NuScale Power Corporation
Annual Report 2018

Plain-text annual report

ANNUAL REPORT 2018 EARNINGS GROWTH DELIVERING SHAREHOLDER RETURNS *As at 16 July 2018 CONTENTS 3 4 6 9 Corporate Information Chairman's Letter 50 Auditor's Independence Declaration 51 Financial Statements Managing Director's Report 98 Declaration by Directors 9 Our Strategy Our Strategy 99 Independent Auditor's Report 11 Financial Year 103 Shareholder Information 23 Directors' Report 105 Other Information 36 Remuneration Report 107 Stanmore's Five-Year Financial History 11 Financial Year 1 Stanmore Coal Annual Report 2018As one of the small ASX-listed coal producers, Stanmore Coal offers an attractive entry point into the coal sector in Australia ASX CODE SMR SHARE PRICE $0.89* SHARES 251,800,978 MARKET CAP $224M* *As at 10 September 2018 Institutions 19% SHARE OWNERSHIP** 22% 4% 20% 35% Other Employees and Directors **As at 31 August 2018 Sprint Capital HK (Greatgroup) Corporate 2 Stanmore Coal Annual Report 2018CORPORATE INFORMATION DIRECTORS Stewart Butel Dan Clifford Stephen Bizzell Chris McAuliffe Neal O’Connor Patrick O’Connor COMPANY SECRETARY Ian Poole REGISTERED OFFICE AND PRINCIPAL BUSINESS OFFICE Level 8 100 Edward Street Brisbane QLD 4000 Phone: + 61 7 3238 1000 Fax: +61 7 3238 1098 COUNTRY OF INCORPORATION INTERNET ADDRESS Australia stanmorecoal.com.au SHARE REGISTRY Link Market Services Level 21, 10 Eagle Street Brisbane Qld 4000 Phone: 1300 554 474 Fax: +61 2 8280 7662 AUDITORS BDO Audit Pty Ltd Level 10, 12 Creek Street Brisbane QLD 4000 Phone: +61 7 3237 5999 Fax: +61 7 3221 9227 STOCK EXCHANGE LISTING Australian Securities Exchange ASX Code: SMR AUSTRALIAN BUSINESS NUMBER 27 131 920 968 3 Stanmore Coal Annual Report 2018CHAIRMAN'S LETTER Stewart Butel Chairman Dear Shareholders, On behalf of the Board of Directors, it gives me great pleasure as your new Chairman to present this year’s Chairman’s letter. Firstly, I want to acknowledge my predecessor, Neville Sneddon, for his leadership, guidance and outstanding service to the company over the past eight years when Stanmore Coal transformed from an exploration company to a coal producer with an exciting future. Stanmore Coal achieved significant improvements in its financial performance during the year as well as de-risking the business through the commodity cycle with the astute acquisition of Isaac Downs (previously Wotonga South) coking coal deposit in June 2018. FINANCIAL PERFORMANCE Stanmore Coal’s revenue from operations totalled a record $208.1 million, up 51% from the 2017 financial year, producing a gross profit of $52.3 million, which was an increase of 55% from prior year. The underlying Earnings Before Interest, Tax, Depreciation and Amortisation improved by 70% to $45.6 million. During the year the company also recognised the remaining $25.3 million contingent consideration due to the vendors of Isaac Plains, because the company has revised up its long-term pricing assumptions which is expected to have a positive impact on future EBITDA and operating cashflows. Stanmore reported another profitable year with a Net Profit After Tax of $6.0 million. Cashflow generation from operations was $21.9 million, a significant turnaround from cash outflow in the prior year. This allowed the company to repay its drawn working capital facility of $15.6 million and be debt free at year end, as well as fund its ongoing sustaining capital and the pre-production capital of $7.2 million at Isaac Plains East. This enabled mining to commence at Isaac Plains East in July 2018. Based on the strong operational performance, the Board declared a maiden dividend of 2 cents per share for the year. With a focus on generating strong cashflows and maintaining balance sheet strength, Stanmore Coal aims to deliver returns to shareholders through improved returns on invested capital. As well as share price appreciation, Stanmore plans to pay ongoing dividends commensurate with performance in earnings, cashflow, the cyclicality of our industry and any capital management decisions made from time to time. INDUSTRY CHALLENGES The outlook for metallurgical coal is positive. To date the industry response to improved long-term prices has been subdued following the overcapacity 4 Stanmore Coal Annual Report 2018Stanmore Coal achieved significant improvements in its financial performance during the year as well as de-risking the business through the commodity cycle with the astute acquisition of Isaac Downs developed in the 2000s and the lessons learnt. However, as metallurgical coal prices remain above the long-term average we anticipate existing operations will absorb underutilised capacity and new capacity will be developed, resulting in infrastructure constraints. Stanmore Coal will remain agile and flexible to manage these challenges. PROTECTION AGAINST THE PRICE CYCLE Stanmore will continue to be disciplined with operating costs and capital to ensure profitability and flexibility throughout the coal price cycle. As we look forward to the next few years, we will strive to become one of the low cost producers in the industry to ensure strong, stable returns for our shareholders. This involves optimisation of our existing portfolio and ensuring that all investment decisions are made with this strategy at the forefront of our minds. Permitting our recently acquired Isaac Downs deposit (Wotonga South) will be a key focus over the next few years. During FY19 the company will place more focus on its portfolio of untapped thermal resources in the Bowen and Surat basins. Stanmore strongly believes the requirement for thermal coal in the overall energy mix both nationally and internationally will sustain long-term demand for this product. GOVERNANCE During the year the Board was renewed. This process was supported by a skills gap analysis with a targeted selection process, resulting in the appointment of Neal O’Connor and myself in September 2017. The Board is well balanced, between independents and non-independents, with a full complementary mix of skills between the current Board members. THANK YOU On behalf of the Board, I thank the Stanmore management team led by our Managing Director Dan Clifford, our employees and contract partners for their outstanding outcomes and effort during FY18. I would like to thank you, the shareholders for your continued support. Together we look forward to delivering superior returns to shareholders by accelerating the company strategy and taking advantage of the improved outlook for metallurgical coal. I look forward to continuing the successes of Stanmore for FY19 and beyond. Stewart Butel Chairman 5 Stanmore Coal Annual Report 2018MANAGING DIRECTOR'S REPORT Dan Clifford Managing Director YEAR IN FOCUS Outcomes for Stanmore during the year included: FULL YEAR PRODUCTION FROM ISAAC PLAINS WITHIN TARGET RANGE DEVELOPMENT OF ISAAC PLAINS EAST WITH MINING COMMENCING JULY 2018 PURCHASE OF ISAAC DOWNS, PROVIDING STANMORE WITH AN EXTRA 10 YEARS OF PRODUCTION RECORD LEVELS OF ENVIRONMENTAL REHABILITATION COMPLETED OPERATIONS RECORDING AN UNDERLYING EBITDA OF $45.6M MAIDEN DIVIDEND DECLARED OF 2 CENTS PER SHARE The achievements of Stanmore Coal in the past year are only the beginning of the outcomes which can be delivered for shareholders as our strategy is implemented ‘on the ground’. 6 Stanmore Coal Annual Report 2018 Not only is the company cycle proofed, but it is capital light and well positioned in metallurgical coal with a strong pipeline ahead of us as the existing infrastructure is pushed to full capacity Before we look back on the year’s achievements for shareholders, it is worth looking ahead at the company’s operating platform. At the end of the 2018 financial year, Stanmore Coal is debt free, invested and well on-track for a 50% increase in production over the next year. We have an improving cost structure, a runway of 15+ years of mine life and all the major infrastructure in place. Not only is the company now placed to perform throughout the commodity cycle, but its operations are capital light and well positioned in metallurgical coal with a strong pipeline ahead as the existing infrastructure is pushed to full capacity. The objectives and expectations targeted from the beginning of the 2018 financial year focused on the key areas of value generation. Firstly, driving further advances in production, cost efficiency and productivity, building on the improvements made in the prior year. Secondly, achieving repeatability in our operating model for further EBITDA growth from the prior year. Thirdly and of significant value, creating ‘runway’ for the current infrastructure beyond the life of Isaac Plans mine and the final focus point of generating certainty in outcomes and returns for shareholders. I am proud and privileged to be in a position to outline these achievements by the entire team at Stanmore Coal. Just as importantly, we are transparent about the areas in which we did not meet the high standards we set out to achieve. Health and Safety is a key pillar supporting the balanced outcomes all stakeholders expect from the company. In FY18, we did not achieve the high standard we set for the company. Our TRIFR (total recordable injury frequency rate) deteriorated from 12.5 to 16.4 injuries per million hours. We have committed significant management and governance resources to the areas of fatal risk and controls, personal safety and leadership to correct this performance. During FY18, we made strong progress both operationally and financially. The physical performance of the operation improved with an 8% increase in ROM coal production supported by a 5% increase in overburden removal as we accelerated the business in the second half of the year to take advantage of fleet capacity and prevailing coal prices. This was an important step for the business as the second half annualised run rate provides the right platform for planned growth in production during FY19. Costs increased to $98/t (excluding state royalties of $12/t) for the full year as more emphasis was placed on increasing volumes in the lead in to the lower cost Isaac Plains East mine. Record full year earnings and cash generation from operations were the flow on from this strong operating performance. Underlying EBITDA rose by 70% compared to the prior year, supported by a 29% improvement in sales volumes, operating cost containment and strong coal prices. Our investment in laying the foundation for the future is critical in driving improved returns and value growth. The approval, development and commencement of Isaac Plains East in the year was a great achievement. Significant further value 7 Stanmore Coal Annual Report 2018Stanmore Coal is well positioned in the metallurgical coal sector with a reducing cost structure, which will add further strength to the company as we seek to grow returns and value has been captured with the acquisition of Isaac Downs, giving the Isaac Plains Complex a 15+ year life with a low capital requirement. This has been right in line with our strategy of low capital cost development and maximising our current infrastructure. It is pleasing to see this discipline resulting in the company being debt free at the end of the year, and posting a 155% increase in the share price. These factors have reinforced the Board’s confidence in the strategic progression of the company and underpinned the decision to provide additional returns to our shareholders by way of a 2 cents per share maiden dividend. The outlook for the company is exciting. Metallurgical coal prices remain well supported and it is our view they will remain that way over the long term as there is no replacement technology for this product in the steel making process. In the short term, China’s environmental and safety reform measures have been successful. The consequence is the closure of local facilities resulting in increased demand for imported coking coal and upward pressure on the Australian FOB price. This movement, in conjunction with economic growth in south-east Asia and India is very positive for the company’s outlook. Stanmore Coal is well positioned in the metallurgical coal sector with a reducing cost structure, which will add further strength to the company as we seek to grow returns and value. We have a proven track record of delivering on our strategic objectives across the resource development cycle (Source, Develop, Operate, Rehabilitate). This can only happen with the dedicated work of the team at Stanmore Coal and I would like to take this opportunity to thank each and every team member for their dedication, enthusiasm and energy as we execute on the strategy. My thanks also to our shareholders, contract partners and neighbours for your support throughout the year. Daniel Clifford Managing Director 8 Stanmore Coal Annual Report 2018 OUR STRATEGY DRIVING CERTAINTY IN STRATEGIC OUTCOMES – CASH GENERATIVE, CAPITAL LIGHT APPROACH WITH FUNDING IN PLACE. INITIAL STAGES OF STRATEGY SUCCESSFULLY EXECUTED LEADING TO STRONG RESULTS AND MAIDEN DIVIDEND Platform acquisition Maximising current assets Right scale of development with capital discipline Positioning in commodity type S R E V I R D E U L A V Reliability established Dragline utilisation IPC CHPP to 3.5Mtpa ROM feed IPC Regional Advantage OC and UG capability Repeatable ‘hub’ model Integrated coal company Operational performance Business plan Life of mine plans Strategic plan Toll loading project in combination with acceleration plan during H2 further sweated the asset as progress to 3.5Mtpa ROM is made Open cut and underground capability secured with Golding open cut contact extension and Isaac Plains Underground BFS underway with Mastermyne Met coal focus benefit with 100% of benchmark pricing received for semi-soft coking coal and strong price outlook 9 Stanmore Coal Annual Report 2018 GOONYELLA BRANCH Legend ML 700019 ML 70342 ML 700018 ISAAC PLAINS EAST MINE Drainage Major roads Minor roads Railway Stanmore ML Stanmore MDL Stanmore EPC Y A W H S H I G N W O ML 700017 ML 700016 K D A E P ~ 1 0 k m EPC 755 EPC 728 ROM ISAAC PLAINS MINE Isaac Plains East pre-production development completed for $8m providing an approximate 8-year production life reinforcing Stanmore’s Capital Light approach R ISAAC RIVER MDL 137 ISAAC DOWNS ISAAC PLAINS ISAAC PLAINS SOUTH Satellite assets acquired with Isaac Downs (Wotonga South) process completed EPC 755 ISAAC PLAINS COMPLEX 10 N 0 4km Stanmore Coal Annual Report 2018 FINANCIAL YEAR EXECUTING THE STRATEGY Now with our sights set on the future, the performance of our team and the Isaac Plains Complex will enable Stanmore to identify and execute further value accretive opportunities Targeting further transformation and return for shareholders through the execution of the FY19 strategic plan based on a solid foundation of values and strategy leading to balanced results and superior financial outcomes BALANCED RESULTS AND FINANCIAL OUTCOMES Health Safety Environment Community People Organisation Operations Growth VALUES STRATEGY SYSTEMS 11 Stanmore Coal Annual Report 2018HEALTH AND SAFETY TRIFR 16.4 Many positive steps forward with a focus on Fatal Risk and visible leadership and there remains much more work to be done. 25 20 15 10 5 0 TRIFR (rolling 12 month average) TRIFR target Jul 17 Aug 17 Sep 17 Oct 17 Dec 17 Jan 18 Feb 18 Mar 18 Apr 18 May 18 Jun 18 Jul 18 ENVIRONMENT AND COMMUNITY Significant site rehabilitation achieved with a total of 128Ha RECONTOURED $8m reduction in site rehabilitation obligation with State achieved 12 Stanmore Coal Annual Report 2018OPERATIONS Record full year earning and record cash generation from operations Acceleration plan implemented and successfully executed H2 annualised ROM 1.9Mt heading for 2.3Mt in FY19 Total underlying FOB unit costs contained to A$98/t (excluding A$12/t contribution to State royalties) following acceleration plan OPERATE REHABILITATE Stanmore has a prove track record of managing the resource cycle DEVELOP SOURCE Strong operational performance Open cut overburden removed increased 5% from FY17 with existing fleet ROM coal production increased 8% PRIME WASTE OVERBURDEN (K BCM) 30,000 25,000 20,000 15,000 10,000 5,000 0 FY17 Actual H1FY18 Annualised Actual H2FY18 Annualised Actual FOB COSTS (A$/TONNE) ROM TONNES MINED (K TONNES) FOR costs FOR to FOB costs State royalties Open cut High wall 140 120 100 80 60 40 20 0 2,000 1,800 1,400 1,200 1,000 800 600 400 400 0 FY17 Actual H1FY18 Annualised Actual H2FY18 Annualised Actual FY17 Actual H1FY18 Annualised Actual H2FY18 Annualised Actual 13 Stanmore Coal Annual Report 2018GROWTH Transitioning to Isaac Plains East and fast- tracking Isaac Downs (Wotonga South) are major steps forward in bringing the infrastructure to 3.5Mtpa ROM Significant shareholder value in EPC755 adjoining Isaac Downs, both resulting in JORC upgrades FINANCIAL Revenue increased 51% Gross profit increased 55% compared to FY17 Underlying EBITDA (non IFRS measure) up from A$26.8m in FY17 to A$45.6m in FY18 155% increase in share price from FY17 and maiden dividend declared of 2 cents per share reflecting solid investment and returns for shareholders e n n o t r e p D S U 400 350 300 250 200 150 100 50 0 60,000 50,000 40,000 30,000 20,000 10,000 0 Hard coking coal FY17 Actual H1FY18 Annualised Actual H2FY18 Annualised Actual ASX : SMR ) $ ( e c i r p e r a h S 1.00 0.75 0.50 0.25 0.00 2015 2016 2017 2018 14 Stanmore Coal Annual Report 2018 OUTLOOK FY19 guidance of 1.8Mt product (2.3Mt ROM) being 50% increase on FY17, in parallel to unit cost reduction of 12% (excluding State royalties), putting Stanmore in a position of strength for FY19 s e n n o t M O R 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 H1FY18 Annualised H2FY18 Annualised FY19 Guidance Strategic Intent CHPP Capacity Metallurgical coal demand and pricing significantly stronger than historical forecasts for the past year and its expected that it will remain well supported moving forward. 15 Stanmore Coal Annual Report 2018 STANMORE COAL ASSETS 16 Stanmore Coal Annual Report 2018STANMORE COAL RESOURCES AS AT JUNE 2018 Project Name Tenement Coal Type* Measured Resources Indicated Resources Inferred Resources Total Resources Competent Person Report Date Issac Plains Isaac Plains East Isaac Downs (Wotonga) Isaac South Isaac Plains Complex Clifford The Range Surat Basin Complex Mackenzie Belview Tennyson Lilyvale Total Coal Resources ML 70342 ML 700018 ML 700019 ML 700016 ML700017 ML700018 ML700019 MDL 137 EPC 728 EPC 755 Sub Total EPC 1274 EPC 1276 EPC 1112 EPC 2030 Sub Total EPC 2081 EPC 1114 EPC 1186 EPC 1798 EPC 1168 EPC 1580 EPC 1687 EPC 2157 C, T 22.2 21.3 C 12.9 8.8 C, PCI C, T 18.7 11.9 65.7 3.6 14.5 48.2 T T 0 200.0 18.1 187.0 18.1 0 0 0 0 387 25.7 50.0 0.0 0 C, T C, PCI T C 9 8 1 25 43 430 81 511 117 280 161 33 52 30 23 52 157 630 286 916 143 330 161 33 83.8 510.9 1,145 1,740 A May 18 A May 18 B Mar 18 C May 18 D Aug 16 A Oct 12 A Nov 11 A Mar 15 A Dec 12 A Feb 14 *Coal Types Potential Legend: CK – Coking Coal, semi-soft or greater potential PCI – Pulverised Coal Injection TH – Export Thermal grade Competent Person A: Troy Turner – Xenith Consulting B: Kane Maxwell – Peabody Australia C: Mal Blaik – JB Mining D: Oystein Naess – Xenith Consulting Note 1: All Coal Resources are reported under The Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (‘the JORC Code’) applicable at the time each report was published. Reports dated 2012, and earlier, used the JORC 2004 version, reports dated after 2012 are reported against the requirements of the 2012 JORC Code. Note 2: Rounding to the nearest significant figure is applied to Total Resource Tonnes in the Inferred Category. This is deemed conservative and reflective of the Inferred Resource category confidence level and accounts for the minor differences in the overall total reported resources. Note 3: All Coal Resources are reported on a 100% basis; Stanmore Coal's economic interest in Clifford is 60%, Mackenzie is 95%, and Lilyvale is 85%, all other tenure is 100% owned by Stanmore Coal. 17 Stanmore Coal Annual Report 2018STANMORE COAL RESERVES AS AT JUNE 2018 Project Name Tenement Proved Probable Total Proved Probable Total Competent Person Report Date Coal Reserves Marketable Coal Reserve ML 70342 1.8 0.9 2.7 10.3 1.9 12.2 1.3 8.0 0.7 2.0 E Aug 18 1.5 9.5 E Aug 18 Issac Plains Opencut Issac Plains East Opencut Isaac Plains Underground ML 700016 ML700017 ML700018 ML700019 ML 70342 ML 700018 ML 700019 12.9 12.9 9.4 9.4 F Apr 18 Isaac Plains Complex 12.1 15.7 27.8 9.3 The Range EPC 1112 EPC 2030 116.6 116.6 11.6 94.2 20.9 94.2 G Jul 11 Surat Basin Complex Total Coal Reserves 116.6 116.6 94.2 94.2 12.1 132.3 144.4 9.3 105.8 115.1 Coal Type Ratio - Coking:Thermal (% of Marketable Coal Reserve) Isaac Plains OC – 76%:24% Isaac Plains East OC – 98%:2% Isaac Plains Underground – 88%:12% The Range – 100% Thermal Competent Person E: Gary Benson – Measured Group F: Mark McKew – Geostudy G: Richard Hoskings – Minserve Note 1: All Coal Resources are reported under The Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (‘the JORC Code’) applicable at the time each report was published. Reports dated 2012, and earlier, used the JORC 2004 version, reports dated after 2012 reported against the requirements of the 2012 JORC Code. Note 2: Totals may not be exact due to significant figure rounding. Note 3: The Reserves quoted for The Range project were established in 2011 under the relevant JORC Code at the time and used a coal price forecast of A$120/tonne for benchmark NEWC thermal coal equivalent. These Reserves were supported by a Feasibility Study that assumed the completion of the Surat Basin rail to connect the mine to the Port of Gladstone. Note 4: All Coal Reserves are reported on a 100% basis, and Stanmore Coal's economic interest in the tenure above is 100%. 18 Stanmore Coal Annual Report 2018 FURTHER DEVELOPMENT THE RANGE THERMAL COAL PROJECT A definitive feasibility study completed in 2012 covering geology, mining and infrastructure confirmed The Range as a high quality, export grade, thermal coal project producing 94Mt of product over a 22 year life is now being reviewed. The focus continues on the investigation of possible rail infrastructure to link the project with the Port of Gladstone. Until there is certainty as to timing of the rail solution, Stanmore will continue with environmental monitoring and other minor on-site activities to maintain compliance with approvals. TENEMENTS EPC 1112, 2030 MLA 55001, 55009, 55010 AREA 90km2 LOCATION Surat Basin – 24km south-east of Wandoan JORC RESOURCE OWNERSHIP Total of 286Mt high quality open pit thermal coal (18Mt Measured + 187Mt Indicated + 81Mt Inferred Resource) 100% Stanmore Coal 19 Stanmore Coal Annual Report 2018OTHER PROJECT AREAS CLIFFORD THERMAL COAL PROJECT The Clifford Project covers about 820km2 in Queensland’s highly prospective Surat Basin. The project is near Stanmore’s The Range, a potential 5 Mt/a open cut export grade thermal coal project. The Clifford Project adjoins Glencore’s Wandoan Project and is targeting thermal coal deposits at depths amenable to open cut mining. The joint exploration initiative with JOGMEC played a key role in the identification and development of new, long term sources of high quality thermal coal highly suitable for Japanese electricity generators. The JORC Resource defined to date totals 630Mt (200Mt indicated, 430Mt inferred). TENEMENTS EPC 1274, 1276 AREA 820km2 LOCATION Surat Basin – north-west of Wandoan JORC RESOURCE OWNERSHIP 630Mt (200Mt Indicated; 430Mt Inferred) 60% Stanmore Coal 40% JOGMEC BELVIEW COKING COAL PROJECT The Belview Project is a large scale, metallurgical coal project located in the heart of Queensland’s Bowen Basin. Belview currently hosts a 330Mt JORC Resource (50Mt Indicated and 280Mt Inferred). Extensive coal analysis has revealed that maintaining a minimum vitrinite content is important to ensure the saleable product displays adequate coking properties. This is achieved by separation at a low density and thus is accompanied by a low product ash level (typically 6–7.5% (ad)). A washed coking coal is likely to exhibit low sulphur (0.4–0.55% ad) and moderate phosphorus (0.07–0.1% ad) with limited plastic properties. The secondary PCI coal has low-volatile matter, standard ash, low sulphur and moderate phosphorus content. At a typical ash level of 10–11% (ad) the calorific value is regarded as high (~7,500 kcal/kg gad). This calorific value level, along with the high carbon content, indicates a high coke replacement ratio. The variable iron and calcium content in the ash impact the ash fusion temperature. The HGI is high (~80–87). Wash and clean coal composite analysis of Belview coal samples indicates that together these products can be produced at a high overall washed yield, with an achieved laboratory yield for the main seam (Pollux) of 79%. Under certain processing scenarios a thermal coal product may also be produced at minimal yields (5–10%) additional to the PCI product, as a moderate ash (20% ad) with reasonably high energy content around 6,500 kcal/kg (gad) and attractive HGI of 75–80. TENEMENTS EPC 1114, 1186, 1798 AREA 125km2 LOCATION 10km south-east of Blackwater JORC TOTAL RESOURCE OWNERSHIP 330 Mt 100% Stanmore Coal 20 Stanmore Coal Annual Report 2018OTHER PROJECT AREAS (continued) LILYVALE COKING COAL PROJECT The Lilyvale Project is 25km north-east of Emerald and close to the operating Kestrel South and Gregory-Crinum coking coal mines. The project hosts the German Creek seam from 336m in depth with a typical thickness across the project area of 2.2–2.5m. Geologically the project and surrounding areas are well understood and not expected to be geologically complex. The project area has defined JORC Resource of 33Mt (at an inferred level). Further exploration is planned to define additional resources. TENEMENTS EP 1687, 2157 AREA 13km2 LOCATION 25km north-east of Emerald JORC RESOURCE OWNERSHIP 33Mt (33Mt Inferred) 85% Stanmore Coal 15% Cape Coal The company maintains other exploration tenements including Mackenzie and Tennyson. 21 Stanmore Coal Annual Report 201822 Stanmore Coal Annual Report 2018DIRECTORS' REPORT 23 Stanmore Coal Annual Report 2018DIRECTORS' REPORT DIRECTORS' REPORT Your Directors present their report on the Consolidated Entity consisting of Stanmore Coal Limited (the Company) and the entities it controlled at the end of, or during, the year ended 30 June 2018 (referred to in this report as Stanmore Coal or the Company). STEWART BUTEL B. Science (Geology), Grad Dip in Business Studies, Advanced Certificate of Coal Mining, GAICD DAN CLIFFORD B. Eng (Mining) MANAGING DIRECTOR NON-EXECUTIVE DIRECTOR APPOINTED 18 SEPTEMBER 2017 CHAIRMAN APPOINTED 1 FEBRUARY 2018 Stewart has more than 40 years of experience in operational management and board roles in the resources industry in New South Wales, Queensland and Western Australia. He joined Wesfarmers Limited in 2000 as Managing Director of the Curragh mine, and was Managing Director of Wesfarmers Resources between 2006 and 2016. Stewart holds a Bachelor of Science (Geology) and qualifications in business and mining. He has completed the Breakthrough Program for Senior Executives at IMD Business School in Switzerland and the Advanced Management Program at Harvard Business School. He was appointed to the Board of Gladstone Ports Corporation in October 2017. He is a past director of a number of Wesfarmers subsidiaries, and Duet Company and Duet Investment Holdings. He is immediate past President of Queensland Resources Council and has held directorships of a number of resources industry bodies including Minerals Council of Australia, Chamber of Mines and Energy WA, Australian Coal Association and its low emissions technology fund, ACALET. Stewart is a member of the Remuneration and Nominations Committee, Chairman of the Health Safety, Environment and Community Committee and a member of the Audit and Risk Management Committee. During the past three years, Stewart has served as a Director of Duet Group an ASX listed company until its delisting on 16 May 2017. Dan was appointed as Managing Director and Chief Executive Officer on 14 November 2016. Dan has more than 20 years’ experience in the coal mining industry and has worked in Australia, South Africa and New Zealand. He has substantial open cut and underground coal mining experience, including responsibility for major dragline and longwall operations under previous employers including Glencore, Anglo Coal, BHP Billiton and Solid Energy. Dan was appointed Chief Executive Officer of Solid Energy New Zealand in 2014 when the company was facing significant financial pressures and very difficult market conditions for coal mining companies. During this period, significant achievements in health and safety and operational efficiencies were reached. In parallel with running the operations of Solid Energy, Dan led the process of an asset sales program. Dan previously held the position of General Manager of the Ulan Complex at Glencore in Ulan, New South Wales, and has held roles with Anglo Coal and BHP in technical, operational and regional management roles. Dan was a member of the Health, Safety, Environment and Community Committee. During the past three years, Dan has not served as a Director of any other listed companies. 24 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) STEPHEN BIZZELL B. Com, MAICD CHRIS MCAULIFFE LLB (Hons), MBA NON-EXECUTIVE DIRECTOR NON-EXECUTIVE DIRECTOR Chris McAuliffe is co-founder and Managing Director of Sprint Capital, a Hong Kong based private equity investment management group. Chris has more than 20 years’ experience in private equity and investment banking with significant relationships across Asia. Prior to co-founding Sprint Capital in 2008, Chris was a Managing Director and co-head of Asia Pacific Industrials Group at Citigroup in Hong Kong, prior to which he was a Managing Director and head of Asia Industrials and Services Group at Credit Suisse in Singapore. During the past three years, Chris has also served as a Director of the following listed companies: • Chaswood Resources Holdings Limited (SGX) (Appointed 30/04/2012 – resigned 01/07/2018) • Xplorer PLC (London) (Appointed 27/06/2013 – current) Chris is a member of the Audit and Risk Management Committee and was a member of the Remuneration and Nominations Committee. Stephen is the Chairman of boutique corporate advisory and funds management group Bizzell Capital Partners Pty Ltd. He was an Executive Director of Arrow Energy Ltd from 1999 until its acquisition in 2010 by Shell and PetroChina for $3.5 billion. He was instrumental in Arrow’s corporate and commercial success and its growth from a junior explorer to a large integrated energy company. He was also a co-founder and director of Bow Energy Ltd until its $550 million takeover. Stephen qualified as a Chartered Accountant and early in his career was employed in the Corporate Finance division of Ernst & Young and the Corporate Tax division of Coopers & Lybrand. He has had considerable experience and success in the fields of corporate restructuring, debt and equity financing, and mergers and acquisitions. He has over 20 years’ corporate finance and public company management experience in the resources and energy sectors in Australia and Canada with various public companies. During the past three years, Stephen has also served as a Director of the following listed companies: • Armour Energy Limited (Appointed 09/03/2012 – current) • Augend Ltd (formerly Titan Energy Services Ltd) (Appointed 28/03/2011 – resigned 14/04/2016) • Diversa Ltd (Appointed 09/03/2012 – resigned 06/10/2016) • Laneway Resources Limited (Appointed 28/06/1996 – current) • Renascor Resources Limited (Appointed 01/09/2010 – current) • UIL Energy Ltd (Appointed 01/08/2014 – current) Stephen is the Chairman of the Audit and Risk Management Committee and a member of the Remuneration and Nominations Committee. 25 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) NEAL O’CONNOR PATRICK O’CONNOR B. Laws and Dip. Legal Practice, GAICD B. Com, FAICD NON-EXECUTIVE DIRECTOR APPOINTED 18 SEPTEMBER 2017 Neal has 30 years of legal experience in private practice in Australia and the United Kingdom, and within the resources industry. He was Company Secretary and General Counsel of the global copper business unit of Xstrata plc between 2003 and 2013, prior to which he was the General Manager Legal at MIM Holdings. Neal holds Bachelor of Laws and Diploma of Legal Practice from Queensland University of Technology. He is admitted to practice as a solicitor in Queensland and England and Wales. He is also a Member of the Australian Institute of Company Directors. During the past three years, Neal has also served as a Director of the following listed companies: • Mitchell Services Limited (Appointed 21 October 2015 – current) Neal is Chairman of the Remuneration and Nominations Committee and is a member of the Health, Safety, Environment and Community Committee. NON-EXECUTIVE DIRECTOR Patrick is an experienced non-executive director in a wide range of industries including mining, oil and gas exploration, forestry, biotechnology and government utilities across several international jurisdictions (Australia, Africa, New Zealand, United Kingdom and USA). During the past three years, Patrick has also served as a Director of the following listed companies: • Optiscan Imaging Limited (Appointed 21/07/2015 – resigned 12/04/2016) • Tech Mpire Limited (Appointed 26/07/2016 – resigned 24/02/2017) Patrick is a member of the Health, Safety, Environment and Community Committee, a member of the Remuneration and Nominations Committee and was a member of the Audit and Risk Management Committee. 26 Stanmore Coal Annual Report 2018 DIRECTORS' REPORT (continued) NEVILLE SNEDDON B. Eng (Mining) (Hons), M. Eng, MAusIMM, Grad AICD NON-EXECUTIVE DIRECTOR AND CHAIRMAN RESIGNED 31 JANUARY 2018 A mining engineer with over 40 years’ experience in most facets of the Queensland and NSW resource sectors. Neville resigned on 31 January 2018 from all positions at Stanmore Coal. Neville was Chairman of the Remuneration and Nominations Committee and a member of the Health, Safety, Environment and Community Committee. During the past three years, Neville has not served as a Director of any other listed companies. COMPANY SECRETARY IAN POOLE B. Econ, CA CHIEF FINANCIAL OFFICER AND COMPANY SECRETARY Ian was appointed Chief Financial Officer on 8 May 2017 and Company Secretary of Stanmore Coal Limited on 2 June 2017. Ian has almost 30 years’ experience in financial and commercial roles in the resources industry in Australia and the United States. He was Chief Financial Officer of ASX-listed minerals processing and infrastructure company, Sedgman Limited between 2010 and 2016. Prior to this, he worked for Rio Tinto Coal Australia Pty Ltd and Pasminco Resources. 27 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) DIRECTORS' INTERESTS The relevant interests of each Director in the shares and rights issued by the Group, as notified by the directors to the Australian Securities Exchange in accordance with section 205G(1) of the Corporations Act 2001, at the date of this report. Stewart Butel Dan Clifford* Stephen Bizzell Chris McAuliffe Neal O'Connor Patrick O’Connor Neville Sneddon Ordinary shares 200,000 500,000 7,372,514 - 125,204 500,000 - *Dan Clifford held 1,636,517 rights issued by the Group as at the date of this report. DIRECTORS’ MEETINGS The number of meetings of Directors (including meetings of committees of Directors) held during the year and the number of meetings attended by each Director was as follows: Board Audit & Risk Management Committee Remuneration & Nominations Committee Health, Safety, Environment & Community Committee Held while in office Meetings attended Held while in office Meetings attended Held while in office Meetings attended Held while in office Meetings attended Stewart Butel Dan Clifford Stephen Bizzell Chris McAuliffe Neal O'Connor Patrick O’Connor Neville Sneddon 17 19 19 19 17 19 8 17 19 19 19 17 19 8 5 - 8 8 - 3 - 5 - 8 5 - 3 - 1 - 4 2 2 4 2 1 - 4 2 2 4 2 2 1 - - 1 3 2 2 1 - - 1 3 2 PRINCIPAL ACTIVITIES The principal activities of Stanmore Coal Limited and its subsidiaries (“the Company”, “the Group” or “the Consolidated Entity”) was the exploration, development, production and sale of metallurgical and thermal coal in Queensland, Australia. 28 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) OPERATING AND FINANCIAL REVIEW HIGHLIGHTS Financial highlights for the year ending 30 June 2018 include: • Full year net profit after tax of $5.966m • Underlying EBITDA of $45.548m (non-IFRS measure) an increase from $26.756m (non-IFRS measure) in FY17 • Recognition of the remaining $25.728m contingent consideration for Isaac Plains mine due to improved forward hard coking coal pricing • Cash generation from operations was $21.874m following cash outgoing in the FY17 of $17.810m • Pre-production development capital at Isaac Plains East of $7.244m was fully funded from operating cashflows • Working capital facility repaid by $15.601m leaving the company debt free • Net cash of $19.817m at 30 June 2018 (FY17 $11.914m) • A final dividend of 2 cents per share is declared for FY18. FINANCIAL PERFORMANCE AND FINANCIAL POSITION Coal sales and other revenue Cost of sales Gross profit/(loss) Other income and expenses Profit/(loss) before income tax and net finance expenses Finance income Financial expenses Profit/(loss) before income tax benefit/(expense) Income tax benefit/(expense) Profit/(loss) after income tax expense UNDERLYING EBITDA RESULT (NON-IFRS MEASURE) 2018 $M 208.081 (155.790) 52.291 (33.465) 18.826 0.293 (9.079) 10.040 (4.074) 5.966 2017 $M 137.846 (104.057) 33.789 (18.046) 15.743 0.212 (9.537) 6.418 5.617 12.035 Underlying EBITDA reflects statutory EBITDA as adjusted to reflect the Director’s assessment of the result for the ongoing business activities of the Group. These numbers have not been audited. Profit/(loss) before income tax and net finance expenses Depreciation and amortisation Earnings before interest, depreciation and amortisation (EBITDA) Adjustments for Underlying EBITDA Movement in impairment of The Range Development Project Impairment and write off of exploration assets Remeasurement of rehabilitation provision Remeasurement of onerous contracts Fair value movement contingent consideration Underlying EBITDA Note 2 9(a) 9(b) 14 13 15 2018 $M 18.826 5.207 24.033 - 0.008 (0.281) (4.040) 25.828 45.548 2017 $M 15.743 3.332 19.075 (8.512) 0.917 1.357 (0.538) 14.457 26.756 29 Stanmore Coal Annual Report 2018 DIRECTORS' REPORT (continued) The Underlying EBITDA of $45.548m was a $18.792m improvement compared to $26.756m in FY17. The improvement in EBITDA performance was driven by a 13.7% increase in underlying margin of A$34.8/t compared $30.6/t in FY17, the continued strong operating performance in difficult geological conditions at Isaac Plains as well as a $3.356m contribution from toll loading utilising infrastructure at Isaac Plains. The primarily drivers contributing to the NPAT result of $5.966m include: • Gross revenue from coal sales increased to $190.832m in FY18 from $137.846m in FY17. The increase was driven by a $9.7/t increase in the A$ realised price to an average of A$144.8/t from A$135.1/t in FY17 and an increase in sales of produced coal from 1,308kt in FY18 from 1,204kt in FY17 • The production mix at Isaac Plains is typically 70:30 semi-soft to thermal however due to the timing of shipments the sales mix of semi-soft coking coal to thermal coal in FY18 was 63:37 compared to 77:23 in FY17. The sales mix impacted realised pricing • Underlying FOB costs of $110.0/t, including $11.9/t of state royalties, were $5.9/t higher than FY17 underlying FOB costs of $104.5/t. FOR costs increased following the implementation of an acceleration plan in the second half of the year to capitalise on buoyant coal prices, enable a strong lead into FY19 and offset some impacts of difficult geological conditions. FOR to FOB costs increased by $2.0/t from demurrage due to shipping queues at DBCT and by $0.8/t because of the price impact on state royalties • • The release of the maiden Isaac Plains Underground JORC reserves resulted in a benefit of $4.040m due to a remeasurement of the onerous contracts provision which relates to long term contracts acquired as part of the Isaac Plains Coal acquisition in November 2015 The remaining contingent consideration due to the vendors of Isaac Plains of $25.858m has been brought to account because the company has revised its long-term pricing assumptions which are expected to have a positive impact on future EBITDA and operating cashflows. The contingent consideration relates to production-based royalties (~$2/t for each of the two vendors) which is triggered by a hard coking coal price threshold. The expense is a non-cash item in FY18. Based on the current coal price outlook and production profile the vendor royalties are expected to be fully paid by FY23. The variance between Underlying EBITDA and cashflow from operations is primarily due to the settlement of liabilities which arose on the acquisition of Isaac Plains, as outlined in the table below. Underlying EBITDA Net Financing costs Settlement of onerous contracts Completion of rehabilitation works Settlement of vendor royalties – contingent consideration Net movement in working capital Cash flow from operations 2018 $M 45.548 (6.645) (2.652) (6.705) (5.550) (2.122) 21.874 2017 $M 26.756 (4.486) (5.326) (1.035) (3.193) (30.526) (17.810) In FY18 $6.705m was invested in rehabilitation at Isaac Plains as the operation is nearing the final stages of mine life. Stanmore Coal integrates this core activity with operations to ensure timely and efficient close out of the rehabilitation targeted each year. In FY19 the mining operations will transition to Isaac Plains East. CASHFLOW In the year to 30 June 2018, a total net cash outflow of $7.698m was recorded. The net inflow from operating activities was positive with $21.874m being contributed by operations. Cash outflows from investing activities were $13.971m 30 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) mainly attributable to Isaac Plains East, planned maintenance of the major equipment and exploration activities. During the year the Consolidated Entity repaid all funds in the working capital facility and at the end of year no funds were drawn from the facility resulting in a net outflow from financing activities of $15.601m. Net cash at beginning of year Net cash from operating activities Net cash from investing activities Net cash from financing activities Net increase/(decrease) in cash held Net cash at end of year 2018 $M 27.515 21.874 (13.971) (15.601) (7.698) 19.817 2017 $M 12.080 (17.810) 2.727 30.518 15.435 27.515 OPERATIONAL SUMMARY HEALTH, SAFETY, ENVIRONMENT AND COMMUNITY PERFORMANCE Stanmore Coal has committed significant management and governance resources to the current and future performance of the business for the health, safety and wellbeing of our people, the environment and the communities in which we operate. The Group undertook or managed 547,970 hours of coal mining, drilling, exploration, and mine development activities directly and through its contractors during the year and reported one lost time injury. The Total Reportable Injury Frequency Rate for the year was 16.4 per million hours, with a Lost Time Injury Frequency Rate of 1.8 per million hours. During the year, Stanmore Coal worked closely with our contract partners to develop and improve a number of systems targeting the management of fatal risk, personal safety and leadership to drive for certainty in an improved performance. Rehabilitation increased during the year with 128ha recontoured and 91ha topsoiled. Additionally, a number of improvement projects were undertaken to improve water management infrastructure and integrity across the Isaac Plains Complex. Stanmore Coal’s presence in the community in which our operations are predominantly positioned was supported by a number of grants, sponsorships and important community initiatives and events. Significant ‘in-kind’ time was also dedicated to regional industry bodies and professional groups to enhance local industry and services in the region. OPERATIONS The Isaac Plains Complex delivered a total of 1,643kt of ROM coal to the coal handling and processing plant (CHPP) at a prime strip ratio of 14.2x. This performance was underpinned by a 5% increase in overburden and 8% increase in open- cut ROM performance compared to FY17. Product coal production of 1,128kt with the CHPP delivering a total yield of 70.4%. The FY18 production split of semi-soft and thermal coal was 70% semi-soft and 30% thermal. The Group completed capital works for the CHPP and dragline during the year together with funding the Isaac Plains East development reflecting the $13.0m cash outflow incurred on investing activities. These major overhauls have been delivered on time and within budget. The average sale price achieved for all coal during the year was A$144.8/t, driven by a strong market for premium hard coking coal. Semi-soft and thermal prices also moved upward along with hard coking coal increases although not to the same extent. Semi-soft and thermal coal prices remained strong and stable during H2 FY18. 31 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) e n n o t / D S U 350 300 250 200 150 100 50 0 Hard coking coal Semi-soft coking coal Thermal coal 2015 2016 2017 2018 Source: Platts – June 2018 Coal Trader International. In light of strong coal prices being received and the granting of the leases at Isaac Plains East, the company accelerated production at Isaac Plains with a small increase in costs to maximise the financial performance of the operation. In the second half of the year, this accelerated performance resulted in the mine operating at an annualised rate of 1.9mt ROM coal. Planned shutdowns of the coal handling and preparation plant and the dragline were successfully completed, and these, in combination with the operations, increased performance positions the company well for FY19. Prime Overburden (bcm) ROM coal produced – Open cut (kt) ROM strip ratio (prime) ROM coal produced – Highwall (kt) CHPP feed (kt) ROM stockpile (kt) Saleable coal produced (kt) Saleable coal purchased (kt) COAL SALES – Metallurgical (kt) – Thermal (kt) Total coal sales (kt) Product Yield Coal product stockpiles (kt) Average sale price achieved (A$/t) UNIT COSTS OF SALES (A$/T SOLD) FOR cost (A$/t sold) FOR to FOB cost (ex. state royalty)(A$/t sold) State royalty (A$/t sold) FOB cash cost (A$/t sold) Margin (A$/t sold) 32 FY18 23,382 1,643 14.2 - 1,602 85 1,128 10 835 483 1,318 70.4% 80 144.8 82.3 15.8 11.9 110.0 34.8 FY17 22,345 1,521 13.4 217 1,617 62 1,204 - 832 188 1,020 74.5% 258 135.1 80.0 13.4 11.1 104.5 30.6 Stanmore Coal Annual Report 2018 DIRECTORS' REPORT (continued) The variance between coal margins and Underlying EBITDA is due to toll loading margin and net corporate overheads as shown in the table below. Coal sales (t’000) Margin (A$/t) Coal sales margin Margin from toll loading 3rd party coal Unallocated corporate overhead Vendor reimbursement Underlying EBITDA ISAAC PLAINS COAL MINE – TOLL HANDLING FY 2018 $M 1,318 34.8 45.815 3.356 (3.623) - 45.548 FY 2017 $M 1,020 30.6 31.226 - (2.547) (1.923) 26.756 During the year Stanmore Coal entered into an agreement with a 3rd party to handle their coal on a toll loading basis. At 30 June 2018 the agreement had finished, and Stanmore Coal had received and railed 610kt to Dalrymple Bay Coal Terminal (DBCT). ISAAC PLAINS COAL MINE – STOCKPILE SALE During the year Stanmore Coal entered into an agreement with a third party for a coal sale by selling the clean coal product from the stockpile at Isaac Plains. This third party then on-sold this product to an existing contracted customer of Isaac Plains under the same contract terms. ISAAC PLAINS EAST There have been a number of key milestones achieved in relation to Isaac Plains East at the date of this report including: • Approval of the Environmental Authority amendment for the Isaac Plains East Project on 24 January 2018 • Commencement of approved project capital works including the Smoky Creek haul road crossing and infrastructure • All compensation and overlapping tenement agreements have been executed with the respective parties and lodged with the Department of Natural Resources and Mines • Granting of the mining leases on 1 March 2018 along with the Commonwealth Environment Protection and Biodiversity Conservation Act (EPBC Act) approvals • Pre-mining operations commenced in June, with first coal mined during August 2018. ISAAC PLAINS UNDERGROUND PROJECT Progress has also been made on the Isaac Plains Underground project and as at the date of this report include: • Pre-feasibility study completed in December 2017 • Maiden JORC reserve declared at 12.9Mt (Marketable Reserves of 9.4Mt) • Bankable Feasibility Study (BFS) underway, investment decision expected in FY19 • Mastermyne Group Limited (ASX Code: MYE) appointed as the contract partner for an early contractor involvement process and to work with the company in undertaking the BFS • The underground mine is targeting to produce over 1Mt of ROM coal per annum at an underlying FOB cost of less than $100/t. 33 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) FUTURE OUTLOOK AND LIKELY DEVELOPMENTS OPERATIONS • With the existing Isaac Plains infrastructure capacity, granting of approvals and flexibility in logistics capability, Stanmore Coal is positioned to boost ROM production to approximately 2.3Mt ROM for FY19, representing a 40% increase over FY18. • Results in approximately 1.8Mt product, representing a +50% increase over FY18. • Underlying FOB Costs will improve to $86/t (excluding state royalties) from $98/t in FY18. State royalties (variable dependent on coal price received) are estimated at $14/t in FY19, up from $12/t in FY18. This reduction is primarily due to the migration of operations from Isaac Plains to Isaac Plains East which will be realised in H2 FY19. • Supported by strong coal prices and embedded cost discipline which is expected to deliver a significant EBITDA growth in FY19 and shareholder value. • The current mining plan has the dragline staying at Isaac Plains for the first part of FY19 and commencing Isaac Plains East with truck and excavator. The dragline will then move over to Isaac Plains East with the truck and excavator remaining to complement production. • All commercial structures impacting costs are being negotiated to ensure that Isaac Plains can revert to the lowest possible cost structure (i.e. dragline and minimal truck & shovel when pre-strip required) on short notice. • High quality semi-soft coking coal from Isaac Plains is purchased by tier one steel mills in Japan, South Korea and Europe. The Group will continue to pursue high value selling opportunities and has taken advantage of the planned increased production from Isaac Plains East to build a new customers and further establish existing customers who have contracted for coking coal since recommencement of operations. ACQUISITIONS On 12 June 2018, the Consolidated Entity announced it had executed definitive agreements with Peabody Australia to acquire MDL137 and EPC7282 from Millennium Coal Pty Ltd. Stanmore Coal has agreed to acquire the coking coal deposit contained within MDL 137 (Wotonga South – now renamed Isaac Downs) and an additional exploration area (EPC 728) for $30 million cash (consisting of $6.0 million payable at completion expected in July 2018 followed by a series of deferred payments totalling a further $24 million payable over the following 12 months). On 31 July 2018, this agreement was completed, and the first payment was made. It is expected all acquisition payments will be funded with existing operational cash flows. This acquisition represents significant value for our shareholders and provides the Isaac Plains Complex with an additional eight to ten years production life, while utilising the existing infrastructure. EXPLORATION AND DEVELOPMENT Stanmore Coal is planning an exploration program for its EPC 755 tenement (15km south of the Isaac Plains Complex), to assess the opportunity to provide further long-term ROM feed for the existing Isaac Plains infrastructure. Due to environmental approval (EA), granting of mining leases and other approvals of the Isaac Plains East Project and the commencement of mine infrastructure works and mine pre-strip it has been assessed that the exploration and evaluation phase has been completed, and the development phase has commenced. Therefore, all exploration and evaluation expenditure has been impairment tested and reclassified as capitalised development costs. Following the commencement of production (August 2018), this balance and additional development costs relating to Isaac Plains East will be reclassified to mining properties in production. In addition, Stanmore Coal reclassified The Range, (an undeveloped thermal deposit in the Surat Basin) from capitalised development costs to exploration and evaluation assets. This is due to an insignificant amount of development activities being completed since the asset was classified as a development asset. The Range was transferred at its fair value of $15.7m. Stanmore Coal continues to support The Range project and the potential development of the Surat Basin is a part of the medium-term strategy (2020–2025). The Group will continue to monitor and assess the opportunities to develop or monetise its existing portfolio of assets in the Surat Basin and South Bowen Basin, particularly with respect to The Range and Belview assets. 34 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) MANAGING RISK Stanmore Coal is a producing coal group operating in a volatile pricing market. Factors specific to Stanmore Coal, or those which impact the market more broadly, may individually or in combination impact the financial and operating performance of the Group. These events may be beyond the control of the Board or management of Stanmore Coal. The major risks associated with an investment in the Group are summarised below: OPERATING RISKS Stanmore Coal is a single-mine producer and therefore reliant on continued performance of operations at the Isaac Plains Complex. There are numerous operating risks which may result in a reduction in performance that decreases the Group’s ability to produce high quality coal to meet customer shipping needs. The risks include, but are not limited to, factors such as weather conditions, machinery failure, critical infrastructure failure or natural disasters. MARKET RISKS The key drivers for the business’s financial performance are commodity price and foreign currency markets. Stanmore Coal is not of a size to have influence on coal prices or the exchange rate for Australian dollars and is therefore a price- taker in general terms. Stanmore Coal sells export coal in United States Dollars and is therefore exposed to movements in currency rates. Stanmore Coal may from time to time use forward exchange contracts to hedge a portion of its short-term currency risk where agreed appropriate between management and the Board. The market price for Stanmore Coal’s coking coal and thermal coal products is impacted by many factors which could be favourable or unfavourable for the Group. GEOLOGICAL RISK Resource and Reserve estimates are prepared by external experts in accordance with the JORC code for reporting. The estimates are inherently subjective in some respects therefore there is a risk that the interpretation of data may not align with the future experienced conditions in the field. Due care is taken with each estimation. REGULATORY AND LAND ACCESS RISK The Group’s operations and projects are subject to State and Federal laws and regulation regarding environmental hazards. These laws and regulations set various standards regulating certain aspects of health and environmental quality, provide for penalties and other liabilities for the violation of such standards and establish, in certain circumstances, obligations to remediate current and former facilities and locations where operations are or were conducted. The ability to secure and undertake exploration and operational activities within prospective areas is also reliant upon satisfactory resolution of native title and management of overlapping tenure. To address these risks, the Group develops strong, long-term effective relationships with landholders, with a focus on developing mutually acceptable access arrangements as well as appropriate legal and technical advice to ensure it manages its compliance obligations appropriately. The Group minimises these risks by conducting its activities in an environmentally responsible manner, in accordance with applicable laws and regulations and where possible, by carrying appropriate insurance coverage. In addition, the Group engages experienced consultants and other technical advisors to provide expert advice where necessary. SAFETY Safety remains of critical importance in the planning, organisation and execution of Stanmore Coal’s exploration and operational activities. Stanmore Coal is committed to providing and maintaining a working environment in which its employees are not exposed to hazards that will jeopardise an employee’s health and safety, or the health and safety of others associated with our business. SOVEREIGN RISK The Group has limited influence over the direction and development of government policy. Successive changes to the Australian resources policy, including taxation policy, have impacted Australia’s global competitiveness and reduced the 35 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) attractiveness of Australian coal projects to foreign investors. The Group’s view is that whilst there is currently a negative perception of thermal coal, it will continue to play a significant role as an export commodity. Coking coal is critical for future steel production and thermal coal will continue to play a key role in the global energy mix as part of sustaining global growth, particularly in developing regions, through efficient electricity generation. ACCESS TO CAPITAL At 30 June 2018, the Group remains well funded with cash reserves and an at call working capital facility expected to be sufficient to meet the business’s operating costs. Stanmore Coal’s ability to effectively continue as a coal producing business may be dependent upon several factors including the success of the mine operations, or the successful exploration and subsequent exploitation of the Group’s tenements. Should these avenues be delayed or fail to materialise, the Group expects to have the ability to successfully raise additional funding through debt, equity or farm out/sell down to allow the Group to continue as a going concern and meet its debts as and when they fall due. REMUNERATION REPORT (AUDITED) This report details the nature and amount of remuneration for each Director of Stanmore Coal Limited, and for the Company’s Key Management Personnel (“KMP”). KMP are defined as those persons who have the authority and responsibility for planning, directing and controlling the activities of the Company. The Company’s KMP during the year were: DETAILS OF KEY MANAGEMENT PERSONNEL Directors Stewart Butel Non-Executive Director Non-Executive Chairman Current Appointee (Appointed 18 September 2017) Current Appointee (Appointed 1 February 2018) Dan Clifford Managing Director Stephen Bizzell Non-Executive Director Chris McAuliffe Non-Executive Director Current Appointee Current Appointee Current Appointee Neal O'Connor Non-Executive Director Current Appointee (Appointed 18 September 2017) Patrick O’Connor Non-Executive Director Current Appointee Neville Sneddon Non-Executive Chairman (Resigned 31 January 2018) Senior Management Ian Poole Chief Financial Officer Company Secretary Current Appointee Current Appointee Bernie O’Neill General Manager Operations Current Appointee Jon Romcke General Manager Development Current Appointee (Appointed 21 August 2017) REMUNERATION POLICY OVERVIEW Stanmore Coal’s business strategy of managing an operating coal business can only be achieved by identifying and retaining high calibre employees with appropriate experience and capability. Developing an appropriate compensation strategy for the Company’s employees is a key factor in ensuring employees are engaged and motivated to improve the Company’s performance over the long term. The Board’s intention is to maximise stakeholder benefit by the retention of a high-quality Board and executive team without creating an undue cost burden for the Company. The Board regularly reviews the appropriateness of employees’ fixed compensation considering the Company’s cost structure and the practices of its peers. 36 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) The following describes the Company’s remuneration arrangements for KMP. FIXED REMUNERATION MANAGING DIRECTOR AND SENIOR MANAGEMENT REMUNERATION The Company aims to reward the Managing Director and senior management with a base level of remuneration which is both appropriate to the position and competitive in the market. Fixed remuneration is reviewed annually by the Remuneration and Nominations Committee and the Board. The Managing Director reviews all senior management performance and remuneration and then makes recommendations to the Remuneration and Nominations Committee. The Remuneration and Nominations Committee reviews the performance and remuneration of the management team. The process consists of a review of Company-wide and individual performance, relevant comparative remuneration in the market and internal, and where appropriate, external advice on policies and practices. NON-EXECUTIVE DIRECTOR FIXED REMUNERATION The Board seeks to set aggregate remuneration at a level which provides the Company with the ability to attract and retain Directors of the highest calibre, whilst incurring a cost which is acceptable to shareholders. The Constitution of Stanmore Coal Limited and the ASX Listing Rules specify that the Non-Executive Directors are entitled to remuneration as determined by the Company in a general meeting to be apportioned among them in such manner as the Directors agree and, in default of agreement, equally. The maximum aggregate remuneration currently determined by Stanmore Coal Limited shareholders $500,000 per annum. During the year the Remuneration and Nominations Committee reviewed Non-Executive Director board and committee fees. With effect from 1 January 2018, the Chairman’s fee was increased to $85,000 per annum (previously $65,000 per annum), Non-Executive Director’s fees was increased to $65,000 per annum (previously $50,000 per annum). Committee fees are also paid to the Chairman of the committee of $10,000 per annum (previously nil) and membership of the committee of $5,000 per annum (previously nil). The maximum aggregate of the fee changed is within the shareholder annual agreed limit. Total Non-Executive Director remuneration for FY18 was $386,706 (FY17: $213,335). A Non-Executive Director is entitled to be paid travel and other expenses properly incurred by them in attending Directors’ or general meetings of Stanmore Coal Limited or otherwise relating to the business of the Company. The fixed remuneration of Non-Executive Directors for the year ending 30 June 2018 is detailed in this Remuneration Report. SHORT-TERM AND LONG-TERM INCENTIVE PLAN STRUCTURES The Board considers that the use of Short Term Incentives (STI) and Long-Term Incentives (LTI) are a reasonable means of remunerating employees, on the basis that they: • • • • encourage Senior Management to drive toward the realisation of shareholder value; provide flexibility to the Company to actively manage the way in which it remunerates and incentivises Senior Management; preserve the Company’s cash resources; and contribute to the attraction and retention of skilled talent in a competitive market. STI and LTI’s were provided in FY18 for KMP. The STI aligned rewards with key performance outcomes associated with mining at Isaac Plains except for the General Manager Development whose KPIs align to key business development activities which are more aligned to his role. The LTI plan contains links to the Stanmore Coal share price with Rights issued with a three-year vesting period for KMP that qualify under the LTI plan rules. 37 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) INCENTIVE OUTCOMES FOR FY18 AND FY17 The incentive outcomes for the STI and LTI schemes are below. SHORT TERM INCENTIVE Incentive Award structure Outcome/discussion FY18 STI FY17 STI TRIFR Based on multiple key performance indicators: • • Prime overburden • Product tonnes • FOR cash cost • Balance Project Plan • Development targets The key performance indicators were met to varying levels resulting in a total accrued payout percentage of 63%. All KMP met eligibility requirements. FY18 STI amounts are highlighted below but are not due and payable until after the signing of these Financial Statements. TRIFR Based on multiple key performance indicators: • • Prime overburden • Product tonnes • FOB cash cost The key performance indicators were met to varying levels resulting in a total accrued payout percentage of 56%. The only entitled KMP was Dan Clifford. FY17 STI amounts were accrued in FY17 and paid in FY18. In the FY18 all KMP were entitled to a payment under the STI scheme. No payment was made before 30 June 2018 and all payments are due to be paid after the signing of these Financial Statements. During the year Mr Clifford was paid his FY17 STI. No other KMP were eligible to a STI in FY17. Maximum STI FY18 Maximum STI FY17 % of Base salary Max. amount $ Awarded $ % of Base salary % of Base salary Max. amount $ Awarded $ % of Base salary 25% 101,800 65,600 16.1% 25% 62,500 35,000 14.0% 30% 30% 30% 96,210 55,900 17.4% 91,620 58,100 19.0% 77,425 52,993 20.5% - - - - - - - - - - - - Dan Clifford Ian Poole Bernie O’Neill Jon Romcke LONG TERM INCENTIVE Incentive Award structure Outcome/discussion During the FY18, Rights were granted to KMP as outlined below to: Dan Clifford, Ian Poole, Bernie O’Neill and Jon Romcke. LTI is based on the Absolute Shareholder Total Return (ASTR) with price targets resulting in the LTI benefits potentially vesting two financial years after the relevant remuneration year. Rights are issued annually with vesting periods of three years, total Rights issued are based on the performance target tested at the end of three years i.e. FY20. In the event that no rights vest at the end of three years, the Rights may be retested for vesting after four years (FY21) subject to the escalated performance target. Further details regarding the LTI plan are shown below. FY18 LTI 38 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) Incentive Award structure Outcome/discussion FY17 LTI LTI is based on the Absolute Shareholder Total Return (ASTR) with price targets resulting in the LTI benefits potentially vesting two financial years after the relevant remuneration year. Rights are issued annually with vesting periods of three years, total Rights issued are based on the performance target tested at the end of three years i.e. FY19. In the event that no rights vest at the end of three years, the Rights may be retested for vesting after four years (FY20) subject to the escalated performance target. Further details regarding the LTI plan are shown below. During the FY17, Rights were granted or subject to AGM approval to KMP. As outlined below to: Dan Clifford, Bernie O’Neill, and Andrew Roach. Andrew Roach’s rights were forfeited when he resigned from the company. During the FY18 3,143,005 rights were granted to KMP of which 2,611,508 related to FY18 rights and 531,497 related to FY17 rights (FY17 94,985). The FY18 and FY17 rights were granted at the maximum amount issuable if stretch targets are reached, all rights will be payable as cash or shares as decided by the Board upon vesting. 3,237,990 (FY17 and FY18) rights remain on issue at FY18. Key Management Personnel1 # of rights Vesting date2 Target % FY Salary package value at Stretch3 Price4 Value of Rights5 Total Value Share based payment expense Dan Clifford Ian Poole6 Bernie O’Neill Jon Romcke7 Total FY18 1,105,020 30/06/2020 50% $407,200 $0.3685 $0.32 $353,606 $191,451 FY17 FY18 FY18 FY17 FY18 531,497 30/06/2019 50% $251,111 $0.4725 $0.29 $154,134 $21,504 593,410 30/06/2020 30% $218,672 $0.3685 $0.32 $189,891 $63,124 492,863 30/06/2020 30% $181,620 $0.3685 $0.38 $187,288 $69,200 94,985 30/06/2019 30% $44,877 $0.4725 $0.17 $16,147 $2,263 420,215 30/06/2020 30% $154,849 $0.3685 $0.38 $159,682 $53,081 3,237,990 1 2 3 4 5 6 7 KMP employed as at 30 June 2018. Retest available after 12 months if no Rights have vested on vesting date. Stretch target based on 2 x Target %. Based on the 10-day VWAP of shares in the 24 hours following the release of the annual results. Accounting value of shares issued. FY18 Rights include an allocation for FY17 based on commencement date. FY18 Rights based on commencement date of 21 August 2017. Below is a summary of the conditions for vesting for FY18 rights granted. Performance Level Stretch Between target and stretch Target ATSR1 of SMR2 CAGR3 52.86% >39.49%<52.86% 39.49% % of stretch/ maximum vesting 100.00% Pro-rata 50.00% June 20 share price for vesting $1.25 Pro-Rata $0.95 Between threshold and target >22.92% <39.49% Pro-Rata Pro-Rata Threshold Below threshold4 22.92% <22.92% 0% 0% $0.65 $0.00 39 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) Below is a summary of the conditions for vesting for FY17 rights granted: Performance Level Stretch Between target and stretch Target Between threshold and target Threshold Below threshold5 1 2 3 4 5 Absolute Shareholder Return Stanmore Coal Limited Compound Annual Growth Rate (CAGR) Subject to Retest in FY21 at CAGR Subject to Retest in FY20 at CAGR ATSR1 of SMR2 CAGR3 58.74% >44.22%<58.74% 44.22% >25.99%<44.22% 25.99% <25.99% % of stretch/ maximum vesting June 19 share price for vesting 100.00% Pro-rata 50.00% Pro-Rata 0% 0% $1.20 Pro-Rata $0.90 Pro-Rata $0.60 $0.00 In relation to the FY18 and FY17 Rights, one retest is available 12 months after the end of the measurement period only if no vesting occurred in relation to the first test following the completion of the measurement period in FY20 and FY19 respectively. The Company does not intend to issue more than an aggregate of 5% of its share capital, from time to time, under the LTI plans. It is a condition of the rights that the KMP must remain employed by Stanmore Coal for the Rights to vest. GENERAL INCENTIVE AND REMUNERATION CONSULTANTS From time to time, the Remuneration and Nominations Committee seeks and considers advice from external advisors who are engaged by and report directly to the Remuneration and Nominations Committee. Such advice will typically cover Non-Executive Director fees, Executive KMP remuneration and advice in relation to equity plans. The Corporations Act requires companies to disclose specific details regarding the use of remuneration consultants. The mandatory disclosure requirements only apply to those advisers that provide a ‘remuneration recommendation’ as defined in the Corporations Act. During FY18 the Remuneration and Nominations Committee received recommendations from Godfrey. Remuneration Group, this recommendation was received free from undue influence from any affected KMP, and the directors ensured this by engaging the consultant independent of any affected KMP. In addition, the recommendation and outcomes were not discussed or influenced by any KMP’s with the remuneration consultant. The cost of services associated with the recommendation made by the remuneration consultant totalled $16,000 (FY17 $59,700). RELATIONSHIP BETWEEN REMUNERATION AND COMPANY PERFORMANCE Performance measure Revenue ($M) Profit/(loss) attributable to the Group ($M) Share price at year end ($/share) Basic EPS (c/Share) Diluted EPS (c/Share) 2018 2017 208.081 137.846 2016 12.700 2015 859 2014 749 5.966 $0.87 2.7 2.7 12.035 $0.34 5.1 5.1 (19.746) (12.148) (11.864) $0.28 $0.06 (8.9) (8.9) (5.8) (5.8) $0.11 (5.7) (5.7) There were no dividends paid during the FY18 (FY17: nil). 40 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) It is the Board’s policy that employment contracts or consultancy agreements are entered with all Executive Directors and senior management. Contracts do not provide for pre-determining compensation values or method of payment. Rather portions of compensation are discretionary STI and LTI plan awards that are determined by the Remuneration and Nominations Committee and the Board in accordance with the Company’s remuneration policies. All other employment contracts or consultancy agreements have either six or three-month (or lower) notice periods. No current employment contracts contain early termination clauses. All Non-Executive Directors have received letters outlining the key terms of their appointment. The contracts have no specified duration. KMP are entitled to their statutory entitlements of accrued annual leave and long service leave together with statutory superannuation on termination. MANAGING DIRECTOR Stanmore Coal Limited has an Executive Services Agreement (ESA) with Mr Dan Clifford for the position of Managing Director which commenced on 14 November 2016. Mr Clifford’s base remuneration is $407,200 (FY17 $400,000) per annum for FY18 plus statutory superannuation. The ESA provides for termination by either party by providing six month’s written notice, or immediately in the case of gross negligence or serious misconduct. Mr Clifford is eligible to participate in the STI and LTI schemes (the current LTI scheme was approved at the 2016 Annual General Meeting). For FY18, the maximum annual STI is 25% of base remuneration and the maximum annual LTI is 50% of base remuneration at Target performance and a further 50% of base remuneration at Stretch performance. Detail of instruments issued under the LTI scheme are provided on page 38 of this report. SENIOR MANAGEMENT CHIEF FINANCIAL OFFICER Stanmore Coal Limited has an Executive Services Agreement (ESA) with Mr Ian Poole for the position of Chief Financial Officer which commenced on 8 May 2017. Mr Poole receives a base remuneration of $320,700 (FY17 $315,000) per annum plus statutory superannuation effective from 8 May 2017. The ESA provides for termination by either party by providing three month’s written notice, or immediately in the case of gross negligence or serious misconduct. Mr Poole is eligible to participate in the STI and LTI schemes. The maximum annual STI is 30% of base remuneration and the maximum annual LTI is 30% of base remuneration at Target performance and a further 30% of base remuneration at Stretch performance. Detail of instruments issued under the LTI scheme are provided on page 38 of this report. GENERAL MANAGER OPERATIONS Stanmore Coal Limited has an Executive Services Agreement (ESA) with Mr Bernie O’Neill for the position of General Manager - Operations which commenced on 1 April 2017. Mr O’Neill receives a base remuneration of $305,400 (FY17 $300,000) per annum plus statutory superannuation. The ESA provides for termination by either party by providing three month’s written notice, or immediately in the case of gross negligence or serious misconduct. Mr O’Neill is eligible to participate in the STI and LTI schemes. The maximum annual STI is 30% of base remuneration and the maximum annual LTI is 30% of base remuneration at Target performance and a further 50% of base remuneration at Stretch performance. Detail of instruments issued under the LTI scheme are provided on page 38 of this report. GENERAL MANAGER DEVELOPMENT Stanmore Coal Limited has an Employment Contract with Mr Jon Romcke, General Manager Development, which commenced on 21 August 2017. Mr Romcke receives a base remuneration of $300,000 per annum plus statutory superannuation. Mr Romcke is eligible to participate in the STI and LTI schemes. The maximum annual STI is 30% of base remuneration and the maximum annual LTI is 30% of base remuneration at Target performance and a further 30% of base remuneration at Stretch performance. Detail of instruments issued under the LTI scheme are provided on page 38 of this report. 41 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) REMUNERATION DETAILS The following tables detail the components of remuneration for KMP of the Company, for both 30 June 2018 and 2017. 2018 DIRECTORS Steward Butel1 Dan Clifford Stephen Bizzell Chris McAuliffe Neal O'Connor2 Patrick O’Connor Neville Sneddon3 Total SENIOR MANAGEMENT Bernie O’Neill Ian Poole Jon Romcke4 Total Total Director and Senior Management remuneration Short-term benefits Post-employment Salary & fees $ Cash bonus $ Other short- term benefits $ Superannuation $ Termination benefits $ Share-based payments Equity-settled (options) Equity-settled (Shares) Performance related Remuneration as remuneration share-based payments 62,903 407,200 72,500 67,500 53,192 70,000 49,583 - 65,600 - - - - - 782,878 65,600 305,400 320,700 250,385 876,485 58,100 55,900 52,993 166,993 1,659,363 232,593 - - - - - - - - - - - - - 5,976 20,048 - - 5,053 - - 31,077 20,048 20,048 15,966 56,062 87,139 - - - - - - - - - - - - $ - - - - - - - - - - - - 191,451 $ - - - - - - 69,200 63,124 53,081 185,405 Total $ 68,879 684,299 72,500 67,500 58,245 70,000 49,583 452,748 459,772 372,425 1,284,945 191,451 1,071,006 376,856 2,355,951 % 0.0% 9.6% 0.0% 0.0% 0.0% 0.0% 0.0% 12.8% 12.2% 14.5% % 0.0% 28.0% 0.0% 0.0% 0.0% 0.0% 0.0% 15.3% 13.7% 14.5% 1 2 3 4 Commenced Non-Executive Director 18 September 2017 and Chairman 1 February 2018 Commenced 18 September 2017 Resigned 31 January 2017 Commenced 21 August 2017 42 Stanmore Coal Annual Report 2018REMUNERATION DETAILS The following tables detail the components of remuneration for KMP of the Company, for both 30 June 2018 and 2017. Salary & fees $ 62,903 407,200 72,500 67,500 53,192 70,000 49,583 305,400 320,700 250,385 876,485 Cash bonus $ 65,600 - - - - - - 58,100 55,900 52,993 166,993 782,878 65,600 2018 DIRECTORS Steward Butel1 Dan Clifford Stephen Bizzell Chris McAuliffe Neal O'Connor2 Patrick O’Connor Neville Sneddon3 Total SENIOR MANAGEMENT Bernie O’Neill Ian Poole Jon Romcke4 Total Total Director and Senior Management remuneration 1,659,363 232,593 Commenced Non-Executive Director 18 September 2017 and Chairman 1 February 2018 1 2 3 4 Commenced 18 September 2017 Resigned 31 January 2017 Commenced 21 August 2017 $ - - - - - - - - - - - - - 5,976 20,048 5,053 $ - - - - 31,077 20,048 20,048 15,966 56,062 87,139 $ - - - - - - - - - - - - DIRECTORS' REPORT (continued) Short-term benefits Post-employment Other short- term benefits Superannuation Termination benefits Share-based payments Equity-settled (options) $ Equity-settled (Shares) $ Total $ Performance related remuneration % Remuneration as share-based payments % - - - - - - - - - - - - - 191,451 - - - - - 68,879 684,299 72,500 67,500 58,245 70,000 49,583 191,451 1,071,006 69,200 63,124 53,081 185,405 452,748 459,772 372,425 1,284,945 376,856 2,355,951 0.0% 9.6% 0.0% 0.0% 0.0% 0.0% 0.0% 12.8% 12.2% 14.5% 0.0% 28.0% 0.0% 0.0% 0.0% 0.0% 0.0% 15.3% 13.7% 14.5% 43 Stanmore Coal Annual Report 2018Share-based payments Equity-settled (options) Equity-settled (Shares) Performance related Remuneration as remuneration share-based payments $ - - - - - - 21,504 (53,397) (31,893) 2,263 (53,397) (53,397) (104,531) Total $ 64,167 299,028 480,096 44,167 44,167 16,667 44,167 992,459 43,916 74,866 294,096 357,249 770,127 % - 11.7% 40.5% - - - - - - 32.9% 38.9% 7.2% (11.1%) % - - - - - - 3.0% (18.2%) (14.9%) $ - - - - - - - - - - - - - - DIRECTORS' REPORT (continued) Short-term benefits Post-employment Other short- term benefits $ Superannuation $ Termination benefits $ - - - - - - - - - - - - - - - 11,755 9,808 - - - - - - 74,448 - - - - 21,563 74,448 23,240 4,527 17,352 13,580 58,699 - - - 12,228 12,228 80,262 86,676 (136,424) 1,762,586 Salary & fees $ 64,167 230,769 254,770 44,167 44,167 16,667 44,167 Cash bonus $ - 35,000 194,467 - - - - 698,874 229,467 20,676 68,076 233,385 245,882 568,019 - - 96,756 138,956 235,712 1,266,893 465,179 2017 Neville Sneddon Dan Clifford1 Nicholas Jorss2 Patrick O’Connor Stephen Bizzell Viv Forbes3 Chris McAuliffe Total SENIOR MANAGEMENT Ian Poole4 Bernie O’Neill5 Andrew Roach6 Michael McKee7 Total Total Director and Senior Management remuneration 1 2 3 4 5 6 7 Commenced 14 November 2016 Resigned 14 November 2016 Resigned 30 November 2016 Commenced 8 May 2017 Commenced 1 April 2017 Resigned (CFO) 8 May 2017 Resigned 3 March 2017 44 Stanmore Coal Annual Report 2018Salary & fees $ 64,167 230,769 254,770 44,167 44,167 16,667 44,167 20,676 68,076 233,385 245,882 568,019 $ - - - - - - - 96,756 138,956 235,712 35,000 194,467 11,755 9,808 74,448 $ - - - - - 23,240 4,527 17,352 13,580 58,699 $ - - - - - - - - - 12,228 12,228 $ - - - - - - - - - - - - - - 698,874 229,467 21,563 74,448 1,266,893 465,179 80,262 86,676 2017 Neville Sneddon Dan Clifford1 Nicholas Jorss2 Patrick O’Connor Stephen Bizzell Viv Forbes3 Chris McAuliffe Total Ian Poole4 Bernie O’Neill5 Andrew Roach6 Michael McKee7 Total SENIOR MANAGEMENT Total Director and Senior Management remuneration 1 2 3 4 5 6 7 Commenced 14 November 2016 Resigned 14 November 2016 Resigned 30 November 2016 Commenced 8 May 2017 Commenced 1 April 2017 Resigned (CFO) 8 May 2017 Resigned 3 March 2017 DIRECTORS' REPORT (continued) Short-term benefits Post-employment Cash bonus Other short- term benefits Superannuation Termination benefits Share-based payments Equity-settled (options) $ Equity-settled (Shares) $ - 21,504 (53,397) - - - - (31,893) - 2,263 (53,397) (53,397) (104,531) - - - - - - - - - - - - - - (136,424) 1,762,586 Total $ 64,167 299,028 480,096 44,167 44,167 16,667 44,167 992,459 43,916 74,866 294,096 357,249 770,127 Performance related remuneration % Remuneration as share-based payments % - 11.7% 40.5% - - - - - - 32.9% 38.9% - 7.2% (11.1%) - - - - - 3.0% (18.2%) (14.9%) 45 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) CASH BONUSES, PERFORMANCE-RELATED BONUSES AND SHARE-BASED PAYMENTS For the financial year ending 30 June 2018 the following cash performance award is accrued. Dan Clifford Ian Poole Bernie O’Neill Jon Romcke Maximum STI cap $ 101,800 96,210 91,620 77,425 STI awarded $ 65,600 55,900 58,100 52,993 % of STI % of STI forfeit 64% 58% 63% 68% 36% 42% 37% 32% Expected payment date 7 September 2018 7 September 2018 7 September 2018 7 September 2018 Rights issued to KMP during FY18 and FY17 are outlined below. FY18 Rights issued FY18 Rights forfeited Dan Clifford Ian Poole Bernie O’Neill Jon Romcke 1,105,020 593,410 492,863 420,215 - - - - Net FY18 Rights 1,105,020 593,410 492,863 420,215 FY17 Rights issued FY17 Rights forfeited 531,497* - 94,985 - - - - - Net FY17 Rights 531,497 - 94,985 - *531,497 FY17 rights issued to Dan Clifford during FY18 related to unissued rights noted in the FY17 financial statements. EQUITY INSTRUMENTS SHAREHOLDINGS Details of ordinary shares held directly, indirectly or beneficially by KMP and their related parties are as follows: Balance at 1 July 2017 Granted as remuneration Exercise of Options or Rights Net change other Balance FY18 DIRECTORS Stewart Butel Dan Clifford Stephen Bizzell Chris McAuliffe Neal O'Connor Patrick O’Connor Neville Sneddon Total SENIOR MANAGEMENT Ian Poole Bernie O’Neill Jon Romcke Total 46 - - 7,372,514 - - 500,000 500,000 8,372,514 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 200,000 500,000 - - 125,204 - (500,000) 200,000 500,000 7,372,514 - 125,204 500,000 - 325,204 8,697,718 90,000 90,000 - - - - 90,000 90,000 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) The net change in shareholding for all KMP relates the acquisition of shares on market other than Neville Sneddon whose decrease in shares occurred when he resigned from the Board. There were no shares held nominally at 30 June 2018. OPTIONS HOLDINGS The Consolidated Entity has had no options on issue in FY18. RIGHTS Details of rights held directly, indirectly or beneficially by KMP and their related parties are as follows: Dan Clifford Ian Poole Bernie O’Neill Jon Romcke Opening balance - - 94,985 - Rights issued 1,636,517 593,410 492,863 420,215 94,985 3,143,005 Rights vested Rights forfeited Closing balance Vesting FY20* Vesting FY21* - - - - - - - - - - 1,636,517 531,497 1,105,020 593,410 587,848 420,215 - 94,985 - 593,410 492,863 420,215 3,237,990 626,482 2,611,508 *Subject to retest conditions on page 39. TRANSACTIONS WITH DIRECTORS AND DIRECTOR-RELATED ENTITIES There were no transactions with Directors or Director-related entities during the year ending 30 June 2018. LOANS TO KEY MANAGEMENT PERSONNEL There were no loans to KMP during the year. END OF REMUNERATION REPORT (AUDITED). INDEMNIFICATION AND INSURANCE OF DIRECTORS, OFFICERS AND AUDITOR Each of the Directors and the Secretary of Stanmore Coal Limited have entered into a Deed with Stanmore Coal Limited whereby Stanmore Coal Limited has provided certain contractual rights of access to books and records of Stanmore Coal Limited to those Directors and Secretary. Stanmore Coal Limited has insured all the Directors and Executive Officers of the Consolidated Entity. The contract of insurance prohibits the disclosure of the nature of the liabilities covered and amount of the premium paid. The Corporations Act does not require disclosure of the information in these circumstances. Stanmore Coal Limited has not indemnified or insured its auditor. OPTIONS AND RIGHTS At the date of this report there were nil unissued ordinary shares under options, and 3,337,990 potential unissued ordinary shares under Rights as follows: • • 626,482 unlisted Rights vesting subject to various performance hurdles in 2019 or in the event that no vesting at all occurs, the Rights may be retested vesting in 2020 subject to escalated performance hurdles and other agreed conditions 2,611,508 unlisted Rights vesting subject to various performance hurdles in 2020 or in the event that no vesting at all occurs, the Rights may be retested vesting in 2021 subject to escalated performance hurdles and other agreed conditions • 100,000 unlisted rights vesting subject to various performance hurdles in 2020. 47 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) No Right holder has any right to participate in any other share issue of Stanmore Coal Limited. During the year ended 30 June 2018 there were 251,800,978 fully paid ordinary shares in Stanmore Coal Limited on issue, no additional shares were issued during the financial year. During the year ended 30 June 2018, 3,143,005 Rights were granted to KMP as part of the Stanmore Coal Limited Rights Plan, of which 531,497 were for Dan Clifford relating to FY17. No rights were forfeited. CHANGES TO CAPITAL STRUCTURE At the date of this report, the Consolidated Entity had 251,800,978 ordinary shares, nil unlisted options and 3,337,990 Rights on issue. EVENTS AFTER REPORTING DATE An unfranked dividend of 2cps is declared for the year ending 30 June 2018. There have been no other events after reporting date. ROUNDING The Company is of a kind referred to in ASIC Corporations Instrument 2016/191 and dated 24 March 2016 and, in accordance with the instrument, all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated. DIVIDENDS PAID OR RECOMMENDED The Board of Stanmore Coal, based on strong operational performance achieved in FY2018 and the outlook for the Group, has resolved to declare an unfranked dividend of $0.02 per share for the financial year ending 30 June 2018. All shareholders on the register at 5pm on 31 October 2018 (“Record Date”) will be entitled to receive the dividend payment which the company expects to pay on 23 November 2018. The ex-dividend date will be 30 October 2018. Subject to approval by the shareholders at the 2018 AGM, Stanmore Coal will also commence a Dividend Reinvestment Program (DRP). The DRP provides a convenient way for shareholders to invest their dividends in new fully paid shares in Stanmore Coal, without paying brokerage and other associated costs. At each dividend payment date, dividends on shares nominated to be subject of the DRP are automatically invested in Stanmore Coal ordinary shares. With a focus on generating strong cash flows and maintaining balance sheet strength, Stanmore Coal aims to deliver satisfactory returns to shareholders through improving returns on invested capital. As well as share price appreciation, Stanmore Coal seeks to pay dividends over time commensurate with performance in earnings, cash flow, the cyclicality of our industry and any capital management decisions from time to time. ENVIRONMENTAL ISSUES The Consolidated Entity is subject to environmental regulation in relation to its exploration activities. There are no material matters that have arisen in relation to environmental issues up to the date of this report. PROCEEDINGS ON BEHALF OF THE CONSOLIDATED ENTITY No person has applied for leave of Court to bring proceedings on behalf of the Consolidated Entity or intervene in any proceedings to which the Consolidated Entity is a party for the purposes of taking responsibility on behalf of the Consolidated Entity for all or any part of those proceedings. The Consolidated Entity was not a party to any such proceedings during the year. 48 Stanmore Coal Annual Report 2018DIRECTORS' REPORT (continued) NON-AUDIT SERVICES The Board of Directors, in accordance with advice from the audit committee, is satisfied that the provision of non- audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the services disclosed below did not compromise the external auditor’s independence for the following reasons: • all non-audit services are reviewed and approved by the audit committee prior to commencement to ensure they do not adversely affect the integrity and objectivity of the auditor; and • the nature of the services provided does not compromise the general principles relating to auditor independence in accordance with APES 110: Code of Ethics for Professional Accountants set by the Accounting Professional and Ethical Standards Board. The following fees were paid or payable to BDO (QLD) Pty Ltd for non-audit services provided during the year ended 30 June 2018: Taxation services $116,273 AUDITOR‘S INDEPENDENCE DECLARATION The Auditor’s Independence Declaration forms part of the Directors’ Report and can be found on page 50. SIGNIFICANT CHANGES AND LIKELY DEVELOPMENTS Comments on significant changes and likely developments are included in the operating and financial review on pages 29 to 36. CORPORATE GOVERNANCE In recognising the need for the highest standards of corporate behaviour and accountability, the Directors of Stanmore Coal Limited support and have adhered to the principles of corporate governance. Stanmore Coal Limited’s Corporate Governance Statement can be found on the Company’s website / ASX platform (http://stanmorecoal.com.au/corporate). This report is signed in accordance with a resolution of the Directors. Daniel Clifford Managing Director Brisbane Date: 27 August 2018 49 Stanmore Coal Annual Report 2018 AUDITOR'S INDEPENDENCE DECLARATION (cid:4)(cid:437)(cid:282)(cid:349)(cid:410)(cid:381)(cid:396)(cid:859)(cid:400)(cid:3)(cid:47)(cid:374)(cid:282)(cid:286)(cid:393)(cid:286)(cid:374)(cid:282)(cid:286)(cid:374)(cid:272)(cid:286)(cid:3)(cid:24)(cid:286)(cid:272)(cid:367)(cid:258)(cid:396)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3) (cid:94)(cid:100)(cid:4)(cid:69)(cid:68)(cid:75)(cid:90)(cid:28)(cid:3)(cid:18)(cid:75)(cid:4)(cid:62)(cid:3)(cid:62)(cid:47)(cid:68)(cid:47)(cid:100)(cid:28)(cid:24)(cid:3)(cid:38)(cid:349)(cid:374)(cid:258)(cid:374)(cid:272)(cid:349)(cid:258)(cid:367)(cid:3)(cid:94)(cid:410)(cid:258)(cid:410)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)(cid:38)(cid:122)(cid:1005)(cid:1012)(cid:3) (cid:4)(cid:437)(cid:282)(cid:349)(cid:410)(cid:381)(cid:396)(cid:859)(cid:400)(cid:3)(cid:47)(cid:374)(cid:282)(cid:286)(cid:393)(cid:286)(cid:374)(cid:282)(cid:286)(cid:374)(cid:272)(cid:286)(cid:3)(cid:24)(cid:286)(cid:272)(cid:367)(cid:258)(cid:396)(cid:258)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3) Tel: +61 7 3237 5999 Fax: +61 7 3221 9227 (cid:90)(cid:90)(cid:90)(cid:17)(cid:69)(cid:71)(cid:82)(cid:17)(cid:70)(cid:82)(cid:80)(cid:17)(cid:68)(cid:88)(cid:3) Level 10, 12 Creek St Brisbane QLD 4000 GPO Box 457 Brisbane QLD 4001 Australia (cid:39)(cid:40)(cid:38)(cid:47)(cid:36)(cid:53)(cid:36)(cid:55)(cid:44)(cid:50)(cid:49)(cid:3)(cid:50)(cid:41)(cid:3)(cid:44)(cid:49)(cid:39)(cid:40)(cid:51)(cid:40)(cid:49)(cid:39)(cid:40)(cid:49)(cid:38)(cid:40)(cid:3)(cid:37)(cid:60)(cid:3)(cid:55)(cid:3)(cid:45)(cid:3)(cid:46)(cid:40)(cid:49)(cid:39)(cid:36)(cid:47)(cid:47)(cid:3)(cid:55)(cid:50)(cid:3)(cid:55)(cid:43)(cid:40)(cid:3)(cid:39)(cid:44)(cid:53)(cid:40)(cid:38)(cid:55)(cid:50)(cid:53)(cid:54)(cid:3)(cid:50)(cid:41)(cid:3)(cid:54)(cid:55)(cid:36)(cid:49)(cid:48)(cid:50)(cid:53)(cid:40)(cid:3)(cid:38)(cid:50)(cid:36)(cid:47)(cid:3)(cid:47)(cid:44)(cid:48)(cid:44)(cid:55)(cid:40)(cid:39)(cid:3) As lead auditor of Stanmore Coal Limited for the year ended 30 June 2018, I declare that, to the best of my knowledge and belief, there have been: 1. No contraventions of the auditor independence requirements of the (cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:36)(cid:70)(cid:87)(cid:3)(cid:21)(cid:19)(cid:19)(cid:20) in relation to the audit; and 2. No contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Stanmore Coal Limited and the entities it controlled during the (cid:92)(cid:72)(cid:68)(cid:85). T J Kendall Director (cid:37)(cid:39)(cid:50)(cid:3)(cid:36)(cid:88)(cid:71)(cid:76)(cid:87)(cid:3)(cid:51)(cid:87)(cid:92)(cid:3)(cid:47)(cid:87)(cid:71) Brisbane, 27 August 2018 BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. (cid:22)(cid:19)(cid:3) 50 Stanmore Coal Annual Report 2018FINANCIAL STATEMENTS 51 Stanmore Coal Annual Report 2018CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2018 Revenue Cost of sales Gross profit/(loss) Other income Other expenses Profit/(loss) before income tax and net finance expenses Finance income Financial expenses Share of net profit/(loss) of associates and joint ventures accounted for using the equity method Profit/(loss) before income tax expense Income tax benefit/(expense) Net profit/(loss) for the year Other comprehensive income Total comprehensive profit/(loss) for the year Profit/(loss) for the year is attributable to: Owners of Stanmore Coal Limited Total comprehensive income profit/(loss) for the year is attributable to: Owners of Stanmore Coal Limited Earnings/(loss) per share attributable to the owners of Stanmore Coal Limited: Basic earnings/(loss) per share (cents per share) Diluted earnings/(loss) per share (cents per share) Note 1 2 1 2 1 2 3 2018 $’000 208,081 (155,790) 52,291 4,321 (37,786) 18,826 293 (9,079) - 10,040 (4,074) 5,966 - 5,966 2017 $‘000 137,846 (104,057) 33,789 (819) (17,227) 15,743 212 (9,537) - 6,418 5,617 12,035 - 12,035 5,966 12,035 5,966 12,035 17 17 Cents Cents 2.7 2.7 5.1 5.1 The above Consolidated Statement of Profit or Loss and other Comprehensive Income should be read in conjunction with the accompanying notes. 52 Stanmore Coal Annual Report 2018 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2018 CURRENT ASSETS Cash and cash equivalents Trade and other receivables Inventories Other current assets Total current assets NON-CURRENT ASSETS Inventories Property, plant and equipment Capitalised development costs Exploration and evaluation assets Intangible assets Deferred tax assets Other non-current assets Total non-current assets Total assets CURRENT LIABILITIES Trade and other payables Interest-bearing loans and borrowings Onerous contracts provision Rehabilitation provision Vendor royalties – contingent consideration Total current liabilities NON-CURRENT LIABILITIES Provision for employee benefit Onerous contracts provision Rehabilitation provision Vendor royalties – contingent consideration Total non-current liabilities Total liabilities Net assets EQUITY Issued capital Share based payment reserve Accumulated Losses Total equity attributable to the owners of Stanmore Coal Limited Note 4(a) 7 6 6 8 9a 9b 10 3 11 12 13 14 15 13 14 15 18 2018 $’000 2017 $‘000 19,817 22,427 20,967 2,583 65,794 4,364 36,444 13,410 39,393 3,778 2,672 2,234 27,515 16,641 27,460 2,279 73,895 - 35,249 15,700 27,008 4,282 6,746 223 102,295 168,089 89,208 163,103 27,028 - 1,790 3,160 6,966 38,944 220 14,612 15,423 25,728 55,983 94,927 73,162 113,200 1,152 (41,190) 73,162 22,282 15,601 2,416 1,161 3,089 44,549 - 19,844 23,717 8,175 51,736 96,285 66,818 113,200 774 (47,156) 66,818 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 53 Stanmore Coal Annual Report 2018 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2018 Issued capital $‘000 Accumulated losses $‘000 Share based payment reserve $‘000 At 1 July 2016 TOTAL COMPREHENSIVE INCOME FOR THE YEAR Profit/(loss) for the year Other comprehensive income - - - TRANSACTIONS WITH OWNERS IN THEIR CAPACITY AS OWNERS Issue of shares Cost associated with issue of share capital Share based payments reserve Deferred tax recognised directly in equity 15,454 (751) - 1,129 12,035 - 12,035 - - 3,469 - At 30 June 2017 113,200 (47,156) At 1 July 2017 113,200 (47,156) TOTAL COMPREHENSIVE INCOME FOR THE PERIOD Profit/(loss) for the year Other comprehensive income - - - 5,966 - 5,966 - - - - - (3,603) - 774 774 - - - TRANSACTIONS WITH OWNERS IN THEIR CAPACITY AS OWNERS Share based payments reserve At 30 June 2018 - – 113,200 (41,190) 378 1,152 Total $'000 12,035 - 12,035 15,454 (751) (134) 1,129 66,818 66,818 5,966 - 5,966 378 73,162 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 54 Stanmore Coal Annual Report 2018 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2018 Note 2018 $’000 2017 $‘000 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest received Interest and other finance costs paid Net cash (outflow)/inflow from operating activities 5 CASH FLOWS FROM INVESTING ACTIVITIES Payments for property, plant and equipment Receipts for exploration, evaluation and development assets (Payments) for exploration, evaluation and development assets Receipts relating to vendor payments Net cash (outflow)/inflow from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares (net of costs) Proceeds from borrowings Repayment of borrowings Net cash (outflow)/inflow from financing activities Net increase/(decrease) in cash held Net cash at beginning of year Net cash at end of year 4b 4a 201,668 (173,149) 293 (6,938) 21,874 (6,923) 2,000 (10,026) 978 (13,971) - 22,084 (37,685) (15,601) (7,698) 27,515 19,817 130,183 (143,507) 212 (4,698) (17,810) (8,191) 1,000 (3,512) 13,430 2,727 14,703 15,815 - 30,518 15,435 12,080 27,515 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 55 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS ABOUT THIS REPORT The financial statements of Stanmore Coal Limited for the year ended 30 June 2018 covers the Consolidated Entity consisting of Stanmore Coal Limited and its subsidiaries (“the Consolidated Entity”) as required by the Corporations Act 2001. The financial statements are presented in the Australian currency. Stanmore Coal Limited is a company limited by shares, incorporated and domiciled in Australia, whose shares are publicly traded on the Australian Securities Exchange. The principal activities the Group were the exploration, development, production and sale of metallurgical and thermal coal in Queensland, Australia. The consolidated general purpose financial report of the Consolidated Entity for the year ended 30 June 2018 was authorised for issue in accordance with a resolution of the directors on 27 August 2018. The Directors have the power to amend and reissue the financial report. The financial report is a general-purpose financial report which: • has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board (AASB) and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board; • • • is presented in Australian dollars with all values rounded to the nearest thousand dollars ($‘000) unless otherwise stated, in accordance with ASIC Corporations (Rounding in Financial / Directors Report) Instrument 2016/191; adopts all new and amended Accounting Standards, IFRS and Interpretations issued by the AASB that are relevant to the operations of the Consolidated Entity and effective for reporting periods beginning on or after 1 July 2017. Refer to note 30 for further details; and does not early adopt any Australian Accounting Standards, IFRS and Interpretations that have been issued or amended but are not yet effective, except for those described in Note 30: Other Accounting Policies. The financial statements have been prepared on a historical cost basis, except for Vendor Royalties – contingent consideration which has been measured at fair value. The entity is a for-profit entity for the purposes of Australian Accounting Standards. KEY JUDGEMENTS AND ESTIMATES In the process of applying the Consolidated Entity’s accounting policies, management has made a number of judgements and applied estimates of future events. Judgements and estimates which are material to the financial report are found in the following notes: Revenue and other income Deferred Tax assets and liabilities Property, plant and equipment Capitalised development costs Exploration and evaluation Onerous contracts provision Rehabilitation provision Vendor royalties – contingent consideration Share based payments Page 58 Page 61 Page 67 Page 69 Page 70 Page 74 Page 75 Page 76 Page 93 Note 1 Note 3 Note 8 Note 9(a) Note 9(b) Note 13 Note 14 Note 15 Note 28 56 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS (continued) GOING CONCERN The financial statements have been prepared on a going concern basis which contemplates the continuity of normal business activities and the realisation of assets and discharge of liabilities in the ordinary course of business. BASIS OF CONSOLIDATION Subsidiaries are all those entities (including special purpose entities) over which the Company has control. The Consolidated Entity controls an entity when the Consolidated Entity is exposed, or has the rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Consolidated Entity. They are de-consolidated from the date that control ceases. All intercompany balances and transactions, including unrealised profits arising from intragroup transactions have been eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. The financial statements of subsidiaries are prepared for the same reporting period as the parent, using consistent accounting policies. Non-controlling interests in the results and consolidated equity of subsidiaries are shown separately in the consolidated statement of profit or loss and other comprehensive income and statement of financial position respectively. Total comprehensive income is attributable to owners of Stanmore Coal Limited and non-controlling interests even if this results in the non-controlling interests having a debit balance. OTHER ACCOUNTING POLICIES Significant and other accounting policies that summarise the measurement basis used and are relevant to an understanding of the financial statements are provided throughout the notes to the financial statements. FOREIGN CURRENCY TRANSLATION Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the reporting date. Foreign exchange differences arising on translation are recognised in profit or loss. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. THE NOTES TO THE FINANCIAL STATEMENTS The notes include information which is required to understand the financial statements and is material and relevant to the operations, financial position and performance of the Consolidated Entity. Information is considered relevant and material if for example: • • • the amount in question is significant because of its size or nature; it is important for understanding the results of the Consolidated Entity; it helps to explain the impact of significant changes in the Consolidated Entity’s business for example, acquisitions and impairment write-downs; or • it is related to an aspect of the Consolidated Entity’s operations that is important to its future performance. 57 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 1: REVENUE AND OTHER INCOME REVENUE Revenue from contracts with customers Total revenue OTHER INCOME Rehabilitation provision re-measurement Onerous contract re-measurement Total other income FINANCE INCOME Interest income Total finance income Note 2018 $’000 2017 $‘000 14 13 208,081 208,081 137,846 137,846 281 4,040 4,321 293 293 (1,357) 538 (819) 212 212 DISAGGREGATION OF REVENUE FROM CONTRACT WITH CUSTOMERS The Group recognises revenue from the transfers of goods over time and at a point in time in the following major product lines and geographical regions. 2018 Sales – thermal coal Sales – semi-soft coking coal Coal sales – subtotal Toll loading revenue Total 2017 Sales – thermal coal Sales – semi-soft coal Total South East Asia AUD '000 Europe AUD '000 Australia AUD ‘000 53,323 132,312 185,635 - 185,635 17,097 116,860 133,957 - 5,197 5,197 - 5,197 - 3,889 3,889 Total AUD '000 53,323 137,509 190,832 17,249 208,081 - - - 17,249 17,249 - - - 17,097 120,749 137,846 During the year the Consolidated Entity completed a contract for toll loading of the 3rd party coal. Stanmore Coal provided the following services: coal handling, loadout, railing to DBCT, and DBCT port loading and then invoiced the 3rd party based on end of month train loaded tonnes. RECOGNITION AND MEASUREMENT Revenue is measured at the fair value of consideration received or receivable. Amounts disclosed as revenue are net of duties and taxes paid. The following specific recognition criteria must also be met before revenue is recognised: 58 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 1: REVENUE AND OTHER INCOME (continued) CONTRACTS WITH CUSTOMERS – COAL SALES General recognition Revenue from the sale of coal is recognised in the profit or loss when the performance obligations of Stanmore Coal have been met and the ownership of the coal is legally transferred to the buyer. Performance obligations are considered to be met under the terms of the individual contracts. Typically, the transfer of ownership and the recognition of a sale occurs when the coal passes the ship rail when loading at the port, unless the sale is made on stockpile at which point the transfer of ownership will occur when the sales agreement is exercised. All coal is shipped through the Dalrymple Bay Coal Terminal and most coal sold during the financial year ending 30 June 2018 was on a contracted ‘free on board’ basis. As is customary with ‘free on board’ contracts, parameters such as coal quality and mass are tested using independent experts and weightometers as the vessel is being loaded. The bill of lading is only issued upon verification and confirmation from several parties involved with the logistic and handling process. Once confirmed, the measured parameters form the basis for calculation of final price on the commercial invoice. All customer contracts specify a known price and tolerance range for quality parameters prior to the Consolidated Entity committing to the supply of coal to the customer. Payment terms for coal customers range from letter of credit basis to up to 45 days, with the majority being settled in 20 days or less from issuance of the commercial invoice. There were no breaches of payment terms noted during the financial year and contracts recognised as fulfilled and therefore receivable at 30 June 2018 have subsequently been receipted in July 2018 without issue. Semi-soft Quarterly Index Linked Price Contracts recognition Semi-soft sales contracts with Stanmore Coal customers generally contain quarterly pricing provisions as is customary in the semi-soft coal markets. Sales contracts with regular customers are linked to the Hunter Valley semi-soft coking coal index with index adjustments based on the term agreements/relationship, Isaac Plains semi-soft variations to the index benchmark, or other contractual reasons. When the quarterly benchmark prices have not been settled sales invoices are issued and paid based on the provisional prices from the prior quarters agreed index price. These provisional prices are then adjusted when the final quarterly benchmark prices are settled. Where sales volumes have not been fulfilled within the scope of the contract for the previous quarters, the coal sales are at the prior quarters price. At the end of the annual contract period full year carry over tonnes are discussed between the parties and the supply of tonnes can be cancelled or carried over to the next annual contract. KEY JUDGEMENTS Due to the volatility in the Hunter Valley semi-soft coal price index, management review the index price at the end of the quarter Coal sales are then adjusted, based on the final index price, which has been agreed with customers. If the price has not yet been signed off on all contracts, management will make judgements on the risks associated with the customer and adjust the provisional price based on the contract. This risk weight price would then be used rather than the quarterly index price which has not yet been agreed with the customer. Thermal Coal Contract Sales Thermal coal sales are not customarily index linked and are settled based on contract prices as agreed and adjusted by the contract terms. Generally, price and adjustments are finalised and final invoiced within a short period of time after the coal is ‘free on board’. KEY JUDGEMENTS Where prices are not finalised at the end of a period due to the timing of contractual adjustments, management will make assessments on the adjustments and provide for the expected impact of the contract adjustments. Price adjustments are minimal in comparison to the total invoice and are generally not material in nature. 59 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 2: COST OF SALES AND OTHER EXPENSES COST OF SALES Mining costs Processing costs Transport and logistics State royalties Private royalties Production overheads Other production costs Sub-total cost of sales Toll loading costs Total cost of sales OTHER EXPENSES Other expenses Fair value movement – vendor royalty – contingent consideration Provision for impairment and write-off – exploration asset Provision for impairment – Development Asset Total other expenses FINANCIAL EXPENSES Interest paid – external parties Interest amortisation unwinding Movement in foreign currency Borrowing costs Total financial expenses RECOGNITION AND MEASUREMENT PRODUCTION COSTS Note 15 9b 13,14,15 2018 $’000 77,897 17,964 18,638 15,661 2,165 3,887 5,685 141,897 13,893 155,790 11,950 25,828 8 - 37,786 2,224 2,676 306 3,873 9,079 2017 $‘000 52,049 14,862 12,694 11,329 1,011 6,575 5,537 104,057 - 104,057 10,365 14,457 917 (8,512) 17,227 4,566 2,043 (1,029) 3,957 9,537 Production costs are costs incurred directly or indirectly relating to the mining and preparation of coal for sale to third party customers. Costs have been recognised on an accruals basis at the time the sale is recognised, in line with movements through inventory and survey information from site. Refer to Inventory in Note 6. OTHER EXPENSES Other expenses include the following specific items: 60 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 2: COST OF SALES AND OTHER EXPENSES (continued) DEPRECIATION AND AMORTISATION Depreciation – plant and equipment Amortisation – intangibles Sub-total depreciation and amortisation Vendor reimbursements EMPLOYEE EXPENSES Employee – salaries and wages Employee superannuation Share-based payments (shares) Sub-total employee expenses Other overhead expenses Minimum lease payments made under operating lease Total other expenses RECOGNITION AND MEASUREMENT WAGES AND SALARIES, ANNUAL LEAVE AND SICK LEAVE Note 8 10 2018 $’000 4,703 504 5,207 - 2,761 226 378 3,365 3,242 136 2017 $‘000 2,828 504 3,332 1,923 2,839 205 (134) 2,910 2,048 152 11,950 10,365 Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be wholly settled within 12 months of the end of the reporting period are recognised in respect of employees’ services rendered up to the end of the reporting period. They are measured at amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when leave is taken and measured at the actual rates paid or payable. LEASES The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease.. NOTE 3: INCOME TAX EXPENSE RECONCILIATION Current income tax expense Deferred income tax benefit Income tax expense/(benefit) RECONCILIATION THROUGH EQUITY Opening balance Current year share issue expenses Prior year DTA not brought to account Income tax expense/(benefit) – equity 2018 $’000 - 4,074 4,074 - - - (1,129) 2017 $‘000 - (5,617) (5,617) - (225) (904) (1,129) 61 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 3: INCOME TAX EXPENSE (continued) The prima facie income tax on the profit/(loss) is reconciled to the income tax expense as follows: Prima facie tax benefit (30%) on loss before income tax Add tax effect of: – Non-deductable expenses – Prior year deferred tax asset recognised Deferred Income tax expense/(benefit) RECOGNISED DEFERRED TAX ASSETS AND LIABILITIES DEFERRED TAX ASSETS Unused tax losses Deductible temporary differences Sub-total deferred tax assets DEFERRED TAX LIABILITIES Assessable temporary differences Deferred tax 2018 $’000 3,012 482 580 4,074 11,617 24,917 36,534 (33,862) 2,672 2017 $‘000 1,926 1,782 (9,325) (5,617) 20,645 14,912 35,557 (28,811) 6,746 Deferred tax assets will only be recognised when: • the Consolidated Entity derives future assessable income of a nature and of an amount sufficient to enable the losses to be realised; • the Consolidated Entity continues to comply with the conditions for deductibility imposed by the law; and • no changes in tax legislation adversely affect the Consolidated Entity in realising the losses. RECOGNITION AND MEASUREMENT The income tax expense for the year is the tax payable on the current year’s taxable income based on the national income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax base of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for all temporary differences at the tax rates expected to apply when the assets are recovered, or liabilities settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. Exceptions are made for certain temporary differences arising on initial recognition of an asset or a liability if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit. Deferred tax assets are only recognised for deductible temporary differences and unused tax losses if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amount and tax bases of investments in subsidiaries, associates and interests in joint ventures where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Current and deferred tax balances relating to amounts recognised directly in other comprehensive income and equity are also recognised directly in other comprehensive income and equity, respectively. 62 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 3: INCOME TAX EXPENSE (continued) 2018 Provision for rehabilitation Provision for onerous contracts Property, plant and equipment Vendor private royalty Exploration and development costs Unrealised FX Other Vendor receivable Provision for impairment exploration and development Rail loop benefit Overburden in advance Prior year yax losses Total 2017 Opening balance $’000 Recognised in equity $’000 Recognised in profit and loss $’000 7,463 6,678 (7,661) 3,379 (17,454) 314 886 (6,407) 3,629 (1,285) (3,665) 20,869 6,746 - - - - - - - - - - - - - (1,888) (1,757) 601 6,429 594 (278) 60 2,200 3 151 (936) (9,253) (4,074) Opening balance $’000 Recognised in equity $’000 Recognised in profit and loss $’000 Provision for rehabilitation Provision for onerous contracts 7,172 8,019 Property, plant and equipment (8,780) Vendor private royalty Exploration and development costs Unrealised foreign exchange Other Vendor receivable Provision for impairment exploration and development Rail loop benefit Overburden in ddvance Prior year yax losses Total - (16,151) - 556 (3,890) 6,025 (1,436) - 8,485 - - - - - - - - - - - - (1,129) (1,129) 291 (1,341) 1,119 3,379 (1,303) (17,454) 314 330 314 886 (2,517) (6,407) (2,396) 151 (3,665) 13,513 7,875 3,629 (1,285) (3,665) 20,869 6,746 Closing balance $’000 5,575 4,921 (7,060) 9,808 (16,860) 36 946 (4,207) 3,632 (1,134) (4,601) 11,616 2,672 Closing balance $’000 7,463 6,678 (7,661) 3,379 Deferred tax asset $’000 Deferred tax liability $’000 5,575 4,921 - - - (7,060) 9,808 - - 36 946 - 3,632 - - 11,616 36,534 (16,860) - - (4,207) - (1,134) (4,601) - (33,862) Deferred tax asset $’000 Deferred tax liability $’000 7,463 6,678 (7,661) 3,379 - 314 886 - 3,629 - - 20,869 35,557 - - - - (17,454) - - (6,407) - (1,285) (3,665) - (28,811) 63 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS NOTE 3: INCOME TAX EXPENSE (continued) TAX CONSOLIDATION Stanmore Coal Limited and its wholly-owned subsidiaries have formed a tax consolidated group and are taxed as a single entity. Stanmore Coal Limited is the head entity of the tax consolidated group. The stand-alone taxpayer/separate taxpayer within a group approach has been used to allocate current income tax expense and deferred tax expense to wholly-owned subsidiaries that form part of the tax consolidated group. Stanmore Coal Limited has assumed all the current tax liabilities and the deferred tax assets arising from unused tax losses for the tax consolidated group via intercompany receivables and payables as a tax funding arrangement is in place. NOTE 4(a): CASH AND CASH EQUIVALENTS Cash at bank and in hand Cash at bank bear floating and fixed interest rates between 1.5% and 1.75% (2017: 1.5% and 1.75%). RECONCILIATION OF CASH 2018 $’000 19,817 2017 $‘000 27,515 The above figures are reconciled to the consolidated statement of cash flows as follows: Balances as above Balances per consolidated statement of cash flows 19,817 19,817 27,515 27,515 RECOGNITION AND MEASUREMENT For the purposes of the Consolidated Statement of Cash Flows, cash and cash equivalents includes cash on hand and at bank, deposits held at call with financial institutions, other short term, highly liquid investments with original maturities of three months or less, that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value and bank overdrafts. NOTE 4(b): RECONCILIATION OF LIABILITIES ARISING FROM FINANCING ACTIVITIES Net cash (outflow)/inflow from financing activities 2017 $’000 15,601 Cash flows (15,601) Non-cash changes - 2018 $ ‘000 - 64 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 5: CASH FLOW INFORMATION A. RECONCILIATION OF PROFIT/(LOSS) AFTER INCOME TAX TO NET CASH FLOW FROM OPERATING ACTIVITIES Profit/(Loss) for the year Depreciation, amortisation and disposal of fixed assets Rehabilitation provision non-cash movement Onerous contract non-cash movement Contingent consideration non-cash movement Unrealised gains/loss on foreign exchange Impairment of exploration and evaluation expenditure Impairment of development assets Share-based payments expense CHANGE IN OPERATING ASSETS AND LIABILITIES: - (Increase)/Decrease in trade and other receivables - (Increase)/Decrease in coal inventory - (Increase)/Decrease in overburden in advance inventory - (Increase)/Decrease in other assets - Increase/(Decrease) in trade and other payables - Increase/(Decrease) in deferred tax asset - Increase/(Decrease) in provisions for onerous contracts - Increase/(Decrease) in rehabilitation provisions Net cash flow from operating activities (B) NON-CASH INVESTING AND FINANCING ACTIVITIES There were no non-cash investing or financing activities during the current year. NOTE 6: INVENTORIES CURRENT ROM coal stocks Product coal stocks Sub-total coal stock Overburden in advance Total current inventories NON-CURRENT Overburden in advance Total non-current inventories Total inventories 2018 $’000 5,966 5,207 820 3,206 21,430 306 8 - 378 (5,785) 5,248 (3,119) (299) (3,413) 4,074 (5,858) (6,295) 2017 $‘000 12,035 3,918 387 857 11,264 1,029 917 (8,512) (134) 6,382 (10,165) (12,216) 567 (15,023) (5,617) (4,469) 970 21,874 (17,810) 2018 $’000 3,752 6,244 9,996 10,971 20,967 4,364 4,364 25,331 2017 $‘000 12,802 2,442 15,244 12,216 27,460 - - 27,460 65 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 6: INVENTORIES (continued) RECOGNITION AND MEASUREMENT Inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimate selling price in the ordinary course of business, less the estimate costs of completion and selling expenses. The cost of coal inventories is determined using a direct costing basis. Costs include blasting, overburden removal, coal mining, processing, labour, transport and other costs which are directly related to mining activities at site. Inventories are classified as follows: • Over-burden in advance material extracted through the pre-strip mining process and includes blasting activities • • run of mine material extracted through the mining process and awaiting processing at the coal handling and preparation plant product coal which has been processed into final saleable form. Product coal may be held at the site or at port shared stockpile facilities awaiting delivery to customers. INTERPRETATION 20 – STRIPPING COSTS IN THE PRODUCTION PHASE OF A SURFACE MINE Interpretation 20, effective 1 January 2013 requires overburden in advance to be capitalised separately as Inventory under AASB 102. This means that coal mining and stripping no longer maintain a timing nexus. As a result of this the stripping process, costs of overburden removal will be capitalised separately as Inventory under AASB 102 as directed under Interpretation 20. As at the reporting date the Consolidated Entity has also recognised non-current deferred stripping costs shown in the consolidated statement of financial position. This balance reflects the overburden in advance from pre-stripping at Isaac Plains not expected to be mined within the next 12 months as mining operations are moving to Isaac Plains East. NOTE 7: TRADE AND OTHER RECEIVABLES CURRENT GST receivable Trade receivables Vendor receivable Other receivables 2018 $’000 1,569 20,559 - 299 2017 $‘000 1,395 14,690 556 - Total current trade and other receivables 22,427 16,641 RECOGNITION AND MEASUREMENT Trade receivables are recognised at original invoice amounts less an allowance for uncollectible amounts and have repayment terms between 30 and 90 days. Collectability of trade receivables is assessed on an ongoing basis and debts which are known to be uncollectible are written off. No receivable balances were past due or impaired at year end and in FY17. 66 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 8: PROPERTY, PLANT AND EQUIPMENT LAND At cost – option fees Accumulated depreciation PLANT AND EQUIPMENT At cost Accumulated depreciation BUILDINGS AND IMPROVEMENTS At cost Accumulated depreciation FURNITURE AND OFFICE EQUIPMENT At cost Accumulated depreciation CAPITAL WORK IN PROGRESS At cost Accumulated depreciation Total property plant and equipment 2018 $’000 - - - 40,496 (8,355) 32,141 1,379 (343) 1,036 137 (117) 20 3,247 - 3,247 36,444 2017 $‘000 1,946 - 1,946 31,152 (3,778) 27,374 1,379 (219) 1,160 137 (115) 22 4,747 - 4,747 35,249 Option fees on land previously recognised within property, plant and equipment has been reclassified as a deposit within non-current assets due to further extension of the commercial agreement to purchase the land, therefore the initial payment is more aligned to the characteristics of a deposit. RECOGNITION AND MEASUREMENT Property, plant and equipment is measured at cost less accumulated depreciation and impairment losses. The cost of fixed assets constructed within the Consolidated Entity includes the cost of materials, direct labour, borrowing costs and an appropriate portion of fixed and variable costs. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, only when it is probable that future economic benefits associated with the item will flow to the Consolidated Entity and the cost of the item can be measured reliably. 67 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 8: PROPERTY, PLANT AND EQUIPMENT (continued) MOVEMENTS IN CARRYING AMOUNTS Plant and equipment $’000 Buildings and improvements $’000 Computer equipment $’000 Land $’000 Furniture and office equipment $’000 Capital work in progress $’000 Total $’000 2018 Balance at the beginning of the year Additions – through ordinary course Capital WIP transfers Net disposals Transfers – through ordinary course (1,946) Depreciation expense Carrying amount at the end of the year - - 1,946 27,374 1,160 - - - 21 9,323 - - - - - - (4,577) (124) 32,141 1,036 - - - - - - - 22 4,747 35,249 - - - - (2) 7,823 7,844 (9,323) - - - - - (1,946) (4,703) 20 3,247 36,444 2017 Balance at the beginning of the year Additions – through ordinary course Capital WIP transfers Net disposals WDV transfers – through ordinary course Depreciation expense Carrying amount at the end of the year DEPRECIATION 1,946 28,920 1,265 17 - - - - - - 1,768 (586) (4) (2,724) - - - (14) (91) 1,946 27,374 1,160 - - - (17) - - - - - - 35 (13) 1,297 33,445 5,218 5,218 (1,768) - - - - (586) - (2,828) 22 4,747 35,249 The carrying amount of all non-mining property fixed assets is depreciated over their useful life from the time the asset is held ready for use. Mining property fixed assets are depreciated on a units of production basis over the life of the economically recoverably resources. The base for the units of production is drawn from the assets principle use. Items that are specific to open cut operations are depreciated over the run of mine open cut coal reserves. Surface infrastructure that is not specific to a mining method such as the wash plant and loadout facilities utilise the Economically Recoverable Resources of the Isaac Plains Complex which includes an estimate of recoverable underground coal reserves. The depreciation rates used for each class of assets are: Class of fixed asset Plant and equipment Computer equipment Furniture and equipment Building and improvements 68 Depreciation rate 10–25% straight line/units of production 33.3% straight line 5–25% straight line 5–10% straight line Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS NOTE 8: PROPERTY, PLANT AND EQUIPMENT (continued) Plant and equipment are measured on the cost basis and therefore carried at cost less accumulated depreciation and any accumulated impairment. In the event the carrying amount of plant and equipment is greater than the estimated recoverable amount, the carrying amount is written down immediately to the estimated recoverable amount and impairment losses are recognised. A formal assessment of recoverable amount is made when impairment indicators are present. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the asset’s employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are recognised in profit or loss in the period in which they arise. When revalued assets are sold, amounts included in the revaluation surplus relating to that asset are transferred to retained earnings. NOTE 9(a): CAPITALISED DEVELOPMENT COSTS NON-CURRENT Capitalised development costs Recoverability of the carrying amount of development assets is dependent on the successful completion of development activities, or alternatively, sale of the respective areas of interest. MOVEMENTS IN CARRYING AMOUNTS Balance at the beginning of the year Transfers from exploration and evaluation Transfers to exploration and evaluation Other additions Sub-total capitalised cost Provision for impairment Carrying amount at the end of the year MOVEMENTS IN PROVISION FOR IMPAIRMENT AMOUNTS Balance at the beginning of the year Provisions (raised)/reversed Provision transferred to exploration and evaluation Provision for impairment at the end of the year RECOGNITION AND MEASUREMENT 2018 $’000 2017 $‘000 13,410 15,700 21,071 6,167 (21,072) 7,244 13,410 - 13,410 (5,371) - 5,371 - 21,058 - - 13 21,071 (5,371) 15,700 (13,883) 8,512 - (5,371) Capitalised development expenditure includes costs transferred from exploration and evaluation when the Consolidated Entity can demonstrate: • • the technical feasibility of completing the intangible asset so that it will be available for use or sale; its intention to complete and its ability to use or sell the asset; • how the asset will generate future economic benefits; • • the availability of resources to complete the asset; and the ability to measure reliability the expenditure during development. 69 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 9(A): CAPITALISED DEVELOPMENT COSTS (continued) Following recognition, the asset is carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins when development is complete, and the asset is available for use. During the year of development, the asset is tested for impairment annually. KEY JUDGEMENTS – CAPITALISATION AND IMPAIRMENT ASSESSMENT OF DEVELOPMENT COSTS Initial capitalisation of costs is based on management’s judgement that technical and economic feasibility is confirmed. In determining the amounts to be capitalised, management makes assumptions regarding the expected future cash generating potential of the project, discount rates to be applied and the expected period of which cash flows are expected to be received. As at 30 June 2018, the carrying amount of capitalised developments costs was $13.4 million (2017: $15.7 million). During the year, due to the receipt of environmental approval (EA), mining leases, the commencement of mine infrastructure works and pre-stripping for Isaac Plains East it has been assessed that the exploration and evaluation phase has been completed, and the development phase has commenced. As required by AASB 136 impairment testing has been completed and it has shown that these costs will be recovered over the life of Isaac Plains East. During the year $6.2m was transferred from exploration and evaluation to capitalised development costs as part of Isaac Plains East. Following commencement of mining operations (July 2018), this balance and all additional development costs relating to Isaac Plains East will then be reclassified to mining properties in production. In addition, Stanmore Coal reclassified The Range (an undeveloped thermal deposit in the Surat Basin), from capitalised development costs to exploration and evaluation assets. This is due to an insignificant amount of development activities being completed since the asset was classified as a development asset in FY12. The Range was transferred at its fair value of $15.7m, which is unchanged from FY17 and is reflected in its cost of $21.072m less the impairment of $5.371m. There were no transactions or significant market movements that affected the previous provision raised against The Range project. NOTE 9(b): EXPLORATION AND EVALUATION ASSETS NON-CURRENT EXPLORATION AND EVALUATION EXPENDITURE CAPITALISED – Exploration and evaluation phases 39,393 27,008 Recoverability of the carrying amount of exploration and evaluation assets is dependent on the successful development and commercial exploitation of coal, or alternatively, sale of the respective areas of interest. 2018 $’000 2017 $‘000 MOVEMENTS IN CARRYING AMOUNTS Balance at the beginning of the year Additions and transfers from work in progress Transferred to capitalised development Transferred from capitalised development Written-off Sub-total capitalised cost Provision for impairment Carrying amount at the end of the year 70 33,734 2,859 (6,167) 21,072 - 51,498 (12,105) 39,393 29,784 4,341 - - (391) 33,734 (6,726) 27,008 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 9(A): CAPITALISED DEVELOPMENT COSTS (continued) MOVEMENTS IN PROVISION FOR IMPAIRMENT AMOUNTS Balance at the beginning of the year Provisions (raised)/reversed Provision transferred from capitalised development Provision for impairment at the end of the year 2018 $’000 2017 $‘000 (6,726) (8) (5,371) (12,105) (6,200) (526) - (6,726) During the year The Range was reclassified from capitalised development costs to exploration and evaluation assets as outlined in Note 9(a) and Isaac Plains East was reclassified to capitalised development costs following the decision to begin development. RECOGNITION AND MEASUREMENT Exploration and evaluation expenditure incurred is capitalised on an area of interest basis. Such expenditures comprise net direct costs and an appropriate portion of related overhead expenditure. These costs are carried forward to the extent that they are expected to be recouped through the successful development of the area or where activities in the area have not yet reached a stage which permits reasonable assessment of the existence of Economically Recoverable Resources and active or significant operations in relation to the area are continuing. A regular review is undertaken on each area of interest to determine the appropriateness of continuing to carry forward costs in relation to that area of interest. Accumulated costs in relation to an abandoned area are written off against profit in the year in which the decision to abandon the area is made. Where an uncertainty exists for further exploration of the area, a provision is raised for the costs of exploration. When the technical feasibility and commercial viability is demonstrated, the accumulated costs for the relevant area of interest are transferred to capitalised development costs. KEY JUDGEMENTS – CAPITALISATION AND IMPAIRMENT ASSESSMENT OF DEVELOPMENT COSTS The Consolidated Entity performs impairment testing on specific exploration assets as required in AASB 6 para 20. During FY18 no impairment indicator was noted. In addition, during the year The Range was reclassified from capitalised development costs to exploration and evaluation assets as outlined in Note 9(a). This has resulted in an increase in total capitalised exploration costs by $21.1m, with an impairment transferred of $5.4m. The total impairment on these exploration and evaluation assets is now $12.1million. No specific event has occurred relating to other exploration and evaluation assets recognised on the Consolidated Statement of Financial Position. At the end of the reporting year the balance of Exploration and Evaluation Assets is $39.4 million (2017: $27.0 million). 71 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 10: INTANGIBLE ASSETS INFRASTRUCTURE INTANGIBLE ASSET At cost Accumulated amortisation MOVEMENTS IN CARRYING AMOUNTS Balance at the beginning of the year Amortisation expense Carrying amount at the end of the year 2018 $’000 4,800 (1,022) 3,778 4,282 (504) 3,778 2017 $‘000 4,800 (518) 4,282 4,786 (504) 4,282 IMPAIRMENT OF ASSETS INCLUDING INTANGIBLE ASSETS At the end of each reporting year the Consolidated Entity assesses whether there is any indication that individual assets are impaired. Where impairment indicators exist, recoverable amount is determined, and impairment losses are recognised in profit or loss where the asset’s carrying value exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of 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. Where it is not possible to estimate recoverable amount for an individual asset, the Consolidated Entity estimates the recoverable amount of the cash-generating unit to which the asset belongs. INTANGIBLE ASSETS The infrastructure intangible asset relates to future rebates on the cost of coal railings based on an agreement with the below rail infrastructure owner. Receipts of coal railing rebates are recognised in profit or loss as a credit against the cost incurred. The estimated useful life of the asset is aligned with the term of the contractual agreement and is amortised on a straight-line basis over the life in accordance with the anticipated profile of benefits received. NOTE 11: TRADE AND OTHER PAYABLES CURRENT Trade and other payables Sundry payables and accrued expenses Employee benefits Total current trade and other payables RECOGNITION AND MEASUREMENT 2018 $’000 2,197 24,325 506 27,028 2017 $‘000 1,254 20,450 578 22,282 Trade and other payables represent liabilities for goods and services provided to the Consolidated Entity prior to the year end and which are unpaid. They are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. No assets of the Consolidated Entity have been pledged as security for the trade and other payables. 72 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 12: INTEREST BEARING LOANS AND BORROWINGS INTEREST BEARING LOANS AND BORROWINGS Facility B – working capital facility Total Interest-bearing loans and borrowings TOTAL FACILITIES FACILITY A – BANK GUARANTEE FACILITY Total available facility Facility utilised Available facility FACILITY B – WORKING CAPITAL FACILITY Total available facility Facility utilised Available facility RECOGNITION AND MEASUREMENT 2018 $’000 2017 $‘000 2018 USD ’000 2017 USD ‘000 - - 15,601 15,601 39,237 24,638 14,599 29,766 - 29,766 27,942 27,942 - 28,601 15,601 13,000 - - 29,000 17,427 11,573 22,000 - 22,000 12,000 12,000 21,493 21,493 - 22,000 12,000 10,000 Interest bearing liabilities are initially recognised at fair value, net of any transactions costs incurred. Interest bearing liabilities are classified as current liabilities. The Group pays a 2% pa facility fee for all undrawn funds in both the working capital and bank guarantee facilities, once utilised the funds attract a 10% fixed interest rate. On 8 June 2018 the Group’s debt finance facility was renewed to allow for an additional facility to be established for the acquisition of Isaac Downs if required. Key terms of the facility remain unchanged, with the expiration date still 15 November 2019. Key terms of the facility are: • Bonding/bank guarantee facility increased to USD$29.0m (unchanged) • Revolving working capital facility of USD$22.0m (unchanged) • • Interest rate on utilised funds of 10.0% (unchanged) Interest rate on available facility of 2.0% (unchanged) • Royalty payable of 1.0% on proceeds from Isaac Plains Complex • Taurus has a security charge of the operating entities which own Isaac Plains East and Isaac Downs. Refer to Note 22 Contingent Assets and Liabilities for further discussion on the debt financing arrangements. The working capital facility is denominated in USD and therefore when drawn exposes the Group to USD fluctuations these fluctuations are accounted for as outlined in Note 19. 73 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 13: ONEROUS CONTRACTS PROVISION CURRENT Current onerous contract provision NON-CURRENT Non-current onerous contract provision Total onerous contracts provision RECONCILIATION OF MOVEMENTS Opening balance Depletions through settlement Adjustment – through re-measurement Unwinding of discount – via profit and loss Closing balance RECOGNITION AND MEASUREMENT 2018 $’000 2017 $‘000 1,790 2,416 14,612 16,402 22,260 (2,652) (4,040) 834 16,402 19,844 22,260 26,729 (5,326) (538) 1,395 22,260 The provision for onerous contracts relates to the transaction to acquire the Isaac Plains Coal Mine which completed in November 2015. The Group acquired various long-term contracts necessary for mining activities at Isaac Plains including rail haulage, port allocations, water supply, electricity supply and accommodation. Based on the initial Isaac Plains mine plan, a portion of these contracts were estimated to be underutilised and the fixed charges incurred above the deemed requirement was recognised as an onerous contract liability. The fair value of onerous contracts at acquisition was estimated by calculating the present value of expected future cash outflows for the onerous portion of each contract, discounted at a rate reflecting the risk profile of each contract. Excluding the assessed onerous portion of the contracts already recognised in the consolidated statement of financial position, the minimum payments required under the identified contracts is approximately $58 million (undiscounted) (2017: $64 million (undiscounted)). These payments are expected to be met as part of normal operational expenditure at Isaac Plains complex in the coming years. In the period from acquisition through to 30 June 2018, a number of onerous contracts have been settled through the ordinary course of business. The onerous position at 30 June 2018 has been re-measured for all contracts having regard to the latest Economically Recoverable Resources of the Isaac Plains Complex which includes an estimate of recoverable underground coal reserves. KEY ESTIMATES – ONEROUS CONTRACTS The Consolidated Entity assesses onerous contracts at each reporting date by evaluating conditions specific to each contract and the then current business plan. Where a contract provides capacity above that required to meet the business plan or for a longer period than the current extent of the business plan, the contract is deemed onerous and the onerous portion of the contract is recognised as a liability using an estimate of future onerous cash flows discounted to a net present value. Any re-measurement of the assessed level of onerous contracts is taken through profit or loss in the period in which the assessment is made. During the FY18 year a total of $2.7 million of onerous contracts were settled through payment, with the unwinding of the discount being $0.8 million and $4.0 million taken through consolidated statement of profit or loss for re-measurement. 74 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 14: REHABILITATION PROVISION CURRENT Current rehabilitation provision NON-CURRENT Non-current rehabilitation provision Total rehabilitation liability RECONCILIATION OF MOVEMENTS Opening balance Depletion – rehabilitation works completed Depletion – re-measurement Unwinding of discount – via profit and loss Closing balance RECOGNITION AND MEASUREMENT 2018 $’000 2017 $‘000 3,160 1,161 15,423 18,583 24,878 (6,705) (281) 691 18,583 23,717 24,878 23,908 (1,035) 1,357 648 24,878 The provision for rehabilitation closure costs relates to areas disturbed during operation of the mine up to reporting date and not yet rehabilitated. Provision has been made to rehabilitate all areas of disturbance including surface infrastructure, contouring, topsoiling and revegetation, using internal and external expert assessment of each aspect to calculate an anticipated cash outflow discounted to a net present value. At each reporting date, the rehabilitation liability is re-measured in line with the then-current level of disturbances, cost estimates and other key inputs. The amount of provision relating to rehabilitation of areas caused by mining disturbance is recognised in profit or loss as incurred. KEY ESTIMATES – REHABILITATION PROVISION The Consolidated Entity assesses rehabilitation liabilities at each reporting date as there are numerous factors that may affect the ultimate liability payable. This includes the extent and nature of rehabilitation activity to be undertaken, changes in technology and techniques, changes in discount rates and regulatory impacts. There may be differences between the future actual expenditure and the assessment made at the balance date. The provisions at balance date represent management’s best estimate of the present value of rehabilitation cost to completely rehabilitate the site. In FY18 a decrease in the rehabilitation provision of $6.3 million was recognised due to the rehabilitation works completed. In addition, a rehabilitation liability was recognised with regard to disturbance of Isaac Plains East. The continued extension of the mine life due to mine plan expansions at Isaac Plains East also contribute to a reduction in the rehabilitation provision due to the value of future cash outflows being reduced by the government discount factor. 75 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 15: VENDOR ROYALTIES – CONTINGENT CONSIDERATION CURRENT Current vendor royalties – contingent consideration 6,966 3,089 2018 $’000 2017 $‘000 NON-CURRENT Non-current vendor royalties – contingent consideration Total vendor private royalty RECONCILIATION OF MOVEMENTS Opening balance – vendor royalties – contingent consideration at fair value Fair value adjustments taken to profit and loss in other expenses Depletions through settlement Unwinding of discount – via profit and loss Total vendor royalties – contingent consideration at fair value 25,728 32,694 11,264 25,828 (5,550) 1,152 32,694 8,175 11,264 - 14,457 (3,193) - 11,264 KEY JUDGEMENT AND ESTIMATES – VENDOR ROYALTIES During the business combination of Isaac Plains in 2015, AASB 3 Business Combinations required the recognition of contingent consideration. The contingent consideration relates to a royalty stream payable to the vendors of Isaac Plains in the event that benchmark hard coking coal prices are above an Australian Dollar equivalent of 160 (adjusted for CPI) and coal is produced and sold from either Isaac Plains or Isaac Plains East. Each royalty is capped at predetermined amounts for each vendor. Once the price threshold and production requirements are met, the royalty is payable at $2 per product tonne (2015 dollars) to each of the two vendors of Isaac Plains. Royalties were paid during the FY18 to the vendors and as a result the remaining cap is $38.992 million (2018 dollars). This valuation has been performed using a discounted cash flow methodology which was consistent with that used in FY17. The method used is classed as a level 3 valuation under AASB 13 the following key unobservable inputs are used in its calculation: • Hard coking coal forward price curve based on a compilation of short term (12 months) prices from Isaac Plains coal marketing consultants Square Trading Pty Ltd and long-term estimates completed by Wood McKenzie; • AUD/USD Foreign exchange forward curve estimates are based on market consensus curves; and • Coal sales based on the current mining plans of the Isaac Plains Complex, including the Isaac Plains mine, the Isaac Plains East Mine (commenced July 2018), and the Isaac Plains Underground (unapproved). As considered in AASB 13 para 93(h)(i) the following unobservable inputs contain sensitivities that would result in significant changes to the market valuation. There interactions between the sensitivities in the coking coal price and the USD/AUD foreign exchange rate. As the coal commodity is currently traded in USD the interaction between the index price and the FX rate could both magnify and mitigate each other depending on the timing and direction of movements of both indexes. A matrix is shown below of changes in the hard coking coal index and the AUD/USD exchange rate. The numbers are shown in millions and the highlighted number in blue is the current valuation. 76 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 15: VENDOR ROYALTIES – CONTINGENT CONSIDERATION (continued) +10% +5% Current (5%) (10%) e v r u C x e d n I X F +10% 32.694 32.694 32.694 32.694 32.694 Hard coking coal index curve +5% 31.625 32.694 32.694 32.694 32.694 Current 21.142 30.286 32.694 32.694 32.694 The below shows the above matrix as a percentage change in value. +10% +5% Current (5%) (10%) e v r u C x e d n I X F +10% - - - - - Hard coking coal index curve +5% (3.3%) - - - - Current (35.3%) (7.4%) - - - (5%) 9.096 21.142 29.011 32.694 32.694 (5%) (72.2%) (35.3%) (11.3%) - - (10%) 9.096 9.096 20.221 27.673 32.694 (10%) (72.2%) (72.2%) (38.1%) (15.4%) - The below shows changes in Valuation due to changes to Isaac Pains coal sales volume relating to a non-operating future mine not being approved for any reason. Change Isaac Plains Underground not approved Remaining Isaac Plains Open Cut reduced by 20% Product Remaining Isaac Plains Open Cut increased by 20% Product Valuation $M Valuation change $M 26.584 31.688 32.694 (6.110) (1.006) 0.000 % Change (23.0%) (3.1%) - As at 30 June 2018 the fair value was assessed at $32.694 million this calculation reaches the cap of both agreements. NOTE 16: DIVIDENDS AND FRANKING CREDITS There were no dividends paid or recommended during the year. There are no franking credits available to the shareholders of Stanmore Coal Limited. 77 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 17: EARNINGS PER SHARE EARNINGS Profit/(loss) attributable to owners of Stanmore Coal Limited used to calculate basic and diluted earnings per share Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share ADJUSTMENTS FOR CALCULATION OF DILUTED EARNINGS PER SHARE: Options 2018 $’000 2017 $‘000 5,966 12,035 2018 Number '000 2017 Number ‘000 251,801 237,638 - - Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 251,801 237,638 BASIC EARNINGS PER SHARE Basic earnings per share is calculated by dividing the profit attributable to owners of Stanmore Coal Limited by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. DILUTED EARNINGS PER SHARE Earnings used to calculate diluted earnings per share are calculated by adjusting the amount used in determining basic earnings per share by the after-tax effect of dividends and interest associated with dilutive potential ordinary shares. The weighted average number of shares used is adjusted for the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. NOTE 18: ISSUED CAPITAL 251,800,978 fully paid ordinary shares (2017: 251,800,978) Share issue costs Deferred tax recognised through equity 2018 $’000 116,547 (4,476) 1,129 113,200 2017 $‘000 116,547 (4,476) 1,129 113,200 78 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 18: ISSUED CAPITAL (continued) A. ORDINARY SHARES ORDINARY SHARES At the beginning of the year Issue of new ordinary shares Deferred tax recognised through equity 2018 Number 2017 Number 2018 $’000 251,800,978 222,497,435 113,200 - - 29,303,543 - - - 2017 $’000 97,368 14,703 1,129 At reporting date 251,800,978 251,800,978 113,200 113,200 Ordinary shares participate in dividends and the proceeds on winding up of the Consolidated Entity in proportion to the number of shares held. At shareholders’ meetings, each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. Ordinary shares have no par value and Stanmore Coal Limited does not have a limited amount of authorised capital. B. OPTIONS AND RIGHTS During the FY18, no options were held by or issued to employees of the Group. During the FY18, no rights held by employees of the Group expired due to expiration of the rights in accordance with the terms, no rights were forfeited due to employment ceasing. All Rights on issue at 30 June 2018 were as follows: Number of rights Exercise price Expiry date Conditions 30 June 2019 30 June 2020 30 June 2020 Share price targets based on Absolute Shareholder Total Return Compound Annual Growth Rates in FY19, if no vesting occurs at FY 19 then retested in FY20 see Remuneration Report Share price targets based on Absolute Shareholder Total Return Compound Annual Growth Rates in FY20, if no vesting occurs at FY 20 then retested in FY21 see Remuneration Report Targets relating to the approval and commencement of mining at The Range in the Surat Basin 626,482 2,611,508 100,000 Nil Nil Nil C. CAPITAL MANAGEMENT The capital of the Consolidated Entity is managed to provide capital growth to shareholders and ensure the Consolidated Entity can fund its operations and continue as a going concern. The Consolidated Entity’s capital comprises equity as shown in the Consolidated Statement of Financial Position. There are no externally imposed capital requirements. Management oversees the Consolidated Entity’s capital by assessing the financial risks and adjusting its capital structure in response to changes in these risks and the market. These responses include the management of share issues and debt. There have been no changes in the strategy adopted by management to control the capital of the Consolidated Entity since the prior year. D. RECOGNITION AND MEASUREMENT Ordinary shares are classified as equity. Costs directly attributable to the issue of new shares or options are shown as a deduction from the equity proceeds, net of any income tax benefit. 79 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 19: FINANCIAL RISK MANAGEMENT GENERAL OBJECTIVES, POLICIES AND PROCESSES In common with all other businesses, the Consolidated Entity is exposed to risks that arise from its use of financial instruments. This note describes the Consolidated Entity’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 There have been no substantive changes in the Consolidated Entity’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. The Consolidated Entity’s financial instruments consist mainly of deposits with banks, trade and other receivables, security deposits, trade and other payables, borrowings and Vendor Royalty – Contingent Consideration. The Board has overall responsibility for the determination of the Consolidated Entity’s risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Consolidated Entity’s finance function. The Consolidated Entity’s risk management policies and objectives are therefore designed to minimise the potential impacts of these risks on the results of the Consolidated Entity where such impacts may be material. The overall objective of the Board is to set polices that seek to reduce risk as far as possible without unduly affecting the Consolidated Entity’s competitiveness and flexibility. Further details regarding these policies are set out below: A. CREDIT RISK Credit risk is the risk that the other party to a financial instrument will fail to discharge their obligation resulting in the Consolidated Entity incurring a financial loss. This usually occurs when debtors fail to settle their obligations owing to the Consolidated Entity. The Consolidated Entity’s objective is to minimise the risk of loss from credit risk exposure. The Consolidated Entity’s maximum exposure to credit risk at the end of the reporting year, without taking into account the value of any collateral or other security, in the event other parties fail to perform their obligations under financial instruments in relation to each class of recognised financial asset at reporting date, is as follows: Cash and cash equivalents Restricted cash Receivables Security deposits and debt service reserve Credit risk exposure 2018 $’000 19,817 - 22,427 288 42,532 2017 $‘000 27,515 85 16,641 138 44,379 Credit risk is reviewed regularly by the Board and the Audit and Risk Management Committee. The Consolidated Entity does not have any material credit risk exposure to any single debtor or group of debtors under financial instruments entered by the Consolidated Entity. No receivables balances were past due or impaired at year end. The credit quality of receivables that are neither past due nor impaired is good. Bank deposits are held with National Australia Bank Limited and Westpac Banking Corporation. B. LIQUIDITY RISK Liquidity risk is the risk that the Consolidated Entity may encounter difficulties raising funds to meet financial obligations as they fall due. The object of managing liquidity risk is to ensure, as far as possible, that the Consolidated Entity will 80 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS NOTE 19: FINANCIAL RISK MANAGEMENT (continued) always have sufficient liquidity to meets its liabilities when they fall due, under both normal and stressed conditions. Liquidity risk is reviewed regularly by the Board and the Audit and Risk Management Committee. The Consolidated Entity manages liquidity risk by monitoring forecast cash flows and liquidity ratios such as working capital. The Consolidated Entity’s working capital, being current assets less current liabilities has decreased from $29.436 million in 2017 to $26.850 million in 2018. MATURITY ANALYSIS – CONSOLIDATED 2018 – FINANCIAL LIABILITIES 2018 FINANCIAL LIABILITIES Trade payables Working capital facility Vendor royalty payment Other payables Carrying amount $’000 Contractual cash flows $’000 <6 months $’000 6–12 months $’000 1–3 years $’000 >3 years $’000 2,197 - 32,694 24,831 59,722 2,197 - 32,694 24,831 59,722 2,197 - 3,663 24,831 30,691 - - - 3,223 14,024 11,784 - - - 3,223 14,024 11,784 MATURITY ANALYSIS – CONSOLIDATED 2017 – FINANCIAL LIABILITIES 2017 FINANCIAL LIABILITIES Trade payables Working capital facility Vendor royalty payment Other payables Carrying amount $’000 Contractual cash flows $’000 <6 months $’000 6–12 months $’000 1–3 years $’000 1,254 15,601 11,264 21,028 49,147 1,254 16,255 11,264 21,028 38,537 1,254 16,255 3,089 21,028 38,537 - - 1,553 - 1,533 - - - - - >3 years $’000 - - 6,622 - 6,622 Further information regarding commitments is included in Note 21. C. CURRENCY RISK The Australian dollar (AUD) is the functional currency of the Group and as a result currency exposure arising from the transactions and balances in currencies other than the AUD The Group’s potential currency exposures comprise: Coal sales denominated in USD Coal sales for export coal are denominated in USD. The Group is therefore exposed to volatility in the USD/AUD exchange rates, due to the recent stability in the exchange rate it remains the Group’s policy not to hedge Foreign exchange risk relating to coal sales. 81 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 19: FINANCIAL RISK MANAGEMENT (continued) Bank guarantee line of credit facilities denominated in USD The line of credit facility utilised by the Group is issued back to back with an Australian institution. This means that while utilised as a Financial Guarantee only facility there is no exchange risk and the USD amount varies while the AUD amount is fixed to the value of the guarantees issued. While this facility limits USD exposure in the event of default on a bank guarantee on issue of the funds by the respective banks the USD loan would crystallise and a USD exposure would eventuate. It is considered the risk of such an event is limited in the current environment. If these loans did crystallise the USD currency risk would be assessed at that time. As noted in below loans in USD currency supply a natural hedge to the USD denominated coal sales. Working capital facility The to the extent utilised the working capital facility result in exposure to USD/AUD currency fluctuations, noting that this facility is a natural partial hedge to the USD denominated coal sales, as fluctuations in the exchange rate result in opposing fluctuations to current and future outstanding sales. Derivative products are therefore currently not deemed necessary to reduce foreign exchange risk. Expenses denominated in currencies other than AUD Currently the exposure to such expenses is minimal, but it is noted that equipment purchases, equipment parts and other mine related expenditure can be in various foreign currencies. When entering major transactions in foreign currencies it is the policy of the Group to assess the currency risk of the transaction and review derivative products or other methods to offset this risk. Where appropriate these products would be used, but no such transactions occurred in the 30 June 2018 or 30 June 2017 financial years. The Group generally aligns all semi-soft coking coal prices to relevant Newcastle semi-soft indexes. While Thermal coal sales are generally sold on the spot market via negotiation with relevant counter parties. The Group does not use any derivative products to mitigate fluctuations in the relevant coal price indexes. D. MARKET RISK Market risk arises from the use of interest bearing, tradable and foreign currency financial instruments. It is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates (interest rate risk), foreign exchange rates (currency risk) or other market factors (other price risk). The Consolidated Entity does not have any material exposure to market risk other than as set out below. A. Foreign exchange risk Foreign exchange risk (FX risk) arises principally from cash and cash equivalents. The objective of FX risk management is to manage and control FX risk exposures within acceptable parameters while optimising the return. FX risk is naturally hedged when the Working Capital Loan facility is utilised as the movements in trade receivables and USD cash are offset by movements in loan. The Group has an unsecured non-margined $30.000 million currency hedging facility which matures on 30 September 2018. The facility is used from time to time to transact spot and short-term forward USD currency contracts. At 30 June 2018, the effect on profit and equity as a result of changes in the FX rate would be: 82 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS NOTE 19: FINANCIAL RISK MANAGEMENT (continued) 2018 Cash and cash equivalents – USD Trade receivables – USD Working Capital Facility – USD Tax charge of 30% After tax increase/(decrease) Carrying amount $’000 6,145 16,088 - - - 2017 Cash and cash equivalents – USD Trade receivables – USD Working Capital Facility – USD Tax charge of 30% After tax increase/(decrease) 11,910 17,805 (15,601) - - B. Interest rate risk Increase in FX rate by 5% Decrease in FX rate by 5% Other comprehensive income $’000 - - - - - - - - - - Profit $’000 307 804 - (92) 1,019 (737) (1,102) 966 262 (611) Profit $’000 (307) (804) - 92 (1,019) 815 1,218 (1,067) (290) 676 Other comprehensive income $’000 - - - - - - - - - - Interest rate risk arises principally from cash and cash equivalents. The objective of interest rate risk management is to manage and control interest rate risk exposures within acceptable parameters while optimising the return. Interest rate risk is managed with a mixture of fixed and floating rate investments. For further details on interest rate risk refer to the tables below: Floating interest rate $’000 Fixed interest rate $’000 Non-interest bearing $’000 Total carrying amount as per the consolidated statement of financial position $’000 Weighted average effective interest rate $’000 2018 FINANCIAL ASSETS Cash and cash equivalents 19,817 Receivables Security deposits - - Total financial assets 19,817 FINANCIAL LIABILITIES Trade payables Working capital facility Other payables Total financial liabilities - - - - - - - - - - - - - 22,427 288 22,715 2,197 - 24,831 27,028 19,817 22,427 288 42,532 2,197 - 24,831 27,028 1.53 10.00 83 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 19: FINANCIAL RISK MANAGEMENT (continued) Floating interest rate $’000 Fixed interest rate $’000 Non-interest bearing $’000 Total carrying amount as per the consolidated statement of financial position $’000 Weighted average effective interest rate $’000 2017 FINANCIAL ASSETS Cash and cash equivalents 27,515 Restricted cash Receivables Security deposits – – – Total financial assets 27,515 FINANCIAL LIABILITIES Trade payables Working capital facility Other payables Total financial liabilities – – – – – 85 – – 85 – 15,601 – 15,601 – – 16,641 138 16,779 1,254 – 21,028 22,282 27,515 85 16,641 138 44,379 1,254 15,601 21,028 37,883 1.53 2.73 - - - – 10.00 - – The Consolidated Entity has performed a sensitivity analysis relating to its exposure to interest rate risk. This sensitivity demonstrates the effect on the current year results and equity which could result from a change in these risks. At 30 June 2018, the effect on profit and equity as a result of changes in the interest rate would be as follows: Increase in interest rate by 1% Decrease in interest rate by 1% Other comprehensive income $’000 198 (59) 139 Profit $’000 198 (59) 139 Other comprehensive income $’000 (198) 59 (139) Profit $’000 (198) 59 (139) Increase in interest rate by 1% Decrease in interest rate by 1% Other comprehensive income $’000 - - - Profit $’000 275 (83) 192 Other comprehensive income $’000 - - - Profit $’000 (275) 83 (192) Carrying amount $’000 19,817 - 19,817 Carrying amount $’000 27,515 - 27,515 2018 Cash and cash equivalents Tax charge of 30% After tax increase/(decrease) 2017 Cash and cash equivalents Tax charge of 30% After tax increase/(decrease) FAIR VALUES The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. Stanmore Coal Limited has adopted the amendment to AASB 7 Financial Instruments: Disclosures which requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: 84 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 19: FINANCIAL RISK MANAGEMENT (continued) 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 (as prices) or indirectly (derived from prices) (level 2); and c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). The fair value of financial assets and financial liabilities must be estimated for recognition, measurement and disclosure purposes. Stanmore Coal Limited has adopted the amendment to AASB 7 Financial Instruments: Disclosures which requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: 1. quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); 2. inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2); and 3. inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). The entity completed a level 3 valuation on contingent consideration (Note 15). The carrying value of a significant portion of all financial assets and financial liabilities approximate their fair values due to their short-term nature. There were no transfers between the levels during the year. FINANCIAL LIABILITIES Vendor royalties contingent consideration held at fair value through profit or loss Total financial liabilities There were no other financial assets or liabilities valued at fair value in FY18. Level 1 $’000 Level 2 $’000 – - – - Level 3 $’000 32,694 32,694 85 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 20: INTERESTS IN OTHER ENTITIES A. SUBSIDIARIES The Group’s principal subsidiaries at 30 June 2018 are set out below. Unless otherwise stated, they have share capital consisting solely of ordinary shares that are held directly by the Group, and the proportion of ownership interests held equals the voting rights held by the Group. The country of incorporation or registration is also their principal place of business. Principal activities Country of incorporation Class of shares Percentage owned Name of entity Mackenzie Coal Pty Ltd Comet Coal & Coke Pty Ltd Belview Coal Pty Ltd Belview Expansion Pty Ltd Brown River Project Pty Ltd Emerald Coal Pty Ltd New Cambria Pty Ltd Kerlong Coking Coal Pty Ltd Stanmore Surat Coal Pty Ltd Theresa Creek Coal Pty Ltd Coal exploration Australia Ordinary Coal exploration Australia Ordinary Coal exploration Australia Ordinary Coal exploration Australia Ordinary Coal exploration Australia Ordinary Coal exploration Australia Ordinary Coal exploration Australia Ordinary Coal exploration Australia Ordinary Coal exploration Australia Ordinary Coal exploration Australia Ordinary Stanmore Wotonga Pty Ltd Coal exploration & mining Australia Ordinary Stanmore IP Coal Pty Ltd Stanmore IP South Pty Ltd Coal mining Australia Ordinary Coal exploration Australia Ordinary Stanmore Bowen Coal Pty Ltd Coal exploration & mining Australia Ordinary Isaac Plains Coal Management Pty Ltd Coal exploration & mining Australia Ordinary Isaac Plains Sales & Marketing Pty Ltd Coal exploration & mining Australia Ordinary B. JOINT VENTURE AND ASSOCIATES Set out below are the significant associates and joint ventures of the Group as at 30 June 2018. The proportion of ownership interest is the same as the proportion of voting rights held. Name of entity Principal activities Place of business/ country of incorporation Nature of relationship Percentage interest Clifford Joint Venture Lillyvale Joint Venture Mackenzie Joint Venture Coal exploration Australia Joint Venture Coal exploration Australia Joint Venture Coal exploration Australia Joint Venture 2018 60% 100% 100% 2017 60% 100% 100% 86 2018 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 2017 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 0% 100% 100% 100% Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 21: COMMITMENTS A. EXPLORATION AND MINING The commitments to be undertaken are as follows: PAYABLE Not later than 12 months Between 12 months and 5 years Greater than 5 years 2018 $’000 762 1,858 689 3,309 2017 $‘000 1,875 1,083 - 2,958 The Consolidated Entity has certain obligations to expend minimum amounts on exploration and mining tenement areas. These obligations are expected to be fulfilled in the normal course of operations. B. OPERATING LEASES The commitments to be undertaken are as follows: PAYABLE Not later than 12 months Between 12 months and 5 years Greater than 5 years 2018 $’000 2017 $‘000 52 134 - 186 63 - - 63 The Consolidated Entity has an operating lease commitment in relation to the commercial office premises. The lease commenced on 1 December 2013 for a term of four years the lease has subsequently been extended for an additional three years. The Consolidated Entity has provided a bank guarantee of $68,153 as a security bond on the premises. C. CAPITAL COMMITMENTS The commitments to be undertaken are as follows: PAYABLE Not later than 12 months Between 12 months and 5 years Greater than 5 years 2018 $’000 8,518 27,700 - 36,218 2017 $‘000 - 3,700 - 3,700 87 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS NOTE 21: COMMITMENTS (continued) LAND ACQUISITIONS On 7 April 2011, the Consolidated Entity announced that it had completed an agreement for the right to purchase a key property at The Range thermal coal Project in the Surat Basin. This agreement gives the Group access to undertake evaluation and development work as the Project moves to coal production. The terms of the acquisition are within normal market expectations and involve staged payments over a number of years. A completion payment of $3.100 million in cash is due the later of 30 days after the Mining Lease is granted by the Department of Mines and Energy or November 2016. An extension to the payment date from November 2014 to November 2016 was granted through an agreement with the landholder. An additional extension has been granted by the land holder to 29 November 2018 through this extension the purchase price was increased to $3.70 million. Option fees of $1.946 million has been paid to date. ISAAC DOWNS ACQUISITION On 12 June 2018, the Consolidated Entity announced it had executed definitive agreements with Peabody Australia to acquire MDL1371 and EPC7282 from Millennium Coal Pty Ltd. Stanmore Coal has agreed to acquire the coking coal deposit contained within MDL 137 and an additional exploration area (EPC 728) for $30 million cash (consisting of $6 million payable at completion expected in July 2018 followed by a series of deferred payments totalling a further $24 million payable over the following 12 months) ISAAC PLAINS COMPLEX ROYALTY On the 8 June 2018, the Group extended its financing facilities through Taurus agreed on the initial establishment of this facility a royalty is payable for: • • the saleable value of all product coal owned by the Group and processed through the Isaac Plains infrastructure. any processing or handing fees arising from the treatment of 3rd party coal processed through the Isaac Plains infrastructure. On the completion of this extension it was agreed to increase the royalty from 0.8% to 1% on all future sales that meet the above criteria. ISAAC PLAINS EAST ROYALTY On 4 September 2015 the Group completed the acquisition of MDL 135 and (part) MDL 137 for an initial cash payment of $2m. The transaction terms include the following contingent consideration item: • A royalty capped at $3m payable at $1 per tonne of production for coal that is mined within the new Mining Lease. ISAAC PLAINS EAST LANDHOLDER AGREEMENT On 20 July 2017 the Group completed a land holder compensation agreement for access to MLA 70016, MLA 70017, MLA 70018, and MLA 70019. The compensation agreement includes the following contingent consideration item: • A royalty of $0.60/product tonne sold (increasing by 2.5% p.a.) from July 2017 when the published hard coking coal price for any quarter is greater than USD$200/t (increasing by 2.5% p.a.) from July 2017. ISAAC DOWNS ROYALTY On 12 June 2018, the Consolidated Entity announced it had executed definitive agreements with Peabody Australia to acquire MDL1371 and EPC7282 from Millennium Coal Pty Ltd. At the date of signing this report all conditions had been met and initial payment completed. Subject to the development of these 2 tenements a royalty will be payable to Millennium Coal Pty under the following circumstances: • Coal production is obtained from MDL1371 and EPC7282 or future associated Mining leases; • Paid quarterly if the premium hard coking coal price index is over A$170/t (CPI Indexed) • Royalty capped is at approximately $10.000m payable (indexed for CPI) at $1 per tonne of production for coal that is mined within the new Mining Lease. 88 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 22: CONTINGENT ASSETS AND LIABILITIES CONTINGENT ASSET – WICET LOAN In the 2014 financial year the Group impaired the full balance of the loan provided to third party infrastructure providers. The loan related to the WEXP1 project in Gladstone and the Group’s participation in the Capacity Commitment Deed (CCD) which provided certain future access rights in return for a funding commitment from the Group. The Group provided $8m in loans which were used to fund studies and complete initial dredging activities in respect of a future expansion to the port site. The CCD expired on 31 August 2014. The Group retains only those rights which relate to recoupment of loaned amounts as a result of a future port expansion, which may or may not occur. Based on a range of factors, a new expansion proponent who achieves financial close prior to 31 December 2020 will be required to reimburse the Group for a portion of the loaned amount which, in the opinion of an expert, provides a benefit to the proponents of that expansion. Until the timing of that future financing event is known, it is difficult to reliably estimate what portion of the Group’s $8m loan would be repaid. CONTINGENT LIABILITY – DEBT FINANCE FACILITY In November 2015 (extended in June 2018), the Group signed a Finance Facility which provides credit support for certain bank guarantees issued to third parties related to the Isaac Plains Coal Mine, such as rehabilitation bonds and to support major infrastructure and transport contracts. Given the structure of the arrangement the facility is backed-to-back with a major financial institution which provides credit support on the Group’s behalf. This arrangement, amongst other things, avoids foreign currency translation risk as the guarantees issued to third parties are denominated in Australian dollars. The letters of credit arrangement is off-consolidated statement of financial position except in circumstances where the Group is in default under the facility agreement or the underlying infrastructure contract. If a default were to occur then the debt would convert into a US dollar loan which would result in Consolidated Statement of Financial Position recognition. At the date of these financial statements there is no default occurring or subsisting. NOTE 23: EVENTS AFTER REPORTING DATE An unfranked dividend of 2 cents per share was declared on 25 August 2018. There have been no other events after reporting date. NOTE 24: KEY MANAGEMENT PERSONNEL TOTAL KEY MANAGEMENT PERSONNEL COMPENSATION Short-term employee benefits Post-employment benefits Termination benefits Share-based payments Total 2018 $’000 2017 $‘000 1,891,956 1,837,072 87,139 - 80,262 86,676 378,000 (136,424) 2,357,095 1,867,586 Further information regarding the identity of Key Management Personnel and their compensation can be found in the Audited Remuneration Report contained in the Directors’ Report on pages 34–45 of this annual report. 89 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 25: AUDITOR’S REMUNERATION 2018 $’000 2017 $‘000 AUDIT SERVICES Amounts paid/payable to BDO Audit Pty Ltd for audit or review of the financial statements for the entity or any entity in the Consolidated Entity 188,272 134,000 TAXATION SERVICES Amounts paid/payable to related entities of BDO Audit Pty Ltd for non-audit taxation services performed for the entity or any entity in the Consolidated Entity Total 116,273 304,545 102,424 236,424 NOTE 26: PARENT ENTITY INFORMATION The Corporations Act 2001 requirement to prepare parent entity financial statements where consolidated financial statements are prepared has been removed and replaced by the new regulation 2M.3.01 which requires the following limited disclosure in regard to the parent entity (Stanmore Coal Limited). The consolidated financial statements incorporate the assets, liabilities and results of the parent entity in accordance with the Group accounting policy. The financial information for the parent entity, Stanmore Coal Limited, has been prepared on the same basis as the consolidated financial statements, except as follows: Investments in subsidiaries, associates and joint ventures are accounted for at cost. Parent entity Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Issued capital Share based payment reserve Accumulated losses Total shareholders equity Profit/(loss) for the year Total comprehensive income for the year GUARANTEES 2018 $’000 9,724 64,417 74,141 1,422 15,503 16,925 57,216 113,185 1,152 (57,121) 57,216 (6,601) - 2017 $‘000 13,099 79,882 92,981 731 28,811 29,542 63,439 113,185 774 (50,520) 63,439 2,672 - Under the terms of the Secured Financing Facility entered in November 2015, Stanmore Coal Limited has provided certain guarantees in relation to the arrangements between the Financier and the borrowing entity (Stanmore IP Coal Pty Ltd). These guarantees relate primarily to payment performance and maintaining the tenure of the Isaac Plains Coal Mine in good standing. 90 Stanmore Coal Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS NOTE 26: PARENT ENTITY INFORMATION (continued) CONTINGENT LIABILITIES The parent entity has no contingent liabilities. CAPITAL COMMITMENTS The parent entity has no capital commitments. NOTE 27: OPERATING SEGMENTS The Consolidated Entity has identified its operating segments based on the internal reports that are reviewed and used by the Board of Directors (chief operating decision makers, “CODM”) in assessing performance and determining the allocation of resources. The Consolidated Entity is managed primarily on a producing asset versus non-producing asset basis. Operating segments are determined on the basis of financial information reported to the Board which is at the Consolidated Entity level. All segments are located within Australia. Accordingly, management currently identifies the Consolidated Entity as having two reportable segments, the first being the operation of the Isaac Plains Coal Mine (including the Isaac Plains East project) and the second being all other exploration and development coal assets and corporate. ACCOUNTING POLICIES ADOPTED Unless otherwise stated, all amounts reported to the Board of Directors, being the CODM with respect to operating segments, are determined in accordance with accounting policies that are consistent with those adopted in the annual financial statements of the Consolidated Entity. INTER-SEGMENT TRANSACTIONS An internally determined transfer price is set for all intersegment sales and services provided. All such transactions are eliminated on consolidation into the Consolidated Entity’s financial statements. SEGMENT ASSETS Where an asset is used across multiple segments the asset is allocated to the segment that receives most of the economic value from the assets. In most instances, segment assets are clearly identifiable based on their nature and physical location. SEGMENT LIABILITIES Liabilities are allocated to segments where there is a direct nexus between the liability and the operations of the segment. Borrowings and tax liabilities are generally considered to relate to the whole Consolidated Entity and are not allocated. Segment liabilities include trade and other payables and certain direct borrowings. UNALLOCATED ITEMS The following items of revenue, expenses, assets and liabilities are not allocated to operating segments as they are not considered core to the operation of any segment: a) Corporate head office costs and salaries of non-site based staff. MAJOR CUSTOMERS Stanmore Coal has several customers to whom it sells export grade coal. Stanmore Coal supplies one such external customer who accounts for 33% of revenue. The next most significant customer accounts for 26% of revenue. RECOGNITION AND MEASUREMENT The Consolidated Entity applies AASB 8 Operating Segments which requires a management approach under which segment information is presented on the same basis as that used for internal reporting purposes. Operating segments are reported in a manner that is consistent with the internal reporting to the chief operating decision maker (CODM), which has been identified by the Consolidated Entity as the Managing Director and other members of the Board of Directors. 91 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS NOTE 27: OPERATING SEGMENTS (continued) SEGMENT PERFORMANCE 2018 Isaac Plains Complex $’000 Exploration and development $’000 Isaac Plains Complex $’000 Exploration and development $’000 Total $‘000 SEGMENT REVENUE External sales Intersegment sales 208,081 - Total segment revenue 208,081 - - - 208,081 137,846 - - 208,081 137,846 RECONCILIATION OF SEGMENT REVENUE TO CONSOLIDATED ENTITY REVENUE Other revenue Intersegment elimination Total Group revenue - - - - - - – – 208,081 - - - - - - - - - 2017 Total $‘000 137,846 - 137,846 – – 137,846 Segment net profit/(loss) from continuing operations before tax 16,250 (3,441) 12,809 3,692 (2,030) 1,662 RECONCILIATION OF SEGMENT RESULT TO CONSOLIDATED ENTITY NET LOSS BEFORE TAX AMOUNTS NOT INCLUDED IN SEGMENT RESULT BUT REVIEWED BY THE BOARD: Impairment of exploration assets Write back impairment of development assets Unallocated Net profit/(loss) before tax from continuing operations - - (8) - (8) - (2,761) - - (917) (917) 8,512 8,512 (2,839) 16,250 (3,449) 10,040 3,692 5,565 6,418 Segment assets 161,811 39,393 201,204 104.967 87,104 192,071 RECONCILIATION OF SEGMENT ASSETS TO CONSOLIDATED ENTITY ASSETS Intersegment eliminations Unallocated assets Total Consolidated Entity assets - - - - - - (35,787) 2,672 168,089 - - - - - - (35,714) 6,746 163,103 Segment liabilities 93,577 26,119 119,696 95,869 25,040 120,909 RECONCILIATION OF SEGMENT LIABILITIES TO CONSOLIDATED ENTITY ASSETS Intersegment eliminations Unallocated liabilities Total Consolidated Entity liabilities 92 (25,275) 506 94,927 (25,202) 578 96,285 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS (continued) NOTE 28: SHARE-BASED PAYMENTS The following share-based payment arrangements existed at 30 June 2018. SHARE-BASED PAYMENTS TO DIRECTORS, EXECUTIVES AND EMPLOYEES SHARES During the year ended 30 June 2018, no shares were granted to KMP as share-based payments. OPTIONS During the year ended 30 June 2018, no options were granted to KMP as share-based payments. Outstanding at beginning of year Granted Forfeited Exercised Expired Outstanding at year-end Exercisable at year-end 2018 Weighted average exercise price $ No. of options - - - - - - - - - - - - - – 2017 Weighted average exercise price $ 0.22 - 0.22 0.22 - - – No. of options 2,766,000 - (762,457) (2,003,543) - - - There were no outstanding options exercisable at 30 June 2018 or at 30 June 2017, no options were granted, exercised or forfeited during the year 30 June 2018. Pursuant to the Consolidated Entity’s Incentive Option Scheme, if an employee ceases to be employed by the Consolidated Entity then options will expire three months from the date employment ceases. Historical volatility has been the basis for determining expected share price volatility. The expected life of the options has been taken to be the full period of time from grant date to expiry date. The options pricing model assumes that options will be exercised on or immediately before the expiry date. The settlement method for the above options is on a 1:1 basis. During the year ended 30 June 2018 no options we exercised options were exercised (2017: 2,003,543) resulting in the issue of no additional shares as a result of the exercise of options. RIGHTS The amount recognised as share-based payment expense in the Consolidated Statement of Profit and Other Comprehensive Income is as follows: Employee benefits expense Administration and consulting expense 2018 $’000 378 - 378 2017 $‘000 (134) - (134) 93 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS NOTE 28: SHARE-BASED PAYMENTS (continued) These amounts have been recognised in equity in the Consolidated Statement of Financial Position as follows: Share capital Share-based payment reserve RECOGNITION AND MEASUREMENT 2018 $’000 - (378) (378) 2017 $‘000 - 134 134 The fair value of shares, options or rights granted to employees and consultants are recognised as an expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the period during which the employees or consultants become unconditionally entitled to the instruments. In determining fair value, no account is taken of any performance conditions other than those related to the share price of Stanmore Coal Limited (market conditions). The cumulative expense recognised between grant date and vesting date is adjusted to reflect the Directors’ best estimate of the number of instruments that will ultimately vest because of internal conditions of the instruments, such as the employees having to remain with the Consolidated Entity until vesting date, or such that employees are required to meet internal sales targets. During the year ended 30 June 2018, Rights were granted to KMP as long-term incentive as outlined in the Remuneration report 2,611,508 FY18 Rights were granted and 531,497 FY17 rights were granted to Dan Clifford following their reapproval at the FY17 AGM. The terms and conditions of the grant are as follows: Grant date 12 Oct 2012 14 Nov 2016 29 Nov 2017* 29 Nov 2017 Expiry date 30 Jun 2020 30 Jun 2020 30 Jun 2020 30 Jun 2020 Tranche 1 2 3 4 Total Exercise price Balance at start of year Granted in year Exercised in year Lapsed during year Balance at end of year Vested and exercisable at end of year $0.00 100,000 $0.00 94,985 - - $0.00 $0.00 - - 531,497* 2,611,508 194,985 3,143,005 - - - - - - - - 100,000 94,985 531,497 2,611,508 3,337,990 - - - - - *531,497 FY17 rights issues to Dan Clifford during FY18 related to unissued rights noted in the FY17 financial statements. PERFORMANCE RIGHTS PRICING MODEL The fair value of performance rights granted under the LTI program is based on the Absolute Shareholder Total Return (ASTR) is measured using a Monte Carlo Simulation model incorporating the probability of the performance hurdles being met. The fair value of performance rights. The following table lists the inputs to the models used for the years ended 30 June 2018 and 30 June 2017: 94 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS NOTE 28: SHARE-BASED PAYMENTS (continued) Performance hurdle Grant date Vesting date Fair value at grant date Share price Exercise price Dividend yield Expected exercise period Risk free interest rate Expected volatility *Specified Disposal Restriction FY18 Rights (issued in FY2018) FY17 Rights (issued in FY2018) FY17 Rights ASTR ASTR ASTR 29 Nov 2017 29 Nov 2017 14 Nov 2016 30 Jun 2020 30 Jun 2019 30 Jun 2019 $0.32–$0.38 (SDR*) $0.60 $0.00 0% $0.29 $0.60 $0.00 0% $0.17 $0.64 $0.00 0% 30 Jun 2020 30 Jun 2021 30 Jun 2019 30 Jun 2020 30 Jun 2020 2.40% 75% 1.79% 75% 1.79% 75% Below is a summary of the conditions for vesting for FY18 rights granted: Performance Level Stretch Between target and stretch Target ATSR1 of SMR2 CAGR3 52.86% >39.49%<52.86% 39.49% % of Stretch/ Maximum Vesting Jun 20 Share Price for vesting 100.00% Pro-rata 50.00% $1.25 Pro-Rata $0.95 Between threshold and target >22.92% <39.49% Pro-Rata Pro-Rata Threshold Below Threshold4 22.92% <22.92% 0% 0% $0.65 $0.00 Below is a summary of the conditions for vesting for FY17 rights granted: Performance Level Stretch Between target and stretch Target ATSR1 of SMR2 CAGR3 58.74% >44.22%,<58.74% 44.22% % of Stretch/ Maximum Vesting Jun 20 Share Price for vesting 100.00% Pro-rata 50.00% $1.20 Pro-Rata $0.90 Between threshold and target >25.99%<44.22% Pro-Rata Pro-Rata Threshold Below Threshold5 1 2 3 4 5 Absolute Shareholder Return Stanmore Coal Limited Compound Annual Growth Rate (CAGR) Subject to Retest in FY21 at CAGR Subject to Retest in FY20 at CAGR 25.99% <25.99% 0% 0% $0.60 $0.00 95 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS NOTE 28: SHARE-BASED PAYMENTS (continued) In relation to the FY18 and FY17 rights, one retest is available 12 months after the end of the measurement period only if no vesting occurred in relation to the first test following the completion of the measurement period in FY20 and FY19 respectively. The Group does not intend to issue more than an aggregate of 5% of its share capital, from time to time, under the LTI plans. It is a condition of the rights that the KMP must remain employed by Stanmore Coal for the rights to vest. KEY ESTIMATES – SHARE-BASED PAYMENTS The Consolidated Entity uses estimates to determine the fair value of equity instruments issued to Directors, executives and employees. The estimates include volatility, risk free rates and consideration of satisfaction of performance criteria for recipients of equity instruments. During the year, no shares or options were issued. Rights were issued as outlined above and the cost of these rights represents the valuation completed by an independent valuer and the accounting impact of prior issuances and determinations remains unchanged. NOTE 29: RELATED PARTY TRANSACTIONS Transactions between related parties are on normal commercial terms and conditions no more favourable than those available to other parties unless otherwise stated. A. PARENT ENTITY The parent entity and ultimate controlling entity is Stanmore Coal Limited, which is incorporated in Australia. B. SUBSIDIARIES Interests in subsidiaries are disclosed in Note 20: Subsidiaries. C. KEY MANAGEMENT PERSONNEL Disclosures relating to KMP are set out in Note 24 and the Remuneration Report contained in the Directors’ Report. D. OTHER RELATED PARTY TRANSACTIONS There were no transactions with other related parties during FY18 (FY17: nil). NOTE 30: OTHER ACCOUNTING POLICIES A. DERIVATIVE FINANCIAL LIABILITIES Obligations to settle fees payable to financiers as either cash or shares are reflected as derivative financial liabilities with changes in fair value recognised directly through profit and loss. B. PROVISIONS Provisions for legal claims, service warranties and make good obligations are recognised when the Consolidated Entity has a present legal or constructive obligation as a result of a past event, it is probable that that an outflow of economic resources will be required to settle the obligation and the amount can be reliably estimated. C. NEW AND AMENDED STANDARDS AND INTERPRETATIONS NOT YET ADOPTED New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Consolidated Entity for the annual reporting year ended 30 June 2018 (with the exception of AASB 15 Revenue from Contracts with Customers which has been early adopted on 1 July 2016). The Consolidated Entity’s assessment of the 96 Stanmore Coal Annual Report 2018NOTES TO THE FINANCIAL STATEMENTS NOTE 30: OTHER ACCOUNTING POLICIES (continued) impact of these new or amended Australian Accounting Standards and Interpretations, most relevant to the Consolidated Entity, where assessed are set out below: AASB 9 FINANCIAL INSTRUMENTS This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard replaces all previous versions of AASB 9 and completes the project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. AASB 9 introduces new classification and measurement models for financial assets. A financial asset shall be measured at amortised cost, if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, which arise on specified dates and solely principal and interest. All other financial instrument assets are to be classified and measured at fair value through profit or loss unless the entity makes an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for- trading) in other comprehensive income (‘OCI’). For financial liabilities, the standard requires the portion of the change in fair value that relates to the entity’s own credit risk to be presented in OCI (unless it would create an accounting mismatch). New simpler hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. New impairment requirements will use an ‘expected credit loss’ (‘ECL’) model to recognise an allowance. Impairment will be measured under a 12-month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted. The standard introduces additional new disclosures. The Consolidated Entity will adopt this standard from 1 July 2018 and the impact of its adoption has been assessed as not material. AASB 16 LEASES This standard is applicable to annual reporting periods beginning on or after 1 January 2019. When effective, the Standard will replace current accounting requirements applicable to leases in AASB 117. AASB 16 introduces a single lessee accounting model that eliminates the requirement for leases to be classified as operating or finance leases. The main changed introduced by the new standard include: recognition of a right-to-use asset and liability for all leases; depreciation of right-to-use assets in line with AASB 116 in profit or loss and unwinding of the liability in principal and interest components; and additional disclosure requirements. The Consolidated Entity will adopt this standard from 1 January 2019 and the impact of its adoption has been assessed as not material. D. NEW, REVISED OR AMENDING ACCOUNTING STANDARDS AND INTERPRETATIONS ADOPTED The Consolidated Entity has adopted all of the new, revised or amending Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. The adoption of these Australian Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the Consolidated Entity, but listed below are the standards applied and any further information required under these standards. 97 Stanmore Coal Annual Report 2018DECLARATION BY DIRECTORS The Directors of the Consolidated Entity declare that: 4. The remuneration disclosures included in pages 1. The Consolidated Financial Statements, comprising the Consolidated Statement of Profit or Loss and Other Comprehensive Income, Consolidated Statement of Financial Position, Consolidated Statement of Cash Flows, Consolidated Statement of Changes in Equity, and accompanying notes, are in accordance with the Corporations Act 2001 and: (a) comply with Australian Accounting Standards and the Corporations Regulations 2001; and (b) give a true and fair view of the Consolidated Entity’s financial position as at 30 June 2018 and of its performance for the year ended on that date. 2. The Consolidated Entity has included in the notes to the financial statements an explicit and unreserved statement of compliance with International Financial Reporting Standards. 3. In the Directors’ opinion, there are reasonable grounds to believe that the Consolidated Entity will be able to pay its debts as and when they become due and payable. 34 to 45 of the Directors’ report (as part of audited Remuneration Report) for the year ended 30 June 2018, comply with section 300A of the Corporations Act 2001. 5. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is signed in accordance with a resolution of the Directors. Daniel Clifford Managing Director Brisbane Date: 27 August 2018 98 Stanmore Coal Annual Report 2018 Tel: +61 7 3237 5999 Fax: +61 7 3221 9227 www.bdo.com.au Level 10, 12 Creek St Brisbane QLD 4000 GPO Box 457 Brisbane QLD 4001 Australia INDEPENDENT AUDITOR'S REPORT To the members of Stanmore Coal Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Stanmore Coal Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial report, including a summary of significant accounting policies and the Directors’ declaration. In our opinion the accompanying financial report of the Group, is in accordance with the Corporations Act 2001, including: (i) Giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its financial performance for the year ended on that date; and (ii) Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the Directors of the Company, would be in the same terms if given to the Directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. (cid:1011)(cid:1013)(cid:3) 99 Stanmore Coal Annual Report 2018 Vendor Royalty– Contingent consideration Key audit matter How the matter was addressed in our audit Refer to Note 15 in the financial report. The valuation of the contingent consideration is based The company has recognised a liability for contingent consideration as at 30 June 2018. The contingent consideration relates to the acquisition of the Isaac Plains mine and requires payment of a royalty to each of the vendors should the benchmark on forecasts and assumptions within a model developed by management. We evaluated and tested key assumptions in this model by performing, amongst others, the following procedures: Hard Coking Coal price exceed certain levels. The • Providing the model to our auditor experts to amount payable is capped at the level of cash assess the reasonableness of the methodology and received from each of the vendors under the sale and assumptions applied in the model in particular purchase agreement. The contingent consideration was a key audit matter due to the size of this liability and the judgement involved in estimating expected selling prices in future periods. • • long term hard coking coal price forecasts and evaluating the results of their work Checking the mathematical accuracy of the model and agreeing the underlying inputs used within the model to external market data were available Examining the cash flow forecasts provided by management and challenging the assumptions therein by ensuring consistency with the stated business and operational objectives Transfer of The Range Project to exploration and evaluation assets Key audit matter How the matter was addressed in our audit Refer to Note 9(a) and 9(b) in the financial report. We obtained and evaluated management’s position During the year, The Range Project was reclassified from capitalised development costs to exploration and paper to assess the facts and circumstances that support the reclassification of The Range Project. evaluation assets. The reclassification occurred given Our audit procedures included, amongst others: there was no significant development activities planned. The Australian accounting standards AASB 6 Exploration for and Evaluation of Mineral Resources • • Consulting with auditor experts to evaluate management’s assessment for the reclassification of the Project Reviewing ASX announcements and reviewing and AASB 138 Intangible Assets do not specifically Directors' minutes to ensure that there had been contemplate the reclassification of development no significant development activities on The assets to exploration and evaluation assets, therefore Range Project, and that no future significant management relied on the application of accounting development activities are planned. principles. This reclassification of The Range Project was a key audit matter due to the significant judgement applied by management. • Checking that an impairment assessment has been performed under AASB 136 Impairment of Assets before the reclassification of The Range Project. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. (cid:1012)(cid:1004)(cid:3) 100 Stanmore Coal Annual Report 2018Carrying value of exploration and evaluation assets Key audit matter How the matter was addressed in our audit Refer to Note 9(b) in the financial report. Our procedures included, but were not limited to the The Group carries exploration and evaluation assets as following: at 30 June 2018 in relation to the application of the • Obtaining evidence that the Group has valid Group’s accounting policy for exploration and rights to explore in the areas represented by the evaluation assets. The recoverability of exploration and evaluation asset is a key audit matter due to the significance of the total balance and the level of procedures undertaken to evaluate management’s application of the requirements of AASB 6 Exploration for and Evaluation of Mineral Resources in light of any indicators of impairment that may be present. • • capitalised exploration and evaluation expenditure by obtaining supporting documentation such as license agreements and also considering whether the Group maintains the tenements in good standing Making enquiries of management with respect to the status of ongoing exploration programs in the respective areas of interest Enquiring of management, reviewing ASX announcements and reviewing Directors' minutes to ensure that the Group had not decided to discontinue activities in any applicable areas of interest and to assess whether there are any other facts or circumstances that existed to indicate impairment. Other information The Directors are responsible for the other information. The other information comprises the information contained in Directors’ report for the year ended 30 June 2018, but does not include the financial report and our auditor’s report thereon, which we obtained prior to the date of this auditor’s report, and the Group’s annual report, which is expected to be made available to us after that date. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the Group’s annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the Directors and will request that it is corrected. If it is not corrected, we will seek to have the matter appropriately brought to the attention of users for whom our report is prepared. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. (cid:1012)(cid:1005)(cid:3) 101 Stanmore Coal Annual Report 2018Responsibilities of the Directors for the Financial Report The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the Directors are responsible for assessing the ability of the group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website (http://www.auasb.gov.au/Home.aspx) at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf This description forms part of our auditor’s report. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 36 to 47 of the Directors’ report for the year ended 30 June 2018. In our opinion, the Remuneration Report of Stanmore Coal Limited, for the year ended 30 June 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. BDO Audit Pty Ltd T J Kendall Director Brisbane, 27 August 2018 BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation, other than for the acts or omissions of financial services licensees. (cid:1012)(cid:1006)(cid:3) 102 Stanmore Coal Annual Report 2018SHAREHOLDER INFORMATION Additional information required by the Australian Securities Exchange Ltd and not shown elsewhere in this report is as follows. The information is current as at 21 August 2018. DISTRIBUTION OF EQUITY SECURITIES The number of Ordinary Shares by size of holding is: 100,001 and over 50,001 to 100,000 10,001 to 50,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Securities 230,463,887 7,304,625 11,720,745 1,443,874 814,750 53,097 % No. of holders 91.53 2.90 4.66 0.57 0.32 0.02 140 97 473 181 280 177 % 10.39 7.20 35.09 13.43 20.77 13.13 251,800,978 100.00 1,348 100.00 The number of shareholders holding less than a marketable parcel is 125 (9483 ordinary shares). The number of Unlisted Rights by size of holding is: 100,001 and over 50,001 to 100,000 10,001 to 50,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total % No. of holders Securities 3,237,990 100,000 - - - - 0.97 0.03 - - - - 3,337,990 1.00 4 1 - - - - 5 % 0.29 0.07 - - - - 0.37 SUBSTANTIAL SHAREHOLDERS Substantial shareholders are shown in shareholder notices received by Stanmore Coal Limited as at 21 August 2018 are: Name of shareholder GREATGROUP INVESTMENTS LTD 3RD WAVE INVESTORS LTD BRAZIL FARMING PTY LTD COMMONWEALTH BANK OF AUSTRALIA ST LUCIA RESOURCES PARADICE INVESTMENT MANAGEMENT PTY LTD Number of shares 54,938,795 37,311,833 19,592,240 15,180,611 13,078,270 13,000,000 103 Stanmore Coal Annual Report 2018SHAREHOLDER INFORMATION (continued) RESTRICTED SECURITIES There are no restricted securities on issue. 20 LARGEST HOLDERS The names of the 20 largest holders, in each class of quoted security are: ORDINARY SHARES Name of shareholder GREATGROUP INVESTMENTS LTD 3RD WAVE INVESTORS LTD CITICORP NOMINEES PTY LTD BRAZIL FARMING PTY LTD ST LUCIA RESOURCES LATIMORE FAMILY PTY LTD ONE MANAGED INVT FUNDS LTD MR PETER LIONEL BRIGER JR NATIONAL NOMINEES LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED NATIONAL NOMINEES LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED MRS NADEZDA KOVIJANIC BNP PARIBAS NOMS PTY LTD COMMON SENSE PTY LTD NERO RESOURCE FUND PTY LTD M RESOURCES PTY LTD KABILA INVESTMENTS PTY LTD INVIA CUSTODIAN PTY LIMITED TOTAL OF 20 LARGEST HOLDERS TOTAL ORDINARY SHARES VOTING RIGHTS All ordinary shares carry one vote per share without restriction. Options and performance rights do not carry voting rights. 104 Number of shares 54,938,795 35,500,000 24,481,682 19,334,720 13,078,270 8,675,800 4,915,000 4,534,136 4,200,800 3,960,364 3,571,555 3,206,254 3,190,148 2,750,002 2,681,863 2,613,270 2,320,018 1,883,402 1,842,502 1,205,000 194,778,168 251,800,978 % of total shares 21.82 14.10 9.72 7.68 5.19 3.45 1.95 1.80 1.67 1.57 1.42 1.27 1.27 1.09 1.07 1.04 0.92 0.75 0.73 0.48 77.35 100.00 Stanmore Coal Annual Report 2018OTHER INFORMATION MARKETABLE RESERVES NOTE The Isaac Plains Complex Marketable Coal Reserve of 20.9 Mt is derived from a run of mine (ROM) Coal Reserve of 27.8 Mt that is JORC compliant based with a predicted overall yield of 75.2%. The 20.9 Mt Marketable Reserve is included in the 157 Mt JORC Resource (65.7 Mt Measured + 48.2 Mt Indicated + 43 Mt Inferred Resource). The Company confirms that it is not aware of any new information or data that materially affects the information included in the announcement made on 24 August 2018 and that all material assumptions and technical parameters underpinning the estimates in the announcement made on 24 August 2018 continue to apply and have not materially changed. COMPETENT PERSONS STATEMENT The information in this report relating to open cut coal reserves for the Isaac Plains and Isaac Plains East was announced on 24 August 2018, titled “2018 Annual Coal Resource & Reserves Summary”, and is based on information compiled by Mr Gary Benson who is a full- time employee of Measured Group. Mr Benson who is a Principal Mining Engineer at Measured Group, is degree qualified in Engineering (Mining) and has the relevant experience (35+ years) in relation to the mineralisation being reported to qualify as a Competent Person as defined in the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (The JORC Code 2012 Edition)”. The Company confirms that it is not aware of any new information or data that materially affects the information included in the announcement made on 24 August 2018 and that all material assumptions and technical parameters underpinning the estimates in the announcement made on 24 August 2018 continue to apply and have not materially changed. The information in this report relating to coal reserves for the Isaac Plains Underground was announced on 24 August 2018, titled “2018 Annual Coal Resource & Reserves Summary”, and is based on information compiled by Mr Mark McKew who is an employee of Geostudy Pty Ltd. Mr McKew is a qualified mining engineer and has sufficient experience which is relevant to the style of mineralization and type of deposit under consideration and to the activity which he is undertaking, to qualify as Competent Person as defined in the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (The JORC Code 2012 Edition)”. The Company confirms that it is not aware of any new information or data that materially affects the information included in the announcement made on 24 August 2018 and that all material assumptions and technical parameters underpinning the estimates in the announcement made on 24 August 2018 continue to apply and have not materially changed. The information in this report relating to coal reserves for the The Range was included in the announcement on 24 August 2018, titled “2018 Annual Coal Resource & Reserves Summary”, and is based on information compiled by Mr Richard Hoskings who is a Director of Minserve. Mr Hoskings is a qualified mining engineer and has sufficient experience which is relevant to the style of mineralization and type of deposit under consideration and to the activity which he is undertaking, to qualify as Competent Person as defined in the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (The JORC Code 2012 Edition)”. The Company confirms that it is not aware of any new information or data that materially affects the information included in the announcement made on 24 August 2018 and that all material assumptions and technical parameters underpinning the estimates in the announcement made on 24 August 2018 continue to apply and have not materially changed. The information in this report relating to coal resources for the Isaac Plains, Isaac Plains East and Isaac Plains Undergournd was included in the announcement on 24 August 2018, titled “2018 Annual Coal Resource & Reserves Summary”, and is based on information compiled by Mr Troy Turner who is a member of the Australasian Institute of Mining and Metallurgy and is a full-time employee of Xenith Consulting Pty Ltd. Mr Turner is a qualified geologist and has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking, to qualify as Competent Person as defined in the 2012 Edition of the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves(The JORC Code 2012 Edition).” The Company confirms that it is not aware of any new information or data that materially affects the information included in the announcement made on 24 August 2018 and that all material assumptions and technical parameters underpinning the estimates in the announcement made on 24 August 2018 continue to apply and have not materially changed. The information in this report relating to coal resources for the Isaac Downs (Wotonga) was included in the 105 Stanmore Coal Annual Report 2018OTHER INFORMATION (continued) announcement on 24 August 2018, titled “2018 Annual Coal Resource & Reserves Summary”, and is based on information compiled by Mr Kane Maxwell. Mr Maxwell is an employee of Peabody Energy Australia. Mr Maxwell has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking, to qualify as Competent Person as defined in the 2012 Edition of the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (The JORC Code 2012 Edition).” The Company confirms that it is not aware of any new information or data that materially affects the information included in the announcement made on 24 August 2018 and that all material assumptions and technical parameters underpinning the estimates in the announcement made on 24 August 2018 continue to apply and have not materially changed. The information in this report relating to coal resources for the Isaac South was included in the announcement on 24 August 2018, titled “2018 Annual Coal Resource & Reserves Summary”, and is based on information compiled by Mr Mal Blaik. Mr Blaik is Principal Geologist at JB Mining Services Pty Ltd. Mr Blaik has over 30 years experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking, to qualify as Competent Person as defined in the 2012 Edition of the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (The JORC Code 2012 Edition).” The Company confirms that it is not aware of any new information or data that materially affects the information included in the announcement made on 24 August 2018 and that all material assumptions and technical parameters underpinning the estimates in the announcement made on 24 August 2018 continue to apply and have not materially changed. The information in this report relating to the Clifford Project exploration results and coal resources is based on information compiled by Mr Oystein Naess who is a member of the Australian Institute of Mining and Metallurgy and is a full-time employee of Xenith Consulting Pty Ltd. Mr Naess is a qualified geologist and has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking, to qualify as Competent Person as defined in the 2012 Edition of the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (The JORC Code 2012 Edition).” The Company confirms that it is not aware of any new information or data that materially affects the information included in the announcements and that all material assumptions and technical parameters underpinning the estimates in the announcements continue to apply and have not materially changed. The information in this report relating to coal resources for all other projects was compiled on the dates noted in the table within the Directors’ Report, and is based on information compiled by Mr Troy Turner who is a full-time employee of Xenith Consulting Pty Ltd. Mr Turner is a qualified geologist and a member of the Australian Institute of Mining and Metallurgy (AusIMM) and has sufficient experience in relation to the style of mineralisation and type of deposits being reported to qualify as a Competent Person as defined in the “Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (The JORC Code 2012 Edition)”. The Company confirms that it is not aware of any new information or data that materially affects the information included in the announcements and that all material assumptions and technical parameters underpinning the estimates in the announcements continue to apply and have not materially changed. 106 Stanmore Coal Annual Report 2018STANMORE’S FIVE-YEAR FINANCIAL HISTORY All figures in $M unless shown otherwise FY18 FY17 FY16 FY15 FY14 SUMMARISED FINANCIAL STATEMENTS Sales revenue 208,081 137,846 12,700 859 749 Operating profit before depreciation and amortisation, finance costs and income tax Underlying EBITDA (non-IFRS measure) Depreciation and amortisation EBIT Finance costs Income tax (expense)/benefit Operating profit after income tax attributable to members of Stanmore Coal Limited CAPITAL AND DIVIDENDS 24,033 19,075 (15,658) (12,108) (11,259) 45,548 (5,207) 26,756 (22,219) (3,478) (3,332) (1,306) (32) (975) (81) 18,826 15,743 (16,964) (12,140) (11,340) (8,786) (4,074) (9,325) (2,782) 5,617 0 (8) 0 (524) 0 5,966 12,035 (19,746) (12,148) (11,864) Ordinary shares on issue (number) 000's as at 30 June 251,801 251,801 222,497 222,497 209,124 Paid up ordinary capital as at 30 June 113,200 113,200 97,368 97,368 88,359 Dividend per ordinary share declared (cents) 2 - - - - FINANCIAL PERFORMANCE Share price at year end ($/sh) Earnings per share (weighted average) (cents) Return on average ordinary shareholders' equity FINANCIAL POSITION AS AT 30 JUNE Total assets Total liabilities Net assets 0.87 2.4 9% 0.34 5.1 23% 0.28 (8.9) 0.06 (5.8) 0.11 (5.7) (40%) (19%) (16%) 168,089 163,103 112,274 59,303 71,274 94,927 96,285 73,189 545 556 73,162 66,818 39,085 58,758 70,718 Net tangible asset backing per ordinary share $0.65 $0.63 $0.48 $0.27 $0.34 Net debt/(cash) to equity Total liabilities/total assets (27%) 56% (18%) 59% (31%) 65% (26%) (25%) 1% 1% Stock market capitalisation as at 30 June 219,067 85,612 62,299 13,350 23,004 107 Stanmore Coal Annual Report 2018NOTES 108 Stanmore Coal Annual Report 2018

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