Report and accounts to 31 December 2011 Contents Chairman’s statement Directors’ report Board of directors Corporate governance Directors’ responsibilities Independent auditor’s report to the members of China Africa Resources plc Consolidated statement of comprehensive income Consolidated and company statements of financial position Consolidated and company statements of changes in equity Consolidated and company cash flow statements Notes to the consolidated financial statements Company information 1 2 6 7 9 10 11 12 13 14 15 33 Namibia Berg Aukas lead/zinc mine Walvis Bay Windhoek Chairman’s statement I am pleased to present the report and accounts for China Africa Resources plc for the 17-month period to 31 December 2011, which includes the first months of trading for the company since it was listed on AIM on 1 August 2011. During this period the group’s principal activity has been to begin the feasibility study of the Berg Aukas lead/zinc project. Financial results During the period the group made a loss of US$1.0 million. The loss incurred during the period consists of costs of the public listing on AIM of US$0.3 million, unrealised exchange losses on sterling deposits of US$0.4 million and ongoing operating costs of US$0.3 million. As at 31 December 2011 the company had a cash balance of US$5.9 million. Review of the period On the day the shares were listed, 1 August 2011, Weatherly International plc (“Weatherly”) paid to its shareholders a dividend in specie consisting of shares in China Africa Resources plc. Accordingly this meant that, at listing, East China Mineral Exploration & Development Bureau (“ECE”) held 65% of the issued share capital of the company, Weatherly held 25% and 10% was held by other investors. The administration of the company is carried out by Weatherly under the provisions of a management services agreement between the two companies. Pursuant to the strategy of the company, at the time of listing, its primary focus has been to progress the feasibility study of the Berg Aukas project. In line with this objective, the company has now: • Appointed most of the consultants (geology, engineering, environmental) that will be working on the feasibility study. • Commenced drilling work based on the drilling program designed by consultant geologists to establish JORC resources. • Commenced metallurgical test work on samples taken from the old run of mine pad. • Collected historical information which is being used to establish a full 3D electronic model of the old mine workings. • Begun environmental studies, and “Interested and Affected Parties” are being established in line with Namibian legislation. • Commenced studies on shaft refurbishment. China Africa Resources was established as an organisation focused on rapid growth. The company is actively seeking and reviewing opportunities with a view to expanding its asset base in the short term. In these early months on a corporate level, much work has been done to establish an appropriate and workable corporate governance framework and procedures through which the business will operate. ECE headquarters in Nanjing. Outlook Facing the complex global economic environment, the management of China Africa Resources will continue to target rapid growth, so that shareholders may gain the greatest benefit. Initially the company will devote itself to the feasibility study of Berg Aukas, and preparation for the development of the project. Meanwhile, the company will continue to look for new investment opportunities through the international capital markets, organic growth, acquisition and cooperation. The company strives to become a highly profitable multi-mineral mining company. Yi Shao Non-executive Chairman 23 February 2012 Report and accounts to 31 December 2011 1 Directors’ report The Directors present the report and audited financial statements of the company for the period ended 31 December 2011. Company information China Africa Resources plc is a publicly listed company incorporated and domiciled in England & Wales. The company’s ordinary shares are traded on the Alternative Investment Market (“AIM”) operated by the London Stock Exchange. The company was incorporated on 20 August 2010. Principal activity The principal activity of China Africa Resources plc is the exploration and development of base metals, primarily lead and zinc. The subsidiary undertakings principally affecting the profits or net assets of the group in the period are listed in note 14. A review of business can be found in the Chairman’s statement on page 1. Business review and future development A review of the business and its operations can be found in the Chairman’s statement on page 1. The Berg Aukas lead/zinc mine. Key risk factors and mitigations Human resources: At the appropriate time recruiting, attracting and retaining key commercial, management and technical staff will be a major challenge to the business in light of the current market conditions in the resources sector. The company has engaged a management team through Weatherly International plc on a contract basis, with the objective of seeing the company through the execution of a feasibility study of the Berg Aukas mine. The effectiveness of this arrangement is under regular review by the directors. Project development risk: All potential projects are subject to an investment appraisal procedure that involves the board at the key stages of initiation, mandate and sanction. Projects are assessed by their strategic fit and contribution to earnings. All projects are scrutinised for consistency of assumptions and accuracy of modelling prior to presentation to the board. Commodity and foreign exchange risks: The company’s costs and the feasibility of its projects are affected by exchange rate movements between the US dollar and Namibian dollar and by the commodity markets. 2 China Africa Resources plc Chinese Premier Wen Jiabao and UK Prime Minister David Cameron attended a signing ceremony in July 2011 to mark the formation of China Africa Resources plc by ECE and Weatherly International. Management and directors review trends in the commodity markets and exchange rates on a regular basis when considering the company’s risk management strategy. Risks relating to investing in Namibia Political: Namibia is considered one of the lowest-risk economies in the African continent. The government pursues a consistent strategy of encouraging investment in the country, and is keen to keep the climate attractive for foreign investors. China Africa Resources has strong links with the President, Prime Minister, Minister for Mines, and other government members and officials. The board reviews the strategic impact of political changes within the country on an ongoing basis. Black Economic Empowerment and local participation: There is currently no Black Economic Empowerment legislation embodied in Namibian law; however, the government encourages local participation through a number of avenues. The directors take a proactive stance in addressing the issue of local participation in its projects. Exchange controls: The company maintains a consistent and compliant approach to exchange regulations within Namibia. Currency and exchange rate fluctuations: China Africa Resources manages its treasury function through its London office. The needs of the Namibian subsidiary are balanced against fluctuations in the currency markets. The group seeks to optimise currency transfers where possible as the subsidiary draws down funds on a prudent basis. Infrastructure: China Africa Resource’s Berg Aukas project is serviced by good regional infrastructure, and the board reviews its infrastructure requirements on an ongoing basis. Any challenges relating to the supply of electricity, water or rail links are incorporated into investment decisions and addressed as needed. Any infrastructure requirements outside the project scope are addressed through dialogue with the government and the relevant parastatal institutions. Key performance indicators Costs: The board and management monitor actual against budgeted costs on a monthly basis. Finance: The liquidity requirements of the company are monitored on a weekly basis by management, a monthly and quarterly basis by the board, and semi- annually by external parties. Performance: The board and management monitor the progress of the feasibility study against planned timescales on a monthly basis. Results and dividends During the period the group made a loss of US$1.0 million. The loss incurred during the period consists of costs of the public listing on AIM of US$0.3 million, unrealised exchange losses on sterling deposits of US$0.4 million and ongoing operating costs of US$0.3 million. The directors do not recommend payment of a dividend. Report and accounts to 31 December 2011 3 Directors’ report Going concern The company has cash resources sufficient to sustain the business for the foreseeable future and to execute its planned activities relating to the feasibility study at Berg Aukas, as set out in its business plan. The company has no debt or financial obligations outside its operating payables. Post reporting date events No matters or circumstances have arisen since the end of the period to the date of signature of these financial statements which significantly affected or may significantly affect the operations of the company, the results of those operations or the state of affairs of the company in future financial years. Directors The directors who served during the period ended 31 December 2011 and up to the date of signing the financial statements were as follows: Yi Shao Appointed 13 May 2011 Rod Webster Appointed 27 October 2010 John Bryant Jianrong Xu Shasha Lu Jingbin Tian Appointed 27 October 2010 Appointed 13 May 2011 Appointed 13 May 2011 Appointed 13 May 2011 James Richards Appointed 13 May 2011 Frank Lewis Appointed 13 May 2011 Edward Lukins Appointed 20 August 2010 and resigned 27 October 2010 MoFo Nominees Limited Appointed 20 August 2010 and resigned 27 October 2010 Directors’ indemnities China Africa Resources plc maintained liability insurance for its directors and officers during the period and also as at the date of the directors’ report. This group cover extends to and includes the directors and officers of the company. 4 China Africa Resources plc Political contributions and charitable donations During the period there were no charitable or political donations. Payment to suppliers The company’s and group’s policy is to settle terms of payment with suppliers when agreeing terms of business, to ensure that suppliers are aware of the terms of payment, and to abide by them. Trade payables of the company as at 31 December 2011 were equivalent to 38 days’ purchases, based on the average daily amount invoiced by suppliers to the group during the period. Remuneration The company remunerates the directors at a level commensurate with the size of the company and the experience of its directors. Only the two independent non-executive directors are remunerated directly by China Africa Resources plc, as the other directors are all remunerated directly by the company that nominated them to the board of directors. As the company grows, it will be necessary to recruit senior management, and the Remuneration Committee will review the remuneration of directors and senior management to ensure that it upholds the objectives of the company with regard to this issue. Details of directors’ emoluments and of payments made for professional services rendered are set out below: John Bryant* Frank Lewis James Richards Fees US$’000 Other benefits US$’000 Total US$’000 – 24 24 48 22 14 19 55 22 38 43 103 Other benefits consisted of payments for consultancy services prior to listing and prior to remuneration contracts being put in place. *These payments are in relation to certain consultancy services which were provided to the company by Axeman Ltd, a company affiliated to John Bryant. Financial instruments The financial risk management policies and objectives are set out in detail in note 21 of the financial statements. Statement as to disclosure of information to auditors The directors who were in office on the date of approval of these financial statements have confirmed, as far as they are aware, that there is no relevant audit information of which the auditors are unaware. Each of the directors has confirmed that they have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that it has been communicated to the auditor. Auditors BDO LLP have expressed their willingness to continue in office and a resolution to reappoint them as auditors will be proposed at the next annual general meeting. By order of the board: Rod Webster Chief Executive Officer 23 February 2012 Report and accounts to 31 December 2011 5 The central ore body at the surface of the Berg Aukas mine. Board of directors Yi Shao Non-executive Chairman Mr Shao is a senior economist and holds an EMBA from Nanjing University Business School. He is a director and former chairman of JEC, and was previously general manager of Jiangsu Provincial Aviation Industry Group and Transport Industry Group. Rod Webster Chief Executive Officer Mr Webster is a graduate mining engineer from the University of Sydney, and is the CEO of Weatherly International plc. He has over 35 years’ experience in the international resources industry, including more than 15 years in managing director or CEO positions. James Richards Senior Independent Non-executive Mr Richards is a graduate of Oxford and Hong Kong Universities, and has considerable academic and professional business experience in China. Since 2010 he has been De La Rue plc’s group director for China. Frank Lewis Independent Non-executive Mr Lewis has over 25 years’ experience in listed and unlisted companies. He has served as chairman, CEO, finance director or non-executive director on the boards of a number of growing mid-market companies in the UK and overseas. 6 China Africa Resources plc Jianrong Xu Non-executive Mr Xu holds an EMBA from Nanjing University and a doctorate in geophysics and information technology. He is a director and chief executive officer of ECE with responsibility for major mining projects and outward investment. Shasha Lu Non-executive Ms Lu has served as chief executive officer of ECE responsible for coordinating overseas investment since 2008. She previously worked at Geneva University as a project manager covering Asia for the World Health Organisation. Jingbin Tian Non-executive Mr Tian holds a master’s degree from Nanjing University and an LLM in international commercial law from Nottingham University. Since January 2010 he has acted as head of ECE’s outward investment division. John Bryant Non-executive Mr Bryant is the non-executive chairman of Weatherly International plc, and the senior independent director of AIM- quoted Igas plc. He was formerly chairman of Gas Turbine Efficiency plc and a director of Attiki (Athens) Gas Company, both quoted on AIM. Corporate governance Introduction The board of directors is committed to high standards of corporate governance. The board is accountable to its shareholders for good governance, and the statement below is based on the review of corporate governance that was carried out prior to the listing of the company on AIM and as reviewed by the Audit Committee, and describes how the principles of good governance have been applied. Constitution of the board During the period from 13 May 2011, when the board was reorganised into its current form, until 31 December 2011, there were six board meetings; there were no Audit Committee meetings, Remuneration Committee meetings or Nomination Committee meetings. Attendance at the board meetings is shown below. The board was comprised of the following: Yi Shao Non-executive Chairman Rod Webster Chief Executive Officer John Bryant Jianrong Xu Shasha Lu Jingbin Tian James Richards Frank Lewis Non-executive Director Non-executive Director Non-executive Director Non-executive Director Senior Independent Non-executive Director Independent Non-executive Director Committees of the board The Audit Committee is made up of Frank Lewis (Chairman), John Bryant, Shasha Lu and James Richards. The Audit Committee meets as required. It reviews the financial reports and accounts and the preliminary and interim statements, including the board’s statement on internal financial control in the annual report, prior to their submission to the board for approval. The Audit Committee also reviews corporate governance within the group and reports on this to the board. In addition, it assesses the overall performance of the external auditor including scope, cost-effectiveness and objectivity of the audit. The Audit Committee is also charged with reviewing the independence of the external auditor and monitors the level of non-audit fees. In the opinion of the Audit Committee, which has reviewed these fees and the procedures that BDO have in place to ensure they retain their independence, the auditor’s independence is not compromised. The Committee met twice in February 2012 to perform its functions in respect of the review of the report and accounts. The Audit Committee can meet for private discussion with the external auditor, who attends its meetings as required. The Company Secretary acts as secretary to the committee. The Remuneration Committee is made up of James Richards (Chairman), Frank Lewis, John Bryant and Jingbin Tian, with the Company Secretary serving as secretary. The Remuneration Committee met post year end, on 23 February 2012. It should be noted that the board has determined the remuneration of the independent non-executive directors. The other directors do not receive any direct remuneration from the company. In the future as the company develops, the Remuneration Committee will determine on behalf of the board the group’s policy on executive remuneration and the remuneration packages for executive directors. It would also approve and administer any executive share option scheme and the grant of options as part of a remuneration package. The Nominations Committee is made up of Yi Shao (Chairman), James Richards and Frank Lewis. It did not meet during the period under review. In accordance with the Quoted Companies Alliance Guidance, the board nominated James Richards as the senior independent non-executive director on 13 May 2011. Attendance at meetings Prior to 13 May 2011 when the current directors were appointed, there were a number of procedural meetings. Details of the attendance at board meetings and committees since 13 May 2011 are set out below: Yi Shao Non-executive Chairman (3/6) Roderick Webster Chief Executive Officer (6/6) John Bryant Jianrong Xu Non-executive Director (6/6) Non-executive Director (5/6) Report and accounts to 31 December 2011 7 Corporate governance Shasha Lu Non-executive Director (6/6) • detailed business plans and budgets to be approved Jingbin Tian Non-executive Director (6/6) James Richards Frank Lewis Senior Independent Non-executive Director (6/6) Independent Non-executive Director (6/6) Following the period end, there was a Remuneration Committee meeting as well as two meetings of the Audit Committee to review the report and accounts for the period ended 31 December 2011. All members of the two committees attended these meetings. Internal control The board is responsible for reviewing and approving the adequacy and effectiveness of the group’s internal controls, including financial and operational control, risk management and compliance. In order to establish effective procedures for internal control and to communicate this throughout the group, including its subsidiaries, the board has issued two important documents to all staff known as the Board Protocol and the Manual of Internal Control. These were produced prior to listing of the shares on AIM and were reviewed by the Audit Committee at its meetings in February 2012. The key elements of the group’s internal control are set out in these documents, which contain: • a clearly defined structure for the group, its subsidiaries and management teams; • powers which the board has reserved to itself. These include the approval of all business plans and budgets for the group and all its subsidiaries, the establishment of subsidiary companies and appointment of directors to them, and the process for project approval and capital expenditure; • terms of reference for the Audit, Remuneration and Nominations Committees, which define the roles of their members; • information about how often the board should meet (as a minimum) and an annual cycle of meetings. This covers the process for the preparation of board agendas and board papers, and their prior consideration by the management team at its weekly meetings; 8 China Africa Resources plc annually and performance monitored by the management team and the board at its monthly meetings; and • procedures for the approval of expenditure, the levels of authority and the management controls. The directors acknowledge their responsibility for the group’s system of internal financial control and risk management, and place considerable importance on maintaining this. The Manual of Internal Control and the process for authorisation that it imposes, together with the Board Protocol setting out the process for authorising business plans, budgets and projects, form an important part of our decision-making process. However, this can only provide reasonable and not absolute assurance against material errors, losses or fraud. There is currently no internal audit function within the group owing to the small size of the administrative function. However, there is a high level of review by directors and a clear requirement for them to authorise transactions. Should the need for a separate internal audit function become apparent, the board will establish one. The Board Protocol and the Manual of Internal Control will continue to be updated and refined as China Africa Resources’ business evolves and grows. Bribery Act compliance At its board meeting on 13 May 2011, the company adopted a policy for compliance with the Bribery Act 2010, together with a set of management procedures. These were reviewed by the Audit Committee at its meetings in February 2012. Relations with shareholders The company endeavours to maintain good communications with shareholders through regulatory announcements, via the company’s website and by direct contact with its major shareholders. The board values the views of its shareholders and fosters continuing dialogue with investment and fund managers, other investors and equity analysts to ensure that the investing community receives an informed view of the group’s prospects, plans and progress. Directors’ responsibilities The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors have elected to prepare the group and company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and company and of the profit or loss of the group and company for that period. The directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and accounting estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions, and disclose with reasonable accuracy at any time the financial position of the company, and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Website publication The directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the company’s website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the company’s website is the responsibility of the directors. The directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. Report and accounts to 31 December 2011 9 Independent auditor’s report to the members of China Africa Resources plc We have audited the financial statements of China Africa Resources plc for the 17-month period ended 31 December 2011 which comprise the group and company statements of financial position, the group statement of comprehensive income, the group and company statements of cash flows, the group and company statements of changes in equity and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the statement of directors’ responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/private.cfm. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the group’s and the parent company’s affairs as at 31 December 2011, and of the group’s loss for the period then ended; 10 China Africa Resources plc • the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the directors’ report for the financial period for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Scott Knight (senior statutory auditor) For and on behalf of BDO LLP, statutory auditor London, United Kingdom 23 February 2012 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). Consolidated statement of comprehensive income For the 17 month period ended 31 December 2011 Administrative expenses Operating loss Finance income Finance cost Loss for the period before taxation Tax expense Loss for the period attributable to the equity holders of the parent Exchange differences on translation of foreign operations Total comprehensive income for the period Loss per share expressed in cents Basic and diluted attributable to the equity holders of the parent All amounts relate to continuing activities during the period. Note 6 10 10 11 12 17 month period ended 31 December 2011 US$’00 (599) (599) 4 (393) (988) – (988) (5) (993) (0.11c) The notes on pages 13 to 30 form part of these financial statements. Report and accounts to 31 December 2011 11 Consolidated and company statements of financial position As at 31 December 2011 Group as at 31 December 2011 US$’000 Company as at 31 December 2011 US$’000 Note Assets Non-current assets Intangible assets Investment in subsidiary Loans to subsidiaries Total non-current assets Current assets Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Total liabilities Net assets Equity Share capital Share premium Merger relief reserve Foreign exchange reserve Retained deficit 13 14 15 16 17 18 19 19 19 4,305 – – 4,305 11 5,949 5,960 – 4,156 340 4,496 10 5,941 5,951 10,265 10,447 (156) (156) 10,109 377 6,607 4,052 (5) (922) (147) (147) 10,300 377 6,607 4,052 – (736) Equity attributable to shareholders of the parent company 10,109 10,300 The financial statements were approved by the Board on 23 February 2012 and signed on behalf of the board by: R J Webster Chief Executive Officer The notes on pages 13 to 30 form part of these financial statements. 12 China Africa Resources plc Consolidated and company statements of changes in equity For the 17 month period ended 31 December 2011 Share capital Share premium Merger reserve US$’000 US$’000 US$’000 Foreign exchange reserve US$’000 Retained earnings Total US$’000 US$’000 Group Balance at 20 August 2010 Issue of share capital Share-based payments Loss for the period Other comprehensive income Exchange differences on translation of foreign operations – 377 – – – – 6,658 (51) – – – 4,052 – – – Balance at 31 December 2011 377 6,607 4,052 Company Balance at 20 August 2010 Issue of share capital Share-based payments Loss for the period – 377 – – – 6,658 (51) – – 4,052 – – Balance at 31 December 2011 377 6,607 4,052 – – – – (5) (5) – – – – – – – 66 (988) – 11,087 15 (988) – (5) (922) 10,109 – – 66 (802) (736) – 11,087 15 (802) 10,300 The following describes the nature and purpose of each reserve within owners’ equity Reserve Share capital Share premium Merger relief reserve Description and purpose Nominal value of shares issued. Amount subscribed for share capital in excess of nominal value. Reserve created on issue of shares on acquisition of subsidiaries in accordance with Companies Act 2006 provisions. Foreign exchange reserve Cumulative translation differences of net assets of subsidiaries. Retained deficit Cumulative net gains and losses recognised in the consolidated statement of comprehensive income The notes on pages 13 to 30 form part of these financial statements. Report and accounts to 31 December 2011 13 Consolidated and company cash flow statements For the 17 month period ended 31 December 2011 Group 17 month period ended 31 December 2011 US$’000 Company 17 month period ended 31 December 2011 US$’000 Note (988) 371 15 (4) (606) (11) 153 (464) 4 – (151) (147) 7,877 (946) 6,931 6,320 – 6,320 (371) 5,949 (802) 371 15 (4) (420) (10) 147 (283) 4 (340) – (336) 7,877 (946) 6,931 6,312 – 6,312 (371) 5,941 Cash flows from operating activities Loss for the year Adjusted by: Unrealised exchange losses Share-based payments Interest received Movements in working capital Increase in trade and other receivables Increase in trade and other payables Net cash used in operating activities Cash flows generated from investing activities Interest received Loans to subsidiary company Payments for evaluation of feasibility studies Net cash used for investing activities Cash flows from financing activities Proceeds from issue of equity shares Associated costs of issue of equity shares Net cash generated by financing activities Cash and cash equivalent at the end of the period Reconciliation to net cash Net cash on incorporation Increase in cash Foreign exchange movements 10 15 13 17 The notes on pages 13 to 30 form part of these financial statements. 14 China Africa Resources plc Notes to the consolidated financial statements For the 17 month period ended 31 December 2011 1. Nature of operations and general information China Africa Resources plc and subsidiaries’ (“the group’s”) principal activities include exploration and evaluation of mining assets. China Africa Resources plc is incorporated and domiciled in England. The address of China Africa Resources plc’s registered office, which is also its principal place of business, is 180 Piccadilly, London W1J 9HF. China Africa Resources plc’s shares are listed on the Alternative Investment Market of the London Stock Exchange. China Africa Resources’ financial statements are presented in United States dollars (US$), which is also the functional currency of the parent company. These consolidated financial statements were approved for issue by the board of directors on 23 February 2012. 2. Standards and interpretations not yet applied by the group 2.1 Overall considerations The company has adopted the new interpretations, revisions and amendments to IFRSs issued by the International Accounting Standards Board, which are relevant to and effective for the company’s financial statements for the period beginning 20 August 2010. The adoption had no significant effects on current, prior or future periods due to the first-time application of these new requirements in respect of presentation, recognition and measurement. An overview of relevant new standards, amendments and interpretations to IFRSs issued but not yet effective is given in note 2.2. 2.2 Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the company At the date of authorisation of these financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the company. Management anticipates that all of the pronouncements will be adopted in the company’s accounting policy for the first period beginning after the effective date of the pronouncement. The new standards and interpretations are not expected to have a material impact on the company’s financial statements. Standard IFRS 7 (Amendments) Impact on initial application Disclosures – transfers of financial assets The amendment requires the disclosure of information in respect of all transferred financial assets that are not derecognised, and for any continuing involvement in a transferred asset existing at the reporting date. The group will apply the amendments from 1 January 2012. Effective date 1 July 2011 IFRS 1 (Amendments) Severe hyper- inflation and removal of fixed dates for first-time adopters Management does not expect this amendment, which is subject to the endorsement by the EU, to be relevant to the group. 1 July 2011 IAS 12 (Amendment) Deferred tax: recovery of underlying assets The amendment introduces the presumption, when measuring the deferred tax relating to an asset, that the entity will normally recover its carrying amount through sale. 1 January 2012 Management does not expect this amendment, which is subject to the endorsement by the EU, to be relevant to the group. Report and accounts to 31 December 2011 15 Notes to the consolidated financial statements For the 17 month period ended 31 December 2011 2. Standards and interpretations not yet applied by the group continued Standard IAS 1 (Amendment) Impact on initial application Presentation of items of other comprehensive income The amendment requires companies to group together items within other comprehensive income (OCI) that may be reclassified to the profit or loss section of the income statement. The group will apply the amendment from 1 January 2013, subject to its endorsement by the EU. Effective date 1 July 2012 IFRS 10 Consolidated financial statements The new standard replaces the consolidation requirements in SIC-12 “Consolidation – special purpose entities” and IAS 27 “Consolidated and separate financial statements”. 1 January 2013 IFRS 11 Joint arrangements IFRS 12 Disclosure of interest in other entities IFRS 13 Fair value measurement IAS 27 (Amendment 2011) Separate financial statements The group will apply the standard from 1 January 2013, subject to its endorsement by the EU. The new standard requires that a party to a joint arrangement recognises its rights and obligations arising from the arrangements rather than focusing on the legal form. The group will apply the standard from 1 January 2013, subject to its endorsement by the EU. The standard includes the disclosure requirements for all forms of interest in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. The group will apply the standard from 1 January 2013, subject to its endorsement by the EU. The standard defines fair value, sets out a framework for measuring fair value, and requires disclosures about fair value measurements. The group will apply the standard from 1 January 2013, subject to its endorsement by the EU. The amendment contains accounting and disclosure requirements for investment in subsidiaries, joint ventures and associates when an entity prepares separate financial statements. The group will apply the amendment from 1 January 2013, subject to its endorsement by the EU. 1 January 2013 1 January 2013 1 January 2013 1 January 2013 IAS 28 (Amendment 2011) Investments in associates and joint ventures The amendment includes the required accounting for joint ventures as well as the definition and required accounting for associates. 1 January 2013 The group will apply the amendment from 1 January 2013, subject to its endorsement by the EU. IAS 19 (Amendment 2011) Employee benefits The main changes introduced by the amendment revolve around the accounting for defined benefit pension schemes. 1 January 2013 Management do not expect this amendment, which is subject to endorsement by the EU, to be relevant to the group as it has no defined benefit pension scheme in place. 16 China Africa Resources plc Standard IFRIC 20 Impact on initial application Stripping costs in the production phase of a surface mine This interpretation applies to waste removal (stripping) costs that are incurred in surface mining activity, during the production phase of the mine. The group will apply the interpretation from 1 January 2013, subject to its endorsement by the EU. IFRS 7 (Amendment 2011) Disclosures – offsetting financial assets and financial liabilities The amendment introduces disclosures to enable users of financial statements to evaluate the effect or potential effect of netting arrangements on entity’s financial position. The group will apply the amendment from 1 January 2013, subject to its endorsement by the EU. Effective date 1 January 2013 1 January 2013 IAS 32 (Amendment 2011) Offsetting financial assets and financial liabilities The amendment seeks to clarify rather than change the offsetting requirements previously set out in IAS 32. 1 January 2014 The group will apply the amendment from 1 January 2014, subject to its endorsement by the EU. IFRS 9 Financial instruments The standard will eventually replace IAS 39 in its entirety. However, the process has been divided into three main components: classification and measurement, impairment, and hedge accounting. The Group will apply the standard from 1 January 2013 subject to its endorsement by the EU. 1 January 2015 The company is currently assessing the impact of these standards, and initial indications suggest that they are not expected to have a significant impact on its financial statements. Based on the company’s current business model and accounting policies, management does not expect material impacts on the company’s financial statements when the new Standards and Interpretations become effective. The company does not intend to apply any of these pronouncements early. 3. Significant accounting policies Basis of preparation The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The financial statements have been prepared on the historical cost basis. The principal accounting policies are summarised below. Basis of consolidation The consolidated financial statements incorporate the financial statements of the company and entities controlled by the company (its subsidiaries) made up to 31 December each year. Control is achieved where the company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the period are included in the consolidated profit and loss from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the group. All intra-group transactions, balances, income and expenses and intra-group unrealised profits and losses are eliminated on consolidation. Report and accounts to 31 December 2011 17 Notes to the consolidated financial statements For the 17 month period ended 31 December 2011 3. Significant accounting policies continued Intangible assets Exploration and evaluation costs Exploration and evaluation expenditure in relation to each separate area of interest is recognised as an exploration and evaluation asset in the period in which it is incurred where the following conditions are satisfied: (i) the rights to tenure of the area of interest are current; and (ii) at least one of the following conditions must also be met: (a) the exploration and evaluation expenditures are expected to be recouped through successful development and exploration of the area of interest, or alternatively, by its sale, or (b) exploration and evaluation activities in the area of interest have not, at the reporting date, reached a stage which permits a reasonable assessment of the existence or otherwise of economically recoverable reserves, and active and significant operations in, or in relation to, the area of interest are continuing. Exploration and evaluation assets are initially measured at cost and include the acquisition of rights to explore, studies, exploratory drilling, trenching and sampling and associated activities, and an allocation of depreciation and amortisation of assets used in exploration and evaluation activities. General, administrative and any share-based payment costs are only included in the measurement of exploration and evaluation costs where they are related directly to exploration and evaluation activities in a particular area of interest. Exploration expenditure is transferred to property, plant and equipment upon achieving a bankable feasibility study. Foreign currency translation The individual financial statements of each group company are presented in the currency of the primary economic environment in which it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each group company are expressed in US dollars, which is the functional currency of the company and the presentation currency for the consolidated financial statements. In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the reporting date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising, if any, are recognised in profit or loss. Exchange differences are recognised in profit or loss in the period in which they arise except for: • exchange differences which relate to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on foreign currency borrowings; • exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur, which form part of the net investment in a foreign operation, and which are recognised in other comprehensive income and reclassified from equity to profit or loss on disposal of the net investment. On consolidation, exchange differences arising from the translation of the net investment in foreign entities are recognised in other comprehensive income and accumulated in the group’s foreign currency translation reserve. On disposal of a foreign operation, the cumulative amount of exchange differences relating to that operation is reclassified from equity to profit or loss. 18 China Africa Resources plc Taxes The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the period. Taxable profit differs from net profit as reported profit or loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interest in joint ventures, except where the group is able to control the reversal of the temporary difference and it is expected that the temporary difference will not reverse in the foreseeable future. In addition, tax losses available to be carried forward as well as other tax credits to the group are assessed for recognition as deferred tax assets. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in profit or loss, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Tax relating to items recognised in other comprehensive income is recognised in other comprehensive income. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to taxes levied by the same taxation authority and the group intends to settle its current tax assets and liabilities on a net basis. Impairment At each reporting date, the group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the group estimates the recoverable amount of the cash- generating unit to which the asset belongs. An intangible asset with an indefinite useful life is tested for impairment annually and whenever there is an indication that the asset may be impaired. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Report and accounts to 31 December 2011 19 Notes to the consolidated financial statements For the 17 month period ended 31 December 2011 3. Significant accounting policies continued Financial instruments, assets and liabilities The group uses financial instruments comprising cash, trade receivables, trade payables, convertible debt, derivatives and other equity investments that arise from its operations. Financial assets The only financial assets currently held by the group are classified as loans and receivables and cash and cash equivalents. These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment. Impairment provisions are recognised when there is objective evidence (such as significant financial difficulties on the part of the counterparty or default or significant delay in payment) that the group will be unable to collect all of the amounts due under the terms receivable, the amount of such a provision being the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For receivables, which are reported net, such provisions are recorded in a separate allowance account with the loss being recognised within administrative expenses in the consolidated statement of comprehensive income. On confirmation that the receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision. Loans and receivables comprise trade and other receivables and cash and cash equivalents in the statement of financial position. Included within loans and receivables are cash and cash equivalents which include cash in hand and other short-term highly liquid investments with a maturity of three months or less. Any interest earned is accrued monthly and classified as interest. Short-term deposits comprise deposits made for varying periods of between one day and three months. For the purposes of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above. Derecognition of financial assets The group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the asset and substantially all the risk and rewards of ownership of the asset to another entity. Financial liabilities Trade payables and other short-term monetary liabilities are all classified as other financial liabilities. At present, the group does not have any liabilities classified as fair value through profit or loss. Trade payables and other short-term monetary liabilities are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method. All interest and other borrowing costs incurred in connection with the above are expensed as incurred, and reported as part of financing costs in the consolidated statement of comprehensive income. Derecognition of financial liabilities The group derecognises financial liabilities when, and only when, the group’s obligations are discharged, cancelled or they expire. 20 China Africa Resources plc Investment in subsidiaries In its separate financial statements, the company recognises its investments in subsidiaries at cost, less any provision for impairment. The cost of acquisition includes directly attributable professional fees and other expenses incurred in connection with the acquisition. It also includes share-based payments issued to employees of the company for services provided to subsidiaries. Finance income Finance income is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Merger relief The difference between the fair value of an acquisition and the nominal value of the shares allotted in a share exchange has been credited to a merger reserve account, in accordance with the merger relief provisions of the Companies Act 2006, and accordingly no share premium for such transactions has been set up. Related parties Parties are considered related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. Individuals, associates or companies that directly or indirectly control or are controlled by or under common control are considered related parties. 4. Critical accounting judgments and key sources of estimation uncertainty In the application of the group’s accounting policies, described in note 3, the directors are required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Critical judgments in applying the group’s accounting policies The following is the critical judgment that the directors have made in the process of applying the group’s accounting policies and that has the most significant effect on the amounts recognised in financial statements. Impairment of intangibles The group determines whether intangibles are impaired when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Such indicators include the point at which a determination is made as to whether or not commercial reserves exist. The carrying amount of intangibles at 31 December 2011 was US$4.3 million (see note 13). Report and accounts to 31 December 2011 21 Notes to the consolidated financial statements For the 17 month period ended 31 December 2011 5. Operating segments Operating segments are reported in a manner consistent with the internal reporting provided to the board, which is responsible for allocating resources and assessing performance of the operating segment. The group had no operating revenue or depreciation during the period. The group currently has one operating segment, the mining segment. This segment is currently engaged in the evaluation of the Berg Aukas mine in Namibia. 17 month period ended 31 December 2011 Segmental loss Operating costs Costs of listing China Africa Resources plc on AIM Total segmental operating loss Realised exchange losses Unrealised exchange losses on sterling deposits Interest income Loss after tax Segmental assets Non-current assets by geographic area Namibia 6. Operating loss This is stated after charging/(crediting): Staff costs Auditor’s remuneration (note 7) Realised exchange losses Share-based payment expense 22 China Africa Resources plc Mining US$’000 (323) (276) (599) (22) (371) 4 (988) Mining US$’000 10,265 Mining US$’000 4,305 17 month period ended 31 December 2011 US$’000 108 69 22 15 7. Auditor’s remuneration The remuneration of the auditor is further analysed as follows: Fees payable to the company’s auditor for the audit of the company’s annual accounts Fees payable to the company’s auditor and its associates for other services: The audit of the company’s subsidiaries, pursuant to legislation Other services pursuant to legislation Reporting accountant on AIM listing Total remuneration 17 month period ended 31 December 2011 US$’000 25 4 40 69 8. Employees and key management The total directors’ emoluments for the period were US$103,000 and those of the highest paid director were US$43,000. Detailed disclosure of directors’ remuneration is provided in the directors’ report on page 3. The group and company averaged 4 employees during the period ended 31 December 2011. Aggregated remuneration comprised: Wages and salaries (including directors) Social security costs Key management remuneration Salaries and fees Social security costs Continuing business 17 month period ended 31 December 2011 US$’000 103 5 108 103 5 108 Key management personnel as defined under IAS 24 have been identified as the board of directors. 9. Loss for the financial period The company has taken advantage of Section 408 of the Companies Act 2006 and has not included its own statement of comprehensive income in these financial statements. The company’s loss for the period was US$802,000. Report and accounts to 31 December 2011 23 Notes to the consolidated financial statements For the 17 month period ended 31 December 2011 10. Net finance expense Finance income Bank deposits Total interest revenue Finance costs Realised exchange losses Unrealised exchange losses on sterling deposits Investment revenue earned on financial assets analysed by category of asset is as follows: Loans and receivables (including cash and bank balances) 11. Income tax expense Current tax: UK corporation tax on the result for the 17 month period Total current taxation Deferred taxation Taxation Differences explained below: Loss before tax Loss before tax multiplied by the standard CT rate (26.2%) Effect of: Expenses not deductible for tax purposes Differences in local tax rates Tax losses for future utilisation Tax charge for the period Unrecognised deferred tax provision Fixed asset timing differences Short-term timing differences Tax losses UK Tax losses Namibia 24 China Africa Resources plc 17 month period ended 31 December 2011 US$’000 4 4 (22) (371) (393) 4 17 month period ended 31 December 2011 US$’000 – – – – (988) (259) 67 30 162 – (27) (4) (143) (96) (270) The deferred tax assets are currently unrecognised as the likelihood of sufficient future taxable profits does not yet meet the definition of “probable”. The unrecognised deferred tax asset has no expiry period. 12. Loss per share The calculation of basic and diluted loss per ordinary share is based on the following data: Basic and diluted loss per share (US cents) Weighted average number of shares for basic and diluted loss per share 17 month period ended 31 December 2011 US$’000 (0.11c) 8,991,343 The basic and diluted earnings per share have been calculated using the loss attributable to shareholders of the parent company, China Africa Resources plc, of US$988,000 as the numerator, i.e. no adjustment to profit was necessary. The basic and dilutive earning per share are the same as the group made a loss in the period. 13. Intangible assets Cost: On incorporation Additions Exchange adjustment Net book value at 31 December 2011 Mining licences US$’000 Evaluation costs US$’000 Totals US$’000 – 4,156 – 4,156 – 151 (2) 149 – 4,307 (2) 4,305 The mining licences and evaluation costs relate to the Berg Aukas mine in Namibia. Report and accounts to 31 December 2011 25 Notes to the consolidated financial statements For the 17 month period ended 31 December 2011 14. Investment in subsidiaries The investments at the reporting date in the share capital of companies include the following: China Africa Resources Namibia (pty) Ltd Company as at 31 December 2011 US$’000 4,156 China Africa Resources Namibia (pty) Ltd is owned 100% by China Africa Resources plc and is incorporated in the Republic of Namibia. On 1 August 2011 the group acquired 100% of the voting equity instruments of China Africa Resources Namibia (pty) Ltd, a company whose principal activity is exploration and evaluation of mining assets in Namibia. The company was acquired by the issuing of 6,326,923 ordinary 1p shares at a price of 40p being the price on the date of acquisition. The acquisition price was converted to US dollars at an exchange rate of 1.642. The principal reason for this acquisition was to develop the Berg Aukas mine in Namibia. Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows: Mining licences 15. Loans to subsidiaries China Africa Resources (pty) Ltd Book value US$’000 – Adjustment US$’000 4,156 Fair value US$’000 4,156 Company as at 31 December 2011 US$’000 340 340 The loan has no fixed terms of repayment and is unsecured. The loan attracts interest of US$ 12-month Libor +2%. 16. Trade and other receivables Sales taxes 26 China Africa Resources plc Group as at 31 December 2011 US$’000 Company as at 31 December 2011 US$’000 11 11 10 10 17. Cash Cash and short-term deposits 18. Trade and other payables – current Trade payables Other payables and accruals Group as at 31 December 2011 US$’000 Company as at 31 December 2011 US$’000 5,949 5,941 Group as at 31 December 2011 US$’000 Company as at 31 December 2011 US$’000 114 42 156 105 42 147 Trade and other payables are non-interest bearing and normally settled in the month following date of invoice. 19. Share capital Ordinary shares of 0.1p converted at an exchange rate of £:USD 1.642 377,001 230,769 31 December 2011 US$ 31 December 2011 £ The company issued the following shares and recorded the following movements on shares capital and reserves: Number of shares 20/08/2010 Balance at incorporation 5,000,000 Share capital US$ 80,160 Share premium US$ 80,160 Merger Consideration reserve US$ US$ Share capital £ Share premium £ Merger Consideration reserve £ £ – 160,320 50,000 50,000 – 100,000 1/08/2011 1/08/2011 Equity raised 18,076,923 on listing 296,841 7,524,923 4,051,882 11,873,646 180,769 4,582,494 2,467,497 7,230,760 Costs of raising – – (998,007) – (998,007) – (607,762) – (607,762) Total 23,076,923 377,001 6,607,076 4,051,882 11,035,959 230,769 4,024,732 2,467,497 6,722,998 The outstanding options to subscribe for ordinary shares of the company at 31 December 2011 are as follows: Date of grant 1 August 2011 Number of options Price per option Expiry date 230,769 42.3p 1 August 2014 Report and accounts to 31 December 2011 27 Notes to the consolidated financial statements For the 17 month period ended 31 December 2011 19. Share capital continued All of the 230,769 outstanding options are exercisable at a price higher than the current share price. All options vest on grant date. The weighted average exercise price of share options was £0.423 at 31 December 2011. The weighted average remaining contractual life of options outstanding at the end of the year was two years eight months. Fair value of options The fair values of options granted have been calculated using the Black Scholes pricing model, which takes into account factors such as the vesting periods, the expected dividend yield on the company’s shares and expected early exercise of share options. Grant date Share price at date of grant Exercise price Volatility Option life Dividend yield Risk-free investment rate 1 Aug 2011 £0.423 (US$0.695) £0.423 (US$0.695) 83% 3 years – 0.68% Volatility has been based on a peer group of companies as considered relevant by the directors due to the lack of trading history of the company. Based on the assumptions, the fair values of the options granted are estimated to be: Grant date Fair value 1 Aug 2011 £0.173 (US$0.284) Expense arising from share-based payments Based on the above fair values, the 2011 expense arising from equity-settled share options was US$66,000, of which US$15,000 was expensed and US$51,000 was set against the share premium account. There were no other share-based payment transactions. 20. Capital and contractual commitments There were no capital or contractual commitments at 31 December 2011. 28 China Africa Resources plc 21. Financial instruments Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument, are disclosed in note 3. The only financial assets currently held by the group are classified as loans and receivables and cash and cash equivalents. Categories of financial instruments The carrying amounts presented in the statement of financial position relate to the following categories of assets and liabilities: Financial assets Current Loans and receivables Intercompany receivables Trade and other receivables Cash and cash equivalents Financial liabilities Current Amortised cost Carrying value Group as at 31 December 2011 US$’000 Company as at 31 December 2011 US$’000 – 11 5,949 5,960 (156) (156) 340 10 5,941 6,291 (147) (147) As at 31 December 2011 there were no trade receivables that were past due and all are believed to be recoverable. All financial liabilities are repayable within 1 year. The fair value is equivalent to book value for current assets and liabilities. Non-current liabilities are discounted at prevailing interest rates for both the long and short-term elements. The main risks arising from the group’s financial instruments are liquidity risk, interest rate risk, credit risk and foreign currency risk. The directors review and agree policies for managing these risks and these are summarised below. Liquidity risk Liquidity risk arises from the group’s management of working capital. It is the risk that the group will encounter difficulty in meeting its financial obligations as they fall due. The directors monitor cash flow on a daily basis and at monthly board meetings in the context of their expectations for the business, in order to ensure sufficient liquidity is available to meet foreseeable needs. Interest rate risk The group, and company, currently finances its operations through equity raisings. There are no borrowings and therefore no significant exposure to interest rate fluctuations. The group, and company, manages the interest rate risk associated with the group’s and company’s cash assets by ensuring that interest rates are as favourable as possible, whether this is through investment in floating or fixed interest rate deposits, while managing the access the group, and company, requires to the funds for working capital purposes. Report and accounts to 31 December 2011 29 Notes to the consolidated financial statements For the 17 month period ended 31 December 2011 21. Financial instruments continued The interest rate profile of the group’s cash and cash equivalents as at 31 December 2011 was as follows: Short-term deposits with fixed interest rates Cash at bank with no interest rates Pound Sterling $’000 5,410 531 5,941 Namibian Dollars $’000 – 8 8 Total $’000 5,410 539 5,949 At reporting date, cash at bank floating interest rate is accruing weighted average interest of 0.7%. As required by IFRS 7, the group has estimated the interest rate sensitivity on period end balances and determined that a one percentage point increase or decrease in the interest rate earned on short-term deposits would have caused a corresponding increase or decrease in net income in the amount of US$54,000. Foreign currency risk management The functional currencies of the companies in the group are US dollars and Namibian dollars. The group does not hedge against the effects of movements in exchange rates. These risks are monitored by the board on a regular basis. The following table discloses the period end rates applied by the group for the purposes of producing the financial statements: Period end Period end Translation 1 GBP – USD 1 USD – ND 2011 1.55 6.12 The carrying amounts of the group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows: Cash and cash equivalents Pound Sterling Namibian Dollars Group as at 31 December 2011 US$’000 5,941 8 5,949 The following table details the group’s sensitivity to a 10% increase and decrease in the US dollar against the relevant foreign currencies. 10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. The sensitivity analysis includes external loans as well as loans to foreign operations within the group where the denomination of the loan is in a currency other than the currency of the lender or the borrower. A positive number below indicates an increase in profit and equity where the US dollar strengthens 10% against the relevant currency. For a 10% weakening of the US dollar against the relevant currency, there would be an equal and opposite impact on the profit/loss and equity, and the balances below would be negative. 30 China Africa Resources plc Effect on profit Effect on equity British pound currency impact Namibian dollar currency impact 30 June 2011 US$’000 30 June 2011 US$’000 595 595 595 595 1 1 1 1 +10% –10% +10% –10% 22. Events subsequent to reporting date There were no significant events subsequent to the reporting date. 23. Related party transactions Group and company The group and company had the following transactions with Weatherly International plc, a 25% shareholder of the group: Management fee paid Trade payables Purchase of China Africa Resources Namibia (pty) Ltd (see note 14) Company only Transactions with China Africa Resources Namibia (pty) Ltd, a wholly owned subsidiary: Management fee charged Interest charged Loans receivable 31 December 2011 US$’000 230 (46) 4,156 250 2 340 The ultimate holding company of China Africa Resources plc is East China Mineral Exploration and Development Bureau for Non Ferrous Metals. Report and accounts to 31 December 2011 31 Notes to the consolidated financial statements For the 17 month period ended 31 December 2011 24. Capital management policies and procedures The group considers its capital to comprise its ordinary share capital, share premium and accumulated retained losses as well as the reserves (consisting of foreign exchange reserve and merger relief reserve). The group’s objective when maintaining capital is to safeguard the entity’s ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders. The company meets its capital needs by equity financing. The group sets the amount of capital it requires to fund the group’s project evaluation costs and administration expenses. The group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. The company and group do not have any derivative instruments or hedging instruments. It has been determined that a sensitivity analysis will not be representative of the company’s and group’s position in relation to market risk, and therefore such an analysis has not been undertaken. 32 China Africa Resources plc Company information Directors Solicitors Yi Shao (Non-executive Chairman) Morrison & Foerster (UK) LLP Roderick Webster (Chief Executive Officer) CityPoint James Richards (Senior Independent Non-executive Director) One Ropemaker Street Frank Lewis (Independent Non-executive Director) London EC2Y 9AW Nominated adviser and broker Ambrian Partners Ltd Old Charge House 128 Queen Victoria Street London EC4V 4BJ Registrars Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Website www.chinaafricares.com John Bryant (Non-executive Director) Jianrong Xu (Non-executive Director) Shasha Lu (Non-executive Director) Jingbin Tian (Non-executive Director) Secretary Max Herbert Registered office 180 Piccadilly London W1J 9HF Registered number 5350512 (England and Wales) Auditor BDO LLP 55 Baker Street London W1U 7EU Bankers Bank of Scotland St James’s Gate 14-16 Cockspur Street London SW1Y 5BL Report and accounts to 31 December 2011 33 China Africa Resources plc 180 Piccadilly, London W1J 9HF www.chinaafricares.com