›to›obtain› more›accurate›capital›expenditure›quotes.› Indicative›proposals›are›expected›during› Q2›2013,›after›which›a›short›list›of› preferred›EPC›bidders›will›be›invited›to› submit›binding,›detailed›bids›during›H2› 2013.›The›binding›bids›will›play›a›key›role› in›completing›the›PPA›and›project›funding. Project funding Ncondezi›plans›to›develop›the›Project›in› partnership›with›a›power›plant›developer› and›operator.›As›a›base›load›electricity› provider,›the›power›plant›is›expected›to› generate›a›consistent›and›stable›revenue› stream›and›the›Company›has›received› strong›indications›of›the›potential› availability›of›project›finance,›ranging› from›70%›to›85%›debt›financing.› It›is›envisaged›that›potential›participation› could›include›corporate›and/or›project› equity,›offtake›and/or›financing›and› construction›capabilities. Ncondezi›is›exploring›a›range›of›options› and›opportunities›regarding›strategic› investors›participating›in›the›300MW› Project.›These›potential›strategic›investors› range›from›strategic›partners›(IPPs,›EPCs,› O&Ms)›infrastructure›and›emerging›market› funds›and›local›Mozambican›companies. Ncondezi Coal CompanyAnnual report and financial statements 2012 Roadmap to implementation Key Work Streams for 300MW Project Power›Framework›Agreement› with›MoE Integrated›300MW›Project›refined› capital›expenditure›estimate› Coal›supply›agreement Heads›of›Terms›Power Purchase›Agreement Commence›Power›Plant› Detailed›Engineering H1›2013 H1›2013 H2›2013 H2›2013 H2›2013 Commence›Power›Plant›Financing H2›2013 Selection›of›Owners›Engineer H2›2013 Selection›of›Operator›&› Maintenance›Contractor Selection›of›Power›Plant› EPC›Contractor H1›2014 H1›2014 Finalise›300MW›Bankable› Power›Purchase›Agreement H2›2014 Mine›Construction Power›Plant›Construction Mine›Commissioning Power›Plant›Commissioning H1›2015 H1›2015 2016 2017 Ncondezi Export Coal Project Since›initiating›the›Mine›DFS›in›Q3›2010,› which›envisaged›a›large›scale,›long›life› mining›operation›producing›export›grade› coal›products,›the›macro-economic› environment›has›changed›considerably› and›seaborne›thermal›coal›prices›have› weakened›significantly.›The›developing›coal› projects›around›Tete›have›not›been›immune› to›these›changes›and›the›large,›capital› intensive›export›rail›and›port›infrastructure› projects,›primarily›for›coking›coal›projects,› have›developed›more›slowly›than› originally›envisaged.› Whilst›the›Mine›DFS›confirmed›the› capability›of›a›large›scale,›long›life,›open›pit› mining›operation›producing›both›domestic› and›export›grade›coal›products,›Ncondezi› has›decided›to›proceed›with›the› development›of›its›power›project.› Production›of›an›export›thermal›coal› product›and›associated›capital›expenditure› will›be›initiated›only›when›rail›and›port› infrastructure›in›Mozambique›has› sufficiently›advanced.›This›approach›has› the›dual›benefit›of›a›reduction›in›the› start-up›capital›outlay›for›the›mine›and› reduces›Ncondezi’s›reliance›on›third›party› rail›and›port›infrastructure›development› for›project›operations›to›begin. Transport infrastructure agreement In›early›2012,›Ncondezi›signed›an› agreement›with›Rio›Tinto›Coal›Mozambique,› a›wholly›owned›subsidiary›of›Rio›Tinto›plc› ("Rio›Tinto"),›and›Minas›de›Revuboè.›The› Agreement›entitles›Ncondezi›to›an›export› allocation›on›the›Integrated›Transport› Development›Project›(“ITD›Project”),›which› is›a›greenfield›rail›and›port›project,›for›its› planned›export›coal›production. The›ITD›Project›is›under›Feasibility›Study,› which›is›being›led›by›Rio›Tinto.›The›ITD› Project›represents›a›scalable›solution›with› the›potential›to›provide›coal›export›capacity› of›between›25Mtpa›and›100Mtpa,›as›well›as› provide›broader›economic›and›social› benefits›to›the›people›and›agricultural› industries›of›Zambezia›Province.›The›ITD› Project›has›the›potential›to›be›a›low›cost› rail›transport›option›for›exporting›coal›from› the›Tete›Province,›as›it›is›expected›to›be›the› shortest›rail›distance›to›port›and›would› utilise›new›and›modern›infrastructure› to›maximise›economies›of›scale. Under›the›terms›of›the›Agreement,› Ncondezi›is›not›required›to›contribute› capital›to›the›ITD›Project›feasibility›study› or›development›capital›costs,›however› Ncondezi›will›have›the›option›to›negotiate› take-or-pay›agreements›with›the›ITD› Project›operator›once›a›decision›has›been› made›to›implement›and›develop›the› ITD›Project. Summary of Mine DFS The›Mine›DFS›was›independently›prepared› by›TWP›Holdings›(Pty)›Ltd›and›confirmed› the›large›scale,›long›life›operational› capability›of›an›integrated›mine›and›power› operation.›The›Mine›DFS›envisaged›an›open› pit,›truck›and›shovel›mining›operation› supplying›domestic›grade›coal›to›an› 1,800MW›mine›mouth›power›station›and› producing›export›grade›thermal›coal›over› a›25›year›life›of›mine›from›only›two›of›the› six›resource›blocks›on›the›Ncondezi›Project› license›area.› The›Mine›DFS›scope›was›designed›to› demonstrate›the›mine›could›support›up› to›an›1,800MW›power›plant,›ramped›up› in›phases,›with›a›25›MJ/kg›(NAR)›export› thermal›coal›product›produced›as›a› secondary›product.›However,›as›there›are› currently›rail›and›infrastructure›limitations› for›the›export›grade›product,›Ncondezi›is› focusing›on›developing›a›much›smaller› mining›operation›to›produce›only›domestic› grade›coal›to›supply›the›power›plant›in›the› short›to›medium›term. Drilling programme and resource upgrade During›the›first›half›of›2012›an›infill›drilling› resource›definition›programme›was› conducted›on›the›license›areas›to›improve› resource›classification,›resulting›in›4,063m› of›additional›drilling›and›bringing›the›total› number›of›metres›drilled›to›over›75,492m.› A›total›of›36›HQ3›cored›boreholes›were› drilled›during›the›campaign.›Previous› geological›modelling›and›resource› estimation›identified›six›discrete›resource› blocks›within›the›Ncondezi›Project›area› that›contained›coal›at›depths›amenable› to›opencast›mining.›These›blocks›are›the› North,›South,›Central,›East,›West›and› River›Blocks.› During›the›Mine›DFS,›optimisation›studies› were›conducted›on›the›North,›South,›East› and›Central›Blocks›and›based›on›these› findings›detailed›mine›design›were› conducted›for›the›North›and›South›Blocks.› These›two›blocks›contain›some›1,206›MTIS› (mineable›tonnes›in›situ)›of›which›62%›is› classified›as›Indicated›Resources›and›the› remaining›38%›as›Inferred.›The›Company’s› geological›consultants,›The›Mineral› Corporation›(Pty)›Ltd,›produced›JORC› compliant›resource›estimations›for›all›the› resource›blocks›and›these›calculations› were›updated›in›Q4›2012›with›the›newly› acquired›data›obtained›by›the›2012› drilling›programme. Social and environmental ERM›and›Impacto›have›been›appointed›to› conduct›the›Mine›Environmental›and›Social› Impact›Assessments›(“ESIA”),›alongside› Parsons›Brinckerhoff›and›Impacto›for›the› power›plant›ESIA.›Work›progressed›well› during›the›year,›with›no›fatal›flaws› discovered.›Extensive›community› engagement›has›been›conducted›with› positive›responses.›The›ESIAs›are›due› for›completion›during›Q3›2013. 09 Overview 02Business review 04Corporate governance 15Financial statements 30 Business review Financial review Outlook The›Directors›have›reviewed›future›cash› forecasts,›with›particular›reference›to› minimum›expenditure›requirements›on›the› licences›and›the›intended›work›programme› for›the›300MW›Project›for›2013,›which›is› focused›on›advancing›negotiations›on›the› key›commercial›agreements,›including› signed›Heads›of›Terms›by›year›end.› The›Group›has›sufficient›funding›to›finance› its›activities›through›to›March›2014.›The› Directors›are›in›negotiations›with›a›number› of›parties›in›respect›of›raising›further›funds› to›continue›with›the›power›plant› development›programme.›Whilst›progress› is›being›made›on›a›number›of›potential› transactions›that›would›provide›additional› financing,›at›present›there›are›no›binding› agreements›in›place.› Based›on›the›current›progress›of› negotiations›with›potential›providers›of› finance›and›discussions›with›potential› investors,›the›Directors›believe›that›the› necessary›funds›to›provide›adequate› financing›to›continue›the›power›plant› development›programme›will›be›raised›as› required.›Accordingly›they›are›confident› that›the›Group›will›continue›as›a›going› concern›and›have›prepared›the›financial› statements›on›that›basis. Manish Kotecha Chief Financial Officer Results from operations The›Group›made›a›loss›after›tax›for›the›year› of›US$8.6m›compared›to›a›loss›of›US$7.0m› for›the›previous›financial›year.›The›basic› loss›per›share›for›the›year›was›7.1›cents› (2011:›5.9›cents). Administrative›expenses›totalled›US$8.6m› (2011:›US$11.1m).›This›included›a›share- based›payments›charge›of›US$1.3m›(2011:› US$2.6m),›impairment›of›exploration›costs› of›US$Nil›(2011:›US$0.7m)›and›research› expenses›of›US$Nil›(2011:›US$1.3m).› Financial position The›Group’s›statement›of›financial›position› at›31›December›2012›and›comparatives›at› 31›December›2011›are›summarised›below: Non-current›assets Current›assets Total›assets Current›liabilities Total›liabilities Net›assets 2012 US$’000 2011›› US$’000 41,409 15,064 56,473 2,687 2,687 53,786 31,155 33,423 64,578 3,499 3,499 61,079 The›movement›in›non-current›assets›of› US$10.2m›was›largely›due›to›an›increase›in› intangible›assets›of›US$10.5m›and›tangible› assets›of›US$0.1m›and›resulted›from›the› continued›development›of›the›Ncondezi› Project,›these›were›reduced›by›a› depreciation›charge›for›the›year›of› US$0.3m. The›decrease›in›current›assets›of› US$18.4m›is›attributable›to›a›decrease›in› cash›and›cash›equivalents. Cash flows The›net›cash›outflow›from›operating› activities›for›the›year›was›US$8.6m› (2011:›US$9.3m). Net›cash›used›in›investing›activities›was› US$9.7m›(2011:›US$15.1m),›including› amounts›of›US$0.1m›for›property,›plant›and› equipment›(2011:›US$1.0m)›and›US$9.7m›on› exploration›activities›(2011:›US$14.2m)› incurred›on›the›Ncondezi›Project. The›resulting›year›end›cash›and›cash› equivalents›held›totalled›US$12.0m› (2011:›US$30.4m).› 10 Ncondezi Coal CompanyAnnual report and financial statements 2012 Business review Resource summary High›Volatile Low›Volatile Sub-Total Resource›Category Indicated Inferred Indicated Inferred Indicated Inferred Total Indicated›&›Inferred High›Volatile Low›Volatile Sub-Total y r a m m u S Resource›Category Indicated Inferred Indicated Inferred Indicated Inferred Total Indicated›&›Inferred GTIS TTIS MTIS Mt 867 Mt Mt 772.8 742.5 3,605.20 3,035.80 2,367.40 819.5 264.8 737.6 225.1 723.9 172.8 1,686.50 1,510.40 1,466.40 3,870.00 3,260.90 2,540.10 5,556.60 4,771.30 4,006.50 RD 1.85 1.94 1.91 1.92 1.88 1.94 1.92 Raw›Coal›Qualities›(air-dried›basis) IM›(%) Ash›(%) VM›(%) FC›(%) CV›(MJ/kg) 1.4 1.9 1.9 1.8 1.7 1.9 1.8 53.5 57.7 51.8 52.1 52.7 57.4 55.6 18.1 18.6 7.5 7.6 12.9 17.8 16 27 21.9 38.7 38.5 32.8 23 26.6 13.83 11.79 12.73 12.78 13.29 11.86 12.38 17›MJ/kg›Domestic›Product TS›(%) 1.01 1 0.88 0.83 0.94 0.99 0.97 Resource›Category Yield›(%) IM›(%) Ash›(%) VM›(%) FC›(%) CV›(MJ/kg) TS›(%) High›Volatile Low›Volatile Sub-Total Indicated Inferred Indicated Inferred Indicated Inferred Total Indicated›&›Inferred 71.3 62.6 71.7 70.8 71.5 63.2 66.2 1.4 2 1.9 1.8 1.6 1.9 1.9 44.4 44.7 42.6 42.5 43.5 44.6 44.2 20.5 22.2 9.1 9 14.9 21.2 18.9 33.7 31.1 46.4 46.7 40 32.3 35.0 17.61 17.07 17.29 17.41 17.45 17.09 17.22 1.09 1.13 1.01 0.98 1.05 1.12 1.09 Notes: –› ›Indicated›resources›were›defined›within›areas›where›the›spacing›of›boreholes›with›raw›coal›quality›data›is›approximately›500›metres.›Extrapolation›of›these›areas›was›limited› to›approximately›250›metres. –› ›Inferred›resources›were›defined›within›areas›where›the›spacing›of›boreholes›with›raw›coal›quality›data›is›approximately›2,000›metres.›Extrapolation›of›these›areas›was› limited›to›approximately›1,000›metres. –› ›GTIS›(Gross›Tonnage›in›situ)›figures›represent›the›entire›classified›resource›for›the›block,›below›the›observed›limit›of›weathering,›with›application›of›a›0.5›metre›minimum›ply› thickness›cut-off,›but›no›depth›restriction. –› ›In›the›Central›Block,›classified›resources›reach›approximately›400›metres›depth;›in›the›North›Block›600›metres;›in›the›South›and›West›Blocks›300›metres,›in›the›East›Block› 330›metres›and›in›the›River›Block›500›metres. –› ›TTIS›(Total›Tonnage›in›situ)›figures›for›high›and›low›volatile›coals›were›calculated›from›the›GTIS›tonnage›by›applying›Geological›Losses.›The›losses›applied›were›generally› 10%›for›Indicated›resources›and›15%›for›Inferred›resources.›In›the›Central›Block,›these›were›increased›to›15%›and›20%›respectively. –› ›MTIS›(Mineable›Tonnage›in›situ)›figures›represent›that›part›of›the›TTIS›which›exists›above›a›depth›of›250›metres. –› ›All›qualities›are›quoted›on›an›air-dried›basis. –› ›Product›yields›are›theoretical›yields›for›+0.5mm›material›derived›from›slim›core›samples. –› ›For›the›Central,›North,›South›and›East›Blocks,›ply›thicknesses›were›weighted›against›MTIS›coal›seam›area›to›obtain›average›resource›ply›thicknesses.›Thicknesses›for› the›River›and›West›Blocks›are›not›incorporated›in›the›"Summary"›table›average›ply›thickness›as›plies›have›not›been›defined›in›those›blocks. –› ›In›the›case›of›the›West›and›River›Blocks,›average›cumulative›coal›thickness›was›weighted›against›MTIS›coal›seam›area›to›obtain›the›average›resource›cumulative› coal›thickness. –› ›RDs›were›weighted›against›MTIS›coal›volume›to›obtain›average›resource›RDs. –› ›Raw›qualities›and›product›yields›were›weighted›against›MTIS›tonnage›to›obtain›average›yields. –› ›Product›qualities›were›weighted›against›wash›yield›and›MTIS›tonnage›to›obtain›average›resource›qualities. –› ›Low›Volatile›coals›have›been›devolatilised›by›igneous›intrusions.›Studies›by›Ncondezi›indicate›that›these›coals›may›be›suitable›for›power›generation. –› ›Low›volatile›coals›are›not›common›in›the›Central,›West›and›River›Blocks›and›have›been›excluded›from›resources. –› ›The›Central,›North,›South›and›East›Block›models›comprise›detailed›ply›models›suitable›for›mine›planning›purposes.›The›West›and›River›Block›models›utilise›a›cumulative› coal›thickness›methodology›that›is›appropriate›only›to›the›classification›of›Inferred›Resources. –› ›As›hydrological›studies›have›not›yet›been›finalised,›no›allowance›has›been›made›for›potential›sterilisation›of›resources›below›the›limits›of›the›Ncondezi›or›Revuboe›Rivers'› flood›lines.›This›could›affect›resources›in›the›Central,›North,›West›and›River›Blocks. –› ›Certain›amounts›of›averaged›"control"›data›were›included›in›the›quality›database,›particularly›wash›analyses›of›low›volatile›coal›samples;›further›analytical›work›is› planned›in›order›to›reduce›dependency›on›the›control›data. 11 Overview 02Business review 04Corporate governance 15Financial statements 30 Business review Environmental & Social Responsibility Good corporate citizenship is integral to the way Ncondezi operates. Environment, social, health and safety responsibilities are a priority for Ncondezi in all aspects of its business. 12 Ncondezi’s›corporate›social›responsibility› (“CSR”)›policy›has›been›designed›to› promote›social›development›projects›that› facilitate›sustainable›development›and› focus›on›community›involvement.›Ncondezi› adheres›to›the›Equator›Principles,›the›IFC› performance›standards›and›to›Mozambican› legislative›requirements.› Social Development Plan A›three›year›Social›Development›Plan› (“SDP”)›is›being›implemented›as›a›public– private›partnership›with›the›Company,›the› Government›and›the›local›communities› actively›participating.›The›SDP›will›benefit› the›local›communities›at›the›Ncondezi› Project,›the›Moatize›District›and›selected› other›communities›in›Tete›and›Mozambique.› A›total›budget›of›US$2m›has›been› allocated.›Around›US$340,000›was›spent› on›social›projects›in›2012. The›objectives›of›the›SDP›include: ›› Contribute›to›sustainable›development› in›Mozambique ›› Partner›with›the›Mozambican› Government›in›development›efforts ›› Create›opportunities›to›share›Ncondezi’s› success›with›local›communities The›SDP›will›be›made›up›of›10›social› initiatives›and›is›the›result›of›extensive› stakeholder›consultation. The›government›has›described›SDP›as› “...unparalleled model of public-private partnership that fulfils the aspirations of the government and of the people of Mozambique which should be emulated by other companies...” Manuel Guimarães,›District›Administrator›› of›Moatize,›1›November›2012› Ncondezi Coal CompanyAnnual report and financial statements 2012 Following›the›signing›of›an›Interim› Memorandum›of›Understanding›with›the› Ministry›of›Mines›in›December›2011,›the› Tete›Provincial›Government›reviewed›and› endorsed›the›SDP›in›July›2012.›It›was› officially›launched›by›the›Tete›Provincial› Governor›in›January›2013›and›will›be› implemented›over›the›next›three›years,› up›to›2015.›The›specific›initiatives›to›be› implemented›are›currently›under›final› review›with›the›provincial›and›district› government›authorities.› Social projects The›table›below›shows›the›summary›of›the›› social›projects›undertaken,›under›way›and›› planned›within›the›approved›SDP.› Social Project Completed (March 2011 – Dec 2012) Social Projects Under way (Jan 2013 – Dec 2013) Planned Projects (Jan 2014 – Dec 2014) ›› Post-graduate›students›in›Coimbra,› ›› Post-graduate›students›in›Coimbra,› ›› Post-graduate›students›in›Coimbra,› Portugal›(x2)1 ›› Built›Meeting›Centre›for› presidential›visit1 ›› Support›to›SOS›orphanage1 ›› Signage›for›Moatize›District1 ›› Intuitional›support›to›district1 ›› Bicycle›Ambulances›for›villagers1 ›› Bicycle›carriers›for›farmers1 ›› 10›water›boreholes›for›villagers1 Portugal›(x4)›continued1 ›› Clinic›rehabilitation›in›Mameme›2› ›› Ambulance›for›Ncondezi›Ceta ›› Intuitional›support›to›district ›› Medical›kit›for›Ncondezi›Ceta ›› Two›water›boreholes›for›Ncondezi›Ceta› ›› Water›and›sanitation›Educational› Programme ›› Provincial›Adult›Literacy›Campaign ›› Agricultural›Support›scheme Portugal›(x2)›continued ›› Agricultural›Support›scheme›continued ›› Provincial›Adult›Literacy›Campaign ›› Health›support›to›district ›› Intuitional›support›to›district ›› Six›water›boreholes ›› Technical›School›in›Madamba US$404,000 US$340,000 US$1,256,000 1› Completed›projects›as›of›December›2012. In›2012,›the›number›of›post›graduate› bursary›students›in›Coimbra,›Portugal› increased›to›four›as›two›more›mining› engineering›students›joined›the›two› geologists›undertaking›an›MSc›in›Geology› and›Mining›Engineering.› The›SDP›projects›for›the›year›included› logistical›support›for›the›presidential›visit,› district›signage›and›an›administration› vehicle›and›ten›water›boreholes›for›ten› different›communities›in›the›Moatize› district›which›will›benefit›an›estimated› 11,000›people.› The environment The›environmental›work›for›2012›was› dominated›by›the›ESIA›studies›for›the›mine› and›power›plant.›This›included›the›review› and›finalisation›stages›of›the›mine›ESIA,› initiation›of›the›power›station›ESIA›and›a› preliminary›resettlement›plan.›The›ESIAs› have›been›designed›to›meet›both›the› Mozambique›legislation›requirements›and› international›best›practice. Mine ESIA ERM›and›Impacto›conducted›an›ESIA›of› the›proposed›Ncondezi›mine›covering› exploration›licences›804L›and›805L.› All›environmental›baseline›studies›and› monitoring›were›completed›during›the›year› and›an›ESIA›report›is›being›prepared›for› submission›to›the›Ministry›for›Coordination› of›Environmental›Action›("MICOA")›in›H1› 2013.›Thereafter›an›application›for›the› environmental›license›for›the›Ncondezi› Project›will›be›prepared›and›will›be› submitted›to›MICOA,›following›acceptance› of›the›ESIA›by›the›authorities.›An›ESIA› study›report›will›also›be›compiled›to›meet› international›best›practice›requirements› and›to›provide›framework›environmental› and›social›management›plans. Resettlement Action Plan for Ncondezi Project As›part›of›the›mine›ESIA,›an›extensive› resettlement›assessment›was›undertaken› that›included›the›following: i.› Specialist›studies›as›part›of›the›ESIA ii.› ›Three›workshops›held›in›Mozambique› and›South›Africa iii.› ›An›internal›resettlement›planning›project The›outcomes›of›the›assessment›were: i.› ›A›comprehensive›Resettlement›Policy› Framework ii.› ›A›preliminary›resettlement›plan›with›full› costings›to›resettle›potentially›affected› families›from›two›communities Power Plant ESIA Ncondezi›commissioned›Parsons› Brinkerhoff›and›Impacto›to›conduct›the› ESIA›for›the›proposed›300MW›thermal› power›station,›which›was›undertaken›in› parallel›with›the›Feasibility›Study.›The›ESIA› has›been›progressing›well›with›no›fatal› flaws›identified.›The›first›public› consultation›meetings›were›held›in› November›2012›in›Tete›and›Moatize.› A›reconnaissance›aerial›tour›of›the› proposed›power›evacuation›route›has› been›conducted›by›Parsons›Brinkerhoff›and› Ncondezi›personnel.›Ncondezi›also›hosted› a›site›visit›by›MICOA›officials›for›a› preliminary›environmental›feasibility› assessment›of›the›power›plant›location› and›the›outcome›was›positive.›The›ESIA› is›due›to›be›completed›during›H1›2013. 13 Overview 02Business review 04Corporate governance 15Financial statements 30 Corporate governance Board of Directors Richard Stuart Non-ExecutiveDirector Richard›Stuart›has›over›19›years'›experience› in›corporate›finance.›He›is›also›currently›the› Chairman›of›Strata,›Ncondezi’s›largest› shareholder.›He›was›a›partner›in›Martin›&›Co› from›1978›and›a›former›Joint›Senior›Partner› of›Fleming-Martin,›which›was›established›in› 1994›and›was›one›of›South›Africa’s›leading› brokerage›firms.›He›played›a›key›role›in› raising›international›equity›capital›for›South› African›companies›in›the›post-sanction›era› and›in›the›relocation›of›Gencor›(as›Billiton›plc.)› and›The›South›African›Breweries›Ltd›onto›the› London›Stock›Exchange. Graham Mascall Non-ExecutiveDirector Graham›Mascall›has›over›40›years›of› commercial,›financial,›and›transaction› experience›in›mergers›and›acquisitions,› business›development›and›project› management›in›mining›and›mining›finance.› Over›the›course›of›his›career›he›has›worked› as›a›senior›executive›for›a›number›of› companies›in›the›mining›and›mine›finance› sector.›He›has›worked›in›senior›positions› for›Billiton›plc,›the›post-merger›entity›BHP› Billiton›plc,›Deutsche›Morgan›Grenfell,› Outokumpu›Metals›and›Resources› International›Limited,›Barclays›Bank,›and› was›Chief›Executive›Officer›of›International› Molybdenum›Limited›and›Lubel›Coal› Company›(UK)›Limited.›Mr›Mascall›is›a› graduate›in›mining›engineering›from›the› Camborne›School›of›Mines›and›holds›a› Master›of›Engineering›in›Mineral› Economics›from›McGill›University.›He›is› currently›also›a›director›of›AIM›listed› Gemfields›Resources›plc.›and›NYSE›listed› Walter›Energy›Inc. Estevão Pale IndependentNon-ExecutiveDirector Estevão›Pale›has›more›than›30›years'› experience›in›the›mining›industry.›He›is› the›Chief›Executive›Officer›of›Companhia› Moçambicana›de›Hidrocarbonetos,›S.A.,›a› Mozambican›natural›gas›company,›where›he› negotiates›sales›agreements›for›natural›gas› and›condensate›as›well›as›dealing›with› junior›and›senior›lenders›of›the›Company.› Between›1996›and›2005,›he›was›the›National› Director›of›Mines›in›the›Ministry›of›Mineral› Resources›and›Energy,›where›he›was› responsible›for›the›supervision›and›control› of›mineral›activities›in›Mozambique›and›the› formulation›and›implementation›of›the› mining›and›geological›policy›approved›by› the›Government›of›Mozambique.› Mr›Pale›has›been›a›Director›of›numerous› companies›in›the›mining›sector›including› Promaco›SARL›and›the›Mining› Development›Company,›as›well›as›the› General›Director›and›Chief›Executive›of› Minas›Gerais›de›Moçambique.›Mr›Pale›has› a›postgraduate›diploma›in›Mining› Engineering›from›the›Camborne›School›of› Mines›in›Cornwall›and›a›Masters›degree›in› Financial›Economics›from›the›University›of› London›(SOAS).›He›completed›a›course›in› Gas›Business›Management›in›Boston›at›the› Institute›of›Human›Resources›Development› Corporation›in›2006. Nigel Sutherland IndependentNon-ExecutiveDirector Nigel›Sutherland›has›spent›over›35›years› working›internationally,›particularly›in›South› Africa,›Australia›and›the›former›Soviet›Union,› in›the›resource›sector.›He›is›currently›a› director›of›Partners›in›Performance› International›('PIP')›and›responsible›for› business›development.›Prior›to›joining›PIP,› he›gained›wide›experience›in›corporate,› commercial,›risk›management›and›strategic› planning›through›his›roles›at›Anglo›American› plc,›in›merchant›banking›and›in›management› consulting.›Mr›Sutherland›has›an›MBA›from› the›University›of›Cape›Town›and›a›Bachelor›of› Engineering›(Metallurgy)›from›the›University› of›Witwatersrand. Michael Haworth Non-ExecutiveChairman (appointed1June2012) Michael›Haworth›was›appointed›to›the› Board›as›Non-Executive›Chairman›in›June› 2012.›He›is›a›Non-Executive›Director›of› Zanaga›Iron›Ore›Company›Limited›and›is› a›Director›of›Strata›Limited›(“Strata”),› a›major›shareholder›of›the›Company. Mr›Haworth›has›over›12›years'›investment› banking›experience,›predominantly›in› emerging›markets›and›natural›resources.› Prior›to›establishing›Strata›in›2006,›Mr› Haworth›was›a›Managing›Director›at›J.P.› Morgan›and›Head›of›Mining›and›Metals› Corporate›Finance›in›London. Paul Venter ChiefExecutiveOfficer (appointed26April2013) Paul›Venter›was›appointed›Chief›Executive› Officer›in›April›2013.›He›joined›the›Company› as›Chief›Operating›Officer›in›June›2012›and› has›been›responsible›for›delivering›the› Company’s›power›strategy.›Mr›Venter›has› over›39›years'›experience›across›Africa,› Mongolia,›China›and›Russia›in›the›mining,› power›generation›and›transport›industries. During›his›recent›tenure›as›Vice›President› –›Energy›Operations›at›Prophecy›Coal›Corp,› a›TSX›listed›company,›he›was›instrumental› in›the›successful›commissioning›of›the› Ulaan›Ovoo›coal›mine›in›Mongolia›into› production›within›six›months›after›the› acquisition›of›the›asset.›He›also›played›a› pivotal›role›in›the›development›phases›of› the›first›coal›fired›Independent›Power› Producer›in›Mongolia. Prior›to›this,›Mr›Venter›held›a›number›of› senior›positions›within›the›coal›industry,› including›Managing›Director›of›EN+›Group’s› coal›mining›activities›in›Russia›and›senior› executive›positions›in›the›coal›divisions›of› Eskom,›Gencor›and›Anglo›American›in› South›Africa. 14 Ncondezi Coal CompanyAnnual report and financial statements 2012 Peter O’Connor IndependentNon-ExecutiveDirector (appointed4February2013) Peter›O’Connor›was›appointed›to›the›Board› on›4›February›2013.›Mr›O’Connor›has›over› 20›years’›experience›in›the›power›sector,› working›for›Eskom,›the›South›African› electricity›public›utility›which›is›the›largest› producer›of›electricity›in›Africa,›an›importer› of›electricity›from›Mozambique›and›is› among›the›top›seven›utilities›in›the›world›in› terms›of›generation›capacity›and›among›the› top›nine›in›terms›of›sales.› Most›recently›he›was›Senior›General› Manager›of›the›Capital›Expansion›Division,› which›was›responsible›for›the›EPCM›of›all› the›company’s›generation›and›transmission› expansion›projects,›as›well›as›the› construction›of›a›1050MW›gas›power›station,› which›was›built›in›record›time.›Prior›to›this,› he›held›senior›management›positions›in›the› Generation›Division,›where›he›successfully› increased›plant›availability›from›78%›to›93%› and›at›the›Transmission›Division,›where›he› was›responsible›for›the›network›delivery,› network›expansion›and›system›operations.› He›gained›operational›experience›as›the› manager›of›Kriel,›Arnot›and›Kendal›power› stations.›He›holds›a›degree›in›mechanical› engineering›and›is›a›patent›lawyer. Mark Trevan IndependentNon-ExecutiveDirector Mark›Trevan›has›over›30›years'›experience› in›the›mining›and›metals›sector.›He›is› currently›the›Managing›Director›of› Australian›coking›coal›producer,›Caledon› Resources›Limited.›Prior›to›joining›Caledon› in›September›2006,›he›spent›25›years›with› Rio›Tinto›Ltd›where›he›held›senior›executive› roles›in›the›areas›of›coal›marketing,› general›commercial,›corporate›strategy› and›project›feasibility.›Mr›Trevan›is›a› graduate›in›Applied›Finance›and›Investment› from›the›Securities›Institute›of›Australia› and›holds›a›Diploma›of›Business› (Accounting)›from›the›Preston›Institute› of›Technology. Christiaan Schutte IndependentNon-ExecutiveDirector (appointed4February2013) Christiaan›Schutte›was›appointed›to›the› Board›on›4›February›2013.›Mr›Schutte’s› career›in›the›power›sector›spans›over› 20›years›during›which›time›he›worked›for› Eskom,›the›South›African›electricity›public› utility›which›is›the›largest›producer›of› electricity›in›Africa,›and›held›a›number› of›senior›management›positions.› Most›recently›he›was›Senior›General› Manager›of›the›Group›Technology›Division› and›responsible›for›all›the›engineering› functions›at›Eskom,›including›design› accountability›for›new›power›stations,› transmission›lines›and›distribution› development.›Prior›to›this›he›was›Senior› General›Manger›of›the›Generation›Division,› managing›five›power›stations›with›over› 18,000MW›total›installed›capacity,›an› operational›budget›of›3.8›billion›Rand›and› a›capital›budget›just›under›4›billion›Rand.› Operational›experience›was›gained›at› Majuba›power›station,›which›he›also› integrated›into›a›single›cluster›operation,› and›Kendal›power›station.›He›holds›a› degree›in›mechanical›engineering›as› well›as›an›MBL›from›Unisa.› 15 Overview 02Business review 04Corporate governance 15Financial statements 30 Directors’ report The Directors present their Annual Report and the audited Group financial statements for the year ended 31 December 2012. Principal activities The principal activity of the Group is the development of an integrated open pit mine and 300MW power plant to produce and supply electricity to the Mozambican domestic market. Business review and future developments Details of the Group’s business and expected future developments are set out in the Chairman’s Statement on pages 4 and 5, the Operations review on pages 6 to 9 and in the Financial review on page 10. Principal risks and uncertainties The Group operates in an uncertain environment that may result in increased risk, cost pressures and schedule delays. The key risk factors that face the Group and their mitigation are set out on pages 18 to 22. Additionally, the Group’s multi‑national operations expose it to a variety of financial risks such as market risk, foreign currency exchange rates and interest rates, liquidity risk, and credit risk. These are considered further in note 17. Key performance indicators The key performance indicators of the Group are as follows: Exploration expenditure (US$’000) Metres drilled Ncondezi Project Share price at 31 December (pence) Cash at bank at 31 December (US$’000) 2012 2011 2010 10,565 3,674 24.00 12,008 14,966 39,333 52.25 30,044 5,078 20,653 200.5 38,068 Results and dividends The results of the Group for the year ended 31 December 2012 are set out on page 30. The Directors do not recommend payment of a dividend for the year (2011: Nil). The loss will be transferred to reserves. Events after the reporting date See note 22 for further information. Financial instruments Details of the use of financial instruments by the Company, its subsidiary undertakings and financial risk management are contained in note 17 of the financial statements. Directors and Directors’ interests Director Michael Haworth Nigel Walls1 Richard Stuart Graham Mascall Estevão Pale Nigel Sutherland Colin Harris2 Mark Trevan 1 Resigned on 25 February 2013. 2 Resigned on 4 February 2013. Ordinary Shares held 31 December 2012 Ordinary Shares held 31 December 2011 421,678 373,889 – 386,130 – 32,785 – – 201,678 333,889 – 336,130 – – – – Michael Haworth and Richard Stuart are Directors of Strata Limited, which beneficially owns 54,289,641 Ordinary Shares, or 44.82% of the Company’s issued shares. 16 Ncondezi Coal CompanyAnnual report and financial statements 2012 Annual General Meeting Resolutions will be proposed at the forthcoming Annual General Meeting, as set out in the Formal Notice. In accordance with the Company’s Articles of Association one third of the Directors are required to retire by rotation. Accordingly, Mark Trevan and Nigel Sutherland will offer themselves for re‑election at the forthcoming Annual General Meeting of the Company. The Company’s Articles of Association also require any Director appointed to the Board during the financial year to retire and stand for re‑election at the Annual General Meeting following appointment. Accordingly Mr Haworth, Mr O’Connor, Mr Schutte and Mr Venter will also retire and stand for re‑election. Corporate Governance The Company’s compliance with the principles of corporate governance is explained in the corporate governance statement on pages 23 to 25. Ordinary Share Capital The Company’s Ordinary Shares of no par value represent 100% of its total share capital. At a meeting of the Company every member present in person or by proxy shall have one vote for every Ordinary Share of which he is the holder. Holders of Ordinary Shares are entitled to receive dividends. On a winding‑up or other return of capital, holders are entitled to share in any surplus assets pro rata to the amount paid up on their Ordinary Shares. The shares are not redeemable at the option of either the Company or the holder. There are no restrictions on the transfer of shares. Disclosure of information to auditors So far as each Director at the date of approval of this report is aware, there is no relevant audit information of which the Company’s auditors are unaware and each Director has taken all steps that he ought to have taken to make himself aware of any relevant audit information and to establish that the auditors are aware of that information. Auditors BDO LLP have expressed their willingness to continue in office as auditors, and a resolution to reappoint them will be proposed at the Annual General Meeting. By order of the Board Elysium Fund Management Limited Company Secretary 27 June 2013 17 Overview 02Business review 04Corporate governance 15Financial statements 30 Risk factors Transmission grid constraints Potential Impact(s) Available transmission capacity is allocated to other power generators. Mitigation Measure(s) Enter into negotiations with EdM and the Mozambican Government to ensure that available transmission infrastructure allocation is secured early and that proper evacuation infrastructure and capacities are available to the Power Project in line with the Group’s strategy. Explore and develop all potential future transmission options including new transmission capacity in Mozambique as well as other countries including Malawi and Zambia. Currently the Group is ideally positioned to connect to new infrastructure build out, particularly the STE “backbone” transmission project which will connect the cities of Tete and Maputo adding +3,000MW of potential new capacity. The Group has already initiated discussions with both Government and EdM to be included in future allocation for this project, which is targeting commissioning by 2020. In addition, Malawi is looking to secure power from Mozambique and is not currently connected to the Mozambican grid. The Power Project is approximately 90km from Malawi’s main substation. Off‑taker risk Potential Impact(s) Mitigation Measure(s) The Group is unable to secure a credit worthy off‑taker for the full output with the plant operating at load factors in excess of 80%. Enter into early PPA negotiations with EdM and other potential credible power off‑taker(s) prior to initiating proceedings to raise finance for the Power Project. Use of CFB Technology Potential Impact(s) Mitigation Measure(s) CFB technology has not been used in Mozambique as there are currently no coal fired power plants. Although CFB is proven technology, its application in Mozambique is new. Consequences may include not meeting guaranteed numbers in terms of plant output, efficiency and emission limits. Operator & Maintenance issues may arise if the Group is not familiar with this technology. This may have an impact on plant reliability and availability. Rigorously review plant performance in the country of origin as well as in other countries where this technology is in use. Visit and discuss with Power Project Sponsors/users identical installation outside Mozambique to benefit from their experience. Actively participate in erection and commissioning activities during project execution. Embed in the EPC contractor’s organisation the Group’s own personnel during all phases of the project execution. Subject the power plant to rigorous pre‑commissioning and commissioning tests as well as performance guarantee tests on completion. 18 Ncondezi Coal CompanyAnnual report and financial statements 2012 Financial closure Potential Impact(s) Mitigation Measure(s) The Group is unable to procure project financing, leading to failure of the project or a delay. The Group will engage with a Financial Advisor at an early stage in the project development phase to ensure that the project is bankable. Competition from other power stations in Mozambique Potential Impact(s) Mitigation Measure(s) Other power stations are being developed in the Tete region and competing for similar resources such as water and transmission line servitudes. The Group’s power project is currently the only dedicated integrated power plant and mine project in Mozambique, maximising the Group’s flexibility to develop the project. Being a thermal coal power station project, the Group can implement commissioning of the power plant faster than competing hydroelectric projects, which typically take two to three years longer to commission. Performance risk Potential Impact(s) Mitigation Measure(s) The power plant may be unable to perform as per the EPC proposal. Performance warranties and guarantees will be required from the EPC contractor as part of the EPC contract, including liquidated damages for non‑performance. The Minimum Functional Specification will define the operating characteristics, including the net capacity and operational criteria such as start‑up response times, dynamic response, and minimum load etc. River water resource risk Potential Impact(s) Mitigation Measure(s) The Revúbuè and Ncondezi Rivers are seasonal, should there be insufficient water at the confluence (water extraction point), the power plant operation will fail. Detailed water investigations are being performed to ascertain the quantity of water available to the Ncondezi Project (power plant and mine) and the required extraction rates. Investigations into the possibility of obtaining water from the Zambezi River as a more reliable source of water will be performed, should inadequate quantities be identified from the Revúbuè and Ncondezi Rivers. Mitigation Measure(s) Further coal quality analysis will be conducted and supplied to the boiler supplier for finalisation of boiler design. Coal risk Potential Impact(s) Coal specification developed at the pre‑feasibility study and verified during the feasibility stage may not be representative of coal to be used in the plant. Not properly characterised coal resources may lead to incorrect boiler design and plant underperformance. 19 Overview 02Business review 04Corporate governance 15Financial statements 30 Risk factors continued Foreign country risk Potential Impact(s) Mitigation Measure(s) The Group’s exploration licences and project are in Mozambique. The Group faces political risk whereby changes in government policy or a change of governing political party could place its exploration licences and project in jeopardy. The Mozambique government has been stable for many years and fosters a beneficial climate towards companies exploring for resources. It is not anticipated that this situation is likely to change. Power plant location geotechnical risks Potential Impact(s) Mitigation Measure(s) Improper geotech investigation may lead to increase in construction cost. An initial geotechnical study was completed late in H2 2012 on the proposed power plant site. No fatal flaws were identified. Further work will be completed to reaffirm the geotechnical study results ahead of any major construction. Utilities availability and transportation (water, limestone, coal, accessibility, heavy loads transportation) Potential Impact(s) Mitigation Measure(s) The cost of the infrastructure related to plant resources may increase if a proper assessment is not done. Detailed utilities studies and surveys of the area and location to determine logistics associated with the supply of utilities are ongoing. Landmines Potential Impact(s) Mitigation Measure(s) Existence of landmines in the Tete region and specifically in the project area, which may lead to safety issues such as fatalities and injury. A comprehensive demining exercise has cleared the project site of any landmine risks. However, additional work will be required around the areas of the power evacuation route once this route has been confirmed. 20 Ncondezi Coal CompanyAnnual report and financial statements 2012 Exploration and mining Potential Impact(s) Mitigation Measure(s) The business of exploration for and identification of coal deposits, is speculative and involves a high degree of risk. The coal deposits of any projects owned or acquired by the Group may not contain economically recoverable volumes of coal of sufficient quality or quantity. Even if there are economically recoverable deposits, delays in the construction and commissioning of mining projects or other technical difficulties may make the deposits difficult to exploit. The exploration and development of any project may be disrupted, damaged or delayed by a variety of risks and hazards which are beyond the control of the Group. These include (without limitation) geological, geotechnical and seismic factors, environmental hazards, technical failures, adverse weather conditions, acts of God and government regulations or delays. Exploration is also subject to general industrial operating risks, such as environmental hazards, explosions, fires, equipment failure and industrial accidents, which may result in potential delays or liabilities, loss of life, injury, environmental damage, damage to or destruction of property and regulatory investigations. Although the Group intends, itself or through operators, to maintain insurance in accordance with industry practice, no assurance can be given that the Group or the operator of an exploration project will be able to obtain insurance coverage at reasonable rates (or at all), or that any coverage it obtains will be adequate and available to cover any such claims. The Group may elect not to become insured because of high premium costs or may incur a liability to third parties (in excess of any insurance cover) arising from pollution or other damage or injury. Geology • Conduct comprehensive drill programmes to increase the understanding of the deposit Assessment of the optimum borehole spacing to increase the level of confidence Structural interpretation of deposit Effective management of drill programmes Core boreholes preferred over noncore boreholes, to provide an observation point to satisfy both structural and coal quality requirements Full suite of analysis conducted on coal samples Data acquisition according to best practises Geological modelling and resource determination The utilisation of down‑hole geophysics The refrigeration of coal samples to minimise degradation • • • • • • • • • Environmental • • • Detailed hydrological studies Environmental baseline and impact studies Social baseline and impact studies Geotechnical • • Detailed geotechnical studies Specialised testing of drill core Equipment • Regular maintenance of mechanical equipment 21 Overview 02Business review 04Corporate governance 15Financial statements 30 Risk factors continued Estimating mineral reserve and resource Potential Impact(s) Mitigation Measure(s) The estimation of mineral reserves and mineral resources is a subjective process and the accuracy of reserve and resource estimates is a function of the quantity and quality of available data and the assumptions used and judgements made in interpreting engineering and geological information. There is significant uncertainty in any reserve or resource estimate and the actual deposits encountered and the economic viability of mining a deposit may differ materially from the Group’s estimates. The exploration of mineral rights is speculative in nature and is frequently unsuccessful. The Group may therefore be unable to successfully discover and/or exploit reserves. Resources • • • • • • Sign off of resources by registered CP Reporting resources in accordance with the JORC code Classification of resources into a high level of confidence category Conduct detailed geological modelling The utilisation of accredited laboratories for the analyses of coal samples QA/QC procedures according to best practices Reserves • • • Sign off of reserves by registered CP Classification of reserves into proven or probable reserves Detailed mine design and scheduling Environmental and other regulatory requirements Potential Impact(s) Mitigation Measure(s) Existing and possible future environmental legislation, regulations and actions could cause additional expense, capital expenditures, restrictions and delays in the activities of the Group, the extent of which cannot be predicted. Before exploration and production can commence on any properties, the Group must obtain regulatory approval and there is no assurance that such approvals will be obtained. No assurance can be given that new rules and regulations will not be enacted or existing rules and regulations will not be applied in a manner which could limit or curtail the Group’s operations. The Group adopts standards of international best practice in environmental management and community engagement in addition to focusing on satisfying Mozambican environmental regulations and requirements in all stages of development. Environmental Management and Social Development Plans have been advanced and are being implemented to satisfy national and international best practice. Impact assessment (ESIA) is being conducted by independent, internationally recognised consultants on both the power plant and mine projects. Financing risk Potential Impact(s) The development of the Group’s properties will depend upon the Group’s ability to obtain financing primarily through the raising of new equity capital, but also by means of joint venture of projects, debt financing, farm outs or other means. There is no assurance that the Group will be successful in obtaining the required financing. If the Group is unable to obtain additional financing as needed some interests may be relinquished and/or the scope of the operations reduced. Mitigation Measure(s) The Directors’ will monitor the monthly cash burn rate to ensure the Group operates within its cash resources. 22 Ncondezi Coal CompanyAnnual report and financial statements 2012 Corporate governance statement The Company, which is listed on AIM, is not formally required to comply with the UK Corporate Governance Code (formerly the Combined Code, as amended in June 2008) (the “UK Corporate Governance Code”), which applies to companies which are fully listed on the London Stock Exchange. However, the Board has given consideration to the provisions set out in Section 1 of the UK Corporate Governance Code. The Directors support the objectives of this code and intend to comply with those aspects which they consider relevant to the Group’s size and circumstances. Details of the key areas relating to the UK Corporate Governance Code are set out below. A statement of the Directors’ responsibilities in respect of the financial statements is set out on page 28. Below is a brief description of the role of the Board and its committees, including a statement regarding the Group’s system of internal financial control. The workings of the Board and its committees The Board of Directors The Board currently comprises a Non‑Executive Chairman, (Michael Haworth), one Executive Director (Paul Venter) and seven further Non‑Executive Directors (Graham Mascall, Richard Stuart, Estevão Pale, Nigel Sutherland, Mark Trevan, Christiaan Schutte and Peter O’Connor). The Board considers that Estevão Pale, Nigel Sutherland, Mark Trevan, Christiaan Schutte and Peter O’Connor are independent of management and free from any business or other relationships which could materially interfere with the exercise of their independent judgement. An agreed procedure exists for Directors in the furtherance of their duties to take independent professional advice. With the prior approval of the Chairman, all Directors have the right to seek independent legal and other professional advice at the Company’s expense concerning any aspect of the Company’s operations or undertakings in order to fulfil their duties and responsibilities as Directors. If the Chairman is unable or unwilling to give approval, Board approval will be sufficient. Newly appointed Directors are made aware of their responsibilities through the Company Secretary. The Company does not make any provision for formal training of new Directors. The Company has established properly constituted audit and remuneration committees of the Board with formally delegated duties and responsibilities. Conflicts of interest The Board confirms that it has instituted a process for reporting and managing any conflicts of interest held by Directors. Under the Company’s Articles of Association, the Board has the authority to authorise, to the fullest extent permitted by law: (a) any matter which would otherwise result in a Director infringing his duty to avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the Company and which may reasonably be regarded as likely to give rise to a conflict of interest (including a conflict of interest and duty or conflict of duties); (b) a Director to accept or continue in any office, employment or position in addition to his office as a Director of the Company and may authorise the manner in which a conflict of interest arising out of such office, employment or position may be dealt with, either before or at the time that such a conflict of interest arises provided that for this purpose the Director in question and any other interested Director are not counted in the quorum at any Board meeting at which such matter, or such office, employment or position, is approved and it is agreed to without their voting or would have been agreed to if their votes had not been counted. A Relationship Agreement was executed on 3 June 2010 between the Company and Strata Limited (“Strata”) in order to manage inter alia potential conflicts of interest in respect of Directors nominated by Strata. Under the terms of this agreement Strata, has the right to nominate up to two Directors to the Board of the Company, and has nominated Richard Stuart and Michael Haworth. Company materiality threshold The Board acknowledges that assessment on materiality and subsequent appropriate thresholds are subjective and open to change. As well as the applicable laws and recommendations, the Board has considered quantitative, qualitative and cumulative factors when determining the materiality of a specific relationship of Directors. Ethical standards The Board has not adopted a formal code of conduct however as part of the Board’s commitment to the highest standard of conduct, the Board will consider adopting a code of conduct to guide executives, management and employees in carrying out their duties and responsibilities. The code of conduct will cover such matters as: • responsibilities to shareholders • compliance with laws and regulations • relations with customers and suppliers • ethical responsibilities • employment practices • responsibility to the environment and the community. 23 Overview 02Business review 04Corporate governance 15Financial statements 30 Corporate governance statement continued Bribery Act It is our policy to conduct all of our business in an honest and ethical manner. We take a zero‑tolerance approach to bribery and corruption and are committed to acting professionally, fairly and with integrity in all our business dealings and relationships wherever we operate, implementing and enforcing effective systems to counter bribery. We will uphold all laws relevant to countering bribery and corruption in all the jurisdictions in which we operate and remain bound by the laws of the UK, including the Bribery Act 2010, in respect of our conduct both at home and abroad. Board meetings Board meetings are held on average every quarter. Decisions concerning the direction and control of the business are made by the Board. Generally, the powers and obligations of the Board are governed by the Company’s Memorandum and Articles and the BVI Business Companies Act 2004, as amended and the other laws of the jurisdictions in which it operates. The Board is responsible, inter alia, for setting and monitoring Group strategy, reviewing trading performance, ensuring adequate funding, examining major acquisition opportunities, formulating policy on key issues and reporting to the shareholders. The Audit Committee The Audit Committee comprised Mark Trevan (Committee Chairman) and Richard Stuart. The Committee provides a forum for reporting by the Group’s external auditors. Meetings are held on average twice a year and are also attended, by invitation, by the Non‑Executive Directors. The Audit Committee is responsible for reviewing a wide range of financial matters including the annual and half year results, financial statements and accompanying reports before their submission to the Board and monitoring the controls which ensure the integrity of the financial information reported to the shareholders. The Remuneration Committee The Remuneration Committee comprises Nigel Sutherland (Committee Chairman) and Richard Stuart during the year. The Committee is responsible for making recommendations to the Board, within agreed terms of reference, on the Company’s framework of executive remuneration and its cost. The Remuneration Committee determines the contract terms, remuneration and other benefits for the Executive Directors, including performance related bonus schemes, compensation payments and option schemes. The Board itself determines the remuneration of the Non‑Executive Directors. A report from the Remuneration Committee appears on pages 26 and 27. Internal financial control The Board is responsible for establishing and maintaining the Group’s system of internal financial controls. Internal financial control systems are designed to meet the particular needs of the Group and the risk to which it is exposed, and by its very nature can provide reasonable, but not absolute, assurance against material misstatement or loss. The Directors are conscious of the need to keep effective internal financial control, particularly in view of the cash resources of the Group. Due to the relatively small size of the Group’s operations, the Executive Director and senior management are very closely involved in the day‑to‑day running of the business and as such have less need for a detailed formal system of internal financial control. The Directors have reviewed the effectiveness of the procedures presently in place and consider that they are still appropriate to the nature and scale of the operations of the Group. Continuous disclosure and shareholder communication The Board is committed to the promotion of investor confidence by ensuring that trading in the Company’s securities takes place in an efficient, competitive and informed market. The Company has procedures in place to ensure that all price sensitive information is identified, reviewed by management and disclosed to the AIM in a timely manner. All information disclosed on AIM is posted on the Company’s website http://www.ncondezicoal.com. Shareholders are forwarded documents relating to each Annual General Meeting, being the Annual Report, Notice of Meeting and Explanatory Memorandum and Proxy Form, and are invited to attend these meetings. 24 Ncondezi Coal CompanyAnnual report and financial statements 2012 Managing business risk The Board constantly monitors the operational and financial aspects of the Company’s activities and is responsible for the implementation and ongoing review of business risks that could affect the Company. Duties in relation to risk management that are conducted by the Directors include but are not limited to: • Initiate action to prevent or reduce the adverse effects of risk • Control further treatment of risks until the level of risk becomes acceptable • Identify and record any problems relating to the management of risk • Initiate, recommend or provide solutions through designated channels • Verify the implementation of solutions • Communicate and consult internally and externally as appropriate • Inform investors of material changes to the Company’s risk profile. Ongoing review of the overall risk management programme (inclusive of the review of adequacy of treatment plans) is conducted by external parties where appropriate. The Board ensures that recommendations made by the external parties are investigated and, where considered necessary, appropriate action is taken to ensure that the Company has an appropriate internal control environment in place to manage the key risks identified. 25 Overview 02Business review 04Corporate governance 15Financial statements 30 Report of the Remuneration Committee The Remuneration Committee (the “Committee”) comprised Nigel Sutherland (Committee Chairman) and Richard Stuart. Remuneration packages are determined with reference to market remuneration levels, individual performance and the financial position of the Company and the Group. The Board determines the remuneration of Non‑Executive Directors within the limits set by the Company’s Articles of Association. They have letters of engagement with the Company and their appointments are terminable on one months’ or three months’ written notice on either side. Long-term incentive plan (“LTIP”) The Company adopted a LTIP which is administered by the Committee. The LTIP is discretionary and the Committee will decide whether to make share awards under the LTIP at any time. As at 31 December 2012 the following awards were in place: Director Richard Stuart Graham Mascall Graham Mascall Estevão Pale Nigel Sutherland Colin Harris Mark Trevan Date of grant Number granted Exercise price 11 June 2010 27 May 2010 27 May 2010 15 June 2010 15 June 2010 11 June 2010 11 June 2010 100,000 2,400,000 800,000 75,000 75,000 75,000 75,000 123p Nil 25c 123p 123p 123p 123p Date exercisable from 10 June 2011 27 May 2010 27 May 2010 10 June 2011 10 June 2011 10 June 2011 10 June 2011 Following the Company’s change in focus to power generation and the signing of the Power Framework Agreement with the Government of Mozambique, the Board approved a restructuring of the existing share incentive scheme for Directors, senior management and contracted personnel to ensure it is appropriate for a developing energy producer. The scheme has been aligned with the power project milestones that will deliver the Ncondezi 300MW power project into commercial operation, as well as recognise the delivery of the key technical aspects of the project to date, such as the Power and Mine Definitive Feasibility Studies. Grant of share awards On 26 April 2013, 4,300,000 share options, with an exercise price of 17.25p and exercisable within three years of vesting, were granted to senior management and contracted personnel, of which 500,000 options vest as at the date of grant, 1,875,000 options are subject to milestone based vesting conditions (“Milestone Based Awards”) and 1,925,000 options are subject to time based vesting conditions (“Time Based Awards”). Simultaneously it was agreed to cancel and/or lapse prior unexercised share awards in respect of 2,762,500 Ordinary Shares, with varying exercise prices between 59p and 143p. The Milestone Based Awards provide that 1/3 of the Milestone Based Awards vest upon the successful conclusion with an offtaker of Heads of Terms for a Power Purchase Agreement and the other 2/3 of the Milestone Based Awards are to vest upon the execution of a Power Purchase Agreement for all or part of the first 300MW phase of the Ncondezi Power Project. The Time Based Awards provide that the share options vest in two equal tranches on the first and second anniversary from the date of grant. Directors’ options Paul Venter was granted 450,000 share options which are Milestone Based Awards and 550,000 share options which are Time Based Awards. 375,000 share options have been granted to certain Directors (see table below). Messrs Michael Haworth (Chairman), Richard Stuart (Non‑Executive Director) and Graham Mascall (Non‑Executive Director) have all waived any new share option awards. Non‑Executives Mark Trevan Nigel Sutherland Estevao Pale Peter O’Connor Christiaan Schutte 26 Options 75,000 75,000 75,000 75,000 75,000 Exercise Price Expiry 17.25p 3 years from vesting 17.25p 3 years from vesting 17.25p 3 years from vesting 17.25p 3 years from vesting 17.25p 3 years from vesting Ncondezi Coal CompanyAnnual report and financial statements 2012 These share options vest in two equal tranches on the first and second anniversary from the date of grant. It has also been agreed to cancel and/or lapse prior unexercised share awards granted to Directors in respect of 325,000 ordinary shares, with an exercise price of 123p. All of the cancelled share awards were granted at the Company’s listing under the Company’s LTIP and are fully vested. Following the above restructuring of the Company’s share incentive scheme, the newly issued and unexercised share awards will jointly represent 8.29% of the Company’s current issued share capital. Directors’ service agreements None of the Directors have a service contract which is terminable on greater than one year’s notice. Non-Executive Directors’ fees The Company has adopted a standard level of fees for Non‑Executive Directors of £40,000 per annum, and £70,000 for the Chairman. Directors’ remuneration The following table sets out an analysis of the pre‑tax remuneration for the year ended 31 December 2012 for individual Directors who held office in the Company during the period. Director Michael Haworth Nigel Walls Richard Stuart Graham Mascall Estevão Pale Nigel Sutherland1 Colin Harris Mark Trevan Base salary/fee US$’000 Bonus US$’000 Pension US$’000 Share‑based payments US$’000 Total 2012 US$’000 Total 2011 US$’000 – 231 46 245 63 63 64 64 776 – – – – – – – – – – 10 – 30 – – – – 40 – 384 16 – 12 12 12 12 448 – 625 62 275 75 75 76 76 – – 149 710 92 92 92 92 1,264 1,227 1 This includes US$63,214 (2011: US$64,353) paid to Mines Value Management for services provided by Nigel Sutherland. On behalf of the Remuneration Committee Nigel Sutherland Remuneration Committee Chairman 27 June 2013 27 Overview 02Business review 04Corporate governance 15Financial statements 30 Statement of Directors’ responsibilities The Directors are responsible for preparing the Directors’ report and the financial statements for the Group. The Directors have prepared the financial statements for each financial year which present fairly the state of affairs of the Group and of the profit or loss of the Group for that year. The Directors have chosen to use the International Financial Reporting Standards (“IFRS”) as adopted by the European Union in preparing the Group‘s financial statements. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of financial statements. International Accounting Standards require that financial statements present fairly for each financial year the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s ‘Framework for the preparation and presentation of financial statements’. In virtually all circumstances a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market. A fair presentation also requires the Directors to: • consistently select and apply appropriate accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • make judgements and accounting estimates that are reasonable and prudent; • provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; • state that the Group has complied with IFRS as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for ensuring the Annual Report and the financial statements are made available on a website. In addition to being mailed to shareholders, financial statements are published on the Company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. 28 Ncondezi Coal CompanyAnnual report and financial statements 2012 Independent audit report to the members of Ncondezi Coal Company Limited We have audited the financial statements of Ncondezi Coal Company Limited for the year ended 31 December 2012 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of changes in equity, the consolidated statement of cash flows and the related notes. The financial reporting framework that has been applied in their preparation is International Financial Reporting Standards (“IFRS”) as adopted by the European Union. This report is made solely to the Company’s members, as a body in accordance with our engagement letter dated 16 January 2013. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Directors’ responsibility for the financial statements As explained more fully in the statement of Directors’ responsibilities, the Directors are responsible for the preparation and fair presentation of the financial statements in accordance with IFRS as adopted by the European Union and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (as issued by the International Federation of Accountants (“IFAC”)). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgement, including the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers the internal control relevant to the entity’s preparation and fair presentation of financial statements in order to design appropriate audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion on financial statements In our opinion: • the financial statements present fairly, in all material respects the state of the Group’s affairs as at 31 December 2012 and its loss for the year then ended; and • have been prepared in accordance with IFRS as adopted by the European Union. Emphasis of matter – going concern In forming our opinion on the financial statements, which is not modified, we have considered the adequacy of the disclosure made in note 1 to the financial statements concerning the Group’s ability to continue as a going concern which is dependent on the Group’s ability to raise further funds through debt or new equity placing. The Directors believe that the Group will secure the necessary funds. While the Directors are continuing funding negotiations with certain third parties there are currently no binding agreements in place. These conditions together with the other matters referred to in note 1 indicate the existence of a material uncertainty which may cast significant doubt over the Group’s ability to continue as a going concern. The financial statements do not include any adjustments that would result if the Group was unable to continue as a going concern. Opinion on other matters In our opinion the information given in the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements. BDO LLP Chartered Accountants 55 Baker Street London W1U 7EU United Kingdom 27 June 2013 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). 29 Overview 02Business review 04Corporate governance 15Financial statements 30 Consolidated income statement for the year ended 31 December 2012 Note 2012 US$’000 2011 US$’000 3 3 3 3 15 4 5 (7,398) 97 – (1,292) (8,593) 88 – (45) (8,550) (55) (8,605) (6,554) (1,334) (656) (2,597) (11,141) 43 4,166 (50) (6,982) (84) (7,066) (7.1) (5.9) 2012 US$’000 2011 US$’000 (8,605) (7,066) 20 19 (8,585) (7,047) Other administrative expenses Research expenses Impairment of exploration costs Share‑based payments charge Total administrative expenses and loss from operations Finance income Gain on derivative financial asset Finance expense Loss for the period before taxation Taxation Loss for the period attributable to equity shareholders of the Parent Company Loss per share expressed in cents Basic and diluted Consolidated statement of comprehensive income for the year ended 31 December 2012 Loss after taxation Other comprehensive income: Exchange differences on translating foreign operations Total comprehensive income for the period The notes on pages 34 to 51 form part of these financial statements. 30 Ncondezi Coal CompanyAnnual report and financial statements 2012 Consolidated statement of financial position as at 31 December 2012 Assets Non‑current assets Intangible assets Property, plant and equipment Total non‑current assets Current assets Inventory Trade and other receivables Cash and cash equivalents Total current assets Total assets Liabilities Current liabilities Current tax payable Trade and other payables Total current liabilities Total liabilities Capital and reserves attributable to shareholders Share capital Foreign currency translation reserve Retained earnings Total capital and reserves Total equity and liabilities Note 2012 US$’000 2011 US$’000 6 7 9 10 11 12 39,081 2,328 41,409 28,563 2,592 31,155 26 3,030 12,008 15,064 56,473 – 2,979 30,444 33,423 64,578 56 2,631 2,687 81 3,418 3,499 2,687 3,499 76,108 44 (22,366) 53,786 56,473 76,108 24 (15,053) 61,079 64,578 The financial statements were approved and authorised for issue by the Board of Directors on 27 June 2013 and were signed on its behalf by: Paul Venter Chief Executive Officer The notes on pages 34 to 51 form part of these financial statements. 31 Overview 02Business review 04Corporate governance 15Financial statements 30 Consolidated statement of changes in equity for the year ended at 31 December 2012 At 1 January 2012 Loss for the period Other comprehensive income for the period Equity settled share‑based payments At 31 December 2012 At 1 January 2011 Loss for the period Other comprehensive income for the period Exercise of warrants Issue of shares Costs associated with issue of shares Share buy‑back and cancellation Exercise of Dos Santos option Reclassification of other reserves Equity settled share‑based payments At 31 December 2011 The notes on pages 34 to 51 form part of these financial statements. Foreign currency translation reserve US$’000 24 – 20 – 44 Foreign currency translation reserve US$’000 5 – 19 – – – – – – – 24 Share capital US$’000 76,108 – – – 76,108 Other reserves US$’000 5,791 – – – – – – (20,770) 14,979 – – Retained earnings US$’000 (15,053) (8,605) – 1,292 Total US$’000 61,079 (8,605) 20 1,292 (22,366) 53,786 Retained earnings US$’000 4,395 (7,066) – – – – – – (14,979) 2,597 Total US$’000 69,436 (7,066) 19 2,934 36,206 (1,399) (20,878) (20,770) – 2,597 (15,053) 61,079 Share capital US$’000 59,245 – – 2,934 36,206 (1,399) (20,878) – – – 76,108 32 Ncondezi Coal CompanyAnnual report and financial statements 2012 Consolidated statement of cash flows for the year ended at 31 December 2012 Cash flow from operating activities Loss before taxation Adjustments for: Finance income Finance expense Share‑based payments charge Derivative financial asset Unrealised foreign exchange movements Disposal of property, plant and equipment Depreciation and amortisation Net cash flow from operating activities before changes in working capital Increase in inventory (Decrease)/increase in payables Increase in receivables Net cash flow from operating activities before tax Income taxes paid Net cash flow from operating activities after tax Investing activities Payments for property, plant and equipment Payments for other intangibles Interest received Exploration costs capitalised Net cash flow from investing activities Financing activities Issue of Ordinary Shares Bank charges Cost of share issue Share buy‑back Net cash flow from financing activities Net decrease in cash and cash equivalents in the period Cash and cash equivalents at the beginning of the period Effect of foreign exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the period The notes on pages 34 to 51 form part of these financial statements. Notes 2012 US$’000 2011 US$’000 (8,550) (6,982) 3 7 6 6 (88) 45 1,292 – 15 7 427 (6,852) (26) (1,636) (51) (8,565) (80) (43) 50 2,597 (4,166) 5 14 328 (8,197) – 670 (1,707) (9,234) (76) (8,645) (9,310) (118) – 88 (9,716) (958) (46) 43 (14,166) (9,746) (15,127) – (45) – – (45) 39,140 (50) (1,399) (20,878) 16,813 (18,436) (7,624) 30,444 38,068 – – 12,008 30,444 33 Overview 02Business review 04Corporate governance 15Financial statements 30 Notes to the consolidated financial statements 1. Principal accounting policies General The Company is a limited liability company incorporated on 30 March 2006 in the British Virgin Islands. The address of its registered office is 2nd floor, Wickham’s Cay II, PO Box 2221, Road Town, Tortola, British Virgin Islands. Going concern In the absence of production revenues, the Group is dependent upon its existing cash resources and its ability to raise additional financing through equity raisings in order to progress with the development of the power plant. The Group has sufficient funding to finance its activities through to March 2014. The Directors are in negotiations with a number of parties in respect of raising further funds to continue with the power plant development programme. Whilst progress is being made on a number of potential transactions that would provide additional financing, at present there are no binding agreements in place. Should the Group be unable to raise the necessary finance, it may be unable to realise its assets and discharge its liabilities in the normal course of business. Based on the current progress of negotiations with potential providers of finance and discussions with potential investors, the Directors believe that the necessary funds to provide adequate financing to continue the power plant development programme will be raised as required. Accordingly they are confident that the Group will continue as a going concern and have prepared the financial statements on that basis. These conditions indicate the existence of a material uncertainty that may cast significant doubt over the Group’s ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Group was not able to continue as a going concern. As at 31 December 2012 the Group’s cash and cash equivalent stood at US$12m. The Group intends to operate within its cash resources. Basis of preparation The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. The policies have been consistently applied to all the years presented, unless otherwise stated. These financial statements have been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively “IFRS”) issued by the International Accounting Standards Board (“IASB”) as adopted by the European Union (“adopted IFRS”). The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The areas involving a higher degree of judgement or complexity, or where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 2. The Group financial information is presented in United States dollars (US$) and values are rounded to the nearest thousand dollars (US$’000). Loss from operations is stated after charging and crediting all operating items excluding finance income and expenses. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision only affects that period or in the period of revision and future periods if the revision affects both current and future periods. Adoption of new and revised accounting standards In 2012, several amended standards and interpretations became effective. These are IFRS 7 (amended) “Disclosures – transfers of financial assets”, IFRS 1 (amended) “Severe hyperinflation and removal of fixed dates for first‑time adopters” and IAS 12 (amended) “Deferred tax: recovery of underlying assets”. The adoption of these standards and interpretations has not had a material impact on the financial statements of the Group. At the date of authorisation of these financial statements, the following standards and relevant interpretations, which have not been applied in these financial statements, were in issue but not yet effective (and some of which were pending endorsement by the EU): • IFRS 1 (amended) “Government loans” – effective for accounting periods beginning on or after 1 January 2013. • IFRS 7 (amended) “Disclosures: Offsetting financial assets and financial liabilities” – effective for accounting periods beginning on or after 1 January 2013. 34 Ncondezi Coal CompanyAnnual report and financial statements 2012 1. Principal accounting policies continued • IFRS 9 “Financial instruments – Classification and measurement” – effective for accounting periods beginning on or after 1 January 2015. • IFRS 10 “Consolidated financial statements” – effective for accounting periods beginning on or after 1 January 2013. • IFRS 11 “Joint arrangements” – effective for accounting periods beginning on or after 1 January 2013. • IFRS 12 “Disclosure of interests in other entities” – effective for accounting periods beginning on or after 1 January 2013. • IFRS 13 “Fair value measurement” – effective for accounting periods beginning on or after 1 January 2013. • IAS 1 (amended) “Presentation of financial statements – other comprehensive income” – effective for accounting periods beginning on or after 1 July 2012. • IAS 19 (revised) “Employee benefits” – effective for accounting periods beginning on or after 1 January 2013. • IAS 27 (revised) “Separate financial statements” – effective for accounting periods beginning on or after 1 January 2013. • IAS 28 (revised) “Investments in associates and joint ventures” – effective for accounting periods beginning on or after 1 January 2013. • IAS 32 (amended) “Offsetting financial assets and financial liabilities” – effective for accounting periods beginning on or after 1 January 2014. • Annual improvements to IFRS 2009–2011 cycle (various standards) – effective for accounting periods beginning on or after 1 January 2013. The Group is yet to assess the full impact of adoption of IFRS 9 and intends to adopt the standard no later than the accounting period beginning on or after 1 January 2015, subject to endorsement by the EU. Adoption of the other standards in future periods is not expected to have a material impact on the financial statements of the Group. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries). The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra‑group transactions, balances, income and expenses are eliminated on consolidation. Segmental reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision‑maker. The chief operating decision‑maker has been identified as the Board of Directors. Share‑based payments Equity‑settled share‑based payments to employees and Directors are measured at the fair value of the equity instrument. The fair value of the equity‑settled transactions with employees and Directors is recognised as an expense over the vesting period. The fair value of the equity instrument is determined at the date of grant, taking into account market based vesting conditions. The fair value of the equity instrument is measured using the Black‑Scholes model. The expected life used in the model is adjusted, based on management’s best estimate, for the effects of non‑transferability, exercise restrictions and behavioural considerations. Property, plant and equipment Property, plant and equipment are stated at cost on acquisition less depreciation. Depreciation is provided on a straight‑line basis at rates calculated to write off the cost less the estimated residual value of each asset over its expected useful economic life. The residual value is the estimated amount that would currently be obtained from disposal of the asset if the asset were already of the age and in the condition expected at the end of its useful life. The annual rate of depreciation for each class of depreciable asset is: Plant and equipment Computers and related equipment Furniture and fixtures Motor vehicles Buildings 25% 33% 20%–25% 25% 10% The carrying value of property, plant and equipment is assessed annually and any impairment is charged to the income statement. Assets in the course of construction are capitalised in the construction in progress account. Costs capitalised include the purchase price of the asset and any costs directly attributable to bringing it into working condition for its intended use. On completion, the cost of construction is transferred to the appropriate category of property, plant and equipment. Construction in progress is not depreciated. 35 Overview 02Business review 04Corporate governance 15Financial statements 30 Notes to the consolidated financial statements continued 1. Principal accounting policies continued Exploration and evaluation assets All costs associated with exploring and evaluating prospects within licence areas, including the initial acquisition of the licence are capitalised on a project‑by‑project basis pending determination of the feasibility of the project. Costs incurred include appropriate technical and administrative expenses but not general overheads. When a decision is made to proceed to development, the related expenditures will be transferred to proven mining properties. Where a licence is relinquished, a project is abandoned, or is considered to be of no further commercial value to the Group, the related costs will be written off. The recoverability of exploration and evaluation assets is dependent upon the discovery of economically recoverable reserves, the ability of the Group to obtain necessary financing to complete the development of reserves and future profitable production or proceeds from the disposition of recoverable reserves. Impairment The carrying amounts of non‑current assets are reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable. If there are indicators of impairment, an exercise is undertaken to determine whether the carrying values are in excess of their recoverable amount. Such review is undertaken on an asset by asset basis, except where such assets do not generate cash flows independent of other assets, in which case the review is undertaken at the cash generating unit level. A previously recognised impairment loss is reversed if the recoverable amount increases as a result of a reversal of the conditions that originally resulted in the impairment. This reversal is recognised in the income statement and is limited to the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised in the prior years. The recoverable amount of assets is the greater of their value in use and fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre‑tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash‑generating unit to which the asset belongs. The Group’s cash‑generating units are the smallest identifiable groups of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Impairments are recognised in the income statement to the extent that the carrying amount exceeds the assets recoverable amount. The revised carrying amounts are amortised in line with the Group’s accounting policies. Operating leases Where substantially all of the risks and rewards incidental to ownership are not transferred to the Group (an ‘operating lease’) amounts payable under the lease are charged to the income statement on a straight‑line basis over the lease term. Borrowing costs Borrowing costs incurred in respect of general borrowings are recognised in the income statement as they accrue, using the effective interest method. There are no borrowings directly attributable to the acquisition, construction or production of qualifying assets. Foreign currency The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results of overseas Group entities are translated into US$, which is the functional currency of the Company, the Mozambican and Mauritian subsidiaries and presentation currency for the consolidated financial statements, at rates approximating to those ruling when the transactions took place, all assets and liabilities of overseas Group entities are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and accumulated in the foreign exchange translation reserve. In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each reporting date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the reporting date. Exchange differences arising on the settlement of monetary items and on the retranslation of monetary items are included in the income statement. 36 Ncondezi Coal CompanyAnnual report and financial statements 2012 1. Principal accounting policies continued Provisions Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic resources will result and that outflow can be reliably measured. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised. Deferred tax is charged or credited to the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Inventory Inventories relate to fuel stocks and are valued at the lower of the average cost and net realisable value. Financial instruments Financial assets and liabilities are recognised when the Group becomes party to the contractual provisions of the instrument. Financial assets The Group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. The Group did not have any financial assets designated at fair value through profit or loss and as held to maturity or held for trading. Unless otherwise indicated, the carrying amounts of the Group’s financial assets are a reasonable approximation of their fair values. The Group’s accounting policy for each category is as follows: Loans and receivables Loans and receivables (including trade receivables) are measured on initial recognition at fair value and subsequently measured at amortised cost using the effective interest rate method. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand, deposits and other short‑term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. The Group assesses at each reporting date whether there is objective evidence that a financial asset or a group of financial assets is impaired. 37 Overview 02Business review 04Corporate governance 15Financial statements 30 Notes to the consolidated financial statements continued 1. Principal accounting policies continued Financial liabilities The Group classifies its financial liabilities only as held at amortised cost. Held at amortised cost Financial liabilities including trade payables and borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the statement of financial position. Share capital Financial instruments issued by the Group are treated as equity only to the extent that they do not meet the definition of a financial liability. The Company’s Ordinary Shares are classified as equity instruments. For the purposes of the disclosures given in note 12, the Company considers its capital to be total equity. The Company is not subject to any externally imposed capital requirements. 2. Critical accounting estimates and judgements The Group makes estimates and assumptions concerning the future, which by definition will seldom result in actual results that match the accounting estimate. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below. Accounting judgements (i) Impairment of exploration and evaluation assets In accordance with the accounting policy stated above, the Group tests annually to see whether exploration and evaluation assets have suffered any impairment. The recoverability of the amounts shown in the consolidated statement of financial position in relation to deferred exploration and evaluation expenditure are dependent upon the discovery of economically recoverable reserves, continuation of the Group’s interest in the underlying mining claims, the political, economic and legislative stability of the regions in which the Group operates, compliance with the terms of the relevant mineral rights licences, the Group’s ability to obtain the necessary financing to fulfil its obligations as they arise and upon future profitable production or proceeds from the disposal of properties. (ii) Fair value of financial instruments and share‑based payments The Group determines the fair value of financial instruments that are not quoted and equity‑settled share‑based payments, using valuation techniques and models which are significantly affected by the assumptions used. In that regard, the derived fair value estimates cannot always be substantiated by comparison with independent markets and, in many cases, may not be capable of being realised immediately. The methods and assumptions applied, and valuations models used are disclosed in notes 14 and 17. Accounting estimates (i) Provisions for liabilities As a result of exploration activities the Group is required to make a provision for rehabilitation. The Group’s exploration activities were largely completed during the year however, no further development work has taken place and as such no significant damage has been caused up to the reporting date. (ii) Contingencies By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of such contingencies inherently involves the exercise of significant judgement and estimates of the outcome of future events. 38 Ncondezi Coal CompanyAnnual report and financial statements 2012 3. Administrative expenses Staff costs Professional and consultancy Office expenses Travel and accommodation Other expenses Foreign exchange loss/(gain) Other administrative expenses Research expenses1 Impairment of exploration costs2 Share‑based payments Total administrative expenses 2012 US$’000 2011 US$’000 2,712 1,296 934 682 1,455 319 7,398 (97) – 1,292 8,593 2,761 1,167 1,094 1,130 1,035 (633) 6,554 1,334 656 2,597 11,141 1 The research expenses relate to an infrastructure study in respect of logistics options available for transportation and export of coal reserves as well as future projects. The 2 positive charge in the year is a result of an over accrual in respect of the infrastructure study. Impairment of exploration costs in 2011 relates to the write off of the exploration costs incurred in respect of licences 1314L and 1315L which were considered to be of no further commercial value to the Group and a decision was made to relinquish these licences (note 6). Auditors’ remuneration Group auditors’ remuneration – audit of the Group’s accounts – audit of the Group’s subsidiaries Other services – other services relating to taxation Staff costs (including Directors) Wages and salaries Share‑based payments Social security costs 2012 US$’000 2011 US$’000 80 40 – 120 69 23 9 101 2012 US$’000 2011 US$’000 3,794 1,292 226 5,120 5,332 2,597 247 8,176 US$1,308,247 (2011: US$2,817,914) included within wages and salaries related to exploration and evaluation costs and have been capitalised to intangible assets (note 6). The average monthly number of employees (including executive Directors) of the Group were: Operational Administration 2012 Number 2011 Number 24 24 48 24 20 44 39 Overview 02Business review 04Corporate governance 15Financial statements 30 Notes to the consolidated financial statements continued 3. Administrative expenses continued Key management compensation: Salary Fees Social security costs Pension Share‑based payments 2012 US$’000 2011 US$’000 1,503 139 157 1,799 52 920 2,771 1,765 – 235 2,000 82 1,838 3,920 Key management personnel are considered to be Directors and senior management of the Group. 4. Taxation The Group entities subject to corporate income tax are Ncondezi Coal Company Mozambique Limitada which is subject to tax at the rate of 32% (2011: 32%) on its profits in Mozambique and Ncondezi Services (UK) Limited which is subject to tax at a rate of 24% (2011: 26%) on its profits in the UK. No tax charge/(credit) arose in the current or prior year for Ncondezi Coal Company Mozambique Limitada. Tax payable for 2012 has been estimated at US$55,000 and has been reconciled to the expected tax charge based on the Group losses at the standard rate of taxation in the UK where the Group has generated taxable profits as follows: Current tax – UK corporation tax Group loss on ordinary activities before tax Effects of: Reconcile to UK corporation tax rate of 24.5% (2011: 26%) Differences arising from different tax jurisdictions Non‑deductible expenses Foreign exchange effect originating in overseas companies Unrecognised taxable losses carried forward Total tax charge for the year 2012 US$’000 2011 US$’000 55 84 (8,550) (6,982) (2,095) 1,136 131 243 640 55 (1,815) 1,081 195 101 522 84 During the exploration and development stages, the Group will accumulate tax losses which may be carried forward. As at 31 December 2012, no deferred tax asset has been recognised for tax losses of US$1,442,000 (2011: US$802,000) carried forward within the Group’s overseas subsidiaries, as the recovery of this benefit is dependent on the future profitability, the timing and certainty of which cannot be reasonably foreseen. Tax losses in Mozambique are available for use over a five year period. Of the total available Mozambican subsidiary tax credits, US$640,000 will be available until 31 December 2017, US$522,000 will be available until 31 December 2016, and US$280,000 will be available until 31 December 2015. 40 Ncondezi Coal CompanyAnnual report and financial statements 2012 5. Loss per share Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of Ordinary Shares outstanding during the year. Due to the losses incurred during the period a diluted loss per share has not been calculated as this would serve to reduce the basic loss per share. There were share incentives outstanding at the end of the year that could potentially dilute basic earnings per share in the future. There were no potential Ordinary Shares outstanding in the year (2011: Nil). Basic and diluted EPS 6. Intangible assets Cost At 1 January 2012 Additions Impairment Foreign exchange At 31 December 2012 At 1 January 2011 Additions Impairment At 31 December 2011 Amortisation At 1 January 2012 Amortisation charge At 31 December 2012 Net Book value 2012 Net Book value 2011 Net book value 2010 2012 Weighted average number of shares (thousands) Loss US$’000 Per share amount (cents) Loss US$’000 2011 Weighted average number of shares (thousands) Per share amount (cents) (8,605) 121,116 (7.1) (7,066) 120,473 (5.9) Exploration and evaluation costs US$’000 Other intangible assets US$’000 28,459 10,565 – – 39,024 13,493 15,622 (656) 28,459 – – – 39,024 28,459 13,493 149 – – 5 154 103 46 – 149 45 52 97 57 104 93 Total US$’000 28,608 10,565 – 5 39,178 13,596 15,668 (656) 28,608 45 52 97 39,081 28,563 13,586 Exploration and evaluation costs relate to the initial acquisition of the licences and subsequent exploration expenditure incurred in evaluating the Ncondezi project. The impairment in 2011 related to exploration and evaluation costs of US$656,000 incurred in respect of exploration licences 1314L and 1315L located in Tete, Mozambique. The results of exploration works carried out in these licence areas proved to be unsuccessful and these licences were no longer considered to be of any commercial value to the Group. Consequently a decision was made to relinquish the licences 1314L and 1315L and the related costs were written off to the income statement in 2011 (note 3). 41 Overview 02Business review 04Corporate governance 15Financial statements 30 Notes to the consolidated financial statements continued 7. Property, plant and equipment Cost At 1 January 2011 Additions Disposals Transfer At 1 January 2012 Additions Disposals At 31 December 2012 Depreciation At 1 January 2011 Depreciation charge Disposals At 1 January 2012 Depreciation charge Disposals At 31 December 2012 Net Book value 2012 Net Book value 2011 Net book value 2010 Assets in the course of construction US$’000 Buildings US$’000 Plant and equipment US$’000 Office and computer equipment US$’000 Furniture and fixtures US$’000 Motor vehicles US$’000 Total US$’000 1,358 – – (1,358) – – – – – – – – – – – – – 1,358 – 399 – 1,358 1,757 – – 1,757 – 59 – 59 75 – 134 1,623 1,698 – 317 172 – – 489 37 (13) 513 21 61 – 82 85 (6) 163 352 407 296 46 183 – – 229 11 (2) 238 12 72 – 84 83 (2) 165 73 145 34 33 – (6) – 27 – – 27 7 5 (4) 8 3 – 11 16 19 26 266 204 (16) – 454 70 – 524 38 96 (3) 131 129 – 260 264 323 228 2,020 958 (22) – 2,956 118 (15) 3,059 78 293 (7) 364 375 (8) 731 2,328 2,592 1,942 8. Subsidiaries The Group has the following subsidiary undertakings: Zambezi Energy Corporation Holdings 1 Limited Zambezi Energy Corporation Holdings 2 Limited Ncondezi Coal Company Mozambique Limitada (formerly Zambezi Energy Corporation Limitada) Ncondezi Services (UK) Limited Ncondezi Power Holdings Limited Ncondezi Power Company Limitada % interest 2012 % interest 2011 100 100 100 100 100 100 100 100 100 100 – – Country of incorporation Mauritius Mauritius Activity Holding company Holding company Mozambique UK Mauritius Mozambique Mining exploration Holding company Holding company Energy company “ZECH1” “ZECH2” “NCCML” “NSUL” “NPHL” “NPCL” Ncondezi Coal Company Mozambique Limitada (formerly Zambezi Energy Corporation Limitada) is owned by Zambezi Energy Corporation Holdings 1 Limited and Zambezi Energy Corporation Holdings 2 Limited. Ncondezi Power Company Limitada is owned by Zambezi Energy Corporation Holdings 2 Limited and Ncondezi Power Holdings Limited. 42 Ncondezi Coal CompanyAnnual report and financial statements 2012 9. Trade and other receivables Current assets: Other receivables Total trade and other receivables Included within other receivables is US$2,682,067 (2011: US$2,530,981) in respect of VAT recoverable in Mozambique. The fair value of receivables is not significantly different from their carrying value. 10. Cash and cash equivalents Cash at bank and in hand The Group’s cash and cash equivalents balances may be analysed by currency as follows: US dollars Great British pounds South African rand Mozambique meticais 2012 US$’000 2011 US$’000 3,030 3,030 2,979 2,979 2012 US$’000 2011 US$’000 12,008 12,008 30,444 30,444 2012 US$’000 2011 US$’000 9,170 1,131 1,651 56 12,008 28,946 1,472 – 26 30,444 Where possible cash is deposited in floating rate deposit accounts at reputable financial institutions with high credit ratings. 11. Trade and other payables Other payables Other taxation and social security Accruals and deferred income 2012 US$’000 2011 US$’000 1,057 93 1,481 2,631 2,223 464 731 3,418 Included within other taxation and social security is US$Nil (2011: US$372,892) in respect of withholding tax payable in Mozambique. The fair value of payables is not significantly different from their carrying value. 12. Share capital Number of shares allotted, called up and fully paid Ordinary shares of no par value At 1 January 2012 At 31 December 2012 2012 2011 121,115,682 121,115,682 Shares issued Number 121,115,682 121,115,682 Share capital US$’000 76,108 76,108 43 Overview 02Business review 04Corporate governance 15Financial statements 30 Notes to the consolidated financial statements continued 12. Share capital continued Number of shares allotted, called up and fully paid At 1 January 2011 Issue of shares Share buy‑back and cancellation Exercise of warrants At 31 December 2011 Shares issued Number 119,857,334 12,000,000 (12,189,474) 1,447,822 121,115,682 Share capital US$’000 59,245 34,807 (20,878) 2,934 76,108 13. Reserves The following describes the nature and purpose of each reserve within owners’ equity. Share capital Foreign currency translation reserve Other reserves Retained earnings Amount subscribed for share capital Gains/losses arising on retranslating the net assets of overseas operations into US dollars Equity element of Dos Santos Put and Call Options Cumulative net gains and losses less distributions made 14. Share‑based payments Share awards are granted to employees and Directors on a discretionary basis and the Remuneration Committee will decide whether to make share awards under the LTIP or unapproved share option scheme at any time. Long‑term incentive plan At 31 December 2012 the following share awards were outstanding: Year of grant 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 Number of options shares 2,800,000 800,000 1,000,000 1,000,000 83,333 83,333 83,333 50,000 50,000 50,000 600,000 100,000 Start date Vesting date End date Exercise price per share 27.05.10 27.05.10 10.06.10 10.06.10 11.06.10 11.06.10 11.06.10 15.06.10 15.06.10 15.06.10 30.12.10 30.12.10 27.05.10 27.05.10 30.09.11 30.09.12 10.06.11 10.06.12 10.06.13 10.06.11 10.06.12 10.06.13 30.09.11 30.09.12 Nil 26.05.20 25c 26.05.20 Nil 09.06.20 Nil 09.06.20 123p (179.58c) 10.06.20 123p (179.58c) 10.06.20 123p (179.58c) 10.06.20 123p (179.58c) 14.06.20 123p (179.58c) 14.06.20 14.06.20 123p (179.58c) 29.12.20 130.5p (201.08c) 143p (220.34c) 29.12.20 The Company’s mid‑market closing share price at 31 December 2012 was 24p (31 December 2011: 52.25p). The highest and lowest mid‑market closing share prices during the year were 66.50p (2011: 230.50p) and 19.13p (2011: 51.50p) respectively. There were no share awards issued during the year. 44 Ncondezi Coal CompanyAnnual report and financial statements 2012 14. Share‑based payments continued The fair value of the remaining 3,900,000 share awards granted under the Group’s LTIP has been calculated using the Black‑Scholes model and spread over the vesting period. The following principal assumptions were used in the valuation: 27.05.10 11.06.10 15.06.10 30.12.101 30.12.101 Share price at date of grant 132.44c 179.58c 179.58c 301.24c 301.24c Exercise price per share 25c 179.58c 179.58c 201.08c 220.34c Volatility 53.50% 53.50% 53.50% 33.86% 33.86% Period likely to exercise 5 years 5 years 5 years 5 years 5 years Risk‑free investment 2.75% 2.75% 2.75% 2.26% 2.26% Fair value 107.10c 88.50c 88.50c 139.40c 129.68c 1 Additional market conditions are attached to these share awards. The fair value at the date of grant was determined using a probability of meeting these market conditions. The volatility of 53.50% was calculated using the share price of a similar company with coal assets in Mozambique. The volatility of 33.86% was calculated using the Company’s own share price. Unapproved share option scheme At 31 December 2012 the following share awards were outstanding: Year of grant 2012 2012 2012 Number of options shares 712,500 775,000 500,000 Start date Vesting date 19.01.2012 19.01.2012 19.06.2012 19.01.2013 30.09.2012 19.06.2013 End date 18.01.22 18.01.22 18.06.22 Exercise price per share 59p (90.67c) 59p (90.67c) 30.5p (47.83c) The Company’s mid‑market closing share price at 31 December 2012 was 24p (31 December 2011: 52.25p). The highest and lowest mid‑market closing share prices during the year were 66.50p (2011: 230.50p) and 19.13p (2011: 51.50p) respectively. The fair value of the 1,987,500 share awards granted under the Group’s unapproved share option scheme has been calculated using the Black‑Scholes model and spread over the vesting period. The following principal assumptions were used in the valuation: 19.01.12 19.01.121 19.06.12 Share price at date of grant 90.67c 90.67c 47.83c Exercise price per share 90.67c 90.67c 47.83c Volatility 50% 50% 50% Period likely to exercise over Risk‑free investment rate 5 years 5 years 5 years 0.9% 0.9% 0.7% Fair value 39.63c 34.67c 20.76c 1 Additional market conditions are attached to these share awards. The fair value at the date of grant was determined using a probability of meeting these market conditions. The volatility of 50% was calculated using the share price of a similar company with coal assets in Mozambique. Based on the above fair values, the expense arising from equity‑settled share options made to employees and Directors was US$1,292,271 for the year (2011: US$2,597,325). 45 Overview 02Business review 04Corporate governance 15Financial statements 30 Notes to the consolidated financial statements continued 15. Derivative financial asset The late Denis Pereira Dos Santos was the registered owner of the 12,189,474 Ordinary Shares of the Company. On 24 May 2010 the Company entered into a Put and Call option agreement with Rogerio Dos Santos (in his capacity as executor and heir to the estates of certain members of the Dos Santos family) and Roberto Dos Santos (in his personal capacity and as heir to the estates of certain members of the Dos Santos family). As the Call Option was priced in Pound sterling whilst the functional currency of the Company is US dollar it was treated as a derivative financial asset with corresponding increase in equity, and was accounted for at fair value through profit and loss. The fair value of the derivative financial asset at the date the call option was exercised in 2011 was US$21,270,000. It was calculated using the Black‑Scholes model with the following principal assumptions used in the valuation: Share price on issue of loan notes Strike price Volatility Risk‑free investment rate Fair value Initial recognition 123.00p 110.70p 54% 1.50% 35.18p At 20 January 2011 220.00p 110.7p 34% 1.5% 110.00p There was no gain recognised during the year. In 2011 a gain of US$4,166,000 was recognised in the consolidated income statement in respect of the fair value movement of the derivative financial asset. 16. Segmental analysis The Group has two reportable segments: • Exploration – this segment is involved in the exploration of coal within the Group’s licence areas in Mozambique and development of • Corporate – this segment comprises head office operations and the provision of services to Group companies power supply project The operating results of each of these segments are regularly reviewed by the Group’s chief operating decision‑maker in order to make decisions about the allocation of resources and assess their performance. The segment results for the year ended 31 December 2012 are as follows: Income statement For the year ended 31 December 2012 Segment result before and after allocation of central costs Finance expense Finance income Loss before taxation Taxation Loss for the year The segment results for the year ended 31 December 2011 are as follows: Income statement For the year ended 31 December 2011 Segment result before and after allocation of central costs Finance expense Finance income Loss before taxation Taxation Loss for the year 46 Exploration US$’000 Corporate US$’000 Group US$’000 (3,369) (18) 1 (3,386) – (5,224) (27) 87 (5,164) (55) (8,593) (45) 88 (8,550) (55) (3,386) (5,219) (8,605) Exploration US$’000 Corporate US$’000 Group US$’000 (2,894) (14) – (2,908) – (2,908) (8,247) (36) 4,209 (4,074) (84) (4,158) (11,141) (50) 4,209 (6,982) (84) (7,066) Ncondezi Coal CompanyAnnual report and financial statements 2012 16. Segmental analysis continued Other segment items included in the Income statement are as follows: Income statement For the year ended 31 December 2012 Depreciation charged to the income statement Share‑based payments Income tax expense Income statement For the year ended 31 December 2011 Depreciation charged to the income statement Share‑based payments Income tax expense Exploration US$’000 Corporate US$’000 Group US$’000 (356) – – (71) (1,292) (55) (427) (1,292) (55) Exploration US$’000 Corporate US$’000 Group US$’000 (270) – – (58) (2,597) (84) (328) (2,597) (84) The segment assets and liabilities at 31 December 2012 and capital expenditure for the year then ended are as follows: Statement of financial position At 31 December 2012 Segment assets Segment liabilities Segment net assets Property, plant and equipment capital expenditure Exploration capital expenditure Exploration US$’000 Corporate US$’000 Group US$’000 41,101 (2,230) 38,871 116 10,565 15,372 (457) 14,916 2 – 56,473 (2,687) 53,786 118 10,565 The segment assets and liabilities at 31 December 2011 and capital expenditure for the year then ended are as follows: Statement of financial position At 31 December 2011 Segment assets Segment liabilities Segment net assets Property, plant and equipment capital expenditure Exploration capital expenditure Exploration US$’000 Corporate US$’000 Group US$’000 30,703 (1,543) 29,160 956 14,966 33,875 (1,956) 31,919 2 – 64,578 (3,499) 61,079 958 14,966 17. Financial instruments The Group is exposed to risks that arise from its use of financial instruments. This note describes the Group’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. The significant accounting policies regarding financial instruments are disclosed in note 1. There have been no substantive changes in the Group’s exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note. 47 Overview 02Business review 04Corporate governance 15Financial statements 30 Notes to the consolidated financial statements continued 17. Financial instruments continued Principal financial instruments The principal financial instruments used by the Group from which financial instrument risk arises, are as follows: Loans and receivables at amortised cost Trade and other receivables Cash and cash equivalents Financial liabilities held at amortised cost Trade and other payables 2012 US$’000 2011 US$’000 348 12,008 448 30,444 2,538 2,954 General objectives, policies and processes The Board has overall responsibility for the determination of the Group’s risk management objectives and policies and retains ultimate responsibility for them. The overall objective of the Board is to set polices that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are set out below: Credit risk Credit risk arises principally from the Group’s investments in cash deposits. The Group holds its cash balances with four different banks in Guernsey, London, Mauritius and Mozambique. The Group seeks to deposit cash with reputable financial institutions with strong credit ratings. Liquidity risk Liquidity risk arises from the Group’s management of working capital and the finance charges and principal repayments on its debts. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The Board receives cash flow projections on a monthly basis as well as information on cash balances. Maturity analysis 2012 Trade and other payables 2011 Trade and other payables Total US$’000 On demand US$’000 In 1 month US$’000 Between 1 and 6 months US$’000 Between 6 and 12 months US$’000 Between 1 and 3 years US$’000 2,538 – 2,538 – – – Total US$’000 On demand US$’000 In 1 month US$’000 Between 1 and 6 months US$’000 Between 6 and 12 months US$’000 Between 1 and 3 years US$’000 2,954 – 2,954 – – – The Group endeavours to match the maturity of its current assets with its current liabilities to mitigate liquidity risk. Borrowing facilities The Group had no undrawn committed borrowing facilities available at 31 December 2012 (2011: Nil). Market risk The Group does not currently sell any electricity. As such there is no specific market risk at the date of this report. However, there is a risk that the Group is unable to secure a credit‑worthy off‑taker for the full output of the power plant, with the plant operating at load factors in excess of 80%. 48 Ncondezi Coal CompanyAnnual report and financial statements 2012 17. Financial instruments continued Currency risk The Group is exposed to currency risk through its activities in Mozambique due to certain costs arising in Mozambique Meticais, whilst the functional currency is US dollars. The Group has no formal policy in respect of foreign exchange risk, however, it reviews its currency exposures on a monthly basis. Currency exposures relating to monetary assets held by foreign operations are included within the Group Income Statement. The Group also manages its currency exposure by retaining the majority of its cash balances in US dollars, being a relatively stable currency. A 5% appreciation in the value of the US dollar against the Meticais, GB pounds and ZAR will increase net assets by US$198,614 (2011: US$191,258). Currency exposures As at 31 December the Group’s net exposure to foreign exchange risk was as follows: US dollars 2012 US$’000 Assets/(liabilities) held 2011 US$’000 Assets/(liabilities) held USD 8,388 8,388 GBP 823 823 ZAR 2,783 2,783 MZN 392 392 Total USD 12,386 12,386 27,159 27,159 GBP 626 626 MZN 2,684 2,684 Total 30,469 30,469 Fair value Fair value is the amount at which a financial instrument could be exchanged in an arm’s length transaction between informed and willing parties, other than a forced or liquidation sale and excludes accrued interest. Where available, market values have been used to determine fair values. Where market values are not available, fair values have been calculated by discounting expected cash flows at prevailing interest rates and by applying year end exchange rates. The fair values of short‑term deposits, loans and overdrafts with a maturity of less than one year are assumed to approximate to their book values. Fair value measurement hierarchy IFRS 7 requires certain disclosures which require the classification of financial assets and financial liabilities measured at fair value using a fair value hierarchy that reflects the significance of the inputs used in making the fair value measurement. The fair value hierarchy has the following levels: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (b) inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). The level in the fair value hierarchy within which the financial asset or financial liability is determined on the basis of the lowest level input that is significant to the fair value measurement. Financial assets and financial liabilities are classified in their entirety into only one of the three levels. Level 3 fair value measurements Opening balance Additions Net gains recognised in income statement Disposal Closing balance Derivative financial asset 2012 US$’000 2011 US$’000 – – – – – 17,104 – 4,166 (21,270) – 49 Overview 02Business review 04Corporate governance 15Financial statements 30 Notes to the consolidated financial statements continued 18. Contingent liabilities Inherent uncertainties in interpreting tax legislation The Group is subject to uncertainties relating to the determination of its tax liabilities. The tax system and tax legislation in Mozambique have been in force for only a relatively short time and are subject to frequent changes and varying interpretations. The Directors‘ interpretations of such legislation in applying it to business transactions of the Group may be challenged by the relevant tax authorities and, as a result, the Group may be assessed on additional tax payments including fines, penalties and interest charges, which could have a material adverse effect on the Group’s financial position and results of operations. The Directors believe that the Group is in substantial compliance with tax legislation and any contractual terms entered into that relate to tax which affect its operations and that, consequently, no additional tax is expected to arise in excess of those recognised in the financial statements. 19. Related party transactions Parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The nature of the related party relationships with whom the Group entered into transactions or had balances outstanding at 31 December 2012 and 31 December 2011 is determined by management as transactions where the Group has the ability to control the decisions taken by management of the related parties through the Group’s shareholders. All companies were classified as “other related parties” according to requirements of IAS 24. Strata Limited (“Strata”) – relationship agreement A relationship agreement dated 3 June 2010 (“Relationship Agreement”) between the Company and Strata was executed to regulate the ongoing relationship between the Company and Strata. The principal purpose of the Relationship Agreement is to ensure that the Company is capable of carrying on its business independently of Strata and its subsidiary undertakings (“Strata Group”) and that transactions and relationships with the Strata Group are at arm’s length and on normal commercial terms. The Relationship Agreement will continue for so long as the Ordinary Shares are admitted to trading on AIM and Strata owns or controls in aggregate 15% or more of the issued shares or voting rights of the Company. As at 31 December 2012 Strata held 44.82% of the Company. Strata Capital UK LLP Strata Capital UK LLP charged the Company US$118,650 (2011: US$160,756) in respect of legal services. MMDN Financial Services LLP (“MMDN”) During the year MMDN a firm which Manish Kotecha is a partner charged the Company US$4,975 (2011: US$36,681) in respect of financial services. The balance outstanding at 31 December 2012 was US$380 (2011: US$370). Mines Value Management During the year US$63,213 (2011: US$64,353) was paid to Mines Value Management in respect of services provided by Nigel Sutherland. PIP Global IP Limited “PIP” During the year PIP a company of which Nigel Sutherland is a Director, provided an independent mine plan and cost review on the Company’s feasibility study. The total charge was US$287,561 (2011: US$Nil). Graham Mascall During the year Graham Mascall charged the company US$139,280 (2011: US$Nil) for consulting services. 50 Ncondezi Coal CompanyAnnual report and financial statements 2012 20. Lease commitments Operating lease commitments – minimum lease payments Ncondezi Services (UK) Limited administration office In November 2011 the Group entered into a three‑year lease for offices in London, United Kingdom. The annual rent for these offices is US$350,049 (£216,505). Future minimum lease payments under non‑cancellable operating leases as at 31 December 2012 are as follows: Within one year After one year but not more than five years Minimum lease payments 2012 US$’000 2011 US$’000 350 350 700 335 670 1,005 21. Commitments In December 2011 a Memorandum of Understanding was signed with the Ministry of Mineral Resources in respect of a three‑year Social Development Programme, with a committed spend of US$2m. During the year US$340,000 was spent as part of this programme. 22. Events after the reporting date On 26 April 2013 the Company granted 4,300,000 share options to its senior management and contracted personnel of which 500,000 options vest as at the date of grant, 1,875,000 options are subject to milestone based vesting conditions (“Milestone Based Awards”) and 1,925,000 options are subject to time based vesting conditions (“Time Based Awards”). The options have an exercise price of 17.25p and are exercisable within three years of vesting. Simultaneously it has been agreed to cancel and/or lapse prior unexercised share awards in respect of 2,762,500 Ordinary Shares, with varying exercise prices between 59p and 143p. The Milestone Based Awards provide that 1/3 of the Milestone Based Awards vest upon the successful conclusion with an offtaker of Heads of Terms for a Power Purchase Agreement and the other 2/3 of the Milestone Based Awards are to vest upon the execution of a Power Purchase Agreement for all or part of the first 300MW phase of the Ncondezi Power Project. The Time Based Awards provide that the share options vest in two equal tranches on the first and second anniversary from the date of grant. 51 Overview 02Business review 04Corporate governance 15Financial statements 30 Company information Directors Company Secretary Registered Office Michael Haworth (Non‑Executive Chairman) Paul Venter (Chief Executive Officer) Christiaan Schutte (Non‑Executive Director) Peter O’Connor (Non‑Executive Director) Graham Mascall (Non‑Executive Director) Richard Stuart (Non‑Executive Director) Estevão Pale (Non‑Executive Director) Nigel Sutherland (Non‑Executive Director) Mark Trevan (Non‑Executive Director) Elysium Fund Management Limited PO Box 650, 1st Floor, Royal Chambers St Julian’s Avenue St Peter Port Guernsey GY1 3JX 2nd Floor Wickham’s Cay II PO Box 2221 Road Town Tortola British Virgin Islands Company number 1019077 Nominated Advisor and Joint Broker Joint Broker Auditors Registrar Legal advisor to the Company as to BVI law Legal advisor to the Company as to English law 52 Liberum Capital Limited Ropemaker Place Level 12 25 Ropemaker Street London EC2Y 9AR finnCap 60 New Broad Street London EC2M 1JJ BDO LLP 55 Baker Street London W1U 7EU Computershare Investor Services (BVI) Limited Woodbourne Hall PO Box 3162 Road Town Tortola British Virgin Islands Ogier LLP 41 Lothbury London EC2R 7HF Berwin Leighton Paisner LLP Adelaide House London Bridge London EC4R 9HA Ncondezi Coal CompanyAnnual report and financial statements 2012 N c o n d e z i C o a l C o m p a n y A n n u a l r e p o r t a n d fi n a n c i a l s t a t e m e n t s 2 0 1 2 www.ncondezicoal.com
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