Perenti Global Limited Annual Report 2018

Plain-text annual report

I AUSDRILL 18 ANNUAL REPORT BRINGING MORE TO MINING AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEWII 02 04 25 24 26 44 45 46 47 48 49 50 51 120 121 130 132 Chairman’s letter to shareholders Operating and financial review Financial report Corporate directory Directors’ report Auditor’s independence declaration Corporate governance statement Consolidated statement of profit or loss Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors’ declaration Independent auditor’s report to the members Shareholder information Financials table AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW01 THE END OF AN ERA – RON SAYERS Ausdrill commenced operations in 1987 from very humble beginnings when Ron Sayers started the Company with a single drill rig. Over 30 years, Ron has built an iconic Australian company that has evolved into an international group operating in 10 countries, providing employment for more than 5,000 people. Ron is a legend in the West Australian mining community. He has instilled a fair and caring culture in the business that will serve the organisation well for many years to come. Ron’s drive to grow a strong, successful business and his love of the industry are obvious and we have all learned much from him. He truly is unique and his open and direct approach to business has earned him respect from many quarters. On 3 July 2018, Ron retired from the company he founded to spend time with his family and pursue his other interests. On behalf of the Board, I would like to thank Ron for his many years of service and to congratulate him on the great legacy he has left us. RON SAYERS FOUNDED AUSDRILL IN 1987 IN KALGOORLIE, BUILDING THE BUSINESS INTO A GLOBAL DIVERSIFIED MINING GROUP. R O N S AY E R S O U T G O I N G M A N A G I N G D I R E C T O R AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW02 AUSDR IL L A NNUA L R EP OR T 2018 CHAIRMAN’S LETTER TO SHAREHOLDERS Chairman’s letter to shareholders I am proud to present the 2018 Annual Report to Shareholders. The Company has delivered another exceptional result and its employees continue to do outstanding work in a challenging and changing environment. In August 2017, the company raised approximately $100.0 million through the successful completion of a placement to institutional and sophisticated investors which was strongly supported by existing and new institutional investors. The company continues to benefit from a strong balance sheet which enables it to invest in opportunities as they arise. Highlights for the year People and safety I am very proud to be able to report that the Group’s safety performance continues to improve. Our continued engagement and commitment to the well-being of Ausdrill’s employees has resulted in a 25% reduction in the number of recordable injuries, and a 41% reduction in the Total Recordable Injury Frequency Rate (TRIFR), to record low levels. Ensuring all our people return home safely at the end of their shift remains the company’s highest priority. Ausdrill is proud to support the communities in which we operate and consistent with our values, commitment to shareholders and our social contract, we seek to build our business along with sustainable communities. At 30 June 2018, we have 5,278 employees engaged with our group across 10 countries. In line with our objective of providing employment opportunities for the people who live in the communities in which we operate, 98% of our total African Mining Services workforce are nationals. Our people are our business and we will continue to engage in local employment, invest in the communities in which we operate, and develop and diversify our workforce for a safe and successful shared future. Ausdrill has carefully worked its way out of the mining industry downturn and is in a strong position looking forward. Rationalisation and business improvement activities continue to contribute to better returns for our shareholders and we are proud to be able to deliver another strong financial performance, in line with what we committed to this time last year. It is a credit to the leadership and focus of our executive team and the commitment and dedication of the entire Ausdrill family. The Company has reported revenues of $887.3 million and net profit after tax of $61.1 million. 2018 has been a busy year during which the Company mobilised and ramped up five new projects, being Mako in Senegal, Boungou in Burkina Faso, Yanfolila in Mali, Subika in Ghana, and Wodgina in Australia. Large capital and working capital expenditures have been committed to these projects, along with substantial growth in our workforce numbers. Ausdrill continues to innovate and invest in technology to remain at the forefront of industry developments. During the year, the Company acquired a strategic investment in HiSeis, a business that is focused on resource definition, and invested in Chrysos, a company that is focused on rapid mineral ore assessment. The Chrysos technology has the potential to be a game-changer for the industry and Ausdrilll is excited to be part of this journey. As part of its strategy to rationalise the group and focus on core competencies, Ausdrill sold Diamond Communications to Power Lines Plus. Ausdrill owned this business for 19 years and is pleased to see it find a home more aligned with its business model. The Company has reported revenues of $887.3 million and net profit after tax of $61.1 million. CHAIRMAN’S LETTER TO SHAREHOLDERS AUSDR IL L A NNUA L R EP OR T 2018 03 Board renewal Challenges During the year, the Board implemented a board renewal strategy which was aimed at providing shareholders with a balanced representation, harnessing diversity and skillsets with a long-term future focus. In June, after an extensive international search, the Board appointed highly experienced mining services executive Mark Norwell as the Company’s new Managing Director and Chief Executive Officer. Mark was, until recently, the Executive General Manager – Strategy & Growth at Thiess Pty Ltd, and a member of Thiess’ executive leadership team. Over a 20-year career in the mining services sector, he has held senior roles with Leighton Contractors, HWE Mining and Macmahon Holdings. Mark will commence in the role at Ausdrill on 17 September 2018. The Board subsequently continued its renewal strategy with the appointment of two new non-executive directors, Robert Cole and Alexandra Atkins. Their combined wealth of knowledge and experience strengthens the Board and provides a diverse and comprehensive skill set to support Ausdrill in its strategy to grow and diversify the business, and to be more technology and innovation focused. In addition to these Board appointments, we have a very strong and committed executive team in place which will enable the Company to capitalise on the next phase of growth. The past year has been a period of significant change for the Ausdrill board. We have farewelled our long-standing Chairman, Terry O’Connor and the company’s founder and managing director, Ron Sayers, while more recently non-executive directors Mark Connelly and Don Argent have also resigned. Our grateful thanks go to each of these directors for their contribution. As demand for mining services increases, labour and equipment markets continue to tighten. Lead times for new equipment continue to push out and securing build slots and good second-hand equipment is critical to the Company’s competitive advantage. Further, the competition for high quality labour has increased, particularly in the past 12 months. The Company’s remuneration and benefits practices are continually reviewed to ensure we remain market competitive as we contest for our most valuable resource: people. Operationally, 2018 has been more challenging, with the concurrent mobilisation and ramp-up of five new projects, with some of the projects incurring more costs than originally planned. Having said that, the overall underlying net profit from continuing operations of the Company increased from $26.5 million to $45.2 million. The Company improvement strategies focused on to continue to deliver better margins and returns for our shareholders. remains Ausdrill also demobilised three projects during the year, being Siguiri in Guinea, and Ravensthorpe and Prominent Hill in Australia. These serve as a reminder that the Company operates in a cyclical and competitive environment and must maintain its customer focus to continue to secure new work to remain successful into the future. Looking forward The Group’s strategy is focused on investing in higher barrier-to- entry businesses that deliver sustainable profits to shareholders. The Board will consider both organic and inorganic growth opportunities to achieve this. Overall, the Company is in a very good position to capitalise on opportunities to deliver on its long-term strategy of being a Tier 1 global mining services provider. Very importantly, we have outstanding, long-term relationships with the major mining companies, many of whom have been Ausdrill customers for decades. We can therefore look forward to another good year and would like to thank our customers, suppliers, shareholders and employees for their ongoing role in the Company’s success. Ian Cochrane Chairman Ausdrill Limited 04 OPERATING AND FINANCIAL REVIEW BUSINESS AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW • 05 Key highlights ■ Key safety indicators at record low levels ■ Sales revenue of $887.3 million, up 16.4% ■ Reported EBITDA of $177.4 million, up 30.6% ■ Reported EBITDA margin increased from 17.8% to 20.0% on the back of efficiencies and scale benefits ■ Reported net profit after tax of $61.1 million, up 95.7% ■ Underlying1 profit after tax of $45.2 million, up 70.8% ■ Basic earnings per share 17.4 cents per share, up 74.0% ■ Fully franked final dividend of 3.5 cents per share declared, comprising a 1.5 cents per share final dividend and a 2.0 cents per share special dividend ■ Strong balance sheet with significant financial flexibility. Approximately $200 million in undrawn debt facilities and cash reserves of $137.3 million - gearing of 25.7% ■ Over $500 million in contract extensions and new work won ■ Long-standing exposure to low-cost gold sector continues to provide a core source of revenue, with ~80% of revenue linked to gold producers in Australia and Africa. Secured projects expected to contribute to profit growth in FY19 ■ Targeting 20%-30% underlying profit growth for FY19 AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW06 AUSDR IL L A NNUA L R EP OR T 2018 06 OPERATING AND FINANCIAL REVIEW HOW WE PERFORMED 887.3 173.7 177.4 74.1 826.3 762.6 743.0 719.8 135.8 126.5 110.8 14 16 17 18 14 15 16 17 18 15 14 15 16 17 18 $887.3 M SALES REVENUE 1 $177.4 M EBITDA 2 1 Based on FY18 sales revenue from continuing operations, excluding intercompany sales and associates revenue 2 Excludes impairment from prior corresponding periods 44.6 34.4 26.6 2.1 15 14 16 17 18 $74.1 M PROFIT BEFORE TA X 2 AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW AUSDR IL L A NNUA L R EP OR T 2018 07 07 The following charts show the percentages of sales revenue by business activity and by geography. Revenue by business activity 1 Revenue by geography 1 Other (5%) Exploration (10%) Drill & Blast Equipment Hire Contract Mining Africa (49%) BUSINESS ACTIVIT Y SECTOR Exploration (10%) COUNTRY SECTOR Other (8%) Contract Mining Africa 57.6% Equipment Hire & Part Sales 14.6% Drill & Blast Exploration Other 12.6% 10.2% 5.0% Production 86.1% Exploration 10.2% Other 3.7% Production (82%) Australia Ghana Mali Burkina Senegal Guinea Other Africa Australia Other 57.6% 40.6% 1.8% 40.6% 28.9% 13.3% 8.2% 4.4% 2.8% 1.8% Other Guinea Senegal Burkina Mali Ghana Other Africa Australia Contract Mining Services Africa Drilling Services Australia Equipment Services & Supplies All Other $511 M 58 % $215 M 24 % $148 M 17 % $13 M 1 % OF GROUP REVENUE OF GROUP REVENUE OF GROUP REVENUE OF GROUP REVENUE 1 Revenues shown in the charts above are for the year ended 30 June 2018 (FY18) for continuing operations and after inter-segment eliminations. AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW 0808 AUSDR IL L A NNUA L R EP OR T 2018 OPERATING AND FINANCIAL REVIEW WHO WE ARE Diversified mining services company with over 5,000 people working in 10 countries on some of the world’s largest mining projects. WHAT WE DO Provide mining and drilling services, mobile equipment and supplies so our customers can get more from the ground. HOW WE DO IT Customers for life Family sticks together Chase the opportunity Find a way Principal Activities Ausdrill (Company or Group) has invested in people, businesses and equipment for over more than 30 years to ensure it can successfully deliver services across every stage of the mining lifecycle, with a particular focus on production. It is a robust business model and one which management believes will continue to deliver in the years ahead. In Australia, the Company’s service offering includes drill and blast, grade control, water well drilling, exploration drilling, mineral analytics, equipment sales and hire, and parts sales. Ausdrill’s Australian regional footprint includes, operations based in Western Australia, Queensland, South Australia, New South Wales and Northern Territory. In Africa, the Group offers load and haul and crusher feed services, in addition to all the production-related services that the Group provides in Australia. The Group provides specialist underground mining services, including high speed decline development and production, through its 50-50 joint venture with Barminco Limited, African Underground Mining Services (AUMS). Ausdrill’s African operations are diversified across a portfolio of clients and jurisdictions including Ghana, Mali, Burkina Faso, Senegal, Cote d’Ivoire, Tanzania, South Africa and Zambia. Africa, in particular West Africa, offers strong opportunities for business growth in both surface and underground mining. These service offerings are complemented by significant in-house capabilities in the design and manufacture of drill rigs, as well as supply and logistics services. AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW 09 THE GROUP’S FOCUS IS TO DELIVER QUALITY SERVICES TO THE MINING INDUSTRY. Accordingly, Ausdrill has built long-term relationships with many of the world’s leading resource companies such as AngloGold Ashanti, BHP Billiton, Newmont, Gold Fields, Perseus, Peabody, Toro Gold and SEMAFO which, in some instances, extend over more than 25 years. The Company also nurtures new opportunities with less-established customers through innovative approaches including drill for equity programs. For the year ended 30 June 2018, approximately 82% of mining services revenues were generated from the provision of services to gold mining companies and approximately 6% to iron ore mining companies, in each case, primarily for production-related services. $ MILLION Continuing operations Sales revenue EBITDA EBIT Profit/(loss) before tax Profit/(loss) after tax Discontinued operations Profit/(loss) after tax Reported net profit/(loss) after tax 18 887.3 177.4 102.9 74.1 59.3 1.7 61.1 17 762.6 135.8 73.6 44.6 30.9 0.3 31.2 % CHANGE FROM PRIOR CORRESPONDING PERIOD 16.4% 30.6% 39.7% 66.0% 91.8% 95.7% Revenue Expenses Sales revenue from continuing operations for the Group increased 16.4% to $887.3 million. Revenue growth was driven by the Contract Mining Services Africa segment, where revenues increased by 26.3% following the commencement of mining works at three new projects, being Boungou for SEMAFO in Burkina Faso, Yanfolila for Hummingbird Resources in Mali, and Mako for Toro Gold in Senegal. The Equipment Services and Supplies segment delivered 13.0% in external revenue growth driven by demand for mining equipment. Drill and blast activities in the Drilling Services Australia segment remained stable. New work secured at Wodgina for Mineral Resources, Tropicana for Macmahon and Mungari for Evolution Mining. Production drilling continues to deliver strong returns. Competition and margins in exploration drilling remain a challenge but represents only a small portion of reported revenue. Reported sales revenue excludes Ausdrill’s 50% share of revenue generated by AUMS, being $145.2 million (2017: $89.9 million). AUMS is equity accounted and only Ausdrill’s 50% share of net profits are included in the consolidated income statement. Revenue from this joint venture grew on the back of the new Subika project for Newmont in Ghana. The Group’s three largest expense categories are materials, labour, and depreciation and amortisation, which represent 84.4% (2017: 84.7%) of all expenses. Materials expense as a percentage of revenue decreased from 42.2% to 40.3% during FY18, but increased in absolute terms driven by major component change-outs and higher maintenance costs to bring idle gear back to work for new projects in Ghana and Burkina Faso. Labour expenses increased by 18.0%, which was in line with the increase in sales revenue. This was predominantly due to a 15.3% increase in headcount in Africa from 2,791 to 3,216 to service the commencement of mining works at new projects in Africa. Australian employee numbers remained stable during FY18. Depreciation and amortisation expenses increased by 19.9% or $12.4 million, largely as a result of growth in the fleet required to commence new projects in Africa. AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW 10 Earnings from continuing operations Contract Mining Services Africa EBITDA increased from $135.8 million to $177.4 million for the year ended 30 June 2018. The major drivers of the increase were from improved operational performance in Equipment Services and Supplies, Drilling Services Australia, growth of the African underground portfolio, a one-off claim settlement of $5.3 million and foreign exchange gain of $11.2 million contributing to earnings improvement. Equity accounted profits delivered through AUMS increased from $13.1 million in 2017 to $22.3 million in 2018. EBITDA margin (excluding equity accounted profits) increased from 16.1% to 17.5%. EBIT (from continuing operations) increased from $73.6 million to $102.9 million for the year ended 30 June 2018 and the EBIT margin (excluding equity accounted profits) has increased from 7.9% to 9.1%. The EBIT margin has been positively impacted by foreign exchange gains and a one-off claim settlement, partially offset by project start up costs. The operating profit before tax from continuing operations increased from $44.6 million to $74.1 million for the year ended 30 June 2018. The reported profit after tax from continuing operations for the year totalled $59.3 million, an increase of 91.8% on the $30.9 million reported in 2017. The Group reported a net profit after tax of $1.7 million from the now discontinued Diamond Communications business which was sold 1 May 2018. Overall Return on Average Capital Employed increased from 8.6% in 2017 to 10.7% in 2018. SEGMENT PERFORMANCE EX TERNAL SALES REVENUE EARNINGS BEFORE INTEREST AND TA X1 18 510.9 17 404.7 18 47.0 17 49.3 $ MILLION CMSA 1EBIT excludes AUMS equity accounted profits The Contract Mining Services Africa business has reported a 26.2% increase in revenue, largely driven by the commencement of mining at its three new projects, as well as increased equipment hire at Nsuta in Ghana. Reported EBIT margin decreased slightly due to the mobilisation and ramp-up of the three new projects, which incurred significant mobilisation costs including freight, consultants and contractors to establish operations. The business expensed $5.9 million in major repairs incurred to mobilse equipment to new projects. Excluding these, reported EBIT would have been $52.9 million for an EBIT margin of 10.4%. Further, the Siguiri contract in Guinea, ceased in October 2017. The operating profit before tax from continuing operations increased from $44.6 million to $74.1 million for the year ended 30 June 2018. Key AMS contracts: The key AMS contracts in place at 30 June 2018: CLIENT PROJECT LOCATION SERVICES PROVIDED SOMIFI (subsidiary of Resolute) Tabakoroni Hummingbird Resources Perseus AngloGold Ashanti SEMAFO Toro Gold Ghana Manganese Company Nordgold Nordgold B2Gold B2Gold West African Resources Golden Rim Resources Cardinal Resources Tietto Minerals Yanfolila Edikan Iduapriem Boungou Mako Nsuta Bissa Taparko Fekola Kiaka Tanlouka Piela Bolgatanga Abujar Mali Mali Ghana Ghana Burkina Faso Senegal Ghana Burkina Faso Burkina Faso Mali Burkina Faso Burkina Faso Burkina Faso Ghana Ivory Coast Open pit mining Open pit mining Open pit mining Open pit mining Open pit mining Open pit mining Equipment hire Equipment hire Equipment hire Exploration drilling Exploration drilling Exploration drilling Exploration Drilling Exploration drilling Exploration Drilling AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW 11 African Mining Services (AMS) In Burkina Faso, AMS: In Ghana, AMS: • • • • signed a 24-month contract with Ghana Manganese Company to provide hire equipment at the Nsuta mine; continued to provide surface mining services to Perseus at its Edikan gold mine; extended exploration drilling contracts with Cardinal Resources in the Upper East Region of Ghana; and continued open pit contract mining at Iduapriem for AngloGold Ashanti. In Mali, AMS: • • • secured a contract with Resolute’s subsidiary, SOMIFI, to provide open pit mining services at the Tabakoroni gold project in Mali for 18 months; continued exploration drilling with B2Gold at its Fekola gold project; and completed open pit contract mining at Syama for Resolute through the year. • • • commenced a 60-month contract to provide surface mining services to SEMAFO at its Boungou gold mine; secured a 12-month extension (with a 12-month option to extend) to provide mining equipment to Nordgold for work on its Bissa gold project; and extended exploration drilling contracts with B2Gold and West African Resources. In Senegal, AMS: • commenced a 75-month contract to provide surface mining services to Toro Gold Ltd at its Mako gold mine. In West Africa, AMS has increased its major mining equipment fleet to over 500 units including dump trucks, excavators, loaders, blast hole drills and grade control drills, along with 14 exploration drills. The outlook remains positive as AMS is seeing a lift in exploration drilling programs, particularly in West Africa. AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW12 African Underground Mining Services (AUMS) 1 SEGMENT PERFORMANCE EX TERNAL SALES REVENUE EARNINGS BEFORE INTEREST AND TA X 18 145.2 17 89.9 18 31.0 17 19.8 $ MILLION AUMS 1AUMS is an equity accounted joint venture for reporting purposes Ausdrill has a 50% interest in the AUMS joint venture, with Barminco holding the other 50%. This business provides underground mining services for clients in Ghana, Mali, Burkina Faso and Tanzania. The Company’s share of revenue from AUMS has increased from $89.9 million to $145.2 million in the year to 30 June 2018, largely due to the commencement of the Subika project in Ghana for Newmont in May 2017 and the expansion of the Geita project in Tanzania for AngloGold Ashanti, mainly the Nyankanga underground works. EBIT increased from $19.8 million in FY17 to $31.0 million (being Ausdrill’s 50% share) in FY18. This is largely as a result of the higher revenue in FY18. Return on average capital employed improved from 35.9% to 48.5%. In Ghana, AUMS: • commenced a five-year contract in May 2017 to provide underground mining services to Newmont Ghana Gold at its Subika underground mine at the Ahafo complex in Ghana, which had significant growth during FY18, in line with schedule. • AUMS through its 70/30 JV with Rocksure International (a Ghanaian mining contractor), is preferred contractor for delivery of underground mining services at AngloGold Ashanti’s Obuasi project in Ghana. Negotiation of the final contract terms and conditions are well advanced with an expectation that project works will commence later in 2018. The joint venture has been incorporated in Ghana and will trade under the name Underground Mining Alliance Limited. In Tanzania, AUMS: • expanded its activities for the Geita project in Tanzania, especially works in the Nyankanga pit. In Burkina Faso, AUMS: • was awarded a 70-month contract to provide underground mining services to SEMAFO at its Siou underground mine in Burkina Faso, expected to commence Q3, 2018; and • secured a 30-month contract renewal, with an option of a 12-month extension, for the Zone 55 and Bagassi South underground mines at Yaramoko, work commenced in Q3 2018. Diamond drilling projects were also carried out in Ghana, Tanzania and Burkina Faso during the year. Key AUMS contracts: The key clients and contracts in place at 30 June 2018 for the AUMS joint venture are: CLIENT Roxgold AngloGold Ashanti AngloGold Ashanti Newmont Ghana Gold SEMAFO PROJECT Yaramoko Geita - Star and Comet Geita - Nyankanga Subika Siou LOCATION Burkina Faso Tanzania Tanzania Ghana Burkina Faso SERVICES PROVIDED Underground mining Underground mining Underground mining Underground mining Underground mining AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEWOPERATING AND FINANCIAL REVIEW AUSDR IL L A NNUA L R EP OR T 2018 13 Drilling Services Australia • expanded works in the coal sector at Blair Athol and Dawson; and SEGMENT PERFORMANCE • added short-term works with growth potential. $ MILLION DSA EX TERNAL SALES REVENUE EARNINGS BEFORE INTEREST AND TA X 18 214.9 17 215.5 18 23.7 17 19.1 Drilling Services Australia (DSA) has reported an improved result for the year in stabilising market conditions. EBIT margin was 11.0%, an improvement on the prior period delivered through further cost and productivity efficiencies. During the period, the business has renewed several key contracts, secured additional new works, and expanded capability in providing geotechnical services. Looking forward, DSA will continue to focus on consolidation initiatives and operational disciplines to optimise performance. DSA has been active in developing a number of technology enablers and the business will be seeking to deploy these initiatives to both existing contracts and the pursuit of new opportunities by further developing technological competitive advantages. Drill and Blast The provision of production drill and blast services to open cut mining operations represents the foundation on which Ausdrill was built and this continues to be an integral part of our service offering. During the year, the business: • • secured new works at the Wodgina Lithium mine for Process Minerals International (PMI); secured new grade control works at the Tropicana mine for Macmahon; • extended the contract at Mungari for Evolution Mining; The business has a large operational fleet comprising production blast-hole drills, purpose-built probe drills and reverse circulation (RC) grade control drills. Exploration The Australian exploration drilling business provides services through its base in Kalgoorlie, which primarily focuses on gold and base metals in the Goldfields region of Western Australia, and its base in Perth, which services the North West of Western Australia. This exploration business operates rotary air blast (RAB), reverse circulation (RC), diamond drill rigs and water well rigs. During the year, growth in exploration opportunities continued, although margins remain suppressed due to excess capacity in the industry. Exploration drilling services were also delivered to a range of clients in the Pilbara, Mid-West and Goldfields regions in Western Australia, as well as term works in South Australia and campaign works in New South Wales. Geotechnical During the year, DSA commenced the provision of geotechnical services including slope stabilisation, rockfall protection and portal establishment focused on open pit mines and mining infrastructure projects. These services are complementary to DSA’s existing in-pit work activities and projects were delivered to both existing sites and new clients. DSA further extended its drilling capability to include geotechnical, high reach and technical access slope work. Key Contracts - Drilling Services Australia The key contracts in place at 30 June 2018 for the Drilling Services Australia segment are: CLIENT KCGM Ensham Resources Link Mining Services OM Manganese Piacentini & Son Macmahon BHP Billiton Gold Fields Evolution Mining SIMEC PROJECT Super Pit Ensham Blair Athol Bootu Creek Tropicana Mungari Various Huntly and Willowdale Huntly, WA Process Minerals International (PMI) Wodgina LOCATION SERVICES PROVIDED Goldfields, WA Emerald, QLD Clermont, QLD Bootu Creek, NT Production drilling, grade control Production drilling Drill and blast Drill and blast Drill and blast Goldfields, WA Pilbara, WA Drill and blast, grade control Drill and blast, grade control Several Pilbara mine sites Pilbara, WA Exploration drilling, drill and blast, equipment hire St Ives and Granny Smith Goldfields, WA Exploration drilling, grade control Goldfields, WA South Australia Pilbara, WA Goldfields, WA Exploration drilling, drill and blast, grade control Exploration drilling Exploration drilling Exploration drilling Consolidated Minerals Woodie Woodie Mincor Various 14 Equipment, Services & Supplies BTP Group SEGMENT PERFORMANCE EX TERNAL SALES REVENUE EARNINGS BEFORE INTEREST AND TA X 18 147.7 17 130.7 18 17.3 17 9.5 $ MILLION ESS The Equipment, Services and Supplies (ESS) segment comprises the BTP Group and Supply Direct Group (SDG). The ESS segment is experiencing improving market conditions resulting in increased demand for equipment rental and maintenance support services. Moving forward the ESS segment’s priority is to ensure it continues to enhance its competitiveness and sustainability. The ESS segment is experiencing improving market conditions resulting in increased demand for equipment rental and maintenance support services BTP Group (BTP) is one of Australia’s largest non-Original Equipment Manufacturer suppliers of heavy earthmoving equipment solutions to the mining and construction industries. BTP’s offering includes maintenance and repair services, parts, reconditioned and service exchange for major components, equipment rebuilds, equipment rental and used equipment sales. BTP’s equipment rental offering includes an extensive fleet of excavators, dump trucks, dozers, graders and ancillary equipment, including water carts. Improvement in financial performance is due to increased asset utilisation, strong capital allocation disciplines, and ongoing cost- control focus. Market conditions generally improved during the year resulting in increased rental fleet utilisation and higher demand for equipment maintenance and support services. During the year, BTP also completed the planned expansion of its component rebuild facility and equipment workshop in Hazelmere, Western Australia. AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW15 All Other $ MILLION ALL OTHER SEGMENT PERFORMANCE EX TERNAL SALES REVENUE EARNINGS BEFORE INTEREST AND TA X 18 13.8 17 11.7 18 6.0 17 (0.5) includes MinAnalytical Laboratory The All Other segment Services, Energy Drilling Australia, Well Control Solutions and Ausdrill Properties. During the period, a $5.3 million claim settlement in Ausdrill’s favour was received that relates to a prior period. Diamond Communications - reported as discontinued operations On 1 May 2018, the Diamond Communications business was sold to private group, Powerlines Plus Pty Ltd. The sale generated a small book profit and was a further divestment of a non-core business in line with Ausdrill’s strategy of rationalising the Group in order to focus on mining. Minanalytical Laboratory Services MinAnalytical Laboratory Services offers a range of high quality analytical services for the mineral exploration and mining Industry and is NATA accredited in accordance with ISO17025:2005. The business has invested in the commercialisation of the Chrysos Photon Assay machine, which provides accurate mineral analysis results within much-reduced timeframes. Importantly, BTP’s unique value offering of end-to-end mining equipment maintenance and refurbishment services puts it in a good position to capitalise on a supply-constrained market. Recent investment to expand BTP’s capacity and upskill its workforce provides a strong platform for cost effective scalability. BTP’s core capabilities in procuring, rebuilding equipment, cylinders, components and engines; and provision of site and workshop labour support will ensure that its customers end to end needs are delivered upon. Equally important, BTP’s mining equipment rental fleet also benefits from these same support structure which ensures optimisation of its equipment availability and reliability whilst operating on customer sites, particularly at a time when these services may be more difficult to procure. Moving forward, BTP’s focus remains on growing revenue profitably. The mining industry is entering a modest reinvestment cycle which is supporting improving market conditions for equipment pricing, increasing mining equipment rental demand and related equipment maintenance, and refurbishment services. BTP is actively seeking to expand its mining equipment rental fleet and refurbishing owned equipment in response to demand. BTP expects the market to remain buoyant yet cost competitive in the near term and thereafter, to begin to normalise to support new investment. Supply Direct Group Supply Direct provides flexible and effective supply chain and logistics solutions predominantly to customers based in Africa, where supply chain issues are often complex. Supply Direct works with customers to find the best machinery and parts supply source. Supply Direct’s managed machinery and parts supply offering include a range of services from sourcing parts on demand to providing fully integrated vendor-held stock models, to tailor made solutions involving complex project management. Supply Direct concluded the financial year with strong operational and financial performance, and SDG expects this to continue. Moving forward, SDG will continue to foster and develop relationships and, together with strong collaboration with BTP, continue to provide unique solutions to customers that meet their needs. AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW16 The first Chrysos Photon Assay unit was commissioned during May 2018 and generated its first revenue in June 2018. Full market acceptance is expected following NATA accreditation, which is expected to be achieved during August 2018. The business has also made a conditional commitment to lease an additional two units proposed for installation in the Kalgoorlie Goldfields region and as part of that decision is looking at further automation of the sampling process. The Chrysos investment is seen as a catalyst for change for the MinAnalytical business, with improved performance expected in FY19. Energy Drilling Australia (EDA) As previously announced, Ausdrill has placed the oil and gas assets of EDA into care and maintenance with the equipment placed in storage. The business will continue to incur depreciation, lease costs and minimal labour costs until such time as the assets are divested at the appropriate time and value. Well Control Solutions (WCS) WCS provides rental and maintenance of pressure control and pump products for the oil and gas sector. To date, it has operated at a modest profit, and has more recently, seen an increase in activity in the coal seam gas sector. The Chrysos investment is seen as a catalyst for change for the MinAnalytical business, with improved performance expected in FY19. Group financial position Capital, funding and liquidity are managed at the corporate level, with the individual businesses focused on working capital and operating cash flow management. The following commentary on the financial position relates to the Group. Cash Flows A summary of the cash flows for the Group is as follows: $ MILLION Cash flows from: operating activities investing activities financing activities Net cash flow for the year 0pening cash Exchange rate effect on cash Closing cash 18 52.6 (161.5) 78.3 (30.6) 166.7 1.2 137.3 17 94.6 (101.1) (7.0) (13.5) 181.9 (1.7) 166.7 CASH FLOWS FROM OPERATING ACTIVITIES Operating cash flow for the year was $52.6 million, a decrease on last year’s $94.6 million. Operating cash flows were impacted by significant investment in working capital and mobilisation costs for three new projects in Africa. Further, delayed payments of $45.9 million were received from debtors early in FY19. CASH FLOWS FROM INVESTING ACTIVITIES The Group’s business requires significant investment in front-ended capital expenditure for mining equipment to service new projects. This equipment typically has a useful life of between seven and 10 years. Consequently, during periods of high or rapid growth, the capital requirements of the Group increase. Historically, capital expenditures have been funded by a combination of operating cash flow, debt and equity. Capital expenditure totalled $173.3 million for the period, driven mainly by growth projects in Africa. Further, during FY18 the Group divested non-core business, Diamond Communications, for which it received sales proceeds of $4.6 million, with a further deferred consideration of $1.6 million to follow in FY19. Proceeds from the sale of certain items of plant and equipment which were surplus to operational needs totalled $3.3 million. AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEWThe following table shows Ausdrill’s acquisitions of property, plant and equipment and other non-current assets funded from all sources by segment for the periods indicated. $ MILLION Drilling Services Australia Contract Mining Services Africa Equipment Services & Supplies Other Proceeds from asset sales CAPEX net of asset sales 18 (29.9) (129.2) (12.0) (2.2) 3.3 17 (6.9) (121.1) (17.2) (2.3) 1.8 (170.0) (145.6) From time to time, the Company engages in drill for equity arrangements pursuant to which it undertakes drilling works for clients in exchange for shares or debt instruments convertible into shares. During the period, the Company invested $9.2 million into drill for equity work programs and other investments, including Chrysos and HiSeis (which amounted to $5.3 million). Distributions from the AUMS joint venture totalled $13.6 million for the year, lower than in FY17 ($22.9 million), due to dividends being deferred to fund growth in AUMS. CASH FLOWS FROM FINANCING ACTIVITIES Net financing cash inflows were $78.3 million in the year ended 30 June 2018, compared to an outflow of $7.0 million in 2017. The cash inflow included net proceeds of $97.6 million from an equity raise that provided balance sheet flexibility, which were partly offset by $19.9 million distributed to shareholders by way of dividends in the period. 17 DIVIDENDS is influenced by earnings and cash The level of dividends requirements of the business. Historically, the Company has paid fully franked dividends to its shareholders twice a year, in April and October, at an average payout ratio of 40%. During the year ended 30 June 2018, the Company paid a final dividend of 2.0 cents per share for the year ended 30 June 2017 and an interim fully franked dividend of 3.5 cents per share. The Company’s revenues have stabilised and grown over recent reporting periods and are expected to grow over the next six to 12 months based on contracts already secured. Whilst uncertainty within the mining services sector remains, the Company has delivered improved profitability in recent reporting periods and has a strong cash position. Consequently, the Directors have elected to declare a fully franked final dividend of 3.5 cents per share, comprising a 1.5 cents per share final dividend and a 2.0 cents per share special dividend for the full year ended 30 June 2018. DEBT, GEARING AND OTHER FINANCING ARRANGEMENTS At 30 June 2018, the Group had total borrowings of $404.6 million (including prepaid borrowing costs and insurance premium funding). Cash and cash equivalents totalled $137.3 million, resulting in net debt of $267.3 million. The Company’s gearing ratio reduced to 25.7%. In August 2017, the Group refinanced and up-sized its revolving debt facility from $125 million to $200 million, of which $199.4 million was undrawn at 30 June 2018. The facility is a 3-year dual currency facility maturing in July 2020. In November 2012, the Group issued unsecured notes to the value of US$300 million. These notes have a seven-year term and have a fixed interest rate of 6.875% paid semi-annually. The following table shows net debt and gearing ratios. 18 17 The Group’s residual debt comprises its US$ bonds which mature in November 2019. $ MILLION WORKING CAPITAL The Group’s working capital comprises current trade and other receivables, inventories and current trade and other payables. The following table shows the principal elements of working capital for the periods indicated. $ MILLION 18 17 Current trade and other receivables Inventories Current trade and other payables Net working capital Increase/(decrease) in net working capital 230.5 212.6 (122.8) 320.3 167.7 188.8 (100.4) 256.1 64.2 (22.2) The Group’s year end working capital balance has increased materially due to the major uplift in Group revenues driven by growth in Africa and delayed debtor payments of $45.9 million which were received early in FY19. New project start-ups required significant investments in both working capital and equipment. US$300 million unsecured notes 405.0 390.5 Insurance premium funding and prepaid borrowing costs Total borrowings Cash and cash equivalents Net debt Total equity Total capital Gearing ratio (0.4) 404.6 (137.3) 267.3 774.8 1,042.0 25.7% (1.9) 388.6 (166.7) 221.9 630.1 852.0 26.0% Note: Columns may not add due to rounding The US$ denominated borrowings of the Group include the US$300 million unsecured notes. These borrowings are translated at the year-end exchange rate of A$1.00: US$0.7407 and, as a result of the weakening A$ over the year, an amount of $14.5 million has been included in the foreign currency translation reserve in relation to borrowings. This loss is offset by the translation differences arising from the translation of foreign currency denominated assets in Africa. The Group’s senior debt facilities contain certain financial covenants that have been complied with during the year, with significant headroom. Ausdrill’s debt structure provides the necessary liquidity for its operations, including the cash advance facility of $200 million expiring 2020. AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW18 BALANCE SHEET Cash and cash equivalents decreased by $29.5 million, primarily due to the significant investment made in growth capital expenditure for new projects in Africa, which were cash funded. Proceeds from the sale of Diamond Communications totalling $4.6 million were received during the reporting period. Trade and other receivables increased by $62.7 million or 37.4% to $230.5 million due to the three new projects started in Africa as well as delayed payments of $45.9 million received in early FY19. Inventories increased by $23.8 million or 12.6% to $212.6 million mainly driven by new work in Africa and higher AUD values of stock due to a weakening Australian dollar. The net value of Property, Plant and Equipment increased by $103.9 million due to the investment in capital expenditure for growth projects in Africa, revaluation gain and favourable exchange gains. Capital expenditure totalled $173.3 million and included expenditure in Africa of $129.2 million. The revaluation gain totalled $5.7 million and the exchange gain totalled $13.1 million. This was offset by depreciation charges totalling $74.8 million, disposals of $6.4 million and other movements totalling $7.1 million. Trade and other payables increased from $100.4 million to $122.8 million, as projects in Africa ramped up. The net debt of the Group (debt including prepaid borrowing costs and insurance premium funding less cash) increased from $221.9 million at 30 June 2017 to $267.3 million at 30 June 2018, due to the reduction in cash reserves. Capital expenditure was funded out of operating cash flow and equity raise proceeds. The gearing ratio reduced to 25.7%. Total drawn borrowings (excluding prepaid borrowing costs and insurance premium funding) of $405.0 million, increased by $14.5 million, mainly due to unfavourable exchange rate movements. Employee obligations of $39.5 million decreased by $2.2 million driven mainly by the cessation of the Siguri contract during FY18. Shareholder equity increased to $774.8 million from $630.1 million. During FY18 the Group received net proceeds of $97.6 million from a capital raising, achieved a profit of $61.1 million and paid a final dividend for FY17 of $7.2 million and an interim dividend for FY18 of 3.5 cents per share totalling $12.7 million. The return on average capital employed increased to 10.7% for the year to 30 June 2018 compared to 8.6% in the previous year and reflects the increased profitability of the continuing operations. (This is calculated as follows: EBIT divided by the sum of average receivables, inventory, plant and equipment and investment in associates, less payables). The balance sheet of the Group remains strong with gearing levels (net debt to total capital) of 25.7%, cash reserves of $137.3 million and interest cover (EBITDA/Net Cash Interest) of 6.2 times and with all debt covenants containing significant headroom. The net assets of the Group increased by $144.6 million to $774.8 million during the year, resulting in the net tangible asset position increasing from $2.02 per share to $2.14 per share. The Group maintains financial flexibility for growth through its cash reserves, its committed lines of funding and strong access to capital markets. Health, Safety, Environment, Quality and Training Ausdrill’s commitment to the safety and wellbeing of its employees, contractors and visitors is a core value of the business. The Group continues to improve its health and safety performance, with the focus on the engagement of its people as they plan and carry out their work with safety in mind. Pleasingly, the Company’s safety record continued to improve during FY18 through continued engagement and commitment, resulting in a 25% reduction in the number of recordable injuries and a 41% reduction in the Total Recordable Injury Frequency Rate (TRIFR) to record low levels. The roll-out of in-house safety awareness-raising videos has been completed. These videos have resulted in further engagement of Ausdrill’s employees in consideration of safety matters, as the videos which are based on employee case studies illustrate how work related, non-work related and health related injuries and illness can affect a range of people (incuding families), not just those directly involved. The videos have received very positive feedback from all work teams, members of the management teams and clients. Several of Ausdrill’s clients asked to show the videos to their management teams. Statistics TRIFR: TOTAL RECORDABLE INJURY FREQUENCY RATE 20 15 10 5 0 DEC 13 JUN 14 DEC 14 JUN 15 DEC 15 JUN 16 DEC 16 JUN 17 DEC 17 JUN 18 AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEWPeople EMPLOYEES 19 6,000 5,000 4,000 3,000 2,000 1,000 0 its jointly owned entities across Australia and Ausdrill and Africa employ 5,278 employees, up from 4,582 as at June 2017. This represents an increase of 15%, driven mainly by new projects in Mali, Burkina Faso and Senegal that saw the African employee numbers increasing to 4,206, from 3,503 at June 2017. Australian numbers remained virtually unchanged. This reporting period provided challenging circumstances, including the impacts of the Super Pit wall failure at Kalgoorlie, the Wodgina project in the Pilbara and a security incident in Mali, all requiring agile resource management. Ausdrill is experiencing a tightening of the labour market generally and specific challenges in securing talent in various occupational segments reflecting an increasing labour cost pressure. The coming year will see Ausdrill’s Employee Experience and People Strategy evolve to meet these challenges following a review of recruitment processes and remuneration and reward strategy. Capturing and retaining talent along with the valuable aspects of Ausdrill’s employment brand will continue to be a core priority balanced against a renewed focus on agility, safety, robust performance and reward. Africa remains a great opportunity for development of Ausdrill’s business, its people and the communities in which it operates. Australia is also poised for progress and greater utilisation of technological advances within the mining sector by Ausdrill’s people in all divisions. With a renewed focus on reward aligned to safety, robust performance and retention of key talent, Ausdrill acknowledges that its people are the key to the successful execution of its business strategy. Communities Ausdrill continues its culture of supporting communities through its various giving initiatives and contributions, actual and in kind. In Africa, Ausdrill supports and sponsors schools, orphanages and sporting clubs. Pleasingly, the Company’s safety record continued to improve during FY18 through continued engagement and commitment, resulting in a 25% reduction in the number of recordable injuries and a 41% reduction in the Total Recordable Injury Frequency Rate JUN 13 JUN 14 JUN 15 JUN 16 JUN 17 JUN 18 AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW20 Group business strategies and prospects for future years Strategies Ausdrill’s longer term strategy is to further strengthen its market position in the mining services industry in Australia and Africa by: Focusing on its core services — Ausdrill will continue to transform its businesses so that it can concentrate its efforts on profitable revenue streams delivering core services in markets where it has a competitive advantage. Ausdrill’s focus on innovation, automation and adherence to stringent standards will help deliver increased client productivity and cost efficiency, assisting the Group to become the mining services provider of choice for clients. Effective marketing of Ausdrill’s client-focused service offering — Ausdrill continues to refine the marketing of its production-related service offering to increase the relevance and value of the services the Group brings to clients and further embed Ausdrill within client operations. The Group believes that its broad service offering will contribute to a resilient business, characterised by strong, defensible market positions in higher margin specialist services. Maintaining and improving strong safety standards across Ausdrill’s operations — To ensure the success of the business and welfare of employees, Ausdrill regards safety as priority number one. Major mining clients generally require service providers to qualify to their safety standards before service providers are eligible to tender for projects. These requirements act as a ‘licence to operate’ when tendering for major projects. The Group has a long-standing dedication to implementing and adhering to clients’ safety standards, which is recognised by key clients. Ausdrill will continue to seek ways to maintain and improve the safety of its service delivery. All staff members are required to undergo compulsory training so that they can develop the skills and attitude to ensure workplace health and safety. The Group will continue to work in partnership with employees and sub-contractors to improve safety standards. Supporting existing clients’ growth ambitions into new geographies where the opportunity meets Ausdrill’s internal requirements — Ausdrill plans to strengthen ties with existing mining company clients by following them into new geographies where such opportunities meet internal requirements regarding financial, safety and reputational considerations. Considerations will include the geological features of the site, the geopolitical stability of the area where the mine will be located as well as infrastructure and environmental concerns. The Group will seek long-term contracts at mines with production phases that are anticipated to be long- lived and which will increase earnings visibility and reduce costs by delaying the need for redeployment of capital and personnel. Clients will continue to be mining companies that have a robust business and outlook. The Group has a successful track record by utilising this strategy in Africa and believes that this strategy is an effective way to strengthen client relationships and provide growth opportunities. Pursue a conservative financial policy — Ausdrill intends to maintain a prudent and sustainable capital structure that allows financial and operational flexibility across a range of economic environments and cycles. The Group believes that prudent risk management policies are represented by the enhanced gearing and interest cover ratios. The Group will leverage long-standing relationships with clients to ensure that working capital and capital expenditure is deployed in a way that maximises return on capital while maintaining prudent reserves as necessary. Prospects Ausdrill’s prospects of achieving the stated strategic objectives are subject to the uncertainties that exist in the broader mining industry in Australia and globally, many of which are beyond Ausdrill’s reasonable control. Risks The following section describes certain factors and trends that have the potential to have a material adverse impact on the financial condition and results of operations. Results of operations are impacted by both global and local factors. These factors may arise individually, simultaneously or in combination. The factors identified below are not necessarily listed in order of importance and are not intended as an exhaustive list of all the risks and uncertainties associated with Ausdrill’s business. Additional risks and uncertainties not presently known to management, or that management currently considers to be immaterial or manageable, may adversely affect Ausdrill’s business. LEVEL OF NEW MINING SERVICES CONTRACTS AND CONTRACT RENEWALS Mining services provided under contracts represent a large portion of revenues for services provided for contract mining, drill and blast, grade control, equipment hire, water well drilling and exploration services. Under most of the Group’s mining services contracts the mine operator contracts Ausdrill to undertake work in accordance with a work schedule. The Group’s mining services contracts, other than equipment hire contracts and exploration, are typically for terms between three and five years. Some contracts, typically exploration contracts, have a shorter term, generally of one year, while equipment rental contracts have varying terms from three months to two years. Generally, in the mining industry, most contracts can be terminated for convenience by the client at short notice and without penalty with the client paying for all work completed to date, unused material and, in most cases, demobilisation from the sites and redundancies. As a result, there can be no assurance that work in hand will be realised as revenue in any future period. The Group is selective in the contracts that it enters into to allow for options to extend where possible to maximise the contract period and the return on capital. Consequently, results from operations are affected by the number of new contracts the Group commences during a period, the number of existing contracts that are renewed during a period and the number of contracts that expire without renewal or extension or which are otherwise terminated during a period. AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW21 Contracts are at risk of termination or non-renewal due to the client having no further need for the service, such as when the mine has reached the end of its planned life, or the operator ceases production because changes in the underlying commodity price or mining costs have rendered continued production from the mine uneconomic. Consequently, the Group has limited exposure to the exploration activities market which has been volatile as the level of activity is generally linked to market sentiment surrounding the outlook for commodity prices and also the ability of smaller junior mining companies to fund such activities from capital which is often raised in the equity markets. Contracts are also at risk of termination or non-renewal as a result of competition if the client seeks to use an alternative mining services provider to provide the service or if the client decides to bring the contracted services in-house. The Group has historically had a strong record of securing contract extensions. PRODUCTION LEVELS AT CLIENTS’ MINES Mining services provided in relation to the production phase (including development and rehabilitation work) of a mine represent a large part of sales revenue. Revenues are associated with, and influenced, by long-term decisions of mine owners to continue producing at their current levels. The Group derives most revenues from mines which are already in production and the majority of other services, such as logistics and assaying, complement production- related services. Under most of the Group’s mining services contracts, a portion of the revenue is earned through a variable component, primarily based on a unit of production agreed in the contract. Consequently, mining services revenues are linked to the volume of materials moved or drilled and not to the short-term price of the underlying commodity or short-term fluctuations in the profitability of the underlying mines. Mines in the production phase of their life cycle typically generate stable revenues because production volumes are relatively stable, even during commodity downturns. A downturn in expenditure in the mining sector typically impacts existing production projects last, with areas such as exploration and infrastructure construction services typically cut first. The price of gold in U.S. dollar terms has fallen since the peak in 2012 which has put production at risk at higher-cost mines. In Australian dollar terms, the gold price is high relative to long-term averages. As the amount of gold produced globally in any single year constitutes a very small portion of the total potential supply of gold, variations in current production do not necessarily have a significant impact on the global supply of gold or on its price. In the year ended 30 June 2018, approximately 82% of mining services revenues were generated from the provision of mining services to gold mining companies and approximately 6% to iron ore mining companies, in each case, for work on producing mines. Consequently, the Group’s activity levels and results of operations are dependent on production levels at clients’ mines and mining remaining economic to continue production at current gold, iron ore lithium, and coal mines. Growth is dependent on mine operators seeking to expand production at existing mines or bringing new mines into production. The Group’s clients in the gold and iron ore sector are predominantly large lower-cost producers. In the gold sector, clients include AngloGold Ashanti, Newmont, Gold Fields, Resolute, Perseus, Toro Gold, Roxgold and SEMAFO. In the iron ore sector, the Group’s largest client is BHP Billiton. Iron ore produced from is amongst the most cost-competitive BHP Billiton’s mines seaborne iron ore fines in the world on a delivered to China basis. In the coal sector, the Group’s largest client is Peabody Australia. In the lithium sector, the Group’s largest client is Mineral Resources. Ausdrill will continue to transform its businesses so that it can concentrate its efforts on profitable revenue streams delivering core services in markets where it has a competitive advantage AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW22 SCALE OF OPERATIONS AND MIX OF ACTIVITIES The scale of operations and the mix of activities that the Group undertakes during a period also impacts results of operations, due to the differing margins on business segments. The activity mix depends in part on client demand for the Group’s existing services as well as the ability to offer new services that the Group develops or acquires. CURRENCY FLUCTUATIONS The Group denominates its consolidated financial statements in Australian dollars. Broadly speaking, the Australian operations are Australian dollar denominated and the African operations are U.S. dollar and Euro denominated. The Group is exposed to fluctuations in the value of the Australian dollar versus other currencies, because the Group’s consolidated financial results are reported in Australian dollars. If the Group generates sales or earnings or has assets and liabilities in other currencies, the translation into Australian dollars for financial reporting purposes can result in a significant increase or decrease in the amount of those sales or earnings and net assets. The Group does not generally hedge translated foreign currency exchange rate exposure. Fluctuations in foreign currency exchange rates may also make period to period comparisons of results of operations difficult. As the operations in Africa grow, foreign exchange translation risk will change. The African operations often bid on contracts in U.S. dollars, but a portion may be paid in local currency and is therefore exposed to transaction risk. If the U.S. dollar strengthens against the local currency during the term of the contract, the revenue the Group earns may be affected where rise and fall mechanisms in the contracts are not perfectly correlated. Where the Group earns revenue in a local currency it is exposed to exchange rate risk from time of invoice to the time of converting the local currency back to U.S. dollars. In addition, the Group purchases capital equipment in various currencies. The Group does not generally hedge its normal operating foreign exchange exposures. However, the Group does sometimes hedge trade receivables that are generated where products are exported from Australia and those receivables are denominated in a currency that is foreign to functional currency. The Group may also hedge large capital expenditure items acquired in a foreign currency. In respect of other monetary assets and liabilities held in currencies other than Australian dollars, the Group ensures that the net exposure is kept to an acceptable level by matching foreign denominated financial assets with financial liabilities and vice versa. The Group does not engage in any speculative trading activities. LABOUR COSTS AND AVAILABILITY Labour represents a significant portion of operating expenses. In order to compete for work and to service clients, the Group needs to be able to continue to attract and retain skilled employees. Consequently, the Group is exposed to increased labour costs in markets where the demand for labour is strong. Within more stable labour markets, the Group’s labour costs are typically protected by rise and fall mechanisms within client contracts, which neutralise the impact of rising labour costs. In Australia, wage labour costs are typically governed by agreed enterprise agreements, which set out agreed wage increases within defined periods of time. Changes to labour laws and regulations (including, for example, the introduction of maximum hours of service rules such as the proposed Ghanaian Minerals Commission employment regulations (8 hour rule)) may limit productivity and increase costs of labour. If implemented and enforced, these types of changes to labour laws and regulations could adversely impact revenues and, if costs increase or productivity declines, operating margins. INCREASED RISK OF DOING BUSINESS IN AFRICA Ausdrill’s African operations are subject to business risks, including health risks such as the Ebola outbreak (2014), political instability, nationalisation and localisation policies, war or civil disturbance, terrorism, abduction, expropriation, import and export restrictions, exchange controls, inflationary economies, currency risks, legal and taxation risks, risks related to the restrictions on repatriation of earnings or proceeds from liquidated assets of foreign subsidiaries, workforce instability, harsh environmental conditions and remote locations. New mining projects by Ausdrill’s clients are increasingly occurring in countries where these risks are significant, which means an increasing portion of Ausdrill’s business may be subject to these risks. REGULATORY COMPLIANCE AND CHANGE OF LAWS The Group must meet regulatory requirements which are subject to continual review, including inspection by regulatory authorities. Failure to continuously comply with regulatory requirements, or failure to take satisfactory corrective action in response to adverse inspection, could result in enforcement actions and have adverse financial consequences. The Group is also subject to changes to laws and regulations in all jurisdictions in which it operates, which changes can have a significant effect on operations and compliance costs. UNINSURED RISKS Ausdrill’s operations are subject to many hazards inherent in the mining services industry, including blowouts, cratering, explosions, fires, loss of hole, damages or lost equipment and damage or loss from inclement weather or natural disasters. Any of these hazards could result in personal injury or death, damage to or destruction of equipment and facilities, suspension of operations, environmental damage and damage to the property of others. Additionally, warranty and indemnity provisions in Ausdrill’s mining services contracts could leave Ausdrill exposed to the risk and liability associated with the services performed under such contracts. Ausdrill seeks protection for certain of these risks through insurance. However, it cannot ensure that such insurance or any indemnification it may receive from third parties will adequately protect the Company against liability from all of the consequences of the hazards described above. The occurrence of an event not fully insured or indemnified against, or the failure of a third party or an insurer to meet its indemnification or insurance obligations, could result in substantial losses. In addition, insurance may not be available to cover any or all of these risks, or, even if available, may not be adequate. Insurance premiums or other costs may rise significantly in the future, so as to make such insurance prohibitively expensive or uneconomic. In future insurance renewals, the Company may choose to increase its self-insurance retentions (and thus assume a greater degree of risk) in order to reduce costs associated with increased insurance premiums. Ausdrill’s operations may be subject to delays in obtaining equipment and supplies and the availability of transportation for the purpose of mobilising rigs and other equipment, particularly where rigs or mines are located in remote areas with limited infrastructure support. In addition, the Company’s operations are subject to adverse weather conditions, natural disasters and mine accidents or unscheduled stoppages or closings. If Ausdrill’s operations are interrupted or suspended for a prolonged period as a result of any such events, its revenues could be adversely affected. AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW23 Gold price chart (US$/A$) 1,900 1,700 1,500 1,300 1,100 900 700 500 JUN 07 JUN 08 JUN 09 JUN 10 JUN 11 JUN 12 JUN 13 JUN 14 JUN 15 JUN 16 JUN 17 JUN 18 GOLD (US$) GOLD (A$) Outlook4 The Group continues to focus its strategy on the delivery of core mining services in markets where it has a competitive advantage. Its strategy is client-focused and harnesses innovation and technology to deliver relevant and low-cost mining solutions to its clients. The mining industry continues to experience strong competition in an environment which is showing stable levels of activity in production drilling and exploration in Australia, increasing demand for equipment hire, parts sales and service exchange and continued growth in both production and exploration activity in Africa. In response to these market conditions, Ausdrill will: • maintain its strong focus on safety • • invest in higher barrier to entry businesses that deliver sustainable profits to shareholders continue to deliver efficiency gains to counter market - driven margin pressures • rationalise its businesses to focus on profitable revenue streams • maintain a stable financial foundation from which to grow the Company in the future • • continue to review working capital, to ensure that it is commensurate with current levels of activity restrict capital expenditure to replacement needs or identified growth opportunities • pursue M&A opportunities which are complementary to its existing business model or to industry rationalisation Ausdrill is of the view that competitive market conditions will persist, and margin pressure will continue in material parts of its business. The gold price (in Australian dollars) currently favours the Australian production-related mining industry and provides a platform for a stable level of activity in the near term. Expenditure in gold exploration is growing in response to sustained periods of strong Australian Dollar gold prices. Growth of the African businesses is expected to continue on the back of strong levels of tendering activity. The outlook for the resources industry is expected to improve over the medium term in both Australia and Africa where Ausdrill has a long-established presence and local know-how. Consequently, Ausdrill is in a strong position to grow in its key markets in the years ahead. Notes: 1. Underlying excludes one off claim settlement , foreign exchange gains and transactions costs 2. Non-IFRS Financial Information “EBITDA” is “Earnings before interest, tax, depreciation and amortisation, and significant items”; “EBIT” is “Earnings before interest and tax and significant items”; and “Operating profit” is profit /(loss) before significant items. 3. Statutory profit / (loss) is profit / (loss) after tax. 4. Disclaimer: These materials include forward looking statements concerning projected earnings, revenue, growth, outlook or other matters for the financial year ending 30 June 2018 or beyond. Forward- looking statements can generally be identified by the use of forward-looking words such as “may”, “will”, “expect”, “intend”, “plan”, “estimate”, “anticipate”, “believe”, “continue”, “objectives”, “outlook”, “guidance” or other similar words and include statements regarding certain plans, strategies and objectives of management, trends and outlook. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause Ausdrill’s actual results, performance and achievements or industry results to differ materially from any future results, performance or achievements, or industry results, expressed or implied by these forward-looking statements. Forward-looking statements are based upon management’s good faith assumptions relating to the financial, market, regulatory and other relevant environments that will exist and affect Ausdrill’s business and operations in the future. Ausdrill cannot give any assurance that the assumptions upon which management based its forward-looking statements will prove to be correct, or that Ausdrill’s business and operations will not be affected in any substantial manner by other factors not currently foreseeable by management or beyond its control. Any forward-looking statements contained in these materials speak only as of the date of these materials. Subject to any continuing obligations under applicable law or any relevant stock exchange listing rules, Ausdrill disclaims any obligation or undertaking to publicly update or revise any forward-looking statement contained in these materials or to reflect any change in management’s expectations with regard thereto after the date hereof of any change in events, conditions or circumstances on which any such statement is based. No representation or warranty, express or implied, is given as to the accuracy, completeness, likelihood of achievement or reasonableness of any forecasts, projections or prospects referred to in these materials. AUSDRILL ANNUAL REPORT 2018OPERATING AND FINANCIAL REVIEW 24 AUSDR IL L A NNUA L R EP OR T 2018 OPERATING AND FINANCIAL REVIEW Corporate Directory Directors Ian Howard Cochrane Chairman Terrence John Strapp Mark Andrew Hine Robert James Cole Alexandra Clare Atkins Secretary Efstratios Vassilios Gregoriadis Chief Financial Officer and acting Chief Executive Officer Theresa Mlikota Principal registered office in Australia 6 - 12 Uppsala Place Canning Vale Western Australia 6155 Share register Computershare Investor Services Pty Ltd Level 11, 172 St George’s Terrace Perth Western Australia 6000 Auditor PwC Level 15, 125 St George’s Terrace Perth Western Australia 6000 Solicitors Johnson Winter & Slattery Level 4, 167 St Georges Terrace Perth Western Australia 6000 Stock exchange listings Ausdrill Limited shares are listed on the Australian Stock Exchange. ASX CODE: ASL Ausdrill Limited’s USD notes are listed on the Singapore Exchange (SGX). Website www.ausdrill.com.au FINANCIAL REPORT 30 JUNE 2018 FOCUSED 26 44 45 46 47 Directors’ report Auditor’s independence declaration Corporate governance statement Consolidated statement of profit or loss Consolidated statement of comprehensive income 48 Consolidated statement of financial position 49 Consolidated statement of changes in equity 50 Consolidated statement of cash flows 51 Notes to the consolidated financial statements 120 Directors' declaration 121 130 Shareholder information 132 Financials table Independent auditor's report to the members These financial statements are consolidated financial statements for the Group consisting of Ausdrill Limited and its subsidiaries. A list of major subsidiaries is included in note 14. The financial statements are presented in the Australian currency. Ausdrill Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Ausdrill Limited ABN 95 009 211 474 6 - 12 Uppsala Place Canning Vale Western Australia 6155 The financial statements were authorised for issue by the directors on 15 August 2018. The directors have the power to amend and reissue the financial statements. All press releases, financial reports and other information are available on our website: www.ausdrill.com.au •• 26 Your directors present their report on the consolidated entity (the "Group") consisting of Ausdrill Limited (the "Company") and the entities it controlled at the end of, or during, the year ended 30 June 2018. Directors and Company Secretary The following persons were directors of the Company during the financial year and up to the date of this report (unless indicated otherwise): Ian Howard Cochrane (Chairman) Terrence John Strapp Mark Andrew Hine Robert James Cole (appointed 14 July 2018) Alexandra Clare Atkins (appointed 14 July 2018) Donald James Argent (ceased on 13 July 2018) Ronald George Sayers (Managing Director) (ceased on 3 July 2018) Mark Anthony Connelly (ceased on 28 June 2018) Terence Edward O'Connor AM QC (ceased on 5 December 2017) After 24 years as a director of the Company, Terry O'Connor retired from the board on 5 December 2017, aged 80. After more than 30 years' service with the Company, on 6 February 2018, Mr Ron Sayers announced his intention to retire within 12 months and subsequently ceased as Managing Director on 3 July 2018, aged 66. Mr Donald Argent resigned from his position as non-executive director of the Company on 13 July 2018, aged 71. Mr Mark Connelly resigned from his position as a non-executive director of the Company on 28 June 2018 given increasing commitments in his current portfolio of companies and other ventures, aged 55. The Company Secretary is Efstratios Gregoriadis. Mr Gregoriadis B.A., L.L.B., M.B.A joined the Company in February 2011 in the position of Group General Counsel / Company Secretary. Prior to joining the Company Mr Gregoriadis held the role of Group General Counsel / Company Secretary at Macmahon Holdings Limited, and has held various other positions as a lawyer in private legal practice. Dividends - Ausdrill Limited Dividends paid to members during the financial year were as follows: Final ordinary fully franked dividend for the year ended 30 June 2017 of 2.0 cents (2016: nil) per fully paid share paid on 18 October 2017 Interim ordinary fully franked dividend for the year ended 30 June 2018 of 3.5 cents (2017: 2.0 cents) per fully paid share paid on 30 March 2018 (31 March 2017) 18 $’000 17 $’000 7,188 - 12,667 19,855 6,246 6,246 On 15 August 2018, the directors elected to declare a final ordinary dividend of 3.5 cents per share for the year ended 30 June 2018 (2017: 2.0 cents). Review of operations Information on the operations and financial position of the Group and its business strategies and prospects is set out in the operating and financial review on pages 5 to 23 of this annual report. Significant changes in the state of affairs The Group entered into a sale agreement to sell the Diamond Communications business for $6.2 million which was completed on 1 May 2018. The Diamond Communications business is reported as a discontinued operation in note 13 of this annual financial report. The Group completed a $100 million equity raising during the year which was strongly supported by existing and new institutional investors globally, providing significant balance sheet strength and flexibility, as disclosed in note 8(a) of the annual financial report. There were no other significant changes in the state of affairs of the consolidated entity during the financial year ended 30 June 2018. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report 27 Events since the end of the financial year On 15 August 2018, the directors declared the payment of a final ordinary dividend of $12,676,912 (1.5 cents per fully paid share dividend in line with a 40% payout ratio on underlying profit and a special dividend of 2.0 cents per fully paid share to align with a payout ratio 40% of reported profit, for a total dividend per fully paid share of 3.5 cents) to be paid on 18 October 2018 out of retained profits at 30 June 2018. The financial effect of this transaction has not been brought to account at 30 June 2018. On 15 August 2018, Ausdrill Limited (Ausdrill) entered into a binding agreement to acquire Barminco Holdings Pty Ltd (“Barminco”), a specialist underground mining contractor with operations predominately in Australia as well as in Africa (through African Underground Mining Services (AUMS)), Egypt and India. Barminco is one of Australia’s leading underground hard-rock mining contractors and is the Group’s long standing joint-venture partner in AUMS. Ausdrill will acquire all of the equity and equity-like instruments in Barminco in exchange for 150.7 million fully paid ordinary ex-dividend Ausdrill shares and $25.4 million in cash. This is equivalent to an equity acquisition price of $271.5 million and an enterprise value of $697.0 million. In order to reduce pro-forma gearing, the Group will undertake a fully underwritten accelerated non-renounceable entitlement offer to raise approximately $250 million. There are no other matters or circumstances that have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Group, the results of those operations, or the state of affairs of the consolidated entity in subsequent financial years. Likely developments and expected results of operations Additional comments on expected results of certain operations of the Group are included in this annual report in the operating and financial review on pages 5 to 23. Environmental regulation The Group is not subject to any significant environmental regulations but is committed to reducing the impact of its operations on the environment. Our clients have obligations under environmental regulations. The Group complies with its contractual obligations in this regard. Information on directors The following information is current as at the date of this report. Mr Ian Howard Cochrane BCom, LLB. Non-executive Chairman. Age 64. Experience and expertise Mr Ian Howard Cochrane was appointed as a non-executive director and Deputy Chairman on 23 November 2015. Subsequently, on 5 December 2017, Mr Cochrane was appointed as Chairman of the Board. Mr Cochrane holds degrees in Commerce and Law. Mr Cochrane was educated in South Africa and immigrated to Australia in 1986. Mr Cochrane practised law, specialising in Mergers and Acquisitions, in national law firms Corrs Chambers Westgarth and Mallesons Stephen Jaques until 2006 when he established (with Mr Michael Lishman) the boutique law firm, Cochrane Lishman, which was eventually acquired by the global law firm Clifford Chance in early 2011. Mr Cochrane has had a long association with Ausdrill having provided the legal services when Ausdrill first floated in 1994. Ian was regularly voted by his peers as being one of the leading M&A lawyers in Australia and retired from the practise of law in December 2013. Ian has not provided legal services to Ausdrill or any other entities since then. Other current directorships Non-executive director of Dacian Gold Limited from 2016. Former directorships in last 3 years None. Special responsibilities Chairman of the Board - effective 5 December 2017. Deputy Chairman of the Board - until 5 December 2017. Member of the Audit & Risk Committee - effective 5 December 2017. Member of the Remuneration Committee - effective 5 December 2017. Interests in shares and options 701,695 ordinary shares. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report28 Information on directors (continued) Terrence John Strapp CPA, SF Fin., MAICD. Non-executive director. Age 74. Experience and expertise Mr Terry Strapp was appointed as a non-executive director on 21 July 2005. Mr Strapp has extensive experience in banking, finance and corporate risk management and has been actively involved in the mining industry for over 30 years. Mr Strapp is a Certified Practising Accountant (CPA), a Senior Fellow of the Financial Services Institute of Australasia and a member of the Australian Institute of Company Directors. Other current directorships Non-executive director of GR Engineering Limited from 2011. Former directorships in last 3 years None. Special responsibilities Chairman of the Audit and Risk Committee. Interests in shares and options 400,000 ordinary shares. Mr Mark Andrew Hine MAICD, MAusIMM. Non-executive director. Age 60. Experience and expertise Mr Mark Hine was appointed as a non-executive director on 24 February 2015. Mr Hine is a Mining Engineer. Mr Hine graduated from the Western Australia School of Mines and is a member of the Australian Institute of Company Directors and the Australian Institute of Mining and Metallurgy. Mr Hine has extensive mining experience with over 25 years in senior management roles in both surface and underground mining operations. Mr Hine has held a number of senior positions in the mining industry including Chief Operating Officer at Griffin Mining Ltd, Chief Operating Officer at Focus Minerals Ltd, Chief Operating Officer at Golden West Resources Ltd, Executive General Manager Mining at Macmahon Contractors Pty Ltd, Chief Executive Officer at Queensland Industrial Minerals Ltd, General Manager at Consolidated Rutile Ltd and General Manager Pasminco, Broken Hill / Elura Mines. Other current directorships None. Former directorships in last 3 years None. Special responsibilities Chairman of the Remuneration Committee - effective 5 December 2017. Member of the Remuneration Committee. Interests in shares and options 75,000 ordinary shares. Mr Robert James Cole, BSc, LLB (Hons) Non-executive director. Age 56. Experience and expertise Mr Robert Cole was appointed as a non-executive director on 14 July 2018. Mr Cole has over 30 years’ experience in the energy and resources industry. Mr Cole is a former executive director on the board of Woodside Petroleum Limited and former managing director of Beach Energy Limited. Mr Cole is also a former Chairman of the Australian Petroleum Production and Exploration Association. Prior to joining the oil and gas industry, Mr Cole was a partner in the law firm now known as King & Wood Mallesons. Mr Cole is currently Chairman of Synergy, Chairman of Southern Ports Authority and Chairman of GLX Holdings Ltd. Mr Cole holds Bachelor of Science and Bachelor of Laws degrees from the Australian National University in Canberra and is also a graduate of the Harvard Business School Advanced Management Program. Other current directorships Non-executive director of Iluka Resources Ltd since March 2018. Former directorships in last 3 years Director of Beach Energy Ltd from March 2015 to February 2016. Special responsibilities None. Interests in shares and options None. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report29 Information on directors (continued) Ms Alexandra Clare Atkins, BE (Mineral Exploration & Mining Geology), Hon BE(Mining) MBA (Finance) FAusIMM (CP) GAICD Non-executive director. Age 50. Experience and expertise Ms Alexandra Atkins was appointed as a non-executive director on 14 July 2018. Ms Atkins is a mining engineer, geologist and geotechnical engineer with 28 years’ experience in the mining industry, and is a director of The Australasian Institute of Mining & Metallurgy (The AusIMM). Ms Atkins has an MBA (Finance) from the Australian Institute of Business, is a Chartered Professional Fellow of The AusIMM, and a graduate of the AICD and she holds Bachelor of Engineering Degrees from the University of Queensland and WA School of Mines. Ms Atkins has held various roles in the mining industry including as a Mining Engineer for Mt Isa Mines Ltd, Underground Miner for Plutonic Resources, Underground Miner, Mine Engineer/Deputy Mine Manager and Geotechnical Engineer for Placer Dome, Construction Project Engineer for Cairns Regional Council and Senior Mining Engineer for AMC Consultants. Ms Atkins has also worked as a District Inspector of Mines for the WA Department of Mines & Petroleum, a Principal Mining Consultant for Optiro and was the Chief Operating Officer of PETRA Data Science Pty Ltd, an artificial intelligence and machine learning software company servicing the mining industry. Ms Atkins has five years of Not For Profit (NFP) Board experience with The AusIMM, Earth Science WA and Advocare Incorporated. Other current directorships None. Former directorships in last 3 years None. Special responsibilities None. Interests in shares and options None. Donald James Argent BCom, CPA, FAICD. Non-executive director. Age 71. Experience and expertise Mr Donald Argent was appointed as a non-executive director on 25 July 2012. Mr Argent was the Director Finance and Administration for the Thiess Group, one of the largest integrated engineering and service providers in Australia and South East Asia. Mr Argent joined Thiess Pty Ltd in 1985 following six years service with Thiess Holdings Ltd in the late 1970's, and until he retired in July 2011, played an instrumental part in the growth of Thiess from a family-run business to a leading Australian construction, mining and services company. Mr Argent holds a Bachelor of Commerce degree, is a Certified Practicing Accountant and a Fellow of the Australian Institute of Company Directors. Mr Argent resigned from his position as non-executive director of the Company on 13 July 2018. Other current directorships Non-executive director of Decmil Group Limited since 2018. Former directorships in last 3 years Non-executive director of Sedgman Limited until 2015. Special responsibilities None. Interests in shares and options 40,000 ordinary shares. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report30 Information on directors (continued) Ronald George Sayers Managing Director. Age 66. Experience and expertise Mr Ron Sayers was re-appointed as Managing Director in December 2000. Mr Sayers founded Ausdrill in 1987 and was Managing Director until May 1997. Mr Sayers was formerly the branch manager of a large mining supply group and has been involved with the mining industry for over 40 years. After more than 30 years' service with the Company, on 6 February 2018, Mr Sayers announced his intention to retire within 12 months and subsequently ceased as Managing Director on 3 July 2018. Other current directorships None. Former directorships in last 3 years None. Special responsibilities Managing Director - until 3 July 2018. Interests in shares and options 37,296,782 ordinary shares up to 26 February 2018. Nil as at 30 June 2018. Mr Mark Anthony Connelly BBus, MAICD. Non-executive director. Age 55. Experience and expertise Mr Mark Connelly was appointed as a non-executive director on 25 July 2012. Mr Connelly has more than 29 years' of experience in the mining industry, and has held senior executive positions with Newmont Mining Corporation and Inmet Mining Corporation. Mr Connelly is the former Managing Director and Chief Executive Officer of Papillon Resources Limited, a Mali-based gold developer which merged with B2Gold Corp in 2014. Mr Connelly was Chief Operating Officer of Endeavour Mining Corporation following its merger with Adamus Resources, where he was Managing Director and CEO. Mr Connelly has extensive experience in financing, development, construction and operation of mining projects in a variety of commodities including gold, base metals and other resources in West Africa, Australia, North America and Europe. Mr Connelly resigned from his position as non-executive director of the Company on 28 June 2018. Other current directorships Non-executive director and Chairman of West African Resources Limited since September 2015. Non-executive director and Chairman of Calidus Resources Limited since January 2018. Non-executive director and Chairman of Tao Commodities Limited since May 2018. Non-executive director and Chairman of Primero Group Limited since May 2018. Former directorships in last 3 years Non-executive director of B2Gold Corp from October 2014 to June 2016. Non-executive director and Chairman of Toro Gold plc from September 2013 to January 2018. Non-executive director of Tiger Resources Limited from December 2016 to July 2018. Non-executive director of Saracen Mineral Holdings Limited from May 2015 to November 2017. Non-executive director and Chairman of Cardinal Resources Limited from 2015 to October 2017. Special responsibilities Member of the Audit and Risk Committee - until 28 June 2018. Member of the Remuneration Committee - until 28 June 2018. Interests in shares and options None. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report31 Information on directors (continued) Terence Edward O’Connor AM QC LLB (WA). Non-executive Chairman. Age 80. Experience and expertise Mr Terry O’Connor is a retired Barrister. Mr O'Connor is a graduate of the University of Western Australia, and was formerly a partner in the legal firm Stone James Stephen Jaques (now King & Wood Mallesons). Mr O’Connor has been a director of a number of public companies. Mr O'Connor was formerly the Chairman of the Anti Corruption Commission, the Chancellor of the University of Notre Dame Australia and a Commissioner of the Australian Football League. Mr O’Connor held the position of Chairman from 1993 until his retirement on 5 December 2017. Other current directorships Non-executive director of EBM Insurance Brokers Ltd from 1990. Former directorships in last 3 years None. Special responsibilities Chairman of the Board - until 5 December 2017. Chairman of the Remuneration Committee - until 5 December 2017. Member of the Audit and Risk Committee - until 5 December 2017. Interests in shares and options 696,778 ordinary shares. Meetings of directors The numbers of meetings of the Company's board of directors and of each board committee held during the year ended 30 June 2018 and the numbers of meetings attended by each director were: FULL MEETINGS OF DIRECTORS AUDIT & RISK REMUNER ATION MEETINGS OF COMMITTEES Ian Howard Cochrane Terence Edward O'Connor Ronald George Sayers Terrence John Strapp Donald James Argent Mark Anthony Connelly Mark Andrew Hine A B 15 6 13 14 15 11 14 15 6 15 15 15 15 15 A 2 2 * 4 * 4 * B 2 2 * 4 * 4 * A 2 1 * * * 2 3 B 2 1 * * * 3 3 A = Number of meetings attended B = Number of meetings held during the time the director held office or was a member of the committee during the year * = Not a member of the relevant committee Remuneration report The directors present the Ausdrill Limited 2018 remuneration report, outlining key aspects of our remuneration policy and framework, and remuneration awarded this year. The report is structured as follows: (a) Key management personnel (KMP) covered in this report (b) Remuneration policy and governance (c) Elements of remuneration (d) Link between remuneration and performance (e) Remuneration expenses for executive KMP (f) Contractual arrangements with executive KMP (g) Non-executive director arrangements (h) Additional statutory information AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report32 Remuneration report (continued) (a) Key management personnel covered in this report Non-executive and executive directors (see pages 26 to 31 for details about each director) I H Cochrane T J Strapp M A Hine R G Sayers Other key management personnel NAME A G Broad J Kavanagh T Mlikota R J Coates D James T E O'Connor D J Argent M A Connelly POSITION Chief Operating Officer - Australian Operations Chief Operating Officer - African Operations Chief Financial Officer and Acting Chief Executive Officer Executive General Manager - Australian Mining Operations Executive General Manager - Equipment Services and Supplies (b) Remuneration policy and governance Our Remuneration Committee is made up of independent non-executive directors. The Committee reviews and determines our remuneration policy and structure annually to ensure it remains aligned to business needs and meets our remuneration principles. From time to time, the Committee also engages external remuneration consultants to assist with this review. In particular, the Committee aims to ensure that remuneration practices are: competitive and reasonable, enabling the Company to attract and retain key talent; aligned to the Company’s strategic and business objectives and the creation of shareholder value; transparent and easily understood; and acceptable to shareholders. The Remuneration Committee is a committee of the Board. It is primarily responsible for making recommendations to the Board on: non-executive director fees; remuneration levels of executive directors and other key management personnel; the over-arching executive remuneration framework; and operation of the incentive plans which apply to executive directors and senior executives (the executive team), including key performance indicators and performance hurdles. The remuneration framework, its elements and link to performance are covered below. (c) Elements of remuneration The executive pay and reward framework has three components: base pay and benefits, including superannuation; short-term performance incentives; and long-term incentives through participation in the Ausdrill Employee Option Plan. Base pay and benefits Executives receive their base pay and benefits structured as a total employment cost package which may be delivered as a combination of cash and prescribed non-financial benefits at the executive's discretion. Executives are offered a competitive fixed base pay. The Remuneration Committee obtain relevant comparative information and seek independent advice to ensure base pay is set to reflect the market for a comparable role. Base pay for executives is reviewed annually and on promotion to ensure that it is competitive with the market. There are no guaranteed base pay increases included in any executive's contract. Executives may elect to receive a fully maintained motor vehicle as a component of their base pay. Superannuation Retirement benefits are delivered under the Superannuation Guarantee Legislation. Short-term performance incentives Cash bonus The amount of the cash bonus paid to senior executives and management varies between $50,000 to a maximum of $100,000, inclusive of superannuation, according to the individual’s position. The cash bonus is at the discretion of the Managing Director and Remuneration Committee and is dependent on the overall financial performance of the Group. If earnings per share is accretive on a year-on-year basis, then the cash bonus becomes payable in the following financial year. $1.6 million was awarded to senior executives and management in relation to financial and safety performance achieved during the financial year ended 30 June 2018. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report 33 Remuneration report (continued) (c) Elements of remuneration (continued) Short-term performance incentives (continued) It is the Board’s view that, given the varied businesses which comprise the Group and the nature of the Group’s operations, it is most beneficial to shareholders and to the management concerned to have the Short Term Inventive (STI) linked to EPS being accretive. This promotes a high level of co-operation and cohesiveness amongst the various managers and businesses, encouraging them to maximise the use of services provided by other Group businesses, and striving for improvement within the Group. New executives are eligible to receive the cash bonus, if payable, in the financial year following the commencement of their employment with the Group. There is no cash bonus payable where an executive's employment terminates prior to the end of the financial year. Service bonus and profit share A profit share bonus, linked to performance will be available to eligible employees who do not qualify for a STI cash bonus or other short-term bonus under their employment contract. $2.1 million was awarded to employees in relation to financial and safety performance achieved during the financial year ended 30 June 2018. A service bonus which is available to eligible employees, excluding the Managing Director, is $1,000 per year of service plus superannuation. The Remuneration Committee retains the right to vary this incentive, which it has chosen to do for the year ended 30 June 2018, varying it to Nil, where it has not been specified under an enterprise agreement. Long-term incentives Long-term incentives are provided to certain employees via the Ausdrill Employee Option Plan which was approved by shareholders at the 2005 annual general meeting. Participation in the plan is at the Board's discretion and no individual has a contractual right to participate in the plan or receive any guaranteed benefits. Under the plan, participants are granted options which typically only vest if the employees are still employed by the Group at the end of the vesting period. The Board completed a review of the LTIP in 2014. The review included benchmarking of Ausdrill’s LTI policy against a “benchmark group” comprised of sector competitors. The review sought to ensure that the balance between rewarding performance and motivating and retaining existing senior executives was effective and reflected the Group’s business strategies. Accordingly, the review focused on the composition and operation of the performance conditions. The following changes were made as a result of the review: Inclusion of an additional performance hurdle, Total Shareholder Return (TSR), so that the exercise of options will be subject to the achievement of this hurdle relative to a peer group (previously the only hurdle was remaining in the employment of Ausdrill at the end of the vesting period); Inclusion of a TSR performance vesting scale (previously none); and Inclusion of TSR measures applying to each third of the options granted to each senior executive (previously none). Options will be issued in three (equal) tranches as follows: Tranche 1 (one third of the options) will become exercisable after the second anniversary of their date of issue; Tranche 2 (a further one third of the options) will become exercisable after the third anniversary of their date of issue; and Tranche 3 (the remaining one third of the options) will become exercisable after the fourth anniversary of their date of issue. Options are granted under the plan for nil consideration. Options are granted for a five year period. Vesting will occur based on the Company’s ranking within the peer group, as follows: TSR R ANK PROPORTION OF OPTIONS THAT VEST Less than 50% percentile 0% 50th percentile Between 50th and 75th percentile 50% Pro-rata (sliding scale) percentage At or above 75th percentile 100% The peer group includes the following companies: Austin Engineering Limited Emeco Holdings Limited Downer EDI Limited Imdex Limited MACA Limited Monadelphous Group Limited Boart Longyear Limited Macmahon Holdings Limited NRW Holdings Limited Brierty Limited AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report 34 Remuneration report (continued) (d) Link between remuneration and performance The table below sets out summary information about the consolidated entity’s earnings and movements in shareholder wealth for the five years to June 2018. Revenue Operating profit before income tax Profit/(loss) after tax from continued operations Profit/(loss) after tax from discontinued operations Net profit/(loss) after tax Share price at start of year ($ per share) Share price at end of year ($ per share) Basic earnings/(loss) (cents per share) from continuing operations Basic earnings/(loss) (cents per share) from discontinued operations Diluted earnings/(loss) (cents per share) from continuing operations Diluted earnings/(loss) (cents per share) from discontinued operations * Does not include impairment expense 18 $000 17 $000 16 $000 15 $000 14 $000 890,317 764,950 74,079 59,349 1,701 61,050 1.84 1.84 16.9 0.5 16.6 0.5 44,622 30,951 250 31,201 0.72 1.84 9.9 0.1 9.6 0.1 744,635 26,578* 20,512 37,638 58,150 0.39 0.72 6.6 12.1 6.4 11.8 721,660 2,064* (160,314) (15,306) (175,620) 0.86 0.39 827,860 34,430* (43,859) - (43,859) 0.86 0.86 (51.3) (13.6) (4.9) - (51.3) (13.6) (4.9) - AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report35 Remuneration report (continued) (e) Remuneration expenses for executive KMP The following table shows details of the remuneration expense recognised for the Group's executive key management personnel for the current and previous financial year measured in accordance with the requirements of the accounting standards. Amounts of remuneration Figure 1: Executive remuneration NAME YEAR Executive directors R G Sayers Other key management personnel A G Broad J Kavanagh T Mlikota R J Coates D James Total executive directors and other KMP remuneration Total non-executive directors remuneration Total KMP remuneration expense 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 FIXED REMUNERATION VARIABLE REMUNERATION CASH SAL ARY $ NON- MONETARY BENEFITS $ LONG SERVICE LEAVE $ POST- EMPLOYMENT BENEFITS $ STI AND SERVICE BONUS * $ OPTIONS $ TOTAL $ 736,299 726,299 25,000 25,000 17,382 17,382 25,000 35,000 - - - - 803,681 803,681 477,420 482,804 - - 28,697 2,878 25,000 19,616 100,000 5,292 18,513 23,806 649,630 534,396 577,169 141,046 564,637 136,648 477,420 472,421 340,242 335,243 340,242 335,242 - - - - - - - - 24,121 3,884 19,670 3,375 18,200 3,030 2,948,792 166,046 108,070 2,916,646 161,648 30,549 460,959 504,000 3,409,751 3,420,646 - - - - 166,046 161,648 108,070 30,549 - - 25,000 30,000 25,000 30,000 25,000 30,000 125,000 144,616 43,791 47,880 168,791 192,496 100,000 9,257 827,472 6,250 100,000 454 11,903 18,513 23,806 719,438 645,054 530,565 75,000 9,257 469,169 571 11,902 381,091 75,000 9,257 467,699 503 11,902 380,677 450,000 64,797 3,862,705 13,070 83,319 3,349,848 - - - - 504,750 551,880 450,000 13,070 64,797 83,319 4,367,455 3,901,728 * There will be a cash bonus payable for the year ended 30 June 2018. There was no cash bonus payable for the year ended 30 June 2017. 25% of the service bonus was accrued and paid for the year ended 30 June 2017. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report 36 Remuneration report (continued) (f) Contractual arrangements with executive KMP Remuneration and other terms of employment for key management personnel are also formalised in service agreements. Each of these agreements provide for other benefits including car allowances and participation, when eligible, in the Ausdrill Limited Employee Option Plan. All key management personnel are employed on standard letters of appointment that provide for annual reviews of base salary and between 4 and 12 weeks of termination by either party unless noted below: NAME R G Sayers Managing Director A G Broad Chief Operating Officer - Australian Operations J Kavanagh Chief Operating Officer - African Operations T Mlikota Chief Financial Officer R J Coates Executive General Manager - Australian Mining Operations D James Executive General Manager - Equipment Services & Supplies TERM OF AGREEMENT BASE SAL ARY INCLUDING SUPER ANNUATION TERMINATION BENEFIT* Retired 3 July 2018 761,299 Ongoing 477,420 Ongoing 533,333 Ongoing 477,420 Ongoing 340,242 Ongoing 340,242 Contract can be terminated by either party with 12 months' notice or payment in lieu. Contract can be terminated by the executive with 3 months' notice or by the Company with 9 months' notice or payment in lieu. Contract can be terminated by the executive with 3 months' notice or by the Company with 9 months' notice or payment in lieu. Contract can be terminated by the executive with 3 months' notice or by the Company with 9 months' notice or payment in lieu. Contract can be terminated by the executive with 3 months' notice or by the Company with 9 months' notice or payment in lieu. Contract can be terminated by the executive with 3 months' notice or by the Company with 9 months' notice or payment in lieu. * There are no additional contractual differences. (g) Non-executive director arrangements On appointment to the Board, all non-executive directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the Board policies and terms, including remuneration, relevant to the officer or director. Fees and payments to non-executive directors reflect the demands which are made on, and the responsibilities of, the directors. Non-executive directors’ fees and payments are reviewed annually by the Board. The Board ensures non-executive directors’ fees and payments are appropriate and in line with the market. The Chairman’s fees are determined independently to the fees of non-executive directors based on comparative roles in the external market. The current base fees were last revised with effect from 1 July 2015. The Chairman and other non-executive directors who chair a committee receive additional yearly fees. Non-executive directors’ fees are determined within an aggregate directors’ fee pool limit, which is periodically recommended for approval by shareholders. The maximum pool currently stands at $800,000 per annum and was approved by shareholders at the annual general meeting on 27 November 2009. THE FOLLOWING FEES HAVE APPLIED: FROM 1 JULY 2015 Base fees Chairman Deputy Chairman Other non-executive directors Additional fees Audit and Risk Committee - Chairman Remuneration Committee - Chairman $108,000 $90,000 $72,000 $9,000 $9,000 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s reportRemuneration report (continued) (g) Non-executive director arrangements (continued) Figure 2: Non-executive director remuneration NAME T E O'Connor * I H Cochrane T J Strapp D J Argent M A Connelly M A Hine Total non-executive director remuneration * T E O'Connor retired on 5 December 2017. (h) Additional statutory information YEAR 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 BASE FEE $ 54,000 108,000 100,306 90,000 72,000 72,000 72,000 72,000 72,000 72,000 72,000 72,000 442,306 486,000 AUDIT COMMITTEE $ REMUNER ATION COMMITTEE $ SUPER- ANNUATION $ - - - - 9,000 9,000 - - - - - - 9,000 9,000 4,500 9,000 - - - - - - - - 5,153 - 9,653 9,000 5,558 11,115 9,529 8,550 7,695 7,695 6,840 6,840 6,840 6,840 7,329 6,840 43,791 47,880 37 TOTAL $ 64,058 128,115 109,835 98,550 88,695 88,695 78,840 78,840 78,840 78,840 84,482 78,840 504,750 551,880 (1) Relative proportions of fixed vs variable remuneration expense The following table shows the relative proportions of remuneration that are linked to performance and those that are fixed, based on the amounts disclosed as statutory remuneration expense in Figure 1 on page 35: Figure 3: Relative proportion of fixed vs variable remuneration expense NAME Executive directors R G Sayers Other key management personnel of the Group A G Broad J Kavanagh T Mlikota D James R J Coates FIXED REMUNER ATION AT RISK - STI AT RISK - LTI * 18 % 100 82 87 82 82 82 17 % 100 95 97 96 97 97 18 % 17 % 18 % 17 % - 15 12 16 16 16 - 1 - - - - - 3 1 2 2 2 - 4 3 4 3 3 * As the long-term incentives are provided exclusively by way of options, the percentages disclosed also reflect the value of remuneration consisting of options, based on the value of options expensed during the year. (2) Performance based remuneration granted during the year Figure 4 shows the value of options that were granted and exercised during the current reporting period. Figure 4: Performance based remuneration granted and excercised during the year 2018 A G Broad J Kavanagh T Mlikota R J Coates D James LTI OPTIONS VALUE GR ANTED $ - - - - - VALUE EXERCISED $ 20,333 - - 10,167 10,167 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report38 Remuneration report (continued) (h) Additional statutory information (continued) (3) Terms and conditions of the share-based payment arrangements Options The terms and conditions of each grant of options affecting remuneration in the current or a future reporting period are as follows: GR ANT DATE 7 October 2013 7 October 2013 7 October 2013 VESTING AND EXERCISE DATE 7 October 2015 7 October 2016 7 October 2017 EXPIRY DATE 7 October 2018 7 October 2018 7 October 2018 23 December 2015 23 December 2017 23 December 2020 23 December 2015 23 December 2018 23 December 2020 23 December 2015 23 December 2019 23 December 2020 20 April 2018 20 April 2018 20 April 2018 20 April 2018 20 April 2018 20 April 2018 20 April 2018 20 April 2018 20 April 2018 21 November 2018 21 November 2021 21 November 2019 21 November 2021 21 November 2020 21 November 2021 22 May 2019 22 May 2020 22 May 2021 12 June 2019 12 June 2020 12 June 2021 22 May 2022 22 May 2022 22 May 2022 12 June 2022 12 June 2022 12 June 2022 Options granted under the plan carry no dividend or voting rights. EXERCISE PRICE VALUE PER OPTION AT GR ANT DATE TSR PERFORMANCE ACHIEVED % VESTED $1.70 $1.70 $1.70 $0.25 $0.25 $0.25 $1.26 $1.26 $1.26 $1.33 $1.33 $1.33 $1.62 $1.62 $1.62 $0.12 $0.12 $0.12 $0.06 $0.07 $0.07 $1.63 $1.62 $1.61 $1.59 $1.58 $1.56 $1.40 $1.40 $1.39 < 50th percentile 75th percentile 75th percentile 75th percentile to be determined to be determined to be determined to be determined to be determined to be determined to be determined to be determined to be determined to be determined to be determined 0% 100% 100% 100% n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a When exercisable, each option is convertible into one ordinary share. Options may not be exercised during the period of four weeks prior to the release of the half-yearly and annual financial results of the Group to the market. Details of options over ordinary shares in the Company provided as remuneration to each director of Ausdrill Limited and each of the key management personnel of the Group are set out below. When exercisable, each option is convertible into one ordinary share of Ausdrill Limited. Further information on the options is set out in note 19 to the financial statements. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report39 Remuneration report (continued) (h) Additional statutory information (continued) (4) Reconciliation of options and ordinary shares held by KMP Figure 5: Options The table below shows a reconciliation of options held by each KMP from the beginning to the end of 30 June 2018. All vested options were exercisable. 2018 NAME & GR ANT DATES A G Broad 23 December 2015 23 December 2015 23 December 2015 J Kavanagh 23 December 2015 23 December 2015 23 December 2015 T Mlikota 23 December 2015 23 December 2015 23 December 2015 R J Coates 23 December 2015 23 December 2015 23 December 2015 D James 23 December 2015 23 December 2015 23 December 2015 BALANCE AT THE START OF THE YEAR VESTED FORFEITED VESTED AND EXERCISABLE UNVESTED GR ANTED AS COMPENSATION NUMBER % EXERCISED NUMBER % BALANCE AT THE END OF THE YEAR OTHER CHANGES VESTED AND EXERCISABLE UNVESTED - - - - - - - - - - - - - - - 333,333 333,333 333,334 166,666 166,666 166,668 333,333 333,333 333,334 166,666 166,666 166,668 166,666 166,666 166,668 - 333,333 100% 333,333 - - - - - - - 166,666 100% - - - - - - - 333,333 100% - - - - - - - - - - - - - - - 166,666 100% 166,666 - - - - - - - - - 166,666 100% 166,666 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 333,333 333,334 166,666 - - - 166,666 166,668 333,333 - - - - - - - - - 333,333 333,334 - 166,666 166,668 - 166,666 166,668 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report 40 Remuneration report (continued) (h) Additional statutory information (continued) (4) Reconciliation of options and ordinary shares held by KMP (continued) Figure 6: Shareholdings 2018 NAME Ordinary shares T E O'Connor R G Sayers T J Strapp D J Argent M A Hine I H Cochrane A G Broad T Mlikota D James R Coates BAL ANCE AT THE START OF THE YEAR RECEIVED DURING THE YEAR ON THE EXERCISE OF OPTIONS RECEIVED ON VESTING OF RIGHTS OTHER CHANGES DURING THE YEAR BAL ANCE AT THE END OF THE YEAR 1,004,285 37,296,782 400,000 40,000 75,000 701,695 41,202 3,465 - - - - - - - - 302,556 - 151,277 151,277 - - - - - - - - - - (307,507) (37,296,782) - - - - (243,000) - (151,277) (151,277) 696,778 - 400,000 40,000 75,000 701,695 100,758 3,465 - - None of the shares above are held nominally by the directors or any of the other key management personnel. (5) Loans to key management personnel No loans have been made to directors or key management personnel of Ausdrill Limited or related entities during the current year. (6) Other transactions with key management personnel Ausdrill Limited rented an office building from Mr R G Sayers until September 2017. The rental agreement is based on arm's length commercial terms and conditions and is reviewed annually. A director, Mr M A Connelly, was a director of B2Gold Corp and was also the non-executive chairman of Toro Gold and West African Resources and Cardinal Resources. B2Gold Corp., through its subsidiary Songhoi Resources Sarl entered into an exploration drilling contract with an Ausdrill Limited subsidiary, African Mining Services Mali Sarl. Further B2Gold Corp., through its subsidiary Kiaka Gold Sarl entered into an exploration drilling contract with an Ausdrill Limited subsidiary, African Mining Services Burkina Faso Sarl. Cardinal Resources entered into an exploration drilling contract with an Ausdrill Limited subsidiary, African Mining Services Ghana. West African Resources entered into an exploration drilling contract with an Ausdrill Limited subsidiary, African Mining Services Burkina Faso Sarl. Toro Gold through its subsidiary Petowal Mining Company entered into a mining services contract with an Ausdrill Limited subsidiary, African Mining Services Senegal Suarl. All contracts are based on normal commercial terms and conditions and Mr Connelly is not party to any contract negotiations for either party. A director, Mr I H Cochrane, is a non-executive director of Dacian Gold Limited. Dacian Gold Limited has been provided with mineral analysis services by an Ausdrill Limited subsidiary, MinAnalytical Laboratory Services Pty Ltd. These services have been provided on arm's length commercial terms and conditions. Mr Cochrane is not party to any contract negotiations for either party. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report41 Remuneration report (continued) (h) Additional statutory information (continued) (6) Other transactions with key management personnel (continued) Aggregate amounts of each of the above types of other transactions with key management personnel of Ausdrill Limited: (i) Amounts recognised as revenue Exploration drilling and mining services* (ii) Amounts recognised as expense Rental office buildings (iii) Amounts recognised as assets and liabilities 18 $ 17 $ 42,675,518 8,365,112 89,508 358,032 At the end of the reporting period, the following aggregate amounts were recognised in relation to the above transactions: Receivables 10,786,785 1,954,906 * The balance includes amounts up to Mr Connelly's resignation date from Cardinal Resources on 12 October 2017. (7) Voting of shareholders at last year’s annual general meeting In 2017, 99.52% of the votes on the remuneration report were in favour of the report. The Company did not receive any specific feedback at the AGM on its remuneration practices. Shares under option Unissued ordinary shares of Ausdrill Limited under option at the date of this report are as follows: DATE OPTIONS GR ANTED EXPIRY DATE ISSUE PRICE OF SHARES NUMBER UNDER OPTION 7 October 2013 7 October 2013 23 December 2015 23 December 2015 23 December 2015 20 April 2018 20 April 2018 20 April 2018 7 October 2018 7 October 2018 23 December 2020 23 December 2020 23 December 2020 21 November 2021 22 May 2022 12 June 2022 $1.70 $1.70 $0.25 $0.25 $0.25 $1.26 $1.33 $1.62 66,666 100,002 733,331 3,033,317 3,033,366 400,000 200,000 200,000 7,766,682 No option holder has any right under the options to participate in any other share issue of the Company or any other entity. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report42 Remuneration report (continued) (h) Additional statutory information (continued) Shares issued on the exercise of options The following ordinary shares of Ausdrill Limited were issued during the year ended 30 June 2018 on the exercise of options granted under the Employee Option Plan. No further shares have been issued since that date. No amounts are unpaid on any of the shares. DATE SHARES ISSUED 30 September 2017 31 October 2017 31 October 2017 30 November 2017 27 December 2017 31 December 2017 31 December 2017 28 February 2018 28 February 2018 31 March 2018 30 April 2018 30 April 2018 28 May 2018 30 June 2018 Indemnification ISSUE PRICE OF SHARES NUMBER OF SHARES ISSUED $0.50 $0.60 $0.53 $0.43 $0.25 $0.39 $0.07 $0.32 $0.07 $0.07 $0.07 $0.30 $0.25 $0.41 315,422 92,823 66,507 201,738 333,331 40,828 658,927 24,410 1,058,940 60,765 90,876 91,661 33,333 9,707 3,079,268 Under the Company’s constitution and subject to section 199A of the Corporations Act 2001, the Company indemnifies each of the directors, the company secretary and every other person who is an officer of the Company and its wholly-owned subsidiaries against: any liability incurred as an officer of the Company (as the case may be) by that person to any person other than the Company or a related body corporate of the Company, unless that liability arises out of conduct involving a lack of good faith or is a liability for a pecuniary penalty order under certain provisions of the Corporations Act 2001; and costs and expenses incurred in defending civil or criminal proceedings subject to certain conditions. The above indemnity is a continuing indemnity and applies in respect of all acts done by a person while an officer of the Company or its wholly- owned subsidiaries even though the person is not an officer at the time the claim is made. The Company has entered into a Deed of Indemnity, Access and Insurance (“Deed”) with each current and former officer of the Company and its subsidiaries, including each director and company secretary and persons who previously held those roles. Under each Deed, to the extent permitted by law and to the extent and in the amount that the officer is not indemnified under any other indemnity, including an indemnity contained in any insurance policy, the Company indemnifies the relevant officer against all liabilities of any kind (including liabilities for legal expenses) incurred by the officer arising out of: the discharge of his or her duties as an officer of the Company or a subsidiary of the Company, or as an officer of any corporation in which the Company holds securities (“Related Corporation”) where the officer is representing the interests of the Company in relation to the Related Corporation; and the conduct of the business of the Company or a subsidiary of the Company, or a Related Corporation where the officer is representing the interests of the Company in relation to that Related Corporation. No amount has been paid under any of these indemnities during the financial year under review. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report 43 Insurance of officers During the financial year, the Company has paid a premium in respect of insuring the directors and officers of the Company and the Group. The insurance contract prohibits disclosure of the premium or the nature of liabilities insured against under the policy. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. Non-audit services The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor's expertise and experience with the Company and/or the Group are important. Details of the amounts paid or payable to the auditor (PwC) for audit and non-audit services provided during the year are set out in note 20 to the financial statements. The Board of directors has considered the position and, in accordance with advice received from the Audit and Risk Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the provision of non-audit services by the auditor did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: all non-audit services have been reviewed by the Audit and Risk Committee to ensure they do not impact the impartiality and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. Auditor's independence declaration The auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 44. Rounding of amounts The Company is of a kind referred to in ASIC Legislative Instrument 2016/191, relating to the 'rounding off' of amounts in the directors' report. Amounts in the directors' report have been rounded off in accordance with the instrument to the nearest thousand dollars, or in certain cases, to the nearest dollar. This report is made in accordance with a resolution of directors. Ian Howard Cochrane Chairman Sydney 15 August 2018 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTDirector’s report 44 Auditor’s independence declaration AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORT45 Corporate governance statement Ausdrill Limited and the Board are committed to achieving and demonstrating the highest standards of corporate governance. Ausdrill Limited has reviewed its corporate governance practices against the Corporate Governance Principles and Recommendations (3rd edition) published by the ASX Corporate Governance Council. The 2018 corporate governance statement is dated as at 30 June 2018 and reflects the corporate governance practices in place throughout the 2018 financial year. The 2018 corporate governance statement was approved by the Board on 15 August 2018. A description of the Group's current corporate governance practices is set out in the Group's corporate governance statement which can be viewed at www.ausdrill.com.au. Voluntary Tax Transparency Code Ausdrill has chosen to provide additional disclosure of tax information as recommended by the Board of Taxation’s Voluntary Tax Transparency Code (“TTC”). Ausdrill is currently classified as a ‘medium business’ for the purposes of the TTC (i.e. The Company’s aggregated Australian turnover is between A$100 million and A$500 million) and has chosen to disclose the following tax information in this annual report: A reconciliation of accounting profit to tax expense. This information is disclosed in note 5(b) to the Consolidated Financial Statements in this annual report; Identification of material temporary and non-temporary differences. This information is disclosed in notes 5(b), 5(c), 5(d) and 7(c) to the Consolidated Financial Statements in this annual report; Accounting effective company tax rates for Australian and global operations. This information is disclosed in note 5(e) to the Consolidated Financial Statements in this annual report; and The Group's approach to tax risk management and governance. Ausdrill formally documented a Tax Risk Management and Governance Framework in 2015 (the “TRMGF”), in accordance with its corporate governance framework (as set out in the Corporate Governance Statement -> http://www.ausdrill.com.au/investors/corporate- governance.html) setting out its approach to tax risk management and governance. In summary, Ausdrill’s approach to tax risk management and governance is as follows: Ensure that all key tax controls, policies and procedures are documented and adhered to via regular monitoring, testing and maintenance; Take a conservative or low risk approach to tax planning and the assessment and management of tax risk; 1 2 Ensure that tax risks are considered as a part of the overall commercial assessment of transactions; 3 Comply with all tax compliance obligations in accordance with tax law and in a timely manner; 4 A systematic approach to the identification, documentation, communication and reporting of tax risks must be in place at all times; 5 6 Ensure that Ausdrill’s tax affairs are managed by employees with the appropriate tax qualifications, skills and experience; 7 Reputable external tax advisors are to be used by Ausdrill to help manage its tax affairs; 8 Utilise tax technology, software or automation to help manage tax compliance obligations; 9 Maintain open and constructive relationships with all relevant tax authorities; and 10 All international related party dealings are to be conducted in accordance with the arm’s length principle in a manner consistent with Australian taxation law and international taxation norms. Additional information regarding international related party dealings. Ausdrill provides support including goods, services, equipment and funding to its overseas operations on an arm’s-length commercial basis. Refer to note 18 for additional information regarding transactions with related parties. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORT 46 Consolidated statement of profit or loss Revenue from continuing operations Other income Materials expense Labour costs Rental and hire expense Depreciation and amortisation expense Finance costs Other expenses from ordinary activities Share of net profit of joint ventures accounted for using the equity method Profit/(loss) before income tax Income tax (expense)/benefit Profit/(loss) from continuing operations Profit/(loss) from discontinued operations (attributable to equity holders of the Company) Profit/(loss) for the year Profit/(loss) is attributable to: Equity holders of Ausdrill Limited Profit/(loss) for the year Earnings/(loss) per share for profit/(loss) from continuing operations attributable to the ordinary equity holders of the Company: Basic earnings/(loss) per share Diluted earnings/(loss) per share Earnings/(loss) per share for profit/(loss) attributable to the ordinary equity holders of the Company: Basic earnings/(loss) per share Diluted earnings/(loss) per share 18 $’000 17 $’000 890,317 22,345 (367,543) (285,090) (14,778) (74,528) (31,626) (87,362) 22,344 74,079 (14,730) 59,349 1,701 61,050 61,050 61,050 764,950 12,468 (328,099) (241,577) (13,779) (62,172) (31,381) (68,878) 13,090 44,622 (13,671) 30,951 250 31,201 31,201 31,201 CENTS CENTS 16.9 16.6 17.4 17.1 9.9 9.6 10.0 9.7 NOTES 2 4(a) 4(b) 4(b) 4(b) 14(b) 5 13 21 21 21 21 The above consolidated statement of profit or loss should be read in conjunction with the accompanying notes. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTConsolidated statement of comprehensive income Profit/(loss) for the year Other comprehensive income/(loss) Items that may be reclassified to profit or loss Exchange (losses)/gains on translation of foreign operations Exchange gains/(losses) on translation of joint ventures accounted for using the equity method Items that will not be reclassified to profit or loss Gain/(loss) on revaluation of land and buildings, net of tax (Loss)/gain on revaluation of available-for-sale financial assets, net of tax Other comprehensive income/(loss) for the year, net of tax 47 NOTES 18 $’000 17 $’000 61,050 31,201 (1,371) 3,671 4,443 (1,664) 5,079 882 (1,024) (421) (1,424) (1,987) 8(b) 8(b) 8(b) 8(b) Total comprehensive income/(loss) for the year 66,129 29,214 Total comprehensive income/(loss) for the year is attributable to: Equity holders of Ausdrill Limited Total comprehensive income/(loss) for the year Total comprehensive income/(loss) for the period attributable to owners of Ausdrill Limited arises from: Continuing operations Discontinued operations 66,129 66,129 64,428 1,701 66,129 29,214 29,214 28,964 250 29,214 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORT48 Consolidated statement of financial position ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Current tax receivables Total current assets Non-current assets Receivables Joint ventures accounted for using the equity method Available-for-sale financial assets Property, plant and equipment Deferred tax assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Borrowings Current tax liabilities Employee benefit obligations Total current liabilities Non-current liabilities Borrowings Deferred tax liabilities Employee benefit obligations Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Other reserves Retained earnings Capital and reserves attributable to owners of Ausdrill Limited Total equity NOTES 18 $’000 17 $’000 6(a) 6(b) 7(a) 6(b) 14(b) 6(c) 7(b) 7(c) 6(d) 6(e) 7(d) 6(e) 7(c) 7(d) 8(a) 8(b) 8(c) 137,258 230,464 212,600 964 581,286 3,314 71,266 11,999 664,347 35,549 786,475 166,710 167,742 188,761 3,028 526,241 - 58,884 5,189 560,464 36,584 661,121 1,367,761 1,187,362 122,770 100,396 3,334 1,196 39,061 166,361 401,216 24,947 486 2,802 4,181 40,805 148,184 385,815 22,289 960 426,649 409,064 593,010 557,248 774,751 630,114 624,571 (12,459) 162,639 774,751 526,447 (17,777) 121,444 630,114 774,751 630,114 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTConsolidated statement of changes in equity ATTRIBUTABLE TO OWNERS OF AUSDRILL LIMITED CONTRIBUTED EQUIT Y $’000 OTHER RESERVES $’000 RETAINED EARNINGS $’000 NOTES Balance at 1 July 2016 Profit for the year Other comprehensive income/(loss) Total comprehensive income/(loss) for the period Transactions with owners in their capacity as owners: Dividends paid Employee share options - value of employee services 12(b) 8(b) 526,447 (16,028) - - - - - - - (1,987) (1,987) - 238 238 96,177 31,201 312 31,513 (6,246) - (6,246) 49 TOTAL EQUIT Y $’000 606,596 31,201 (1,675) 29,526 (6,246) 238 (6,008) Balance at 30 June 2017 526,447 (17,777) 121,444 630,114 Profit for the year Other comprehensive income/(loss) Total comprehensive income/(loss) for the period Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs and tax Shares issued on conversion of employee share options Dividends paid Employee share options - value of employee services 8(a) 8(a) 12(b) 8(b) Balance at 30 June 2018 - - - 97,516 608 - - 98,124 624,571 - 5,079 5,079 - (517) - 756 239 61,050 - 61,050 - - (19,855) - (19,855) 61,050 5,079 66,129 97,516 91 (19,855) 756 78,508 (12,459) 162,639 774,751 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORT50 Consolidated statement of cash flows Cash flows from operating activities Receipts from customers (inclusive of goods and services tax) Payments to suppliers and employees (inclusive of goods and services tax) Interest received Interest and other costs of finance paid Income taxes (paid)/refunded Management fee received from joint ventures Net cash inflow/(outflow) from operating activities Cash flows from investing activities Payments for property, plant and equipment Proceeds from sale of property, plant and equipment Payments for available-for-sale financial assets Proceeds from sale of available-for-sale financial assets Proceeds from sale of business Cash removed on disposal of subsidiary Distributions received from associates NOTES 18 $’000 17 $’000 892,394 (802,239) 90,155 2,990 (28,982) (12,312) 742 52,593 802,207 (670,096) 132,111 2,391 (29,113) (11,782) 1,006 94,613 (173,280) (147,418) 3,319 (9,187) - 4,600 (602) 13,633 1,780 (3,855) 3,207 22,213 - 22,946 9(a) 13 Net cash (outflow)/inflow from investing activities (161,517) (101,127) Cash flows from financing activities Proceeds from issues of shares, net of transaction costs Repayment of hire purchase and lease liabilities Proceeds from unsecured borrowings Dividends paid to Company's shareholders Repayment of unsecured borrowings Net cash inflow/(outflow) from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of year Non-cash investing and financing activities (refer note 9(b)) Cash flows from discontinued operations (refer note 13) 97,606 - 3,991 (19,855) (3,458) 78,284 - (471) 3,721 (6,246) (3,969) (6,965) (30,640) (13,479) 166,710 1,188 137,258 181,857 (1,668) 166,710 12(b) 6(a) The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORT Notes to the consolidated financial statements How numbers are calculated 1 2 3 4 5 6 7 8 9 Risk 10 11 12 Segment information Revenue Individually significant items Other income and expense items Income tax expense/(benefit) Financial assets and financial liabilities Non-financial assets and liabilities Equity Cash flow information Critical accounting estimates and judgements Financial risk management Capital management Group structure 13 14 Discontinued operations Interests in other entities Unrecognised items 15 16 17 Contingencies Commitments Events since the end of the financial year Other information 18 19 20 21 22 23 24 25 Related party transactions Share-based payments Remuneration of auditors Earnings per share Assets pledged as security Deed of cross guarantee Parent entity financial information Summary of significant accounting policies 51 52 53 57 58 60 61 63 69 76 78 80 81 81 88 89 90 93 96 97 97 97 98 99 100 102 103 104 105 108 109 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORT52 How numbers are calculated This section provides additional information about those individual line items in the financial statements that the directors consider most relevant in the context of the operations of the entity, including: (a) accounting policies that are relevant for an understanding of the items recognised in the financial statements. These cover situations where the accounting standards either allow a choice or do not deal with a particular type of transaction (b) analysis and sub-totals, including segment information (c) information about estimates and judgements made in relation to particular items. 1 2 3 4 5 6 7 8 9 Segment information Revenue Individually significant items Other income and expense items Income tax expense/(benefit) Financial assets and financial liabilities Non-financial assets and liabilities Equity Cash flow information 53 57 58 60 61 63 69 76 78 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements53 1 Segment information (a) Description of segments Management has determined the operating segments based on the internal reports reviewed by the Board that are used to make strategic decisions. The Board assesses the performance of the operating segments based on revenue, EBIT, EBITDA and profit or loss before tax. The operating segments are identified by the Board based on the nature of the services provided. The Board considers the business from a geographic perspective, similarity of the services provided and the nature of risks and returns associated with each business. Reportable segments are: Drilling Services Australia: The provision of drilling services and drilling equipment including drilling and blasting, in-pit grade control, exploration drilling and water well drilling in Australia. Equipment Services and Supplies: The provision of mining supplies, products and services including equipment hire, equipment parts and sales throughout the world. Contract Mining Services Africa: The provision of mining services including drilling and blasting, in-pit grade control, exploration drilling and earthmoving in Africa. All Other Segments: Australian operating segments which do not meet the aggregation criteria for the current segments. This includes the provision of energy drilling and equipment hire, mineral analysis and property holding services. Corporate and Finance: This segment includes Group central functions including treasury, accounting, human resources and administration. In the prior year, the Group embarked on a centralisation of accounts payable, accounts receivable and payroll for its Australian operations. These costs are not distributed amongst the other segments. Intersegment eliminations: Represents transactions which are eliminated on consolidation. Discontinued operations: This segment includes the discontinued operations of the Diamond Communications business (2017: The Miners Rest Motel). Information about discontinued businesses can be found in note 13. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ D E T A D I L O S N O C S N O I T A N I M I L E S N O I T A R E P O S N O I T A R E P O S N O I T A N I M I L E E C N A N I F & D E U N I T N O C S I D G N I U N I T N O C L A T O T - R E T N I T N E M G E S E T A R O P R O C 0 0 0 ’ $ R E H T O L L A S T N E M G E S 0 0 0 ’ $ G N I N I M A C I R F A S E C I V R E S T C A R T N O C 0 0 0 ’ $ T N E M P I U Q E S E C I V R E S S E I L P P U S & 0 0 0 ’ $ G N I L L I R D S E C I V R E S A I L A R T S U A 54 d r a o B e h t o t d e d i v o r p n o i t a m r o f n i t n e m g e S ) b ( ) d e u n i t n o c ( n o i t a m r o f n i t n e m g e S 1 : s w o l l o f s a s i 8 1 0 2 e n u J 0 3 d e d n e r a e y e h t r o f s t n e m g e s e b a t r o p e r e h t l r o f d r a o B e h t o t d e d v o r p n o i t a m r o f i n i t n e m g e s e h T - 8 5 2 , 5 0 9 8 5 2 , 5 0 9 0 9 9 , 2 8 4 2 , 8 0 9 - - - - - 5 1 8 , 9 7 1 ) 7 2 1 ( ) 5 7 7 , 4 7 ( - 0 4 0 , 5 0 1 ) 7 2 1 ( 0 9 9 , 2 ) 3 5 7 , 1 3 ( 7 7 2 , 6 7 ) 7 2 2 , 5 1 ( 0 5 0 , 1 6 0 1 0 , 3 9 5 1 6 7 , 7 6 3 , 1 6 6 2 , 1 7 4 4 3 , 2 2 7 6 4 , 2 8 1 - 7 2 1 - - - - - - 4 2 9 , 7 1 4 3 3 , 7 8 8 - - 4 2 9 , 7 1 7 1 3 9 , 7 1 4 6 5 , 2 ) 7 4 2 ( 7 1 3 , 2 8 ) 7 2 1 ( 8 9 1 , 2 ) 7 9 4 ( 1 0 7 , 1 - - - - - 4 3 3 , 7 8 8 3 8 9 , 2 7 1 3 , 0 9 8 8 7 3 , 7 7 1 ) 8 2 5 , 4 7 ( 0 5 8 , 2 0 1 2 8 9 , 2 ) 3 5 7 , 1 3 ( 9 7 0 , 4 7 ) 0 3 7 , 4 1 ( 9 4 3 , 9 5 ) 0 3 3 , 2 2 ( ) 0 3 3 , 2 2 ( ) 1 0 4 , 5 2 ( ) 1 3 7 , 7 4 ( 7 2 1 - 7 2 1 - ) 1 0 4 , 5 2 ( 4 7 2 , 5 2 - - - 6 6 2 , 1 7 4 4 3 , 2 2 - - - - 6 6 2 , 1 7 4 4 3 , 2 2 - - - - 1 6 7 , 7 6 3 , 1 ) 7 4 7 , 7 8 1 , 1 ( 9 1 0 , 0 3 7 5 4 9 , 1 8 3 8 3 , 2 6 7 7 8 6 , 2 7 1 4 7 4 , 8 0 8 0 1 0 , 3 9 5 ) 1 6 8 , 8 2 8 ( 8 1 8 , 0 0 0 , 1 0 6 0 , 3 3 5 5 , 3 5 2 5 3 8 , 8 7 5 0 6 , 5 8 8 3 7 9 2 7 , 1 8 1 3 6 3 , 9 4 8 2 , 1 4 8 1 , 9 2 1 6 5 9 , 1 1 2 4 9 , 9 2 s t e s s a t n e r r u c - n o n d n a t n a l p , y t r e p o r p f o n o i t i s u q c A i r e h t o d n a s e b g n a t n l i i , t n e m p u q e i ) 3 8 2 ( ) 6 4 6 , 3 1 ( 1 3 7 , 7 2 ) 8 9 6 , 1 3 ( ) 3 1 6 , 7 1 ( ) 7 5 2 , 2 ( 5 6 9 , 5 8 ) 9 6 3 ( ) 2 4 3 , 6 ( ) 6 5 1 , 9 4 ( 1 3 3 , 9 6 7 3 5 ) 2 5 5 , 1 1 ( 6 1 3 , 8 5 ) 0 2 7 , 8 ( 6 2 3 , 7 1 7 4 ) 6 0 2 , 4 ( 7 6 1 , 3 1 ) 2 1 1 , 4 1 ( 7 4 7 , 3 2 0 6 ) 9 2 2 , 3 ( 8 7 5 , 0 2 - - - 2 3 7 , 7 2 2 3 7 , 7 2 - 6 8 4 8 , 3 1 9 9 8 , 0 1 5 8 7 3 5 8 4 8 , 3 1 5 0 9 , 0 1 5 7 4 1 6 6 , 7 4 1 6 1 7 , 6 1 7 7 3 , 4 6 1 0 6 8 0 6 , 5 6 2 9 , 4 1 2 4 3 5 , 0 2 2 ) 3 6 3 , 3 1 ( 2 2 2 , 8 7 8 4 , 8 1 1 6 4 0 , 6 2 9 5 8 , 7 3 I A D T B E t n e m g e S 6 5 8 , 3 1 2 4 4 , 1 1 5 4 2 4 , 4 6 1 4 9 5 , 0 2 2 e u n e v e r t n e m g e s l a t o T s r e m o t s u c l a n r e t x e o t s e a S l e u n e v e r t n e m g e S 8 1 0 2 l s e a s t n e m g e s r e t n I e u n e v e r s e l a s l a t o T e u n e v e r r e h t O n o i t a s i t r o m a d n a n o i t a c e r p e D i I T B E t n e m g e S e m o c n i t s e r e t n I e s n e p x e t s e r e t n I t l u s e r t n e m g e S s e s n e p x e t i f e n e b / ) e s n e p x e ( x a t e m o c n I r a e y e h t r o f ) s s o l ( / t i f o r P s e r u t n e v t n o i j n i s t n e m t s e v n I n o i t a m r o f n i t n e m g e s r e h t O s e i t i l i b a i l t n e m g e S s t e s s a t n e m g e S i j t n o m o r f s t i f o r p t e n f o e r a h S s e r u t n e v AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 55 - 7 5 6 , 6 7 7 7 5 6 , 6 7 7 1 9 3 , 2 8 4 0 , 9 7 7 0 2 6 , 6 3 1 ) 3 1 4 , 2 6 ( 1 9 3 , 2 7 0 2 , 4 7 ) 2 1 5 , 1 3 ( 6 8 0 , 5 4 ) 5 8 8 , 3 1 ( 1 0 2 , 1 3 8 4 2 , 7 5 5 2 6 3 , 7 8 1 , 1 4 8 8 , 8 5 0 9 0 , 3 1 3 7 2 , 1 5 1 - ) 1 6 ( ) 1 6 ( - ) 1 6 ( - - - - - - - - - - - 1 6 1 9 0 , 4 1 2 5 1 , 4 1 7 9 5 1 , 4 1 9 2 8 ) 1 4 2 ( 8 8 5 7 ) 1 3 1 ( 4 6 4 ) 4 1 2 ( 0 5 2 - - - - - 6 6 5 , 2 6 7 - - 6 6 5 , 2 6 7 4 8 3 , 2 0 5 9 , 4 6 7 1 9 7 , 5 3 1 ) 2 7 1 , 2 6 ( 4 8 3 , 2 9 1 6 , 3 7 ) 1 8 3 , 1 3 ( 2 2 6 , 4 4 ) 1 7 6 , 3 1 ( 1 5 9 , 0 3 ) 1 2 3 , 1 6 ( ) 1 2 3 , 1 6 ( ) 2 5 3 , 2 2 ( ) 3 7 6 , 3 8 ( - - - - ) 2 5 3 , 2 2 ( 2 5 3 , 2 2 4 8 8 , 8 5 0 9 0 , 3 1 3 7 2 , 1 5 1 - - - 2 6 3 , 7 8 1 , 1 ) 2 2 9 , 0 6 0 , 1 ( 1 6 3 , 3 8 6 4 9 0 , 9 8 8 9 9 , 1 9 5 5 3 6 , 4 7 1 6 9 1 , 9 0 7 8 4 2 , 7 5 5 ) 1 4 8 , 4 1 8 ( 9 6 4 , 8 0 9 8 5 9 , 4 5 4 0 , 8 8 2 4 4 8 , 3 8 3 7 7 , 6 8 - - - - 4 8 8 , 8 5 0 9 0 , 3 1 - - - - 7 2 2 , 4 9 0 9 , 1 5 7 0 , 1 2 1 2 9 1 , 7 1 0 7 8 , 6 s t e s s a t n e r r u c - n o n d n a t n a l p , y t r e p o r p f o n o i t i s u q c A i r e h t o d n a s e b g n a t n l i i , t n e m p u q e i ) 2 5 2 ( ) 4 3 8 , 6 1 ( 6 0 8 , 3 2 ) 1 9 4 , 1 3 ( ) 9 1 5 , 4 2 ( 7 ) 1 2 5 ( ) 2 1 1 , 2 ( ) 9 1 4 , 6 ( ) 3 3 9 , 6 ( ) 2 6 4 , 3 3 ( 8 4 3 , 2 6 1 4 3 ) 0 3 7 , 7 ( 9 5 9 , 4 5 ) 7 9 5 , 8 ( 4 9 4 , 9 1 8 ) 1 6 7 , 4 ( 4 1 8 , 4 ) 9 4 7 , 7 1 ( 2 3 1 , 9 1 1 0 5 ) 2 3 3 , 3 ( 1 0 3 , 6 1 - - - 6 0 8 , 3 2 6 0 8 , 3 2 - 3 4 5 7 6 , 1 1 3 8 6 , 4 0 4 7 1 4 3 5 7 6 , 1 1 6 2 7 , 4 0 4 1 8 4 8 6 , 0 3 1 6 5 1 , 8 4 0 4 8 , 8 7 1 1 0 5 4 2 5 , 5 1 2 2 2 1 , 3 1 6 4 6 , 8 2 2 ) 2 8 5 , 6 1 ( 1 9 5 , 1 0 1 8 , 5 9 1 9 0 , 8 1 1 8 8 , 6 3 I A D T B E t n e m g e S 2 8 6 , 1 1 7 6 0 , 5 0 4 1 2 9 , 8 7 1 7 4 1 , 9 2 2 e u n e v e r t n e m g e s l a t o T s r e m o t s u c l a n r e t x e o t s e a S l e u n e v e r t n e m g e S 7 1 0 2 l s e a s t n e m g e s r e t n I e u n e v e r s e l a s l a t o T e u n e v e r r e h t O n o i t a s i t r o m a d n a n o i t a c e r p e D i I T B E t n e m g e S e m o c n i t s e r e t n I e s n e p x e t s e r e t n I t l u s e r t n e m g e S s e s n e p x e t i f e n e b / ) e s n e p x e ( x a t e m o c n I r a e y e h t r o f ) s s o l ( / t i f o r P s e r u t n e v t n o i j n i s t n e m t s e v n I n o i t a m r o f n i t n e m g e s r e h t O s e i t i l i b a i l t n e m g e S s t e s s a t n e m g e S i j t n o m o r f s t i f o r p t e n f o e r a h S s e r u t n e v 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ 0 0 0 ’ $ D E T A D I L O S N O C S N O I T A N I M I L E S N O I T A R E P O S N O I T A R E P O S N O I T A N I M I L E E C N A N I F & D E U N I T N O C S I D G N I U N I T N O C L A T O T - R E T N I T N E M G E S E T A R O P R O C 0 0 0 ’ $ R E H T O L L A S T N E M G E S 0 0 0 ’ $ G N I N I M A C I R F A S E C I V R E S T C A R T N O C 0 0 0 ’ $ T N E M P I U Q E S E C I V R E S S E I L P P U S & 0 0 0 ’ $ G N I L L I R D S E C I V R E S A I L A R T S U A : s w o l l o f s a s i 7 1 0 2 e n u J 0 3 d e d n e r a e y e h t r o f s t n e m g e s e b a t r o p e r e h t l r o f d r a o B e h t o t d e d v o r p n o i t a m r o f i n i t n e m g e s e h T ) d e u n i t n o c ( d r a o B e h t o t d e d i v o r p n o i t a m r o f n i t n e m g e S ) b ( ) d e u n i t n o c ( n o i t a m r o f n i t n e m g e S 1 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 56 1 Segment information (continued) (c) Other segment information (i) Segment revenue Sales between segments are carried out at arm's length and are eliminated on consolidation. The revenue from external parties reported to the Board is measured in a manner consistent with that in the consolidated income statement. Total revenue from continuing operations by geographical location is as follows: CONSOLIDATED ENTITY 2018 2017 TOTAL SEGMENT REVENUE $’000 INTER- SEGMENT REVENUE $’000 REVENUE FROM EX TERNAL CUSTOMERS $’000 TOTAL SEGMENT REVENUE $’000 INTER- SEGMENT REVENUE $’000 REVENUE FROM EX TERNAL CUSTOMERS $’000 Drilling Services Australia - Australia 220,594 (5,608) 214,986 229,147 (13,122) 216,025 Equipment Services & Supplies - Australia - Other foreign countries Contract Mining Services Africa - Ghana - Burkina Faso - Mali - Senegal - Guinea - Other foreign countries All Other Segments - Australia Corporate & Finance - Australia Total segment revenue 139,604 24,820 248,229 72,935 118,258 38,716 24,501 8,803 13,856 27,732 938,048 (8,076) (8,640) 131,528 16,180 248,229 72,935 118,258 38,716 24,501 8,797 - - - - - (6) - 155,005 23,916 220,353 35,988 62,421 957 75,777 9,571 (35,694) (12,462) - - - - - (43) 119,311 11,454 220,353 35,988 62,421 957 75,777 9,528 13,856 11,682 - 11,682 (25,401) (47,731) 2,331 890,317 23,806 848,623 (22,352) (83,673) 1,454 764,950 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements57 (d) Segment assets Segment assets are measured in the same way as in the financial statements. These assets are allocated based on the operations of the segment and the physical location of the asset. Total of non-current assets other than deferred tax assets, broken down by location of the assets, is shown in the table below. Drilling Services Australia - Australia Equipment Services & Supplies - Australia - Other foreign countries Contract Mining Services Africa - Ghana - Burkina Faso - Mali - Senegal - Guinea - Other foreign countries All Other Segments - Australia Corporate & Finance - Australia Total non-current segment assets 2 Revenue From continuing operations Sales revenue Sale of goods Services Other revenue Interest (a) Revenue recognition 18 17 NON-CURRENT SEGMENT ASSETS $’000 NON-CURRENT SEGMENT ASSETS $’000 115,845 103,228 71,723 75 191,724 112,966 99,033 54,940 819 16,476 75,324 27 174,796 65,743 75,846 41,832 6,003 5,367 70,222 70,521 17,103 750,926 5,850 624,537 18 $’000 17 $’000 32,902 854,432 887,334 25,396 737,170 762,566 2,983 2,384 890,317 764,950 Revenue is recognised for the major business activities using the methods outlined below. (i) Contract services Sales are recognised monthly on the basis of units of production at agreed contract rates. (ii) Mining supplies and manufactured goods Sales are recorded when goods have been despatched to a customer pursuant to a sales order and the associated risks have passed to the customer. (iii) Other revenue See note 25(e) for the recognition and measurement of other revenue. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements58 3 Individually significant items (a) Impairment of non-current assets For the year ended 30 June 2018, the Company assessed whether there were any indicators of impairment. The Company's market capitalisation throughout the year was above its net assets, however, as at 30 June 2018 it was below its net assets. Based on the thorough and systematic impairment analysis conducted, management remains of the view that the recoverable amounts of the Company’s non- current assets are not sensitive to this factor. Rather, management considered the profitability of the Cash Generating Units (CGUs) against their budgets. Where a business was performing below its forecast and had high underutilisation of PPE, management considered that there was an impairment indicator and performed an impairment assessment for those CGUs. This was the case for the Ausdrill Northwest, Energy Drilling Australia, Kalgoorlie / Synegex and Contract Mining Services Africa CGUs. For these CGUs, management has made estimates associated with the recoverable amount of the relevant CGU to determine whether there was any impairment or reversal of previous impairment in relation to its carrying value. Determining a CGUs recoverable amount was completed via the following methods: (a) assets are firstly considered individually to determine whether there is any impairment related to specific assets due to factors such as technical obsolescence, declining market value, physical condition or saleability within a reasonable timeframe; (b) for certain CGUs, the recoverability of its assets is completed via a fair value less costs of disposal methodology (FVLCD); and (c) for certain CGUs, the recoverability of its assets is completed via a value in use methodology (VIU). The recoverable amount of a CGU is calculated as the higher of its FVLCD or its VIU. The Company has sourced an external valuation along with its own internal valuation where a fair value less costs of disposal has been used. In the instances where this has been adopted, the valuation technique and fair value hierarchy is noted below. The recoverable amount of a CGU determined by a VIU calculation requires the use of assumptions. Cash flow projections are calculated using budgeted EBITDA, changes in working capital and capital expenditure to determine a “free cash flow” estimate. These projections are based on actual operating results, a Board approved business plan and subsequent financial forecasts prepared by management. Future cash flows are extrapolated by applying conservative growth rates for each segment and terminal growth rates not exceeding 3%. This methodology is consistently applied in reporting periods. For the CGUs which had impairment triggers at 30 June 2018, some were assessed by a FVLCD method and some were assessed via the VIU method and resulted in no impairment charge or reversal of previous impairment being recorded. For the year ended 30 June 2017 some of the CGUs were assessed by a FVLCD method and some were assessed via the VIU method and resulted in no impairment charge being booked in the prior year. Please see the table below for the information on which method was applied to each CGU and a comparison between 30 June 2018 and 30 June 2017. Summary of the impairment taken, and method used to assess the impairment A summary of the Company’s assessment of any indicators of impairment testing for material CGUs, the valuation method used and impairment expense/(reversal) is as follows. CGU TRIGGER FOR IMPAIRMENT TESTING VALUATION METHOD USED IMPAIRMENT EXPENSE/(REVERSAL) OF PPE 18 17 18 17 18 17 Kalgoorlie / Synegex CGU Ausdrill Northwest (ANW) CGU BTP Equipment (BTPE) CGU Contract Mining Services Africa (CMSA) CGU Energy Drilling Australia (EDA) CGU Y Y N Y Y Y Y N Y Y VIU VIU FVLCD FVLCD - VIU - VIU FVLCD FVLCD - - - - - - - - - - Key assumptions used for value in use calculations For certain CGUs the recoverability of its assets is completed via a VIU methodology. The calculation of VIU for the CGUs is most sensitive to the following assumptions: (a) EBITDA/sales margins (b) Capital expenditure (c) Discount rates and growth rates used to extrapolate cash flows beyond the forecast period EBITDA margin EBITDA margin is based on management’s best estimate of the CGU’s performance, taking into account past performance with changes where appropriate for expected market conditions and efficiency improvements. Working capital has been adjusted, in particular inventory levels, to return to and reflect what would be considered a normal operating level to support the underlying business. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements59 3 Individually significant items (continued) (a) Impairment of non-current assets (continued) Capital expenditure Capital expenditure with an emphasis on replacement capital only, has been kept to a minimum as idle machinery will gradually return to work to sustain the assumed levels of activity. The resulting expenditure has been compared against the annual depreciation charge to ensure that it is reasonable. Growth rate estimates and discount rates Future cash flows are extrapolated by applying conservative growth rates for each segment, terminal rates not exceeding 3% and appropriate discount rates to the CGU. This methodology is consistently applied in reporting periods. Kalgoorlie / Synegex CGU This CGU is included in the Drilling Services Australia operating segment. At 30 June 2018, this CGU had triggers for impairment testing, and a VIU methodology was adopted. Based on the impairment testing performed, no impairment expense has been recognised at the CGU level at 30 June 2018. At 30 June 2017, this CGU had triggers for impairment testing, and a VIU methodology was adopted. Based on the impairment testing performed, no impairment expense was recognised at the CGU level at 30 June 2017. Contract Mining Services Africa (CMSA) CGU This CGU is included in the Contract Mining Services Africa operating segment. At 30 June 2018, this CGU had triggers for impairment testing, and a VIU methodology was adopted. Based on the impairment testing performed, no impairment expense has been recognised at the CGU level at 30 June 2018. At 30 June 2017, this CGU had triggers for impairment testing, and a VIU methodology was adopted. Based on the impairment testing performed, no impairment expense has been recognised at the CGU level at 30 June 2017. Key assumptions used for Fair Value less Costs of Disposal Energy Drilling Australia (EDA) CGU This CGU is included in the Other operating segment. At 30 June 2018, this CGU had triggers for impairment testing. To determine the recoverable amount of this CGU, the Company engaged an independent external valuer to undertake a fair market valuation. The valuation approach, a combination of Level 1, Level 2, and predominately Level 3 inputs in the fair value hierarchy, was employed for this fair value valuation. The directors assessed the fair value of each asset, taking into account the independent valuation and determined the assets’ fair value within a range of reasonable fair value estimates. As a result, no impairment charge was made as the fair value valuation supported the carrying value. During the prior year, this CGU exhibited triggers for impairment testing and the Company engaged an independent external valuer to undertake a fair market valuation (the same as that described above) resulting in no impairment charge during the period ending 30 June 2017. ANW CGU (previously ANW and Connector CGU) This CGU is included in the Drilling Services Australia operating segment. At 30 June 2018, this CGU had triggers for impairment testing. To determine the recoverable amount of this CGU, the Company engaged an independent external valuer to undertake a fair market valuation. The valuation approach, a combination of Level 1, Level 2 and predominately Level 3 inputs in the fair value hierarchy, was employed for this fair value valuation. The directors assessed the fair value of each asset, taking into account the independent valuation and determined the assets’ fair value within a range of reasonable fair value estimates. As a result, no impairment charge was made as the fair value valuation supported the carrying value. During the prior year, this CGU exhibited triggers for impairment testing and the Company engaged an independent external valuer to undertake a fair market valuation (the same as that described above) resulting in no impairment charge during the period ending 30 June 2017. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements60 4 Other income and expense items This note provides a breakdown of the items included in “other income” and an analysis of expenses by nature. (a) Other income Insurance proceeds Management fee received Foreign exchange gain (net) Gain on sale of available-for-sale financial assets Impairment reversal - trade receivables Other(i) (i) The Group settled a claim and received $5.3 million net of GST during the current period. (b) Breakdown of expenses by nature Depreciation expense Buildings Plant and equipment Total depreciation expense Rental expense relating to operating leases Finance costs Hire purchase interest Interest paid Amortised borrowing cost Total finance costs Other expenses from ordinary activities Freight Consultants Staffing, safety and training Travel and accommodation IT and communications Other property related expenses Insurance Net loss on disposal of property, plant and equipment All other expenses 18 $’000 1,544 1,047 11,249 - 425 8,080 22,345 17 $’000 2,209 1,240 4,747 934 347 2,991 12,468 18 $’000 17 $’000 1,703 72,825 74,528 1,629 60,543 62,172 6,264 6,511 - 28,856 2,770 31,626 18,737 15,802 11,376 9,581 6,927 6,734 6,645 1,635 9,925 68 28,914 2,399 31,381 15,816 12,004 9,869 7,023 5,900 6,419 5,028 3,713 3,106 Total other expenses from ordinary activities 87,362 68,878 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements61 5 Income tax expense/(benefit) This note provides an analysis of the Group’s income tax expense, shows what tax amounts are recognised directly in equity and how the tax expense/(benefit) is affected by non-assessable and non-deductible items. It also explains significant estimates made in relation to the Group’s tax position. (a) Income tax expense/(benefit) Current tax on profits for the year Deferred tax Adjustments for current tax of prior periods Income tax expense/(benefit) is attributable to: Profit/(loss) from continuing operations Profit/(loss) from discontinued operations Aggregate income tax expense Deferred income tax expense/(benefit) included in income tax expense comprises: Decrease/(increase) in deferred tax assets Increase/(decrease) in deferred tax liabilities (b) Numerical reconciliation of accounting profit to income tax expense/(benefit) Profit/(loss) from continuing operations before income tax expense Profit/(loss) from discontinuing operations before income tax expense Tax at the Australian tax rate of 30% (2017 - 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Share of net (profit) of joint ventures Share-based payments Other foreign permanent differences Withholding tax Other non-assessable/(non-deductible) items Difference in overseas tax rates Under/(over) provision in prior years Current year tax losses not recognised Deferred tax assets not recognised / (now recognised) Effect of currency translation on tax base Deferred tax recognised on undistributed profits for foreign subsidiaries and joint ventures Income tax expense/(benefit) NOTES 7(c)(i) 7(c)(ii) NOTES 18 $’000 10,823 3,547 857 15,227 14,730 497 15,227 3,962 (415) 3,547 18 $’000 74,079 2,198 76,277 22,883 (6,703) 227 (192) 1,233 1,121 18,569 3,004 857 2,566 (7,378) (2,935) 544 (3,342) 15,227 17 $’000 13,077 (991) 1,799 13,885 13,671 214 13,885 4,189 (5,180) (991) 17 $’000 44,622 464 45,086 13,526 (3,927) - (734) 2,488 1,169 12,522 1,499 1,799 1,882 (5,833) 2,030 (14) 1,363 13,885 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements62 5 Income tax expense/(benefit) (continued) 18 $’000 17 $’000 (c) Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly debited or credited to equity: Deferred tax - debited/(credited) directly to equity 146 (412) (d) Unrecognised temporary differences (i) Temporary differences for which deferred tax assets have not been recognised: Unused tax losses for which no deferred tax asset has been recognised Other temporary differences Unrecognised deferred tax assets relating to the above temporary differences (ii) Temporary differences relating to investments in subsidiaries for which deferred tax liabilities have not been recognised: Undistributed earnings Unrecognised deferred tax liabilities relating to the above temporary differences 134,640 16,837 151,477 45,443 119,902 41,431 161,333 48,400 61,059 5,804 116,070 9,159 Ausdrill Limited has undistributed earnings of $61,059,261 (2017: $116,069,507) which, if paid out as dividends, would be unfranked and therefore subject to tax in the hands of the recipient. An assessable temporary difference exists, but no deferred tax liability has been recognised as the parent entity is able to control the timing of distributions from the subsidiary and is not expected to distribute these profits in the foreseeable future. (e) 2018 accounting effective company tax rates for Australian and global operations in terms of the Board of Taxations’ Voluntary Tax Transparency Code (i) Australian operations The accounting effective company tax rate for the year ended 30 June 2018 is 0% (30 June 2017: 0%). This effective tax rate is lower than the Australian company tax rate due to the impact of functional currencies, items of income and expenditure which are not assessable or deductible, the inclusion of equity accounted profits in profit before tax and not recognising a portion of deferred tax assets. The effective tax rate excluding the impact of these items is 30.0% (30 June 2017: 30.0%). (ii) Global operations The accounting effective company tax rate for the year ended 30 June 2018 is 20.0% (30 June 2017: 30.8%). This effective tax rate is lower than the Australian company tax rate due to the impact of functional currencies, items of income which are not assessable, capital gains, not recognising a portion of deferred tax assets and the impact of differences in overseas tax rates. The effective tax rate excluding the impact of these items is 30.2% (30 June 2017: 33.8%). AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 63 6 Financial assets and financial liabilities This note provides information about the Group’s financial instruments, including: an overview of all financial instruments held by the Group specific information about each type of financial instrument accounting policies information about determining the fair value of the instruments, including judgements and estimation uncertainty involved. The Group holds the following financial instruments: Financial assets 2018 Cash and cash equivalents Trade and other receivables* Available-for-sale financial assets 2017 Cash and cash equivalents Trade and other receivables* Available-for-sale financial assets * Excluding prepayments. ** Fair value through other comprehensive income Financial liabilities 2018 Trade and other payables Borrowings 2017 Trade and other payables Borrowings NOTES ASSETS AT F V TOCI** $’000 FINANCIAL ASSETS AT AMORTISED COST $’000 TOTAL $’000 6(a) 6(b) 6(c) 6(a) 6(b) 6(c) NOTES 6(d) 6(e) 6(d) 6(e) - - 11,999 11,999 - - 5,189 5,189 137,258 137,258 213,727 - 350,985 166,710 151,969 - 318,679 213,727 11,999 362,984 166,710 151,969 5,189 323,868 LIABILITIES AT AMORTISED COST $’000 TOTAL $’000 122,770 404,550 527,320 100,396 388,617 489,013 122,770 404,550 527,320 100,396 388,617 489,013 The Group’s exposure to various risks associated with financial instruments is discussed in note 11. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 64 6 Financial assets and financial liabilities (continued) (a) Cash and cash equivalents Current assets Cash at bank and in hand (i) Reconciliation to cash at the end of the year 18 $’000 17 $’000 137,258 166,710 The above figures reconcile to the amount of cash shown in the statement of cash flows at the end of the financial year as follows: Balance as above Balances per consolidated statement of cash flows 137,258 137,258 166,710 166,710 (b) Trade and other receivables 2018 2017 CURRENT $’000 NON-CURRENT $’000 TOTAL $’000 CURRENT $’000 NON-CURRENT $’000 TOTAL $’000 Trade receivables Provision for impairment of receivables (see note 11(b)) Accrued revenue Net GST / VAT receivables Other receivables (ii) Prepayments 141,917 (11,421) 130,496 50,973 12,654 16,290 20,051 - - - - - 3,314 - 141,917 122,746 (11,421) (14,361) 130,496 50,973 12,654 19,604 20,051 108,385 34,104 5,242 4,238 15,773 167,742 230,464 3,314 233,778 - - - - - - - - 122,746 (14,361) 108,385 34,104 5,242 4,238 15,773 167,742 Further information relating to loans to related parties and key management personnel is set out in note 18. (i) Classification as trade and other receivables Trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business. Loans and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. If collection of the amounts is expected in one year or less they are classified as current assets. If not, they are presented as non-current assets. Trade receivables are generally due for settlement not more than 90 days from the date of recognition and therefore are all classified as current. The Group’s impairment and other accounting policies for trade and other receivables are outlined in notes 11(b) and 25(k) respectively. (ii) Other receivables This amount includes mobilisation costs, operating expense rebates and other receivables. If collection of other receivables is expected in one year or less they are classified as current assets. (iii) Foreign exchange and interest rate risk Information about the Group's exposure to foreign currency risk and interest rate risk in relation to trade and other receivables is provided in note 11. (iv) Fair value and credit risk Due to the short-term nature of these receivables, their carrying amount is assumed to be the same as their fair value. For the non- current receivables, the fair values are also not significantly different to their carrying amounts. (v) Impairment and risk exposure Information about the impairment of trade and other receivables, their credit quality and the Group’s exposure to credit risk, foreign currency risk and interest rate risk can be found in note 11(a) and 11(b). AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements6 Financial assets and financial liabilities (continued) (c) Available-for-sale financial assets Available-for-sale financial assets include the following classes of financial assets: Non-current assets Listed securities Equity securities Unlisted securities Equity securities 65 18 $’000 17 $’000 6,336 4,151 5,663 11,999 1,038 5,189 (i) Classification of financial assets as available-for-sale Investments are designated as available-for-sale financial assets if they do not have fixed maturities and fixed or determinable payments, and management intends to hold them for the medium to long-term. Financial assets that are not classified into any of the other categories (fair value through profit or loss, loans and receivables or held-to-maturity investments) are also included in the available-for-sale category. The financial assets are presented as non-current assets unless they mature, or management intends to dispose of them within 12 months of the end of the reporting period. (ii) Impairment indicators for available-for-sale financial assets A security is considered to be impaired if there has been a significant or prolonged decline in the fair value below its cost. See note 25(m) for further details about the Group’s impairment policies for financial assets. (iii) Amounts recognised in profit or loss and other comprehensive income During the year, the following (losses)/gains were recognised in other comprehensive income. 18 17 NOTES $’000 $’000 (Losses)/gains recognised in other comprehensive income 8(b) (2,377) (2,034) (iv) Non-current assets pledged as security Refer to note 22 for information on non-current assets pledged as security by the Group. (v) Fair value, impairment and risk exposure Information about the methods and assumptions used in determining fair value is provided in note 6(f) below. None of the available- for-sale financial assets are either past due or impaired. On 18 April 2018, the Group, as part of a group of senior industry executives and other professional investors, together purchased the majority of shares in mining services company HiSeis Pty Ltd ("HiSeis"), an end to end seismic hard rock exploration service provider. The Company paid $3.9 million and has 19.9% of shares in HiSeis. During the year, the Group purchased 29,305,516 shares in Golden Rim Resources totalling $1.0 million. The Group has a 9.2% interest in Golden Rim Resources. In 2017, the Group agreed with Azumah Resources Limited to the redemption and settlement of its $2.0 million convertible note through the payment by Azumah of $1.0 million cash and the issue of 22,727,273 shares at a price of $0.044 each. All available-for-sale financial assets are denominated in either Australian Dollars, Great British Pound or Canadian Dollars. For an analysis of the sensitivity of available-for-sale financial assets to price and interest rate risk refer to note 11(a). AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 66 6 Financial assets and financial liabilities (continued) d) Trade and other payables Current liabilities Trade payables Accrued expenses Payroll accruals Net GST / VAT payables Other creditors and accruals 18 $’000 17 $’000 59,957 46,481 10,619 3,979 1,734 62,762 25,786 6,589 4,591 668 122,770 100,396 Trade payables are unsecured and are usually paid within 45 to 60 days of recognition. The carrying amounts of trade and other payables are considered to be the same as their fair values, due to their short-term nature. (e) Borrowings Unsecured USD notes Prepaid borrowing costs Insurance premium funding Total unsecured borrowings (i) Secured liabilities 2018 2017 CURRENT $’000 NON-CURRENT $’000 TOTAL $’000 CURRENT $’000 NON-CURRENT $’000 TOTAL $’000 - - 3,334 3,334 404,998 404,998 (3,782) - (3,782) 3,334 401,216 404,550 - - 2,802 2,802 390,505 390,505 (4,690) - (4,690) 2,802 385,815 388,617 At 30 June 2018, the Group had the following facilities that were not drawn at balance date: Total unutilised facilities - bank loans Bank loans 18 $’000 17 $’000 199,433 124,776 In August 2017, Ausdrill Limited refinanced and increased its revolving debt facility from A$125 million to A$200 million. The facility is a 3-year, dual currency, syndicated facility, maturing on 1 July 2020 and has been provided by a number of leading lending institutions in the Australian banking market. As at 30 June 2018, this facility remains largely undrawn. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 67 6 Financial assets and financial liabilities (continued) (e) Borrowings (continued) (ii) Unsecured liabilities USD notes On 12 November 2012, Ausdrill completed an offering of US$300 million in aggregate principal amount of 6.875% Guaranteed Senior Unsecured Notes due November 2019 in an offering to qualified institutional buyers in the United States pursuant to Rule 144A under the United States Securities Act of 1993, and to certain persons outside the United States in offshore transactions in reliance on Regulation S under the Securities Act. Covenants on financing facilities The Group’s financing facilities contain undertakings including an obligation to comply at all times with certain financial covenants which require the Group to operate within certain financing ratio threshold levels as well as ensuring that subsidiaries that contribute minimum threshold amounts of Group EBITDA and Group Total Tangible Assets are guarantors under various facilities. All banking covenants have been complied with at reporting date. Refinancing requirements Where existing facilities approach maturity, the Group will seek to renegotiate with existing and new financers to extend the maturity date of those facilities. The Group’s earnings profile, credit rating, state of the economy, conditions in financial markets and other factors may influence the outcome of those negotiations. Credit ratings The Group currently has a credit rating of Ba3 (Outlook Stable) from Moody's and a credit rating of BB- (Outlook Stable) from Standard & Poor's. Where a credit rating is reduced or placed on negative watch, customers and suppliers may be less willing to contract with the Group. Banks and other lending institutions may demand more stringent terms (including increased pricing) on debt facilities to reflect the higher credit risk profile. (iii) Fair value For the majority of the borrowings, the fair values are not materially different to their carrying amounts, since the interest payable on those borrowings is either close to current market rates or the borrowings are of a short-term nature. Material differences are identified only for the following borrowings: 2018 2017 CARRYING AMOUNT $’000 FAIR VALUE $’000 DISCOUNT R ATE % CARRYING AMOUNT $’000 FAIR VALUE $’000 DISCOUNT R ATE % On-balance sheet Non-traded financial liabilities USD notes 404,998 411,468 6.22 390,505 402,412 5.86 The fair values of non-current borrowings are based on discounted cash flows using the rates disclosed in the table above. (iv) Risk exposures Information about the Group's exposure to interest rate and foreign currency changes is provided in note 11. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 68 6 Financial assets and financial liabilities (continued) (f) Recognised fair value measurements (i) Fair value hierarchy This section explains the judgements and estimates made in determining the fair values of the financial instruments that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified its financial instruments into the three levels prescribed under the accounting standards. An explanation of each level follows below. At 30 June 2018 Financial assets Available-for-sale financial assets Australian listed equity securities Australian unlisted equity securities CAD listed equity securities GBP listed equity securities Total financial assets At 30 June 2017 Financial assets Available-for-sale financial assets Australian listed equity securities Australian unlisted equity securities GBP listed equity securities Total financial assets LEVEL 1 $’000 LEVEL 2 $’000 LEVEL 3 $’000 TOTAL $’000 5,093 - 514 729 6,336 - - - - - - 5,663 - - 5,093 5,663 514 729 5,663 11,999 LEVEL 1 $’000 LEVEL 2 $’000 LEVEL 3 $’000 TOTAL $’000 2,777 - 1,374 4,151 - - - - - 1,038 - 1,038 2,777 1,038 1,374 5,189 There were no transfers between any levels in the current or prior year. The Group’s policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period. Level 1: The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the Group is the current bid price. These instruments are included in level 1. Level 2: The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity- specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. This is the case for unlisted equity securities. (ii) Valuation techniques used to determine fair values Specific valuation techniques used to value financial instruments include: the use of quoted market prices or dealer quotes for similar instruments AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 6 Financial assets and financial liabilities (continued) (f) Recognised fair value measurements (continued) (iii) Fair value measurements using significant unobservable inputs (level 3) The following table presents the changes in level 3 items for the period ended 30 June 2018: Consolidated entity Opening balance 1 July 2017 Acquisitions Closing balance 30 June 2018 69 UNLISTED EQUIT Y SECURITIES $’000 1,038 4,625 5,663 TOTAL $’000 1,038 4,625 5,663 (iv) Valuation inputs and relationships to fair value The fair value of the unlisted equity securities has been determined as its acquisition cost due to the acquisition proximity to 30 June 2018 and nothing has come to our attention that would impact this value. Opening balances have also been determined as their acquisition cost and nothing has come to our attention that would impact this value. 7 Non-financial assets and liabilities This note provides information about the Group's non-financial assets and liabilities, including: specific information about each type of non-financial asset and non-financial liability - - - - inventories (note 7(a)) property, plant and equipment (note 7(b)) deferred tax balances (note 7(c)) employee benefit obligations (note 7(d)) accounting policies information about determining the fair value of the assets and liabilities, including judgements and estimation uncertainty involved. (a) Inventories Work in progress Finished goods Consumables and store items (i) Assigning costs to inventories 18 $’000 12,558 9,208 190,834 212,600 17 $’000 14,903 16,421 157,437 188,761 The costs of individual items of inventory are determined using weighted average costs. See note 25(l) for the Group’s other accounting policies for inventories. (ii) Amounts recognised in profit or loss Write-downs of inventories to net realisable value amounted to $2,095,740 (2017: $2,003,328). These were recognised as an expense during the year ended 30 June 2018 and included in materials expense in the consolidated statement of profit or loss. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 70 7 Non-financial assets and liabilities (continued) (b) Property, plant and equipment Non-current At 1 July 2016 Cost or fair value Accumulated depreciation Net book amount Year ended 30 June 2017 Opening net book amount Exchange differences Additions Transfers to inventory Depreciation charge Disposals Transfers between classes Closing net book amount At 30 June 2017 Cost or fair value Accumulated depreciation Net book amount Year ended 30 June 2018 Opening net book amount Exchange differences Revaluation of land and buildings Additions Disposal of subsidiary Transfers to inventory Depreciation charge Disposals Transfers between classes Closing net book amount At 30 June 2018 Cost or fair value Accumulated depreciation Net book amount L AND AND BUILDINGS $’000 PL ANT AND EQUIPMENT $’000 PL ANT AND EQUIPMENT UNDER FINANCE $’000 TOTAL $’000 59,221 (1,801) 57,420 1,145,675 (715,520) 430,155 57,420 (503) 970 - (1,629) (2,374) - 430,155 (3,856) 146,447 (2,119) (60,603) (5,513) 2,069 53,884 506,580 56,717 (2,833) 53,884 1,229,684 (723,104) 506,580 53,884 739 5,717 17 - - (1,703) - (46) 506,580 12,406 - 173,264 (1,476) (7,064) (73,072) (4,945) 46 58,608 605,739 61,489 (2,881) 58,608 1,353,925 (748,186) 605,739 4,725 (2,468) 2,257 2,257 (7) - - (181) - (2,069) - - - - - - - - - - - - - - - - - 1,209,621 (719,789) 489,832 489,832 (4,366) 147,417 (2,119) (62,413) (7,887) - 560,464 1,286,401 (725,937) 560,464 560,464 13,145 5,717 173,281 (1,476) (7,064) (74,775) (4,945) - 664,347 1,415,414 (751,067) 664,347 (i) Non-current assets pledged as security Refer to note 22 for information on non-current assets pledged as security by the Group. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements7 Non-financial assets and liabilities (continued) (b) Property, plant and equipment (continued) (ii) Carrying amounts that would have been recognised if land and buildings were stated at cost If freehold land and buildings were stated on the historical cost basis, the amounts would be as follows: Buildings Cost Accumulated depreciation Net book amount 71 18 $’000 17 $’000 40,566 (14,734) 25,832 41,234 (13,220) 28,014 (iii) Revaluation, depreciation methods and useful lives Land is not depreciated. Depreciation on major plant and equipment and components is calculated on machine hours worked over their estimated useful life. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, as follows: Buildings Plant and equipment Power station assets 5 - 25 years 2 - 10 years 3 - 20 years See note 25(n) for the other accounting policies relevant to property, plant and equipment. (iv) Impairment loss Refer to note 3 for details. (v) Significant estimates - valuations of land and buildings Information about the valuation of land and buildings is provided in note 7(e) below. (vi) Change in accounting estimates In May 2017, an independent expert was commissioned to review the condition of Energy Drilling Australia's ("EDA") assets and the longer term processes around asset management in relation to EDA’s equipment following being placed in care and maintenance. Due to the assets' extended life, management decided to extend the useful life of straight line depreciated assets by three years from July 2016. This resulted in a reduction in depreciation charge for the year ended 30 June 2017 of $342,000. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 72 7 Non-financial assets and liabilities (continued) (c) Deferred tax balances (i) Deferred tax assets The balance comprises temporary differences attributable to: Employee benefits Foreign tax credits Accruals Provision for obsolete stock Doubtful debts Depreciation Other Borrowing and business expenses Current year tax losses recognised Available-for-sale financial assets Aggregate income tax expense Total deferred tax assets NOTES 18 $’000 17 $’000 11,352 12,677 - 1,339 2,837 3,658 3,909 110 825 2,593 4,591 7,194 23,095 27,990 1,089 1,361 1,772 4,222 108 407 1,059 1,574 27,317 29,564 8,232 35,549 21,394 5,923 27,317 7,020 36,584 22,375 7,189 29,564 Adjustment of deferred tax liabilities pursuant to set-off provisions 7(c)(ii) Net deferred tax assets Deferred tax assets expected to be recovered within 12 months Deferred tax assets expected to be recovered after more than 12 months EMPLOYEE BENEFITS $'000 DEPRECIATION $'000 ACCRUALS $’000 DOUBTFUL DEBTS $’000 OTHER $’000 TOTAL $’000 At 1 July 2016 (Charged)/credited to profit or loss (Charged)/credited directly to equity At 30 June 2017 10,988 1,689 - 12,677 10,995 (3,801) - 7,194 (Charged)/credited to profit or loss (1,325) (3,285) (Charged)/credited directly to equity At 30 June 2018 - 11,352 - 3,909 811 14 - 825 514 - 1,339 4,696 (105) - 4,591 (933) - 3,658 6,514 (1,986) (251) 4,277 1,067 1,715 7,059 34,004 (4,189) (251) 29,564 (3,962) 1,715 27,317 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements73 NOTES 18 $’000 17 $’000 9,191 (2,395) 9,330 16,126 437 43 109 589 9,735 (2,461) 7,469 14,743 223 212 91 526 16,715 15,269 8,232 24,947 (1,807) 18,522 16,715 7,020 22,289 (1,935) 17,204 15,269 7 Non-financial assets and liabilities (continued) (c) Deferred tax balances (continued) (ii) Deferred tax liabilities offsetting within tax consolidated group The balance comprises temporary differences attributable to: Foreign entities distributable profits Inventories Revaluation of land and buildings Other Receivables Unrealised foreign exchange Prepayments Total deferred tax liabilities Adjustment of deferred tax liabilities pursuant to set-off provisions 7(c)(i) Net deferred tax liabilities Deferred tax liabilities expected to be settled within 12 months Deferred tax liabilities expected to be settled after more than 12 months At 1 July 2016 (Credited)/charged to profit or loss Charged/(credited) directly to equity At 30 June 2017 (Credited)/charged to profit or loss Charged/(credited) directly to equity At 30 June 2018 (d) Employee benefit obligations FOREIGN ENTITIES DISTRIBUTABLE PROFITS $’000 INVENTORIES $’000 REVALUATION OF LAND & BUILDINGS $’000 OTHER $’000 TOTAL $’000 9,743 (8) - 9,735 (544) - 9,191 2,117 (4,578) - (2,461) 66 - (2,395) 7,884 (576) 161 7,469 - 1,861 9,330 544 (18) - 526 63 - 589 20,288 (5,180) 161 15,269 (415) 1,861 16,715 2018 2017 CURRENT $’000 NON-CURRENT $’000 TOTAL $’000 CURRENT $’000 NON-CURRENT $’000 TOTAL $’000 Leave obligations 39,061 486 39,547 40,805 960 41,765 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 74 7 Non-financial assets and liabilities (continued) (d) Employee benefit obligations (continued) (i) Leave obligations The leave obligations include the Group’s liability for long service leave and annual leave. The current portion of this liability includes all of the accrued annual leave, the unconditional entitlements to long service leave where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The total current provision of $39,061,000 (2017: $40,805,000) is presented as current, since the Group does not have an unconditional right to defer settlement for any of these obligations. However, based on past experience, the Group does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. The following amounts reflect leave that is not expected to be taken or paid within the next 12 months. 18 $’000 17 $’000 Current leave obligations expected to be settled after 12 months 23,379 21,305 (e) Recognised fair value measurements (i) Fair value hierarchy This note explains the judgements and estimates made in determining the fair values of the non-financial assets that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified its non-financial assets into the three levels prescribed under the accounting standards. An explanation of each level is provided in note 6(f) and 7(e)(ii)-(v). LEVEL 1 $’000 LEVEL 2 $’000 LEVEL 3 $’000 TOTAL $’000 At 30 June 2018 Assets Land and buildings Office buildings Industrial sites Total non-financial assets At 30 June 2017 Assets Land and buildings Office buildings Industrial sites Total non-financial assets - - - - - - - - - - - - 7,695 50,912 58,607 7,695 50,912 58,607 8,366 45,518 53,884 8,366 45,518 53,884 There were no transfers between any levels for recurring fair value measurements during the current or prior period. (ii) Valuation techniques used to determine level 3 fair values The Group obtains independent valuations for its freehold land and buildings (classified within property, plant and equipment) at least every three years, see note 7(e)(v) for details. At the end of each reporting period, the directors update their assessment of the fair value of each property, taking into account the most recent independent valuations. The directors determine a property’s value within a range of reasonable fair value estimates. The best evidence of fair value is current prices in an active market for similar properties. Where such information is not available, the directors consider information from a variety of sources including: capitalised income projections based upon a property’s estimated net market income, and a capitalisation rate derived from an analysis of market evidence. current prices in an active market for properties of a different nature or recent prices of similar properties in less active markets, adjusted to reflect those differences. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 75 7 Non-financial assets and liabilities (continued) (e) Recognised fair value measurements (continued) (iii) Fair value measurements using significant unobservable inputs (level 3) The following table presents the changes in level 3 items for the periods ended 30 June 2017 and 30 June 2018 for recurring fair value measurements: Consolidated entity Opening balance 1 July 2016 Acquisitions Depreciation and impairment Disposals (Losses)/gains recognised in other comprehensive income Closing balance 30 June 2017 Acquisitions Depreciation and impairment Revaluation Transfers between classes Gains/(losses) recognised in other comprehensive income OFFICE BUILDINGS INDUSTRIAL SITES $’000 $’000 9,194 - (634) - (194) 8,366 - (660) (320) - 309 48,226 971 (995) (2,374) (310) 45,518 17 (928) 6,037 (46) 314 TOTAL $’000 57,420 971 (1,629) (2,374) (504) 53,884 17 (1,588) 5,717 (46) 623 Closing balance 30 June 2018 7,695 50,912 58,607 (iv) Valuation inputs and relationships to fair value The following table summarises the quantitative information about the significant unobservable inputs used in level 3 fair value measurements. FAIR VALUE AT 30 JUNE 2018 $’000 30 JUNE 2017 $’000 38,140 37,080 DESCRIPTION Industrial Sites -Australia Industrial Sites -Ghana 12,772 8,438 Office Buildings -Ghana 7,695 8,366 R ANGE OF INPUTS (PROBABILIT Y-WEIGHTED AVER AGE) VALUATION TECHNIQUE UNOBSERVABLE INPUTS* 2018 2017 Income capitalisation Capitalisation rate 7.25-11.75% (7.77%) 7.75-17.5% (8.99%) Market rental value per (m2) $18-104 per m2 ($48) $33-81 per m2 ($53) REL ATIONSHIP OF UNOBSERVABLE INPUTS TO FAIR VALUE The higher the capitalisation rate, the lower the fair value The higher the market rate, the higher the fair value Direct comparison m2 Selection of industrial sites with similar approximate utility Direct comparison m2 Selection of industrial sites with similar approximate utility $24-1,284 per m2 ($335) $37-1,158 per m2 ($339) The higher the rate per square metre, the higher the fair value $1,850 per m2 ($1,850) $2,256 per m2 ($2,256) The higher the rate per square metre, the higher the fair value * There were no significant inter-relationships between unobservable inputs that materially affect fair values. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements76 7 Non-financial assets and liabilities (continued) (e) Recognised fair value measurements (continued) (v) Valuation processes The Group engages external, independent and qualified valuers to determine the fair value of the Group’s land and buildings every three years. As at 30 June 2018, the fair values of the industrial sites properties have been determined by members of the Australian Property Institute, and the Ghana Institute of Surveyors. The main level 3 inputs used by the Group are derived and evaluated as follows: Industrial sites - discount rates, terminal yields, expected vacancy rates and values per square metre are estimated by members of the Australian Property Institute, and the Ghana Institute of Surveyors based on comparable transactions and industry data; Historical cost for recently completed buildings. 8 Equity (a) Contributed equity Fully paid ordinary shares 362,197,492 312,277,224 624,571 526,447 18 SHARES 17 SHARES 18 $’000 17 $’000 (i) Movements in ordinary share capital: Opening balance 1 July 2017 Contribution of equity, net of transaction costs and tax Excercise of options under the Employee Option Plan Balance 30 June 2018 (ii) Ordinary shares NUMBER OF SHARES 312,277,224 46,841,000 3,079,268 TOTAL $’000 526,447 97,516 608 362,197,492 624,571 Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. (iii) Dividend reinvestment plan The Company has a dividend reinvestment plan under which holders of ordinary shares may elect to have all or part of their dividend entitlements satisfied by the issue of new ordinary shares rather than by being paid in cash. The Board has determined that the dividend reinvestment plan will be suspended until further notice and that all dividends, if any, be paid in cash. (iv) Options Information relating to the Ausdrill Limited Employee Option Plan, including details of options issued, exercised and lapsed during the financial year and options outstanding at the end of the financial year, is set out in note 19. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 77 8 Equity (continued) (b) Other reserves The following table shows a breakdown of the balance sheet line item ‘other reserves’ and the movements in these reserves during the year. A description of the nature and purpose of each reserve is provided below. CONSOLIDATED ENTIT Y NOTES REVALUATION SURPLUS $’000 AVAIL ABLE- FOR-SALE FINANCIAL ASSETS $’000 SHARE- BASED PAYMENTS $’000 TR ANSACTIONS WITH NCI $’000 FOREIGN CURRENCY TR ANSLATION $’000 TOTAL $’000 19,939 (7) 5,969 (2,664) (39,265) (16,028) Balance at 1 July 2016 Revaluation - gross Deferred tax Currency translation differences Currency translation joint ventures Other comprehensive income Transactions with owners in their capacity as owners 7(b), 6(c) (515) (2,034) 7(c) 94 - - 610 - - (421) (1,424) Share-based payment expense 19 - - At 30 June 2017 19,518 (1,431) Balance at 1 July 2017 Revaluation - gross Deferred tax Currency translation differences Currency translation joint ventures Other comprehensive income Transactions with owners in their capacity as owners 7(b), 6(c) 7(c) 19,518 5,717 (1,524) 250 - (1,431) (2,377) 713 - - 4,443 (1,664) Share-based payment expense 19 Shares issued on conversion of employee share options - - - - At 30 June 2018 23,961 (3,095) (i) Nature and purpose of other reserves Revaluation surplus - property, plant and equipment - - - - - 238 6,207 - - - - - - - (292) 1,174 (1,024) (142) (2,549) 412 1,174 (1,024) (1,987) - 238 (2,664) (39,407) (17,777) 6,207 (2,664) (39,407) (17,777) - - - - - 756 (517) 6,446 - - - - - - - - (195) (1,176) 3,671 2,300 - - 3,340 (1,006) (926) 3,671 5,079 756 (517) (2,664) (37,107) (12,459) The property, plant and equipment revaluation surplus is used to record increments and decrements on the revaluation of non- current assets. In the event of a sale of an asset, any balance in the reserve in relation to the asset is transferred to retained earnings. See accounting policy note 25(n) for details. Available-for-sale financial assets Changes in the fair value and exchange differences arising on translation of investments that are classified as available-for-sale financial assets (e.g. equities), are recognised in other comprehensive income and accumulated in a separate reserve within equity. Amounts are reclassified to profit or loss when the associated assets are sold or impaired, see accounting policy note 25(m) for details. Share-based payments reserve The share-based payments reserve is used to recognise the fair value of options issued to employees that are expensed in the statement of comprehensive income each year and conversion of options. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements78 8 Equity (continued) (b) Other reserves (continued) (i) Nature and purpose of other reserves (continued) Transactions with non-controlling interests (NCI) This reserve is used to record the differences described in note 25(b)(iv) which may arise as a result of transactions with non- controlling interests that do not result in a loss of control. Foreign currency translation Exchange differences arising on translation of the foreign controlled entities are recognised in other comprehensive income and accumulated in a separate reserve within equity. The cumulative amount is reclassified to profit or loss when the net investment is disposed of. The Group’s share of exchange differences arising on translation of foreign joint ventures are recognised in other comprehensive income and are accumulated in this reserve. (c) Retained earnings Movements in retained profits were as follows: Balance 1 July Net profit/(loss) for the year Dividends paid Transfer from reserves Balance 30 June 9 Cash flow information NOTES 12(b) 18 $’000 17 $’000 121,444 61,050 (19,855) - 96,177 31,201 (6,246) 312 162,639 121,444 (a) Reconciliation of profit or loss after income tax to net cash inflow from operating activities Profit/(loss) for the year Depreciation and amortisation expense Loss/(gain) on sale of non-current assets Net (gain)/loss on sale of businesses (Gain)/loss on sale of available-for-sale financial assets Net exchange differences Bad debts and provision for doubtful debts Share of profits of joint ventures Non-cash employee benefits expense - share-based payments Change in operating assets and liabilities: (Increase)/decrease in trade debtors (Increase)/decrease in inventories (Increase)/decrease in deferred tax assets (Increase)/decrease in other operating assets (Decrease)/increase in trade creditors (Decrease)/increase in provision for income taxes payable (Decrease)/increase in deferred tax liabilities (Decrease)/increase in other provisions Net cash inflow from operating activities 18 $’000 61,050 74,775 1,626 (390) - (11,718) (588) (22,344) 756 (53,540) (20,074) 2,065 (6,883) 30,972 (1,108) 883 (2,889) 52,593 17 $’000 31,201 62,413 3,630 64 (934) 2,634 (184) (13,090) 238 (10,025) 878 31 (8,111) 16,393 2,027 45 7,403 94,613 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements79 9 Cash flow information (continued) (b) Non-cash investing and financing activities There were no non-cash investing and financing activities during the year (2017: nil). (c) Net debt reconciliation This section sets out an analysis of net debt and the movements in net debt. Net debt Cash and cash equivalents Borrowings - repayable within one year Borrowings - repayable after one year Net debt Cash and cash equivalents Gross debt - fixed interest rates Net debt Net debt as at 1 July 2017 Cash flows Foreign exchange adjustments Other non-cash movements Net debt as at 30 June 2018 18 $’000 17 $’000 137,258 166,710 (831) (403,719) (267,292) 137,258 (404,550) (267,292) BORROWINGS DUE WITHIN 1 YEAR $’000 BORROWINGS DUE AFTER 1 YEAR $’000 (559) (388,058) (221,907) 166,710 (388,617) (221,907) TOTAL $’000 (559) (2,319) (34) 2,081 (831) (388,058) (221,907) - (14,617) (1,044) (32,959) (13,463) 1,037 (403,719) (267,292) CASH $’000 166,710 (30,640) 1,188 - 137,258 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements80 Risk This section of the notes discusses the Group’s exposure to various risks and shows how these could affect the Group’s financial position and performance. 10 11 12 Critical accounting estimates and judgements Financial risk management Capital management 81 81 88 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements81 10 Critical accounting estimates and judgements The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the Group’s accounting policies. This note provides an overview of the areas that involved a higher degree of judgement or complexity, and of items which are more likely to be materially adjusted due to estimates and assumptions turning out to be incorrect. Detailed information about each of these estimates and judgements is included in notes 1 to 14 together with information about the basis of calculation for each affected line item in the financial statements. In addition, this note also explains where there have been actual adjustments this year as a result of an error and of changes to previous estimates. (a) Significant estimates and judgements Recognition of revenue - note 2 Impairment of available-for-sale financial assets - note 6(c) Estimated fair value of certain available-for-sale financial assets - note 6(c) Estimation of fair values of land and buildings - note 7(b) Estimation of useful life of property, plant and equipment - note 7(b) Recognition of deferred tax asset for carried forward tax losses - note 7(c) Consolidation decisions and classification of joint arrangements - note 14 Estimates and judgements are continually evaluated. They are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. (b) Critical judgements in applying accounting policies There have been no critical judgements used in preparing the Group’s financial statements for the year ended 30 June 2018 (30 June 2017: none). 11 Financial risk management This note explains the Group’s exposure to financial risks and how these risks could affect the Group’s future financial performance. Current year profit and loss information has been included where relevant to add further context. RISK EXPOSURE ARISING FROM MEASUREMENT MANAGEMENT Market risk - foreign exchange Future commercial transactions Recognised financial assets and liabilities not denominated in AUD Cash flow forecasting Sensitivity analysis Forward foreign exchange contracts Market risk - interest rate Market risk - security prices Credit risk Long-term borrowings at variable rates Sensitivity analysis Interest rate swaps Investments in equity securities Sensitivity analysis Portfolio diversification Cash and cash equivalents, trade receivables, derivative financial instruments and available-for-sale debt instruments Aging analysis Credit rating Credit limits, retention of title over goods sold, letters of credit Liquidity risk Borrowings and other liabilities Rolling cash flow forecasts Availability of committed credit lines and borrowing facilities The Group’s key management personnel report to the Audit and Risk Committee and Board regularly on the progress and objectives of the risks and the associated corporate governance policy objectives. The Group’s financial risk management is carried out by a central treasury department (Group treasury) under policies approved by the Board of directors. Group treasury identifies, evaluates and hedges financial risks in close co-operation with the Group’s operating units. The Board provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 82 11 Financial risk management (continued) (a) Market risk The Group hedges large capital expenditure items acquired in foreign currency. There are no hedges currently in place. In respect of other monetary assets and liabilities held in currencies other than the AUD, the Group ensures that the net exposure is kept to an acceptable level by matching foreign denominated financial assets with matching financial liabilities and vice versa. (i) Foreign exchange risk Exposure The Group's exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows: Cash Trade and other assets Available-for-sale financial assets Trade payables Borrowings USD $’000 GHS $’000 GBP $’000 EUR $’000 TZS $’000 ZMW $’000 ZAR $’000 XOF $’000 30 JUNE 2018 4,203 10,802 - 262 44 - 1 - 382 45,289 729 - (13,339) (5,487) (72) (11,080) (3,721) - - (31,301) 9 2 - - - 1 - - (71) - - - 514 - - - 19 - (83) - USD $’000 GHS $’000 GBP $’000 EUR $’000 TZS $’000 ZMW $’000 ZAR $’000 XOF $’000 30 JUNE 2017 Cash Trade and other assets Available-for-sale financial assets Trade payables Borrowings 5,898 2,854 10,958 - - - - - 1,559 48,488 137 - (12,931) (8,963) (76) (3,788) - - - (71,836) 10 - - - - - 1,061 - (65) - - - - - - - - - (221) - Amounts recognised in profit or loss and other comprehensive income During the year, the following foreign exchange related amounts were recognised in profit or loss and other comprehensive income: 17 18 $’000 $’000 Amounts recognised in profit or loss Net foreign exchange gain/(loss) included in other income/other expenses Total net foreign exchange gain/(loss) recognised in profit or loss before income tax for the year 11,249 11,249 4,747 4,747 Net gain/(loss) recognised in other comprehensive income (note 8(b)) Translation of foreign currency denominated operations 2,745 150 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 83 11 Financial risk management (continued) (a) Market risk (continued) (i) Foreign exchange risk (continued) A 10 percent strengthening of the Australian dollar against the following currencies at 30 June would have increased (decreased) pre-tax profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2017. 30 June 2018 USD GHS GBP EUR TZS ZAR CAD XOF 30 June 2017 USD GHS GBP EUR TZS ZAR XOF PROFIT OR (LOSS) A$’000 186 471 (59) (299) (2) 6 (47) 99 356 (432) 552 (6) 2,325 (2) (116) 20 2,341 A 10 percent weakening of the Australian dollar against the above currencies at 30 June would have had the equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. The Group’s exposure to other foreign exchange movements is not material. (ii) Cash flow and fair value interest rate risk The Group’s fixed rate borrowings and receivables are carried at amortised cost. They are therefore not subject to interest rate risk as defined in AASB 7, since neither the carrying amount nor the future cash flows will fluctuate because of a change in market interest rates. The Group’s main interest rate risks arise from cash, cash equivalents and long-term borrowings. Cash, cash equivalents and borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. During 2018 and 2017, the Group’s borrowings subject to variable interest rates were denominated in Australian Dollars. Refer to note 11(c) Liquidity risk for cash, cash equivalents and variable rate exposure. As at the end of the reporting period, the Group had no variable interest rate borrowings. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements84 11 Financial risk management (continued) (a) Market risk (continued) (iii) Price risk Exposure The Group's exposure to equity securities price risk arises from investments held by the Group and classified in the balance sheet as available-for-sale. 53% (2017: 80%) of the Group's equity securities are publicly traded on the Australian Securities Exchange, the London Stock Exchange and the Canadian Stock Exchange. The majority of the unlisted shares relate to the investment in HiSeis Pty Ltd, an end to end seismic hard rock exploration service provider acquired in May 2018. Sensitivity analysis The table below summarises the impact of an increase/(decrease) of the available-for-sale financial assets on the Group's equity for the year after tax. The analysis is based on the assumption that the available-for-sale financial assets had increased by 10% or decreased by 10% with all other variables held constant. CONSOLIDATED ENTIT Y Available-for-sale assets - increase 10% Available-for-sale assets - decrease 10% IMPACT ON OTHER COMPONENTS OF EQUIT Y 18 $’000 840 (840) 17 $’000 363 (363) Other components of equity would increase/decrease as a result of gains/losses on equity securities classified as available-for- sale. As the fair value of the publicly traded available-for-sale financial assets would still be above cost, no impairment loss would be recognised in profit or loss as a result of the decrease in the respective share price of the shares held. Amounts recognised in profit or loss and other comprehensive income The amounts recognised in other comprehensive income in relation to the various investments held by the Group are disclosed in note 6(c). (b) Credit risk (i) Risk management Credit risk is managed on a Group basis. Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and investment securities. Credit risk also arises from cash and cash equivalents. The Group limits its exposure to credit risk from cash and cash equivalents by only investing in counterparties that have an acceptable credit rating. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements85 11 Financial risk management (continued) (b) Credit risk (ii) Credit quality (continued) The Group’s maximum exposure to credit risk for receivables at the reporting date by geographic region was: (AUD) Australia Africa Asia Europe Trade and other receivables Counterparties with external credit rating (Moody's) A2 A3 Ba1 Ba3 Baa2 Baa3 B1 B3 Counterparties without external credit rating * Group 1 Group 2 Group 3 Total trade and other receivables The Group’s maximum exposure to credit risk for cash at bank and short term deposits was: Cash at bank and short-term bank deposits (AUD) AA AA- A+ A BBB+ BBB- B Other 18 $’000 73,902 139,392 263 170 17 $’000 79,248 72,489 229 3 213,727 151,969 212 11,941 77 7,773 9,502 2,377 - 331 2,729 7,499 6,807 - 3,868 17,797 6 - 32,213 38,706 13,893 167,621 - 181,514 213,727 100 107,149 1,114 4 1,474 874 26,422 121 137,258 537 112,726 - 113,263 151,969 124 120,107 904 945 2,314 - 42,235 81 166,710 * Group 1 - new customers (less than 6 months) Group 2 - existing customers (more than 6 months) with no defaults in the past Group 3 - existing customers (more than 6 months) with some defaults in the past. All defaults were fully recovered. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements86 11 Financial risk management (continued) (b) Credit risk (continued) (iii) Impaired trade receivables Individual receivables which are known to be uncollectible are written off by reducing the carrying amount directly. The other receivables are assessed collectively to determine whether there is objective evidence that an impairment has been incurred but not yet been identified. For these receivables, the estimated impairment losses are recognised in a separate provision for impairment. The Group considers that there is evidence of impairment if any of the following indicators are present: significant financial difficulties of the debtor; probability that the debtor will enter bankruptcy or financial reorganisation; and default or delinquency in payments (more than 90 days overdue). Receivables for which an impairment provision was recognised are written off against the provision when there is no expectation of recovering additional cash. Impairment losses are recognised in profit or loss within other expenses. Subsequent recoveries of amounts previously written off are credited against other expenses. See note 3 for information about how impairment losses are calculated. As at 30 June 2018, current trade receivables of the Group with a nominal value of $13,247,935 (2017: $14,474,644) were impaired. The amount of the provision for impaired receivables was $11,420,595 (2017: $14,361,469). The Group expects that a portion of the receivables is to be recovered. The aging of these receivables is as follows: 3 to 6 months Over 6 months Movements in the provision for impairment of trade receivables that are assessed for impairment collectively are as follows: At 1 July Provision for impairment (reversed)/recognised during the year Receivables written off during the year as uncollectible Discontinued operations removed Unused amounts reversed (including currency impact) At 30 June 18 $’000 422 12,826 13,248 14,361 (2,901) 43 (163) 81 11,421 17 $’000 61 14,414 14,475 14,726 (295) 2 - (72) 14,361 The creation and release of the provision for impaired receivables has been included in other expenses in the consolidated statement of profit or loss. Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. (iv) Past due but not impaired As at 30 June 2018, trade receivables of $56,670,523 (2017: $29,039,368) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The aging analysis of these trade receivables is as follows: Up to 2 months Over 2 months 18 $’000 54,846 1,825 56,671 17 $’000 28,143 896 29,039 The other classes within trade and other receivables do not contain impaired assets and are not past due. Based on the credit history of these other classes, it is expected that these amounts will be received when due. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 87 11 Financial risk management (continued) (c) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. Due to the dynamic nature of the underlying businesses, the Group aims at maintaining flexibility in funding by keeping committed credit lines available with a variety of counterparties. (i) Financing arrangements The Group had access to the following undrawn debt facilities at the end of the reporting period: Floating rate - Bank loans 18 $’000 17 $’000 199,433 199,433 124,776 124,776 In August 2017, Ausdrill Limited refinanced and up-sized its revolving debt facility from A$125 million to A$200 million. Refer note 6(e). Maturities of financial liabilities The tables below analyse the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Contractual maturities of financial liabilities Group - at 30 June 2018 Trade payables Fixed rate Total Group - at 30 June 2017 Trade payables Fixed rate Total LESS THAN 6 MONTHS $’000 6 - 12 MONTHS $’000 BET WEEN 1 AND 2 YEARS $’000 BET WEEN 2 AND 5 YEARS $’000 OVER 5 YEARS $’000 TOTAL CONTR ACTUAL CASH FLOWS $’000 CARRYING AMOUNT LIABILITIES $’000 122,770 15,037 137,807 - 13,685 13,685 - 417,640 417,640 100,396 14,000 114,396 - 13,443 13,443 - 24,399 24,399 - - - - 403,929 403,929 - - - - - - 122,770 122,770 446,362 404,550 569,132 527,320 100,396 455,771 556,167 100,396 388,617 489,013 Details about financial guarantee contracts are provided in note 24. The amounts disclosed in the table are the maximum amounts allocated to the earliest period in which the guarantee could be called. The parent entity does not expect these payments to eventuate. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements88 12 Capital management (a) Risk management The Group’s objectives when managing its capital is to safeguard its ability to continue as a going concern, so it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistently with others in the industry, the Group monitors capital on the basis of the gearing ratio. The ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings, as shown in the statement of financial position, less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the statement of financial position plus net debt. The gearing ratios at 30 June 2018 and 30 June 2017 were as follows: Total borrowings Less: cash and cash equivalents Net debt Total equity Total capital Gearing ratio See note 6(e) for information on financial covenants on borrowings. b) Dividends (i) Ordinary shares Final ordinary fully franked dividend for the year ended 30 June 2017 of 2.0 cents (2016: nil) per fully paid share paid on 18 October 2017 Interim ordinary fully franked dividend for the year ended 30 June 2018 of 3.5 cents (2017: 2.0 cents) per fully paid share paid on 30 March 2018 (31 March 2017) Total dividends provided for or paid Dividends paid in cash or satisfied by the issue of shares under the dividend reinvestment plan during the years ended 30 June 2018 and 2017 were as follows: (ii) Dividends not recognised at the end of the reporting period 18 $’000 17 $’000 404,550 388,617 (137,258) (166,710) 267,292 774,751 1,042,043 221,907 630,114 852,021 26% 26% 18 $’000 7,188 12,667 19,855 19,855 18 $’000 17 $’000 - 6,246 6,246 6,246 17 $’000 In addition to the above dividends, since year end the directors have recommended the payment of a final dividend of 1.5 cents per fully paid ordinary share and a special dividend of 2.0 cents per fully paid ordinary share (2017: 2.0 cents). The aggregate amount of the proposed dividend expected to be paid on 18 October 2018 out of retained earnings at 30 June 2018, but not recognised as a liability at year end, is 12,677 7,188 (iii) Franked dividends Franking credits available for subsequent reporting periods based on a tax rate of 30% (2017 - 30%) 26,501 34,985 The above amounts are calculated from the balance of the franking account as at the end of the reporting period, adjusted for franking credits and debits that will arise from the settlement of liabilities or receivables for income tax and dividends after the end of the year. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 89 Group structure This section provides information which will help users understand how the Group structure affects the financial position and performance of the Group as a whole. In particular, there is information about: changes to the structure that occurred during the year as a result of business combinations and the disposal of discontinued operations; transactions with non-controlling interests; and interests in joint operations. A list of significant subsidiaries is provided in note 14. This note also discloses details about the Group’s equity accounted investments. 13 14 Discontinued operations Interests in other entities 90 93 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 90 13 Discontinued operations (a) Diamond Communications (i) Description The Group entered into a sale agreement to sell the Diamond Communications business for $6.2 million which was completed on 1 May 2018. The sale includes all of the operational assets of the Diamond Communications business. Financial information relating to the discontinued operation for the period to the date of disposal is set out below. (ii) Financial performance and cash flow information The financial performance and cash flow information presented are for the twelve months ended 30 June 2018 and 30 June 2017. 17 18 $’000 $’000 Revenue Expenses Profit before income tax Income tax (expense)/benefit Profit after income tax of discontinued operation Gain on sale of the subsidiary after income tax Profit from discontinued operation Other comprehensive income/(loss) from discontinued operation Net cash inflow/(outflow) from operating activities Net cash (outflow)/inflow from investing activities Net cash (outflow)/inflow from financing activities Net (decrease)/increase in cash generated by the subsidiary (iii) Details of the sale of the subsidiary Consideration received or receivable: Cash Deferred consideration * Carrying amount of net assets sold Gain on sale before income tax and reclassification of foreign currency translation reserve Income tax expense on gain Capital losses applied Tax losses applied Gain on sale after income tax * An amount of $1,565,000 remains outstanding and is due for settlement no later than 1 May 2019. 13,770 (13,064) 706 (214) 492 - 492 492 (105) (436) 436 (105) 17,931 (16,123) 1,808 (497) 1,311 390 1,701 1,701 524 (746) (805) (1,027) 18 $’000 4,600 1,565 (5,775) (390) (117) - 117 390 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 13 Discontinued operations (continued) (a) Diamond Communications (continued) The carrying amounts of assets and liabilities as at the date of sale, 1 May 2018, were: Property, plant and equipment Cash Trade and other receivables Inventories Deferred tax asset Total assets Trade and other creditors Employee benefits obligations Total liabilities Net assets (b) The Miners Rest Motel (i) Description 91 18 $’000 1,899 602 4,811 164 - 7,476 1,140 561 1,701 5,775 The Group entered into a sale agreement to sell The Miners Rest Motel business for $2.5 million which was completed on 21 September 2016. The sale included the land and buildings and all of the operational assets of The Miners Rest Motel business. A fair value reduction of $0.9 million was made to the value of the land and buildings and was brought to account as at 30 June 2016. Financial information relating to the discontinued operation for the period to the date of disposal is set out below. (ii) Financial performance and cash flow information The financial performance and cash flow information presented are for the twelve months ended 30 June 2018 and 30 June 2017. Revenue Expenses (Loss) before income tax Income tax (expense)/benefit (Loss) after income tax of discontinued operation (Loss) on sale of the subsidiary after income tax (Loss) from discontinued operation Other comprehensive (loss)/income from discontinued operation Net cash (outflow)/inflow from operating activities Net cash inflow/(outflow) from investing activities Net cash (outflow)/inflow from financing activities Net (decrease)/increase in cash generated by the subsidiary 18 $’000 - - - - - - - - - - - - 17 $’000 329 (507) (178) - (178) (64) (242) (242) (181) 2,408 (2,341) (114) AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 92 13 Discontinued operations (continued) (b) The Miners Rest Motel (continued) (iii) Details of the sale of the subsidiary Consideration received or receivable: Cash Carrying amount of net assets sold (Loss) on sale before income tax and reclassification of foreign currency translation reserve Income tax expense on gain Capital losses applied Tax losses applied (Loss) on sale after income tax The carrying amounts of assets and liabilities as at the date of sale, 21 September 2016, were: Property, plant and equipment Trade receivables Inventories Total assets Trade creditors Employee benefits obligations Total liabilities Net assets (c) Drilling Tools Australia Pty Ltd (i) Description 17 $’000 2,413 (2,477) (64) - - - (64) 17 $’000 2,477 - - 2,477 - - - 2,477 On 19 May 2016, the Company announced that it had agreed to sell the Drilling Tools Australia (DTA) business to Finnish manufacturer the Robit Plc Group. Completion of that sale occurred on 30 June 2016. (ii) Financial performance and cash flow information The outstanding proceeds from the sale of DTA totalling $19,800,000 as at 30 June 2016 were received during the prior financial year. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements93 14 Interests in other entities (a) Material subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following principal subsidiaries in accordance with the accounting policy described in note 25(b): NAME OF ENTIT Y COUNTRY OF INCORPOR ATION CL ASS OF SHARES EQUIT Y HOLDING ** 18 % 17 % ACN 103534087 Pty Ltd * African Mining Services Burkina Faso Sarl African Mining Services (Ghana) Pty Ltd * African Mining Services Mali Sarl African Mining Services Guinee Sarl African Mining Services Senegal Suarl AMCG Ltd Ausdrill Finance Pty Ltd * Ausdrill (Ghana) Pty Ltd Ausdrill International & Management Services Pty Ltd * Ausdrill International Pty Ltd * Ausdrill Northwest Pty Ltd * Ausdrill Properties Pty Ltd * Ausdrill Tanzania Limited Ausdrill Utilities Pty Ltd * Ausdrill Underground Mining Services Australia Pty Ltd (1) BTP Equipment Pty Ltd * BTP Parts Pty Ltd * Connector Drilling Pty Ltd * Diamond Communications Pty Ltd * Drill Rigs Australia Pty Ltd * Energy Drilling Australia Pty Ltd * Golden Plains Pty Ltd * Logistics Direct Ltd MinAnalytical Holdings Pty Ltd * MinAnalytical Laboratory Services Australia Pty Ltd * Mining Technology and Supplies Ltd Power Solutions Africa Suarl Supply Direct Pty Ltd * Supply Direct South Africa Pty Ltd * Synegex Holdings Pty Ltd * West African Mining Services Ltd (1) Deregistered by ASIC on 12 December 2017. Australia Burkina Faso Australia Mali Guinea Senegal Ghana Australia Australia Australia Australia Australia Australia Tanzania Australia Australia Australia Australia Australia Australia Australia Australia Australia Ghana Australia Australia Ghana Senegal Australia Australia Australia Ghana Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 * These subsidiaries have been granted relief from the necessity to prepare financial reports in accordance with ASIC instrument 2016/785. For further information refer to note 23. ** All controlled entities are directly controlled by Ausdrill Limited with the exception of: African Mining Services Mali Sarl, African Mining Services (Ghana) Pty Ltd, West African Mining Services Limited, Ausdrill Tanzania Limited, Energy Drilling Australia Pty Ltd, Synegex Holdings Pty Ltd and AMCG Ltd are 100% owned by Ausdrill International Pty Ltd. African Mining Services Burkina Faso Sarl, African Mining Services Guinee Sarl, African Mining Services Senegal Suarl and Power Solutions Africa Suarl are 100% owned by African Mining Services (Ghana) Pty Ltd. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 94 14 Interests in other entities (continued) (a) Material subsidiaries (continued) Mining Technology and Supplies Limited which is 100% owned by West African Mining Services Limited. Supply Direct Pty Ltd which is 100% owned by Golden Plains Pty Ltd. Supply Direct South Africa Pty Ltd and Logistics Direct Limited are 100% owned by Supply Direct Pty Ltd. MinAnalytical Laboratory Services Australia Pty Ltd is 100% owned by MinAnalytical Holdings Pty Ltd. BTP Equipment Pty Ltd is 75% owned by Ausdrill Finance Pty Ltd and 25% owned by Ausdrill International Pty Ltd. BTP Parts Pty Ltd is 100% owned by BTP Equipment Pty Ltd. Ausdrill Limited carries on business in Australia. African Mining Services (Ghana) Pty Ltd, Ausdrill (Ghana) Pty Ltd, West African Mining Services Limited, Mining Technology and Supplies Limited and Logistics Direct Limited carry or carried on business in Ghana. Ausdrill Tanzania Limited carries on business in Tanzania. Ausdrill Utilities Pty Ltd has a branch which carries on business in Zambia. African Mining Services Mali Sarl carries on business in Mali. African Mining Services Burkina Faso Sarl carries on business in Burkina Faso. African Mining Services Guinee Sarl carries on business in Guinea. Supply Direct South Africa Pty Ltd carries on business in South Africa. Supply Direct Pty Ltd has a branch which carries on business in the United Kingdom. African Mining Services Senegal Suarl and Power Solutions Africa Suarl carry on business in Senegal. Steps have been taken for the voluntary liquidation of West African Mining Services Limited and Mining Technology and Supplies Ltd. (b) Interests in joint ventures Set out below are the joint ventures of the Group as at 30 June 2018 which, in the opinion of the directors, are material to the Group. The entities listed below have share capital consisting solely of ordinary shares, which are held directly by the Group. The country of incorporation or registration is also their principal place of business, and the proportion of ownership interest is the same as the proportion of voting rights held. NAME OF ENTIT Y PL ACE OF BUSINESS/ COUNTRY OF INCORPOR ATION % OF OWNERSHIP INTEREST NATURE OF REL ATIONSHIP MEASUREMENT METHOD 18 % 17 % CARRYING AMOUNT 18 $’000 17 $’000 African Underground Mining Services Ghana, Mali, Burkina Faso and Tanzania 50 50 Joint ventures Equity method 71,266 58,884 African Underground Mining Services is not a consolidated entity of Ausdrill Limited because Ausdrill Limited is not able to govern the activities of this entity so as to obtain benefits from it. (i) Commitments and contingent liabilities in respect of joint ventures 18 $’000 17 $’000 Commitments - joint ventures Share of African Underground Mining Services capital commitments 9,604 19,672 Contingent liabilities - joint ventures African Underground Mining Services did not have any contingent liabilities as at 30 June 2018 (30 June 2017: nil). AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements95 14 Interests in other entities (continued) (b) Interests in joint ventures (continued) (ii) Summarised financial information for joint ventures Financial information for those joint ventures that are material to the Group is provided below. The information disclosed reflects the amounts presented in the financial statements of the relevant joint ventures and not Ausdrill Limited’s share of those amounts. They have been amended to reflect adjustments made by the entity when using the equity method, including fair value adjustments and modifications for differences in accounting policy. SUMMARISED BAL ANCE SHEET Current assets Cash and other cash equivalents Other current assets Total current assets Non-current assets Current liabilities Financial liabilities (excluding trade payables) Other current liabilities Total current liabilities Non-current liabilities Net assets Reconciliation to carrying amounts: Opening net assets 1 July Profit for the year Other comprehensive income/(loss) Dividends paid Closing net assets at 30 June Group share in % Group share in $ Carrying amount SUMMARISED STATEMENT OF COMPREHENSIVE INCOME Revenue Interest income Depreciation and amortisation expense Interest expense Income tax expense Profit from continuing operations Profit for the year Other comprehensive income/(loss) Total comprehensive income AFRICAN UNDERGROUND MINING SERVICES 18 $’000 17 $’000 33,272 98,420 131,692 90,588 17,992 40,440 58,432 21,316 25,058 73,062 98,120 57,266 5,318 29,314 34,632 2,986 142,532 117,768 117,768 44,688 7,342 (27,266) 142,532 50.0% 71,266 71,266 290,434 1,874 (37,070) (4,338) (14,762) 44,688 44,688 7,342 52,030 139,528 26,180 (2,048) (45,892) 117,768 50.0% 58,884 58,884 179,724 2,374 (21,940) (3,874) (11,892) 26,180 26,180 (2,048) 24,132 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements96 Unrecognised items This section of the notes provides information about items that are not recognised in the financial statements as they do not (yet) satisfy the recognition criteria. In addition to the items and transactions disclosed below, there are also: (a) Unrecognised tax amounts – see note 5 (b) Non-cash investing and financing transactions – see note 9(b). 15 16 17 Contingencies Commitments Events since the end of the financial year 97 97 97 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 97 15 Contingencies (a) Contingent liabilities In the course of its normal business, the Group occasionally receives claims arising from its operating activities. In the opinion of the directors, all such matters are covered by insurance or, if not covered, are without merit or are of such a kind or involve such amounts that would not have a material adverse effect on the operating results or financial position of the Group if settled unfavourably. For information about guarantees given by entities within the Group, including the parent entity, please refer to note 24. (b) Contingent assets The Group lodged a claim in relation to a matter which at the date of this report is unresolved and is subject to litigation. The directors are confident that a favourable outcome will be achieved. However, the contingent asset has not been recognised as a receivable at 30 June 2018 as receipt of this amount is dependent on the outcome of the litigation. 16 Commitments (a) Capital commitments Capital expenditure contracted for at the end of the reporting period but not recognised as liabilities is as follows: Property, plant and equipment Payable: Within one year 18 $’000 17 $’000 10,393 16,111 The capital commitments are to be funded from cash and available finance facilities. (b) Non-cancellable operating leases The Group leases various offices and warehouses under non-cancellable operating leases expiring within one to six years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year Later than one year but not later than five years Later than five years 17 Events since the end of the financial year 18 $’000 17 $’000 3,476 2,642 15 6,133 2,638 799 - 3,437 On 15 August 2018, the directors declared the payment of a final ordinary dividend of $12,676,912 (1.5 cents per fully paid share dividend in line with a 40% payout ratio on underlying profit and a special dividend of 2.0 cents per fully paid share to align with a payout ratio 40% of reported profit, for a total dividend per fully paid share of 3.5 cents) to be paid on 18 October 2018 out of retained profits at 30 June 2018. The financial effect of this transaction has not been brought to account at 30 June 2018. On 15 August 2018, Ausdrill Limited (Ausdrill) entered into a binding agreement to acquire Barminco Holdings Pty Ltd (“Barminco”), a specialist underground mining contractor with operations predominately in Australia as well as in Africa (through African Underground Mining Services (AUMS)), Egypt and India. Barminco is one of Australia’s leading underground hard-rock mining contractors and is the Group’s long standing joint-venture partner in AUMS. Ausdrill will acquire all of the equity and equity-like instruments in Barminco in exchange for 150.7 million fully paid ordinary ex-dividend Ausdrill shares and $25.4 million in cash. This is equivalent to an equity acquisition price of $271.5 million and an enterprise value of $697.0 million. In order to reduce pro-forma gearing, the Group will undertake a fully underwritten accelerated non-renounceable entitlement offer to raise approximately $250 million. There are no other matters or circumstances that have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Consolidated entity, the results of those operations, or the state of affairs of the Consolidated entity in subsequent financial years. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements98 Other information This section of the notes includes other information that must be disclosed to comply with the accounting standards and other 18 19 20 21 22 23 24 25 Related party transactions Share-based payments Remuneration of auditors Earnings per share Assets pledged as security Deed of cross guarantee Parent entity financial information Summary of significant accounting policies 99 100 102 103 104 105 108 109 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements18 Related party transactions (a) Parent entities The ultimate parent entity of the Group is Ausdrill Limited. (b) Subsidiaries Interests in subsidiaries are set out in note 14(a). (c) Key management personnel compensation Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Detailed remuneration disclosures are provided in the remuneration report on pages 31 to 42. (d) Transactions with other related parties The following transactions occurred with related parties: Sales of goods and services Joint ventures Entities related to key management personnel Management fee received / receivable Joint ventures Purchase of goods Rental office buildings 99 18 $’000 17 $’000 4,025,797 3,595,364 168,791 108,070 64,797 192,496 30,549 83,319 4,367,455 3,901,728 18 $’000 17 $’000 11,606,354 11,507,028 42,675,518 8,365,112 651,001 669,932 89,508 358,032 (i) Purchases from entities controlled by key management personnel The Group acquired the following goods and services from entities that are controlled by members of the Group key management personnel: rental of an office building provision of exploration drilling services mining services For detailed disclosures please refer to the remuneration report on pages 40 and 41. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 100 18 Related party transactions (continued) (e) Outstanding balances arising from sales / purchases of goods and services The following balances are outstanding at the end of the reporting period in relation to transactions with related parties: Current receivables (sales of goods and services) Joint ventures Entities related to key management personnel (f) Loans to/from related parties 18 $’000 17 $’000 6,560,666 18,491,227 10,786,785 1,954,906 There were no loans to/from key management personnel during the year (2017: nil). (g) Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. Outstanding balances are unsecured and are repayable in cash. 19 Share-based payments (a) Employee Option Plan The Employee Option Plan is designed to provide long-term incentives for senior managers (excluding executive directors) to deliver long-term shareholder returns. Under the plan, participants are granted options which only vest if certain performance conditions are met. Participation in the plan is at the Board’s discretion and no individual has a contractual right to participate in the plan or to receive any guaranteed benefits. The amount of options that will vest depends on Ausdrill Limited’s total shareholders return (TSR), including share price growth, dividends and capital returns, ranking with a peer group of selected companies that are listed on the ASX over a period of time. Once vested, the options remain exercisable for a period of between 3.6 years and 5 years from their issue date. Options are granted under the plan for nil consideration. Options granted for nil consideration and settled in shares under the plan carry no dividend or voting rights. Set out below are summaries of options granted under the plan: 18 AVER AGE EXERCISE PRICE PER SHARE OPTION NUMBER OF OPTIONS AVER AGE E XERCISE PRICE PER SHARE OPTION $0.66 $1.37 $1.09 $0.85 $0.39 $0.52 13,833,346 800,000 (5,733,329) (1,133,335) 7,766,682 899,999 $0.85 $0.00 $0.00 $1.11 $0.66 $1.70 17 NUMBER OF OPTIONS 16,100,015 - - (2,266,669) 13,833,346 1,966,654 As at 1 July Granted during the year Exercised during the year Forfeited during the year As at 30 June Vested and exercisable at 30 June No options expired during the periods covered by the above tables. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 101 19 Share-based payments (continued) (a) Employee Option Plan (continued) Share options outstanding at the end of the year have the following expiry date and exercise prices. GR ANT DATE 07/10/2013 07/10/2013 23/12/2015 23/12/2015 23/12/2015 20/04/2018 20/04/2018 20/04/2018 20/04/2018 20/04/2018 20/04/2018 20/04/2018 20/04/2018 20/04/2018 EXPIRY DATE 07/10/2018 07/10/2018 23/12/2020 23/12/2020 23/12/2020 21/11/2021 21/11/2021 21/11/2021 22/05/2022 22/05/2022 22/05/2022 12/06/2022 12/06/2022 12/06/2022 EXERCISE PRICE SHARE OPTIONS 30 JUNE 2018 SHARE OPTIONS 30 JUNE 2017 $1.70 $1.70 $0.25 $0.25 $0.25 $1.26 $1.26 $1.26 $1.33 $1.33 $1.33 $1.62 $1.62 $1.62 66,666 100,002 733,331 3,033,317 3,033,366 133,333 133,333 133,334 66,666 66,666 66,668 66,666 66,666 66,668 1,966,654 1,966,692 3,299,982 3,299,982 3,300,036 - - - - - - - - - 7,766,682 13,833,346 Weighted average remaining contractual life of options outstanding at end of period 2.56 years 2.86 years (i) Fair value of options granted There were 800,000 options granted during the year ended 30 June 2018 (2017: nil). The fair value at grant date is independently determined using either a Monte Carlo simulation or an amended Black Scholes Merton methodology valuation. The model inputs for options granted during the year ended 30 June 2018 included: (a) Options are granted for no consideration and vest based on Ausdrill's TSR rating with a peer group of selected companies for the vesting periods below: (b) vesting period - tranche 1 - 1/3 of options 215 days (c) vesting period - tranche 2 - 1/3 of options 580 days (d) vesting period - tranche 3 - 1/3 of options 946 days 397 days 763 days 1,128 days $1.33 418 days 784 days 1,149 days $1.62 $1.26 20 April 2018 20 April 2018 20 April 2018 21 November 2021 22 May 2022 12 June 2022 (e) exercise price (f) grant date (g) expiry date (h) share price at grant date $2.82 (i) expected price volatility of company shares 37.48% (j) expected dividend yield (k) risk free interest rate 1.94% 2.21% $2.82 37.48% 1.94% 2.21% $2.82 37.48% 1.94% 2.21% The expected price volatility is based on the historic volatility (based on the remaining life of the options), adjusted for any expected changes to future volatility due to publicly available information. Where options are issued to employees of subsidiaries within the Group, the subsidiaries compensate Ausdrill Limited for the amount recognised as expense in relation to these options. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements102 19 Share-based payments (continued) (b) Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: Options issued under employee option plan 20 Remuneration of auditors 18 $’000 17 $’000 756 238 During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: (a) PricewaterhouseCoopers Australia (i) Audit and other assurance services Audit and review of financial statements (ii) Taxation services Tax compliance services (iii) Other services Advisory and accounting consulting services Total remuneration of PricewaterhouseCoopers Australia (b) Network firms of PricewaterhouseCoopers Australia (i) Audit and other assurance services Audit and other assurance services (ii) Taxation services Tax compliance services (iii) Other services Advisory and accounting consulting services Total remuneration of network firms of PricewaterhouseCoopers Australia (c) Non PricewaterhouseCoopers audit firms (i) Audit and other assurance services Audit and review of financial statements Total remuneration for audit and other assurance services Total auditors' remuneration 18 $ 17 $ 449,286 471,412 64,229 111,569 198,401 711,916 10,000 592,981 257,582 312,542 55,625 140,461 19,854 333,061 32,373 485,376 46,677 46,677 45,403 45,403 1,091,654 1,123,760 It is the Group's policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where PricewaterhouseCoopers expertise and experience with the Group are important. These assignments are principally tax advice and due diligence reporting on acquisitions, or where PricewaterhouseCoopers is awarded assignments on a competitive basis. It is the Group's policy to seek competitive tenders for all major consulting projects. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements21 Earnings per share (a) Basic earnings/(loss) per share From continuing operations attributable to the ordinary equity holders of the Company From discontinued operations Total basic earnings/(loss) per share attributable to the ordinary equity holders of the company (b) Diluted earnings/(loss) per share From continuing operations attributable to the ordinary equity holders of the Company From discontinued operations Total basic earnings/(loss) per share attributable to the ordinary equity holders of the company (c) Reconciliation of earnings used in calculating earnings per share Profit/(loss) attributable to the ordinary equity holders of the Company used in calculating basic and diluted earnings per share: From continuing operations From discontinued operations (d) Weighted average number of shares used as denominator 103 17 CENTS 9.9 0.1 10.0 17 CENTS 9.6 0.1 9.7 17 $’000 18 CENTS 16.9 0.5 17.4 18 CENTS 16.6 0.5 17.1 18 $’000 59,349 1,701 61,050 30,951 250 31,201 18 17 NUMBER NUMBER Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Effect of share options on issue Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted earnings per share 351,782,137 312,277,224 5,932,674 7,978,121 357,714,811 320,255,345 (e) Information on the classification of securities (i) Options Options granted to employees are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent to which they are dilutive. The options have not been included in the determination of basic earnings per share. Details relating to the options are set out in note 19. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements104 22 Assets pledged as security The carrying amounts of assets pledged as security for current and non-current borrowings are: Current Floating charge Cash and cash equivalents Receivables Inventory Total current assets pledged as security Non-current Floating charge Plant and equipment Freehold land and buildings Receivables Investment Total non-current assets pledged as security Total assets pledged as security 18 $’000 17 $’000 133,294 204,448 198,440 536,182 544,807 58,607 3,314 83,265 689,993 165,321 158,889 183,179 507,389 468,128 53,884 - 64,073 586,085 1,226,175 1,093,474 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements105 23 Deed of cross guarantee Ausdrill Limited and the entities noted below are parties to a deed of cross guarantee under which each company guarantees the debts of the others. By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare a financial report and a directors’ report under Australian Securities and Investments Commission Instrument 2016/785 (as amended). The closed group consists of Ausdrill Limited and the following entities: ACN 103534087 Pty Ltd; African Mining Services (Ghana) Pty Ltd; Ausdrill International Pty Ltd; Ausdrill International & Management Services Pty Ltd; Ausdrill Finance Pty Ltd; Ausdrill Northwest Pty Ltd; Ausdrill Properties Pty Ltd; Ausdrill Utilities Pty Ltd; BTP Parts Pty Ltd; BTP Equipment Pty Ltd; Connector Drilling Pty Ltd; Diamond Communications Pty Ltd; Drill Rigs Australia Pty Ltd; Energy Drilling Australia Pty Ltd; Golden Plains Pty Ltd; MinAnalytical Holdings Pty Ltd; MinAnalytical Laboratory Services Australia Pty Ltd; Supply Direct Pty Ltd; Supply Direct South Africa Pty Ltd; and Synegex Holdings Pty Ltd. (a) Consolidated statement of profit or loss, consolidated statement of comprehensive income and summary of movements in consolidated retained earnings The above companies represent a 'closed group' for the purposes of the instrument, and as there are no other parties to the deed of cross guarantee that are controlled by Ausdrill Limited, they also represent the 'extended closed group'. Set out over page is a consolidated statement of profit or loss, a consolidated statement of comprehensive income and a summary of movements in consolidated retained earnings for the closed group. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements106 23 Deed of cross guarantee (continued) (a) Consolidated statement of profit or loss, consolidated statement of comprehensive income and summary of movements in consolidated retained earnings (continued) Consolidated statement of profit or loss Revenue from continuing operations Other income Materials Labour Rental and hire Depreciation and amortisation expense Management fee income/(expense) Finance costs Other expenses from ordinary activities Share of net profits of joint ventures accounted for using the equity method Profit from discontinued operations Profit/(loss) before income tax Income tax (expense)/benefit Profit/(loss) for the year Consolidated statement of comprehensive income Other comprehensive income Profit/(loss) for the year Items that may be reclassified to profit or loss 18 $’000 17 $’000 641,603 20,463 (290,441) (200,111) (12,587) (49,222) 5,473 (31,724) (47,166) 22,344 1,701 60,333 (6,919) 53,414 606,368 13,922 (289,465) (172,679) (12,278) (52,239) (3,173) (31,555) (44,038) 13,090 - 27,953 (10,206) 17,747 53,414 17,747 Exchange differences on translation of foreign operations 4,404 528 Items that will not be reclassified to profit or loss Gain/(loss) on revaluation of land and buildings (Loss)/gain on revaluation of available-for-sale assets Other comprehensive income/(loss) for the year, net of tax Total comprehensive income/(loss) for the year Summary of movements in consolidated retained earnings Retained earnings at the beginning of the financial year Profit/(loss) for the year Retained earnings transfer Dividends paid Retained earnings at the end of the financial year 4,443 (1,664) 7,183 60,597 39,124 53,414 - (19,855) 72,683 (421) (1,424) (1,317) 16,430 18,880 17,747 312 (6,246) 30,693 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 23 Deed of cross guarantee (continued) (b) Consolidated statement of financial position Set out below is the consolidated statement of financial position as at 30 June of the closed group. Current assets Cash and cash equivalents Trade and other receivables Inventories Current tax assets Total current assets Non-current assets Receivables Investments accounted for using the equity method Available-for-sale financial assets Property, plant and equipment Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Current tax liabilities Employee benefit obligations Total current liabilities Non-current liabilities Borrowings Deferred tax liabilities Employee benefit obligations Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity 107 18 $’000 17 $’000 113,000 164,846 153,868 186 431,900 31,202 296,208 11,999 430,175 49,928 819,512 143,145 122,295 142,575 3,155 411,170 98,250 112,624 5,189 407,308 42,085 665,456 1,251,412 1,076,626 91,426 3,334 228 31,564 126,552 403,770 35,820 486 440,076 566,628 83,825 - 2,194 25,509 111,528 391,022 31,813 742 423,577 535,105 684,784 541,521 624,571 (12,470) 72,683 684,784 526,447 (15,619) 30,693 541,521 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements108 24 Parent entity financial information (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Shareholders' equity Issued capital Reserves Asset revaluation reserve Share-based payments reserve Pre-2015 reserve Accumulated losses - 2015 reserve Retained earnings Total equity (Loss)/profit for the period Total comprehensive (loss)/income 18 $’000 17 $’000 65,511 465,422 530,933 26,072 6,392 32,464 57,726 485,340 543,066 23,474 6,957 30,431 624,571 526,447 909 6,446 104,904 (183,177) (55,184) 498,469 (92,879) (92,674) 704 6,206 104,904 (183,177) 57,551 512,635 (60,723) (60,723) The financial information for the parent entity has been prepared in accordance with note 25(aa). (b) Guarantees entered into by the parent entity The parent entity has not entered into any guarantees (2017: nil). However, there are cross guarantees given by Ausdrill Limited as described in note 23. Deficiencies exist in some of these companies. (c) Contingent liabilities of the parent entity The parent entity did not have any contingent liabilities as at 30 June 2018 or 30 June 2017. For information about guarantees given by the parent entity, please see (b) above. (d) Contractual commitments for the acquisition of property, plant or equipment As at 30 June 2018, the parent entity had contractual commitments for the acquisition of property, plant and equipment totalling $4,828,712 (30 June 2017: nil). These commitments are not recognised as liabilities as the relevant assets have not yet been received. (e) Pre-2015 Reserve Each reserve of the parent entity has the same nature and purpose as described for the consolidated Group (in note 8(b)). In addition, the parent entity on 30 June 2016 and 30 June 2015 established separate reserves for the purpose of paying future dividends. The reserves are referred to as the “Pre-2015 reserve” and the “Accumulated losses - 2015 reserve”. On the date of establishment, the “Pre-2015 reserve” had an amount of $114,273,000 transferred to it from retained earnings and the “Accumulated losses - 2015 reserve” had an amount of ($183,177,000) transferred to it from retained earnings. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements109 25 Summary of significant accounting policies This note provides a list of all significant accounting policies adopted in the preparation of these consolidated financial statements. These policies have been consistently applied to all the periods presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of Ausdrill Limited and its subsidiaries. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards, and Interpretations issued by the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. Ausdrill Limited is a for-profit entity for the purpose of preparing the financial statements. (i) Compliance with IFRS The consolidated financial statements of Ausdrill Limited and its subsidiaries also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (ii) New and amended standards adopted by the Group The Group has applied the following standards and amendments for the first time for their annual reporting period commencing 1 July 2017: AASB 2017-2 Amendments to Australian Accounting Standards - Annual improvements to Australian Accounting Standards 2014 - 2016 cycle AASB 107 Amendments to Australian Accounting Standards - Narrow scope amendments to statement of cash flows, and AASB 112 Amendments to Australian Accounting Standards - Narrow scope amendments to income taxes. The adoption of these amendments did not have any impact on the current period or any prior period and is not likely to affect future periods. (iii) New standards and interpretations not yet adopted Certain new accounting standards and interpretations have been published that are not mandatory for the 30 June 2018 reporting period and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below. AASB 9 Financial Instruments AASB 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The Group’s equity instruments that are currently classified as available-for-sale will satisfy the conditions for classification as, at fair value through other comprehensive income (FVOCI) and hence there will be no change to the accounting for these assets. Accordingly, the Group does not expect the new guidance to affect the classification and measurement of its financial assets. However, gains or losses realised on the sale of financial assets at FVOCI will no longer be transferred to profit or loss on sale, but instead reclassified below the line from the FVOCI reserve to retained earnings. During the 2018 financial year, A$Nil (2017: A$933,674) of such gains were recognised in profit or loss in relation to the disposal of available-for-sale financial assets. There will be no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated as, at fair value through profit or loss and the Group does not have any such liabilities. The derecognition rules have been transferred from AASB 139 Financial Instruments: Recognition and Measurement and have not been changed. The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under AASB 139. It applies to financial assets classified at amortised cost, debt instruments measured at FVOCI, contract assets under AASB 15 Revenue from Contracts with Customers, lease receivables, loan commitments and certain financial guarantee contracts. Based on the assessments undertaken to date, the group expects a small increase in the loss allowance for trade debtors by approximately 1.0%. The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the group’s disclosures about its financial instruments particularly in the year of the adoption of the new standard. The Group does not intend to adopt AASB 9 before its mandatory date of 1 July 2018. The Group will apply the new rules retrospectively from 1 July 2018, with the practical expedients permitted under the standard. Comparatives for 2017 will not be restated. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements110 25 Summary of significant accounting policies (continued) (a) Basis of preparation (continued) (iii) New standards and interpretations not yet adopted (continued) AASB 15 Revenue from Contracts with Customers The AASB has issued a new standard for the recognition of revenue. This will replace AASB 118 which covers contracts for goods and services and AASB 111 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer. The standard permits either a full retrospective or a modified retrospective approach for the adoption. Management has assessed the effects of applying the new standard on the Group's financial statements and has identified the following from the review: Ausdrill currently has both contracts for services (contract mining, both underground and surface mining, drill and blast, exploration drilling, rental of equipment and mineral assays and analysis) and contracts for sale of goods (predominantly BTP equipment and BTP Parts). In the 30 June 2018 financial statements, the contracts for services are recognised over time and the sale of goods at a point in time which would be the same under the new standard. Management have considered whether a contract exists, whether the party to the contract is a customer, what the performance obligations are, what the transactions price payable by the customer is, how the contract price is split across the performance obligations, and whether the contract means performance over time or at a point in time. The application of AASB 15 may result in the accounting for certain costs incurred in fulfilling a contract which did not qualify for recognition as an asset under any of the other accounting standards. If the costs relate directly to the contract, generate resources used in satisfying the contract and are expected to be recovered, they will therefore be eligible for capitalisation under AASB15 and recognised as a contract asset as of 1 July 2018 (2018: nil). The application of AASB 15 will also require additional disclosure requirements from 1 July 2018 including separate presentation of contract assets in the balance sheet and costs to obtain or fulfil a contract. Management has assessed the effect of applying the new standard on the Group's financial statements and does not expect that there will be an impact on its consolidated financial statements for revenue recognition. Mandatory for financial years commencing on or after 1 January 2018, the Group intends to adopt the standard using the modified retrospective approach which means that the cumulative impact of the adoption will be recognised in retained earnings as of 1 July 2018 and that comparatives will not be restated. The new standard will only be applied to contracts that remain in force at the transition date. AASB 16 Leases IFRS 16 was issued in January 2016. It will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. The accounting for lessors will not significantly change. The standard will affect primarily the accounting for the Group’s operating leases. As at the reporting date, the Group has non-cancellable operating lease commitments of $6,133,000, see note 16. The Group estimates that approximately 38.4% of these relate to payments for short-term and low value leases which will be recognised on a straight-line basis as an expense in profit or loss. However, the Group has not yet assessed what other adjustments, if any, are necessary because of the change in the definition of the lease term and the different treatment of variable lease payments and of extension and termination options. It is therefore not yet possible to estimate the amount of right-of-use assets and lease liabilities that will have to be recognised on adoption of the new standard and how this may affect the Group’s profit or loss and classification of cash flows going forward. Mandatory for financial years commencing on or after 1 January 2019. At this stage, the Group does not intend to adopt the standard before its effective date. The Group intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. Other amendments to existing standards that are not yet effective are not expected to result in significant changes to the Group’s accounting policies. (iv) Historical cost convention These financial statements have been prepared on a historical cost basis except for the following: revaluation of land and buildings, and available-for-sale financial assets, financial assets and liabilities (including derivative instruments) at fair value through profit or loss. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 111 25 Summary of significant accounting policies (continued) (b) Principles of consolidation (i) Subsidiaries Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has 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 Group. They are deconsolidated from the date that control ceases. The acquisition method of accounting is used to account for all business combinations by the Group (refer to note 25(h)). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of financial position respectively. (ii) Joint arrangements Under AASB 11 Joint Arrangements, investments in joint arrangements are classified as either joint operations or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. Ausdrill Limited has only joint ventures. Joint ventures Interests in joint ventures are accounted for using the equity method (see (iii) below), after initially being recognised at cost in the consolidated statement of financial position. (iii) Equity method Under the equity method of accounting, the investments are initially recognised at cost and adjusted thereafter to recognise the Group's share of the post-acquisition profits or losses of the investee in profit or loss, and the Group's share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from joint ventures are recognised as a reduction in the carrying amount of the investment. When the Group's share of losses in an equity-accounted investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the other entity. Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group's interest in these entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of equity accounted investees have been changed where necessary to ensure consistency with the policies adopted by the Group. The carrying amount of equity-accounted investments is tested for impairment in accordance with the policy described in 25(i). (iv) Changes in ownership interests The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity attributable to owners of Ausdrill Limited. When the Group ceases to have control, joint control or significant influence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as a joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group has directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. If the ownership interest in a joint venture is reduced, but joint control or significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements112 25 Summary of significant accounting policies (continued) (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board. (d) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in Australian dollars ($), which is Ausdrill Limited's functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognised in profit or loss. They are deferred in equity if they are attributable to part of the net investment in a foreign operation. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary assets and liabilities such as equities held at fair value through profit or loss are recognised in profit or loss as part of the fair value gain or loss and translation differences on non- monetary assets such as equities classified as available-for-sale financial assets are recognised in other comprehensive income. (iii) Group companies The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: assets and liabilities for each statement of financial position presented are translated at the closing rate at end of the reporting period income and expenses for each income statement and statement of comprehensive income are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions), and all resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, exchange differences are reclassified to profit or loss, as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. (e) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and duties and taxes paid. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group's activities as described below. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. The specific accounting policies for the Group’s main types of revenue are explained in note 2. Revenue for other business activities is recognised on the following basis: (i) Interest income Interest income is recognised using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. (ii) Dividends Dividends are recognised as revenue when the right to receive payment is established. This applies even if they are paid out of pre- acquisition profits. However, the investment may need to be tested for impairment as a consequence, refer note 25(m). AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 113 25 Summary of significant accounting policies (continued) (f) Income tax The income tax expense or revenue for the period is the tax payable on the current period's taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax base of assets and liabilities and their carrying amount in the financial statements, and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company's subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the statement of financial position date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the Company 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. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Ausdrill Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. As a consequence, these entities are taxed as a single entity and the deferred tax assets and liabilities of these entities are set-off in the consolidated financial statements. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. (i) Investment allowances and similar tax incentives Companies within the Group may be entitled to claim special tax deductions for investments in qualifying assets or in relation to qualifying expenditure (e.g. the Research and Development Tax Incentive regime in Australia or other investment allowances). The Group accounts for such allowances as tax credits, which means that the allowance reduces income tax payable and current tax expense. A deferred tax asset is recognised for unclaimed tax credits that are carried forward as deferred tax assets. (g) Leases Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases (note 7(b)). Finance leases are capitalised at lease inception at the fair value of the leased property, plant and equipment or, if lower, the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other current and non-current payables. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the asset's useful life and the lease term. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases (note 4(b)). Payments made under operating leases (net of any incentives received from the lessor) are charged to profit or loss on a straight-line basis over the period of the lease. Lease income from operating leases is recognised in income on a straight-line basis over the lease term. (h) Business combinations The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the: fair values of the assets transferred liabilities incurred to the former owners of the acquired business equity interests issued by the Group fair value of any asset or liability resulting from a contingent consideration arrangement, and fair value of any pre-existing equity interest in the subsidiary. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 114 25 Summary of significant accounting policies (continued) (h) Business combinations (continued) Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. Acquisition-related costs are expensed as incurred. The excess of the: consideration transferred amount of any non-controlling interest in the acquired entity, and acquisition date fair value of any previous equity interest in the acquired entity over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised directly in profit or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such remeasurements are recognised in profit or loss. (i) Impairment of assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets, other than goodwill that suffered an impairment, are reviewed for possible reversal of the impairment at each reporting period. (j) Cash and cash equivalents For the purpose of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, 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. Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position. (k) Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for impairment. See note 6(b) for further information about the Group's accounting for trade receivables and note 11(b) for a description of the Group's impairment policies. (l) Inventories (i) Consumables and store items, work in progress and finished goods Consumables and store items, work in progress and finished goods are stated at the lower of cost and net realisable value. Cost comprises direct materials, direct labour and an appropriate proportion of variable and fixed overhead expenditure, the latter being allocated on the basis of normal operating capacity. Costs are assigned to individual items of inventory on the basis of weighted average costs. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 115 25 Summary of significant accounting policies (continued) (m) Investments and other financial assets Classification The Group classifies its investments in the following categories: loans and receivables, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and, in the case of assets classified as held-to-maturity, re-evaluates this designation at the end of each reporting period. See note 6 for details about each type of financial asset. (i) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of selling the receivable. They are included in current assets, except for those with maturities greater than 12 months after statement of financial position date which are classified as non-current assets. Loans and receivables are included in trade and other receivables (note 6(b)). (ii) Available-for-sale financial assets Available-for-sale financial assets, comprising principally marketable equity securities, are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of the investment within 12 months of the end of the reporting period. Investments are designated as available-for-sale if they do not have fixed maturities and fixed or determinable payments and management intends to hold them for the medium to long-term. Financial assets - recognition and derecognition Regular way purchases and sales of financial assets are recognised on trade-date - the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in profit or loss. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. When securities classified as available-for-sale are sold, the accumulated fair value adjustments recognised in other comprehensive income are reclassified to profit or loss as gains and losses from investment securities. Subsequent measurement Loans and receivables are carried at amortised cost using the effective interest method. Available-for-sale financial assets are subsequently carried at fair value. Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences related to changes in the amortised cost are recognised in profit or loss, and other changes in carrying amount are recognised in other comprehensive income. Changes in the fair value of other monetary and non-monetary securities classified as available-for-sale are recognised in other comprehensive income. Details on how the fair value of financial instruments is determined are disclosed in note 6(f). Impairment The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or a Group of financial assets is impaired. A financial asset or a Group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or Group of financial assets that can be reliably estimated. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the assets are impaired. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 116 25 Summary of significant accounting policies (continued) (m) Investments and other financial assets (continued) (i) Assets carried at amortised cost For loans and receivables, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognised in profit or loss. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument’s fair value using an observable market price. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor's credit rating), the reversal of the previously recognised impairment loss is recognised in profit or loss. Impairment testing of trade receivables is described in note 11(b). (ii) Assets classified as available-for-sale If there is objective evidence of impairment for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss - is removed from equity and recognised in profit or loss. Impairment losses on equity instruments that were recognised in profit or loss are not reversed through profit or loss in a subsequent period. (n) Property, plant and equipment The Group's accounting policy for land and buildings is explained in note 7(b). All other plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. Increases in the carrying amounts arising on revaluation of land and buildings are credited, net of tax, in other comprehensive income and accumulated in reserves in shareholders' equity. To the extent that the increase reverses a decrease previously recognised in profit or loss, the increase is first recognised in profit or loss. Decreases that reverse previous increases of the same asset are first recognised in other comprehensive income to the extent of the remaining surplus attributable to the asset; all other decreases are charged to profit or loss. Each year, the difference between depreciation based on the revalued carrying amount of the asset charged to profit or loss and depreciation based on the asset’s original cost, net of tax, is reclassified from the property, plant and equipment revaluation surplus to retained earnings. The depreciation methods and periods used by the Group are disclosed in note 7(b). The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. 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 (note 25(i)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These gains or losses are included in profit or loss. When revalued assets are sold, it is Group policy to transfer any amounts included in other reserves in respect of those assets to retained earnings. (o) Intangible assets (i) Goodwill Goodwill is measured as described in note 25(h). Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill on acquisitions of associates is included in investments in associates. Goodwill is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash- generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segments (note 1). AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements117 25 Summary of significant accounting policies (continued) (o) Intangible assets (continued) (ii) Research and development Expenditure on research activities, undertaken with the prospect of obtaining new scientific or technical knowledge and understanding, is recognised in the income statement as an expense when it is incurred. Expenditure on development activities, being the application of research findings or other knowledge to a plan or design for the production of new or substantially improved products or services before the start of commercial production or use, is capitalised if the product or service is technically and commercially feasible and adequate resources are available to complete development. The expenditure capitalised comprises all directly attributable costs, including costs of materials, services, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the income statement as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation. Amortisation is calculated using the straight-line method to allocate the cost over the period of the expected benefit. (iii) Designs and drawings Designs and drawings acquired as part of a business combination are recognised separately from goodwill. The designs and drawings are carried at their fair value at the date of acquisition less accumulated amortisation and impairment losses. Amortisation is calculated based on the projected technical life of the design and drawings, which is expected to be five years. (p) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 45 to 60 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the reporting date. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method. (q) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Borrowings are removed from the statement of financial position when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in other income and other expenses. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period. (r) Borrowing costs Borrowing costs incurred for the construction of any qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use or sale. Other borrowing costs are expensed. (s) Provisions Provisions for legal claims are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of management's best estimate of the expenditure required to settle the present obligation at the statement of financial position date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements118 25 Summary of significant accounting policies (continued) (t) Employee benefits (i) Short-term obligations Liabilities for wages and salaries, including non-monetary benefits and accumulating sick leave that are expected to be settled wholly within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees' services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liabilities are presented as current employee benefit obligations in the balance sheet. (ii) Other long-term employee benefit obligations The liabilities for long service leave and annual leave are not expected to be settled wholly within 12 months after the end of the period in which the employees render the related service. They are therefore measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and period of service. Expected future payments are discounted using market yields at the end of the reporting period of high quality corporate bonds with terms and currencies that match, as closely as possible, the estimated future cash outflows. Remeasurements as a result of experience adjustments and changes in actuarial assumptions are recognised in profit or loss. The obligations are presented as current liabilities in the balance sheet if the entity does not have an unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when the actual settlement is expected to occur. (iii) Share-based payments Share-based compensation benefits are provided to employees via the Ausdrill Limited Employee Option Plan and an employee share scheme. Information relating to these schemes is set out in note 19. The fair value of options granted under the Ausdrill Limited Employee Option Plan is recognised as an employee benefit expense with a corresponding increase in equity. The fair value at grant date is independently determined using a Monte Carlo simulation valuation or an amended Black Scholes Merton methodology valuation model that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the non-tradable nature of the option, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. (u) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares for the acquisition of a business are not included in the cost of the acquisition as part of the purchase consideration. (v) Maintenance and repairs Maintenance, repair costs and minor renewals are charged as expenses as incurred. Significant costs incurred in overhauling plant and equipment are capitalised and depreciated over the remaining useful life of the asset or the component in accordance with note 25(n). (w) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the reporting period but not distributed at the end of the reporting period. (x) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing: the profit attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements 119 25 Summary of significant accounting policies (continued) (y) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case, it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. (z) Rounding of amounts The Company is of a kind referred to in ASIC Legislative Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the 'rounding off' of amounts in this report and the accompanying financial report. Amounts in this report and the accompanying financial report have been rounded off to the nearest thousand dollars, or in certain cases, to the nearest dollar. (aa) Parent entity financial information The financial information for the parent entity, Ausdrill Limited, disclosed in note 24 has been prepared on the same basis as the consolidated financial statements, except as set out below. (i) Investments in subsidiaries, associates and joint venture entities Investments in subsidiaries, associates and joint venture entities are accounted for at cost in the financial statements of Ausdrill Limited. Dividends received from associates are recognised in the parent entity's profit or loss when its right to receive the dividend is established. (ii) Tax consolidation legislation Ausdrill Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, Ausdrill Limited, and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand- alone taxpayer in its own right. In addition to its own current and deferred tax amounts, Ausdrill Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Ausdrill Limited for any current tax payable assumed and are compensated by Ausdrill Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Ausdrill Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities' financial statements. The amounts receivable/payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as current amounts receivable from or payable to other entities in the Group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. (iii) Financial guarantees Where the parent entity has provided financial guarantees in relation to loans and payables of subsidiaries for no compensation, the fair values of those guarantees are accounted for as contributions and recognised as part of the cost of the investment. (iv) Share-based payments The grant by the Company of options over its equity instruments to the employees of subsidiary undertakings in the Group is treated as a capital contribution to that subsidiary undertaking. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTNotes to the consolidated financial statements120 Directors' declaration Directors' declaration In the directors' opinion: (a) the financial statements and notes set out on pages 46 to 119 are in accordance with the Corporations Act 2001, including: (i) (ii) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and giving a true and fair view of the consolidated entity's financial position as at 30 June 2018 and of its performance for the financial year ended on that date, and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable, and (c) at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group identified in note 23 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in note 23. Note 25(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. 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 made in accordance with a resolution of the directors. Ian Howard Cochrane Director Sydney 15 August 2018 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTIndependent auditor's report to the members 121 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORT122 Independent auditor's report to the members AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTIndependent auditor's report to the members 123 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORT124 Independent auditor's report to the members AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTIndependent auditor's report to the members 125 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORT126 Independent auditor's report to the members AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTIndependent auditor's report to the members 127 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORT128 Independent auditor's report to the members AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTIndependent auditor's report to the members 129 AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORT130 Shareholder information A. Distribution of equity securities Analysis of numbers of equity security holders by size of holding as at 13 July 2018: HOLDING 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over There were 1,286 holders of less than a marketable parcel of 296 ordinary shares. B. Equity security holders The names of the twenty largest holders of quoted equity securities as at 13 July 2018 are listed below: ORDINARY SHARES NUMBER OF HOLDERS 2,336 2,000 801 1,051 115 6,303 SHARES 782,427 5,305,911 6,127,564 28,554,777 321,426,813 362,197,492 NAME 1. HSBC Custody Nominees (Australia) Limited 2. J P Morgan Nominees Australia Limited 3. Citicorp Nominees Pty Limited 4. National Nominees Limited 5. CS Third Nominees Pty Limited 6. BNP Paribas Noms Pty Ltd 7. BNP Paribas Nominees Pty Ltd 8. BNP Paribas Nominees Pty Ltd 9. HSBC Custody Nominees (Australia) Limited 10. Zero Nominees Pty Ltd 11. BNP Paribas Noms Pty Ltd 12. CTS Funds Pty Ltd 13. HSBC Custody Nominees (Australia) Limited - A/C 2 14. Mr BG Wright + Mrs WJ Wright 15. Mrs Patricia Gladys Wright 16. Royal Blue Pty Ltd 17. Brispot Nominees Pty Ltd 18. CS Fourth Nominees Pty Limited 19. AMP Life Limited 20. Mrs PG Wright + Mr MG Wright + Mr JG Wright ORDINARY SHARES NUMBER HELD PERCENTAGE OF ISSUED SHARES 118,118,351 51,990,004 34,982,451 22,581,047 13,351,097 8,615,561 6,349,428 4,443,500 3,978,315 3,500,000 3,420,617 3,139,665 3,087,304 2,584,380 2,466,233 2,267,000 2,179,317 1,859,466 1,338,751 1,221,500 32.61% 14.35% 9.66% 6.23% 3.69% 2.38% 1.75% 1.23% 1.10% 0.97% 0.94% 0.87% 0.85% 0.71% 0.68% 0.63% 0.60% 0.51% 0.37% 0.34% Total held by the twenty largest shareholders 291,473,987 80.47% Unquoted equity securities Options issued under the Employee Option Plan to take up ordinary shares 7,766,682 44 NUMBER HELD NUMBER OF HOLDERS AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTShareholder information C. Substantial holders Substantial holders in the Company are set out below as at 13 July 2018: NAME 1. FMR LLC 2. Pendal Group Limited 3. UBS Group AG D. Voting rights 131 ORDINARY SHARES NUMBER HELD PERCENTAGE 27,908,079 19,258,655 18,156,560 7.71% 5.32% 5.01% The voting rights attaching to each class of equity securities are set out below: (a) Ordinary shares: every member present at a meeting of the Company in person or by proxy shall have one vote and upon a poll each share shall have one vote. (b) Options: no voting rights. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORT132 Financials table REVENUE Sales revenue (from continuing operations) Interest received Total PROFIT/(LOSS) EBITDA* Depreciation and amortisation expense EBIT* Net interest expense Operating profit before income tax* Impairment expense Profit / (loss) before income tax Income tax (expense) / benefit Profit / (loss) from discontinued operations Profit / (loss) for the year Number of ordinary shares at year end Weighted number of ordinary shares Basic earnings / (loss) per share Diluted earnings / (loss) per share STATEMENT OF FINANCIAL POSITION Total assets Total liabilities Shareholders' equity Net tangible assets per share CASH FLOWS Gross cash flows from operating activities Net cash flows from operating activities Net cash flows from investing activities Net cash flows from financing activities Closing cash balance Gross debt Net debt DIVIDENDS Total dividends per share (interim and final declared) Total dividends paid NET DEBT / TOTAL CAPITAL EBIT* TO SALES REVENUE EBITDA* TO SALES REVENUE EMPLOYEES AT YEAR END $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 $'000 000's 000's CENTS CENTS $'000 $'000 $'000 $ $'000 $'000 $'000 $'000 $'000 $'000 $'000 CENTS $'000 % % % # 14 15 16 17 18 826,305 1,555 827,860 719,832 1,828 721,660 743,003 1,632 744,635 762,566 2,384 764,950 887,334 2,983 890,317 173,656 110,793 126,536 135,791 (99,177) 74,479 (40,049) 34,430 (77,893) (43,463) (396) - (73,598) 37,195 (35,131) 2,064 (184,244) (182,180) 21,866 (15,306) (43,859) (175,620) 312,277 312,277 (13.6) (13.6) 312,277 312,277 (56.2) (56.2) (67,894) 58,642 (32,064) 26,578 (1,485) 25,093 (4,581) 37,638 58,150 312,277 312,277 18.7 18.2 (62,172) 73,619 (28,997) 44,622 - 44,622 (13,671) 250 31,201 312,277 312,277 10.0 9.7 177,378 (74,528) 102,850 (28,771) 74,079 - 74,079 (14,730) 1,701 61,050 362,197 351,782 17.4 17.1 1,367,736 1,130,034 1,150,381 1,187,362 1,367,761 615,568 752,168 2.37 576,741 553,293 1.77 543,785 606,596 1.94 123,158 91,006 60,853 557,248 630,114 2.02 593,010 774,751 2.14 132,111 94,613 90,155 52,593 (101,127) (161,517) 138,486 117,936 (738) (104,693) (47,772) (6,965) 77,865 433,789 355,924 181,857 398,540 216,683 166,710 388,617 221,907 78,283 137,258 404,550 267,292 1.00 9,369 39 5.17 15.39 4,080 - - 26 7.89 17.03 3,841 4.00 6,246 26 9.65 17.81 4,582 7.00 19,855 26 11.59 19.99 5,278 192,371 142,117 (56,223) (101,209) 62,695 453,311 390,616 4.50 24,981 34 9.01 21.02 4,578 * EBITDA, EBIT and operating profit before income tax excludes impairment expense and discontinued operations. AUSDRILL ANNUAL REPORT 2018FINANCIAL REPORTOPERATING AND FINANCIAL REVIEW AUSDR IL L A NNUA L R EP OR T 2018 133 OUR BUSINESS AT A GLANCE Contract Mining Services Exploration drilling Surface mine development and production - Drill and blast - Load and haul Equipment hire Logistics Underground Mining Services Drilling Services Underground mine development and production - Drill and blast - Load and haul Diamond drilling Consulting and mine management Exploration drilling Production drilling - Drill and blast - Grade control Hydrological drilling Drill rig manufacture Equipment Services & Supplies Earthmoving fleet hire and sales Earthmoving equipment parts Supply and logistics All Other Mineral analysis and resource definition Oil and gas equipment rental and sales FOLLOW US AT AUSDRILL.COM.AU GROW WITH US AUSDRILL.COM.AU • •

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