Serabi Gold plc
Annual Report 2018

Plain-text annual report

Annual Report 2018 Serabi Gold plc // Report and Accounts 2018 Welcome to Serabi Gold plc Operational Highlights Engaged in the evaluation and development of gold projects. Our Mission Our objective is to become a pre-eminent junior gold mining company in Brazil, securing future growth through expansion of our existing operations and projects and, taking advantage of our position as an existing gold producer, to become involved with and successfully develop other carefully selected opportunities within the country. = See page 04 to read more Our Focus We strive to operate efficiently and effectively with specific focus on quality and efficiency, both in our mining practices and maximising the utilisation of our processing facility. Whilst we seek to maximise the long term value for our shareholders we also aim to bring benefits to all stakeholders and to work closely with neighbouring communities to ensure we can bring benefits to them from our activities. = See page 04 to read more 2018 has been a very satisfying year. We finished with a superb fourth quarter and this momentum has been maintained into the first months of 2019. Exploration results particularly around São Chico have been better than expected and I am excited by the significant growth potential that we have identified in our tenements. Progress at our Coringa project continues and having announced an increase in the mineral resources of 37 per cent, work is now progressing on a Preliminary Economic Assessment for the end of the second quarter. Mike Hodgson Chief Executive 2018 HIGHLIGHTS • Total gold production for 2018 of 37,108 ounces. • Mine production in 2018 totalling 167,722 tonnes at 7.29 g/t of gold. • 168,253 tonnes processed through the plant for the combined mining operations, with an average grade of 7.06 g/t of gold. • 10,371 metres of horizontal mine development completed in the year. • Drilling at Palito confirms northerly and southerly extensions of the key Pipocas and G3 veins and southerly extensions in the Chico da Santa area. • Successful factory testing of ore sorter completed in December 2018 and the unit is now in transit to site. • Completion of share placings in second quarter 2018 raising more than US$23.5 million for exploration and activity and ongoing development of Coringa project. • Regional airborne electromagnetic and magnetic survey identified east-west magnetic high running across the tenement, a 10 kilometre strike of electromagnetic anomalies to the east of São Chico and the magnetic and electromagnetic high of the Cinderella shear zone to the south east of São Chico. • Terrestrial Inducted Polarisation surveys around São Chico identified significant anomalies to the west of São Chico and also the coincident chargeability high of the Cinderella zone. • Drilling at Coringa has extended the known mineralisation for a further 500 metres to the west and total mineral resources increased by 37 per cent. Read more on how we have performed on pages 20 to 45 = Where We Operate Contents Serabi Gold plc // Report and Accounts 2018 01 PARA Manaus Santarem Belém Itaituba Palito Complex Coringa Welcome to Serabi Gold plc IFC Strategic Report Chairman’s Statement Business Model Our Business at a Glance Our Near-term Objective Our Operations The Palito Complex The Coringa Gold Project Exploration Strategy The Gold Market Performance Review and KPIs Principal Risks and Uncertainties Management Discussion and Analysis Operational Review Group Mineral Reserves and Resources Financial Review Community and Social Responsibility Modern Slavery and Human Trafficking Statement Social and Environmental Activities 02 04 06 08 10 12 14 16 20 24 26 34 38 46 48 Corporate Governance Board of Directors and Senior Management 52 54 Report on Corporate Governance 63 Directors’ Remuneration Report 68 Directors’ Report Financial Statements Independent Auditor’s Report Statement of Comprehensive Income Group Balance Sheet Company Balance Sheet Statements of Changes in Shareholders’ Equity Cash Flow Statements Notes to the Financial Statements Glossary Shareholder Information 71 78 79 80 81 83 84 116 118 = See our website for more information on our Company: www.serabigold.com a n d A n a y s s i l S o c a i l R e s p o n s b i i l i t y i S t r a t e g c R e p o r t M a n a g e m e n t i D s c u s s o n i C o m m u n i t y a n d C o r p o r a t e G o v e r n a n c e i F n a n c a i l S t a t e m e n t s 02 Chairman’s Statement Strategic Report “The past 12 months have seen the start of what, I hope, will be a sustained period of growth for the Company. The acquisition of the Coringa project at the end of 2017 provided the initial impetus and, following the successful equity financings completed in the second quarter of 2018, the Company has been able to undertake an aggressive and highly encouraging exploration programme over the past nine months. The highlights of this exploration work, to date, have been the identification of significant new growth potential in and around the São Chico deposit and a significant enhancement of the geological resource at Coringa with an overall increase of 37 per cent in the total Measured, Indicated and Inferred Resources. These are certainly encouraging signs that the Company’s near term objectives, of being a 100,000 ounce per annum producer with a global gold resource of more than two million ounces, are well within reach.” The current mining and processing operations of the Palito Complex continued to perform well during the year and overall production of 37,108 ounces represented an improvement on 2017 levels. For 2019, the Company’s production guidance is between 40,000 and 44,000 ounces with the improvements expected to be generated from improved control of mining dilution, resulting in improved head-grades, and the increased processing rates of stockpiled material, particularly the historic flotation tailings. In the second half of the year, the Company also plans to be commissioning an ore-sorter which is expected to liberate processing capacity within the current plant and have a significant production impact for 2020. The real step change in production will begin during 2020 with the development of the Coringa gold project located approximately 200 kilometres to the south of the Palito Complex. During the year the Company has made steady progress with the permitting and licensing of this project with trial mining licences being issued in May 2018 and at the end of the year the approval of the state environmental authority (“SEMAS”) of the Environmental Impact Assessment (“EIA”) that had been submitted to them at the end of 2017. This approval has allowed the process of arranging the required public hearings to begin, and if there is a positive outcome from this, this will clear the way for the award by SEMAS of the first and generally the most contentious licensing stage, the Preliminary Licence (“Licençia Prévia” or “LP”). This will allow the Company to engage consultants to prepare and present the technical submissions to support the application for the Installation Licence which is required before construction can commence. In the meantime, the Company has been undertaking further exploration around the Coringa project and a diamond drilling campaign completed in February 2019 which has contributed to a 37 per cent increase in the global gold resource of the project. This is extremely encouraging and may, potentially, extend the life of mine significantly beyond the initial five years projected by the feasibility study published by Anfield Gold, the previous owners, in September 2017. The Company has also enjoyed significant exploration success with the regional and near mine programmes carried out during 2018. Most significant of these was the airborne magnetic and electromagnetic (“VTEM”) survey flown in July 2018. This had been long awaited and, by complementing similar surveys undertaken in 2008 and 2011, it now means the entire 43,000 hectare tenement, that comprises the Palito Complex, has been covered by airborne VTEM. The survey results have highlighted the presence of numerous pronounced magnetic anomalies, most notably a major east-west lineament crossing the entire tenement. This feature is extremely interesting and there are a significant number of electromagnetic anomalies lying on the flanks of this magnetic high. The survey also identified an extremely interesting electromagnetic (“EM”) anomaly trending north-south and located to the south east and east of the São Chico tenement. The Company’s current ground geophysics and drill programmes have not extended out this far and this is therefore untested ground. As a completely new find and considering that it extends for more than 10 kilometres, this is a very exciting development. Serabi Gold plc // Report and Accounts 201803 the reduced numbers of specialist mining funds, dwindling interest from generalist investment funds and retail investors, this funding from major mining groups has been a significant source of finance for juniors whilst the majors have used the juniors to undertake a significant element of greenfield exploration on their behalf. Serabi’s Board is of the view that this further reduction in the availability of capital will create opportunities that can be accretive and that Serabi, with its existing cash flow and supportive shareholder base, will be well positioned to take advantage of. The next 12 months will undoubtedly be a very interesting chapter in the Company’s history. By this time next year, I very much hope that I will be discussing progress on the construction and development of Coringa ahead of a first gold pour later in 2020, the Company will have delineated the nature and level of production expansion within the Palito Complex, and Serabi being well on the way to realising its target of annualised production of 100,000 ounces. We are fortunate as a Company to have a strong and supportive group of major shareholders who share the vision and strategy of the Board. On behalf of the Board of Directors I would like to extend my appreciation to them for the continued support and confidence. As a Board we are also indebted to the employees and management of Serabi for a job well done during the past year. Their hard work and determination to succeed mean your Company is well positioned to reap the benefits of the higher gold price environment we expect during 2019 and beyond. Finally, thank you to the rest of our shareholders, large and small, for your patience during the last few years. I continue to believe the future is extremely bright for Serabi. Mel Williams Chairman 28 March 2019 However, the area of our near term focus will be what has been christened the Cinderella zone, a north east to south west trending feature extending over seven kilometres and traversing the south east corner of the São Chico mining tenement. This has developed into a very compelling exploration target, and our exploration team has worked quickly to develop, and have already begun, geochemical survey programmes that will allow us to evaluate further the potential of this zone. It is made more interesting by the current and historical artisanal mining activity around the areas that drain from the anomaly. As the old adage goes, the best place to find gold is next to an old gold mine. We were all deeply saddened by the recent and tragic events at Brumadinho in Minas Gerais state in Brazil. This has created significant concern in Brazil over the safety of tailings dams generally. The Group had already undertaken studies for using a filtration plant that would produce dry tailings which could be stacked, and negating the need for a tailings dam. The Group is currently amending the Environmental Impact Study for Coringa to incorporate a filtration plant, removing the need for a wet tailings facility which the Group sees as a major factor in minimising permitting delays and concerns. I would also like to give reassurance to our stakeholders regarding the tailings management facility at Palito. Serabi’s operations are all about quality not quantity, therefore we mine and process almost insignificant volumes of rock relative to industrial mineral, iron ore and bauxite operations such as Brumadinho. New legislation had already been introduced following the dam failure at Mariana, also in Minas Gerais, in 2015 and the Company undertook significant civil works during 2018 to add further strengthening to our tailings ponds and the annual audit of our tailings facilities, undertaken late last year by an accredited Brazilian geotechnical engineering expert, confirmed our tailings management facility to be in good order, and it remains fully licensed and certified. Whilst the outlook for the Company is extremely exciting it must not be forgotten that its fortunes are very closely linked to the gold price and also, in our case, the Brazilian Real/ US Dollar exchange rate. Jair Bolsonaro, the new president of Brazil, only took power on 1 January 2019, and it will take some time to see the reaction, both domestically and internationally, to some of the policy changes and initiatives that he is seeking to introduce. After many years of control by the Workers Party, the switch to a pro-business, right- leaning president wanting to re-invigorate the economy, reduce government bureaucracy and maximise the economic benefits of the country’s vast natural resources, including the expansion of its hydro-electric capability, are all encouraging signs that should promote new investment and reduce perceived risk. However, the task that lays ahead of him is not easy and it can be expected that it will take time for his reforms to be agreed by the government and implemented. In the long term it might be expected that renewed economic success for Brazil will lead to a strengthening of the currency but we feel that it will be some time before this materialises. Gold prices have averaged approximately US$1,250 and US$1,260 in 2017 and 2018 respectively although across these two years there has been some significant volatility, with 2018 seeing a high point of more than US$1,350 and a low below US$1,200. Increasing tensions in US politics, questions over the strength of the global economy and the expectation that the US Federal Reserve will hold off on the previously expected interest rates rises for 2019, have in recent months contributed to attracting investors back to gold as they show signs of anxiety about the state of the world. Stock markets remain somewhat fragile and in January 2018, Goldman Sachs raised its gold forecast and now expects a gold price of $1,425 over the next year. Against this backdrop, it seems a very opportune time to be looking to develop and bring on stream production growth. Nevertheless, the Serabi Board will continue to be prudent in its growth strategy as we seek to maximise the value that we can achieve from each dollar invested. We remain a small producer for now and will insist that management continues to follow its proven formula and systematic approach to exploration activity. We feel we have excellent potential in our tenements, at Palito, São Chico and Coringa, so anything outside these areas has to offer a significant value upside to be included in our growth strategy. Growth will always need to be balanced with the concurrent need to continue to improve the Group’s working capital position and improve its resilience to short term market movements that can negatively impact on cash flow and margin. We remain open to looking at further acquisitions that we consider can bring synergies and reduce the Company’s overall unit costs and whilst Brazil remains our immediate focus, we are aware of opportunities outside of Brazil that could represent an excellent fit for Serabi, through increased levels of gold production and having the potential for further long term growth. Recent combinations of some of the larger gold mining groups, may lead to a reduction in the levels of funding available to junior miners from senior miners compared with recent years. With reduced levels of activity from US, Canadian and European brokerage houses, Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report04 Business Model How We Create Value We strive to be as efficient in our mining and processing operations as possible, utilising existing infrastructure wherever practical to minimise the environmental footprint whilst seeking to maximise value for our shareholders. OUR STRATEGY Evaluate Identify high quality opportunities through exploration or acquisition of existing gold exploration and development projects. Develop Plan, finance and build new mines in a timely and cost-effective manner. Operate Seek continuous operational improvement to maximise value and streamline the production process across our sites. Return Generate value for all stakeholders (investors, government and communities) to encourage the continuation of the cycle. OUR FOCUS Our focus is to pursue gold mining opportunities in Brazil and beyond appropriate to the Group’s size and capabilities, working closely with governing bodies and communities to produce successful and responsible returns. Shareh old e r s Explore R G A N IC GROWTH O Pursue gold mining opportunities appropriate to the Group’s size and capabilities G D o e v e r n l i v e r m e n t s a n T A R GETED AC Q U I S I T I O d A g e ncies Lo c al C o m m u n i t i e s N p Develo m ployees E OUR STRENGTHS At Serabi we have a particular set of strengths that help drive the success of our operations. Strong Gold Production As a junior mining company seeking to grow and develop in Brazil, Serabi has established a track record of stable and consistent production over the last two years and the current operations are well positioned to continue to achieve similar results in the future. Experienced Employees Serabi has assembled an experienced and loyal workforce, well versed in the challenges that the Group’s operations might bring. Strong Leadership Serabi’s Board combines experience across a range of disciplines, with a record of successful development of mining projects and growing and realising value for shareholders. = See our Operational Review on pages 26 to 33 Serabi Gold plc // Report and Accounts 2018 05 OUR MANAGEMENT PROCESS Risk Management There are many risks inherent in mining operations which to a greater or lesser degree can be anticipated. Serabi has an active risk management programme seeking to assess and instigate actions to minimise risk in all areas of the business. = Read more on our Risks and Uncertainties on page 24 Working with Government Agencies Serabi works closely and transparently with all key government agencies and other stakeholders to ensure that, with regards to social, environmental and safety aspects, its operations are run in compliance with and above prevailing legislation. = Read more on our work with agencies on page 48 Commitment to Regulation and Responsible Practice Serabi is committed to ensuring that its operations have minimal impact on communities and the environment. It seeks to bring positive benefit to the neighbouring communities, through providing assistance with education, healthcare and general improvements in living conditions. = Read more on our Corporate Social Responsibility on page 48 HOW WE PERFORMED Our target is to achieve an annualised rate of production of 100,000 ounces during 2021. To ensure this, we monitor different elements of our process in common with similar companies operating in our industry. These KPI targets primarily focus on production and efficiency. 10,371metres Mine development completed 162,722 tonnes Mined ore 2018 2017 2016 10,371 9,864 11,209 2018 2017 2016 162,722 168,876 158,864 37,108 ounces Annual gold production 168,876tonnes Plant throughput 2018 2017 2016 37,108 37,004 39,390 2018 2017 2016 168,876 172,565 158,966 $9.8mCash holding (US$) 2018 2017 2016 $4.16m $2.19m 7.05g/t Average gold grade processed $9.8m 2018 2017 2016 7.05 7.11 8.11 = See our Performance Review on page 20 to read about our KPIs CREATING VALUE FOR OUR STAKEHOLDERS Shareholders Generation of short term capital appreciation through investment of cash in accretive growth to grow longer term cash generation to sustain distributions to shareholders. Host Government and Government Agencies Generation of tax and royalty receipts to sustain a high quality oversight and regulatory regime. Local Communities Provide improvements to infrastructure, education and healthcare to improve the living standards and opportunities for local populations. Employees Generate a stable and secure work environment in which employees learn, are mentored and can progress and develop their careers. = See our Operational Review on pages 26 to 33 Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report06 Our Business at a Glance How We Plan to Develop A blend of organic growth through the continued development of the Group‘s existing assets and targeting opportunities that have potential for long term value improvement will be at the centre of the Group's plans for expanding the business. OUR STRATEGY Focus Pursue gold mining opportunities appropriate to the Group’s size and capabilities. Evaluate Identify high quality opportunities through exploration or acquisition of existing gold exploration and development projects. Develop Plan, finance and build new mines in a timely and cost effective manner. Operate Seek continuous operational improvement to maximise value and streamline the production process across our sites. Return Generate value for all stakeholders (investors, government and communities) to encourage the continuation of the cycle. WHAT WE HAVE ACHIEVED = See our Management Discussion and Analysis on pages 26 to 33 to read more HOW DO WE PRIORITISE = WHAT ARE OUR PLANS = See our Key Performance Indicators on pages 20 to 21 to read more See our Management Discussion and Analysis on pages 26 to 33 Management have assessed and pursued several opportunities and acquired the Coringa gold project in December 2017, an advanced stage project capable of adding further production of 40,000 ounces per annum in the near term. Other opportunities continue to be reviewed which could provide further accretive growth for the Group. Management continues to maintain its focus on Brazil where it can leverage its existing infrastructure, local knowledge, contact base, and specialist skills, in particular, successfully developing and operating mining operations. Substantial exploration programmes were undertaken during 2018 which have: The Board reviews all projects that management brings to its attention and only A significant focus of management during 2019 will be: • • • • Identified further resource expansion potential at Palito. Identified extensions of the São Chico Main Vein. Identified parallel veins at São Chico. Identified significant new areas of exploration interest within the Group’s tenement holdings. • Expanded the total mineral resource at Coringa by 37 per cent. Several acquisition opportunities are continuing to be assessed, evaluated and compared with potential returns that could be generated from organic growth opportunities. Serabi plans to issue the results of a new Preliminary Economic Analysis for its Coringa project before the end of June 2019. This will form the basis for negotiating a financing package for the construction. The Group has successfully brought into production the Palito and São Chico deposits and established a technical team that has the capability in conjunction with selected third party consultants to undertake much of the planning and construction activities for mines of similar size and nature. During 2018, the Group continued to seek ways to improve efficiency; • Switching the São Chico orebody to a mechanised mining method better suited to the orebody and improving mining productivity. • Completed test work on the benefits of ore-sorting and acquired an X-ray and colour sorter to add into the process flow sheet to liberate plant capacity and increase feed-grade of ore to the mills. • Completed the construction of a scrubber unit to process historic flotation tailings to enhance gold production. • Upgraded tailings management facilities to comply with enhanced levels of regulation in Brazil. • Introduced smaller profile mining equipment to reduce the size of some mine development to reduce costs and minimise dilution without compromising rates of advance. The Group has established a strong track record of production which is expected to grow in 2019 and, with the acquisition of Coringa and success from exploration, has now established, what management believe to be, a tangible pathway to growing production to 100,000 ounces in the relatively near term. authorises the pursuit of opportunities, including organic growth opportunities, that the Board considers to have synergies, strong growth prospects and good investment return potential or will in other ways have strong potential to add value for shareholders. • Successful licensing, permitting and financing for the Coringa project. • Start up of construction and development for Coringa. • Continued evaluation, through exploration, of the organic growth opportunities around Palito and São Chico. • Follow up ground exploration, on key areas of interest, in the wider Jardim do Ouro tenement holding. Development of new opportunities or expansion of existing operations Dependent on exploration success, the Group would be looking to develop new are measured against development plans and costs. Performance is satellite orebodies in close proximity to either or both of the São Chico or Palito judged by considering adherence to time schedules, cost estimates deposits at the earliest possible opportunity to facilitate production growth. and performance against plan. It has, with the introduction of the ore sorter and smaller profile development machinery, already implemented solutions that permit the processing of increased ore volumes and higher grade ore at low additional cost and with negligible impact on existing operations. The Group will progress, as quickly as possible, the permitting process for the Coringa project, with the objective to commence development and construction during 2019 with first gold being produced in 2020. Operational performance is judged by considering annual and quarterly results Management continues to review all aspects of operational performance to achieved by comparison with forecasts, using a blend of measurements with achieve improvements in total gold production but simultaneously seeking a key objective of efficiency in the use of the Group’s human, equipment and to improve safety, reduce costs, improve equipment utilisation rates, reduce financial resources. machinery down-time and achieve better production rates per shift. The Board seeks to add value for all of the Group’s stakeholders and recognises The Group has and will use existing cash flow to finance its exploration and that stakeholders may seek returns in varying ways. Returns are evaluated by the development programmes and supplement its working capital with appropriate ability of the Group to generate cash and sustainable cash flow, to reduce the levels of debt and other financing instruments that are non-dilutive for investment risk for stakeholders and increase, on a sustainable basis, the value shareholders. of the Group. New equity will be used to accelerate investment plans where the Group considers that those investments will be accretive to existing shareholders and the nature of the investment does not readily lend itself to alternative financing structures. Serabi Gold plc // Report and Accounts 201807 OUR STRATEGY WHAT WE HAVE ACHIEVED = HOW DO WE PRIORITISE = See our Key Performance Indicators on pages 20 to 21 to read more WHAT ARE OUR PLANS = See our Management Discussion and Analysis on pages 26 to 33 Management continues to maintain its focus on Brazil where it can leverage its existing infrastructure, local knowledge, contact base, and specialist skills, in particular, successfully developing and operating mining operations. The Board reviews all projects that management brings to its attention and only authorises the pursuit of opportunities, including organic growth opportunities, that the Board considers to have synergies, strong growth prospects and good investment return potential or will in other ways have strong potential to add value for shareholders. A significant focus of management during 2019 will be: • Successful licensing, permitting and financing for the Coringa project. • Start up of construction and development for Coringa. • Continued evaluation, through exploration, of the organic growth opportunities around Palito and São Chico. • Follow up ground exploration, on key areas of interest, in the wider Jardim do Ouro tenement holding. Development of new opportunities or expansion of existing operations are measured against development plans and costs. Performance is judged by considering adherence to time schedules, cost estimates and performance against plan. Dependent on exploration success, the Group would be looking to develop new satellite orebodies in close proximity to either or both of the São Chico or Palito deposits at the earliest possible opportunity to facilitate production growth. It has, with the introduction of the ore sorter and smaller profile development machinery, already implemented solutions that permit the processing of increased ore volumes and higher grade ore at low additional cost and with negligible impact on existing operations. The Group will progress, as quickly as possible, the permitting process for the Coringa project, with the objective to commence development and construction during 2019 with first gold being produced in 2020. Operational performance is judged by considering annual and quarterly results achieved by comparison with forecasts, using a blend of measurements with a key objective of efficiency in the use of the Group’s human, equipment and financial resources. Management continues to review all aspects of operational performance to achieve improvements in total gold production but simultaneously seeking to improve safety, reduce costs, improve equipment utilisation rates, reduce machinery down-time and achieve better production rates per shift. The Board seeks to add value for all of the Group’s stakeholders and recognises that stakeholders may seek returns in varying ways. Returns are evaluated by the ability of the Group to generate cash and sustainable cash flow, to reduce the investment risk for stakeholders and increase, on a sustainable basis, the value of the Group. The Group has and will use existing cash flow to finance its exploration and development programmes and supplement its working capital with appropriate levels of debt and other financing instruments that are non-dilutive for shareholders. New equity will be used to accelerate investment plans where the Group considers that those investments will be accretive to existing shareholders and the nature of the investment does not readily lend itself to alternative financing structures. Focus Pursue gold mining opportunities appropriate to the Group’s size and capabilities. Evaluate Identify high quality opportunities through exploration or acquisition of existing gold exploration and development projects. Develop Plan, finance and build new mines in a timely and cost effective manner. Operate Seek continuous operational improvement to maximise value and streamline the production process across our sites. Return Generate value for all stakeholders (investors, government and communities) to encourage the continuation of the cycle. See our Management Discussion and Analysis on pages 26 to 33 to read more Management have assessed and pursued several opportunities and acquired the Coringa gold project in December 2017, an advanced stage project capable of adding further production of 40,000 ounces per annum in the near term. Other opportunities continue to be reviewed which could provide further accretive growth for the Group. Substantial exploration programmes were undertaken during 2018 which have: Identified further resource expansion potential at Palito. Identified extensions of the São Chico Main Vein. Identified parallel veins at São Chico. • • • • Identified significant new areas of exploration interest within the Group’s tenement holdings. • Expanded the total mineral resource at Coringa by 37 per cent. Several acquisition opportunities are continuing to be assessed, evaluated and compared with potential returns that could be generated from organic growth opportunities. Serabi plans to issue the results of a new Preliminary Economic Analysis for its Coringa project before the end of June 2019. This will form the basis for negotiating a financing package for the construction. The Group has successfully brought into production the Palito and São Chico deposits and established a technical team that has the capability in conjunction with selected third party consultants to undertake much of the planning and construction activities for mines of similar size and nature. During 2018, the Group continued to seek ways to improve efficiency; • Switching the São Chico orebody to a mechanised mining method better suited to the orebody and improving mining productivity. • Completed test work on the benefits of ore-sorting and acquired an X-ray and colour sorter to add into the process flow sheet to liberate plant capacity and increase feed-grade of ore to the mills. • Completed the construction of a scrubber unit to process historic flotation tailings to enhance gold production. • Upgraded tailings management facilities to comply with enhanced levels of regulation in Brazil. • Introduced smaller profile mining equipment to reduce the size of some mine development to reduce costs and minimise dilution without compromising rates of advance. The Group has established a strong track record of production which is expected to grow in 2019 and, with the acquisition of Coringa and success from exploration, has now established, what management believe to be, a tangible pathway to growing production to 100,000 ounces in the relatively near term. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report08 Our Near-term Objective The Pathway to 100,000oz Our short term mission is to reach an annualised production output of 100,000oz per annum by 2020. The acquisition and permitting of the Coringa gold project offers the Company the chance to diversify the asset portfolio, whilst growth around our current operations creates expansion opportunities. Our current operations are centred in the Tapajos region of Brazil. Our main asset, the Palito Complex, has performed consistently well in recent years, delivering around 40,000oz per year. With expansion of the current operations and as Coringa achieves expected production levels, we are planning to grow gold production by around 120%. BRAZIL Belém Santarem Itaituba PARÁ THE PALITO COMPLEX CORINGA Efficiency Serabi’s ethos is on quality rather than quantity. Management constantly strives to make each area work better to improve margins and maximise the use of existing mining, plant and infrastructure capabilities. Sustainability The focus is to build a long term sustainable business that returns value to shareholders but considers the obligations to employees, communities and other stakeholders and provides secure long term benefit to all those associated with, or affected by, the Group’s operations. Quality Serabi has established itself as one of the premier underground mining operators in Brazil. = Read more in our Operational Review on pages 26 to 33 Serabi Gold plc // Report and Accounts 201809 ACHIEVING OUR MISSION Coringa The start up of Coringa in 2020 will increase production by an estimated 40,000oz per annum. Exploration Successful exploration, will help to contribute to our 100,000oz goal 2020 2018 2018 100,000oz est 2019 44,000oz est The Palito Complex 2018 40,000oz 2020 TARGETS 3Operating Sites 2,000,000oz Global Gold Resource 100,000 ounces Target output per year = Read more about our operations on pages 10 to 14 KEY OBJECTIVES FOR 2019 • Building an increase in mineral resources and setting the platform for future production growth in 2020. • Continue the permitting process for Coringa to allow construction to commence during the fourth quarter of 2019. • Continue, and accelerate, the current drilling programme at Palito to test the strike extension of orebodies beyond the current resource limits. • Commence a similar drill and surface geochemistry campaign at São Chico to test the five kilometre trend that hosts the São Chico deposit as well as multiple historic artisanal mines along its length. • Optimise mine planning and development plans for the Coringa project to improve the economics and the projected life. • Continue to evaluate M&A opportunities in the region and across Brazil. = Read more about our operations on pages 10 to 14 Ore sorter Additional operational advancements at Palito will improve efficiency, further increasing gold production Scrubber The introduction of a scrubber will enable the processing of historic tailings for residual gold Key: Current Operations Future Operations Exploration Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report10 Our Operations The Palito Complex The Palito Mining Complex comprises two orebodies, providing mined ore to a common plant. Extensions of the orebodies and additional satellite deposits are expected to provide future production growth and extended mine life. SHORT TERM PRODUCTION GROWTH The Group has established a stockpile of tailings from its flotation recovery plant with an average grade in excess of 2.75 g/t. The installation of a scrubber (above) is allowing the Group to accelerate the processing of this material which will generate a production improvement in 2019. The Group has undertaken extensive test-work to evaluate the benefits of introducing an ore-sorter into the process flow-sheet. A unit utilising both X-ray and colour sorting was shipped to Brazil early in 2019 and is due to be commissioned during the second half of 2019. APA Tapajos N Moraes de Almeida Jardim do Ouro 163 MINA DO PALITO MINA SÃO CHICO Rod Transgarimpeira Km 0 2.5 5 7.5 Rio Novo FN Jamanxim Rio Jamanxim Riozinho 163 Mining Lease Trial Mining Lease Tenement Area Palito The Palito orebody is a narrow-vein underground mining operation and reflects Serabi’s desire to concentrate on high quality projects with low capital costs and early repayment of capital. It is a small-scale, high-grade operation using selective mining techniques with a production target of around 25,000 ounces per annum. São Chico The São Chico orebody is a satellite deposit providing supplementary high-grade gold ore to the Palito processing plant to increase Serabi’s overall gold production. Whilst the current NI 43-101 compliant resource is small, management is confident of the potential for this to be expanded. • High grade satellite to Palito currently • 28 veins comprising the current resource of which eight are in the current mine plans. providing ore feed of 150 to 250 tpd at 8.0 to 9.0 g/t of gold. • A trial licence for mining 50,000 tonnes per year is in place, with a second licence in application to increase this to 100,000 tonnes per year. • 90,000 ounces of NI 43-101 compliant mineral resources (2017). • With the greater ore widths at São Chico, mining is more mechanised than at Palito with open stope retreat mining methods generally being deployed with levels spaced at approximately 15 metres. • Fully permitted. • Currently operating at 250 to 350 tonnes per day at 7.0 to 8.0 g/t gold. • Mining is undertaken by on-lode development followed by selective open stoping between 30-40 metre vertically spaced levels. • The mine is dry with excellent ground conditions. • 448,000 ounces of NI 43-101 compliant mineral resources (2017). • Experienced underground mining labour at site with proven experience in underground selective mining. • Mains grid-power at site with back up from diesel powered generators. • Fully functioning camp for ~250 employees, airstrip, assay laboratory, hospital, and workshops all in place with year-round road access. Serabi Gold plc // Report and Accounts 201811 MEDIUM TERM GROWTH The Group has achieved excellent results from the exploration programmes completed during 2018. These indicate that there is strong growth potential at Palito whilst the São Chico area demonstrates significant potential to be a much larger opportunity than was originally considered when it was initially acquired in 2013. The São Chico main orebody is completely open along strike and until this year the Group had very little geological information outside the immediate mine limits. Nonetheless there are strong indications that substantial strike extensions of the principal vein and adjacent veins are waiting to be defined. In the near term the Cinderella zone located to the south east of the current deposit is an area of particular interest. The Group’s IP surveys initially identified a very prominent anomaly. It has also been highlighted in the results obtained from the airborne survey and the strike was extended in a follow up IP survey. A coincidental linear anomaly, which now extends for seven kilometres and where there has been historical artisanal mining activity around the areas that drain from the anomaly, make it an extremely compelling target. Image of São Chico mine through EM survey a n d A n a y s s l i M a n a g e m e n t D s c u s s o n i i C o m m u n i t y a n d S o c a i l R e s p o n s b i i l i t y C o r p o r a t e G o v e r n a n c e i F n a n c a i l S t a t e m e n t s Strategic ReportFinancial StatementsCorporate GovernanceSerabi Gold plc // Report and Accounts 2018 12 Our Operations continued The Coringa Gold Project Located 200 kilometres south of the Palito Complex, containing a gold resource of 514,000 ounces. A major stepping stone in our goal of achieving an annualised production target of 100,000 ounces. N Filão Valdette Filão da Galena Filão Eloy-Juara Filão Mae-de-leite Filão da Serra Filão Demetrio Filão Sr. Domingo Filão do Meio Km 1 2 0 Filão do Come-Quieto Camp Tenement Outline Artisanal Workings Veins Roads Coringa hosts a total mineral resource estimate of 514,000 ounces of gold, including an Indicated Resource of 216,000 ounces of gold with an average grade of 7.95 g/t and an Inferred Resource of 298,000 ounces with an average grade of 6.46g/t. This represents a 37 per cent increase over the resource ascribed to the project when the Company acquired it in December 2017. Coringa is located some 70 kilometres to the south-east of the town of Novo Progresso which is approximately 130 kilometres by road to the south of Serabi’s current mining operations at Palito. Serabi is well placed to develop the Coringa project. KEY ACHIEVEMENTS IN 2018 • Environmental Agency has approved the Environmental Impact Assessment (EIA/RIMA) submitted in November 2017 allowing the Group to plan the necessary public hearings. This is the next stage in obtaining the initial Licença Prévia (“LP”) confirming the selection of the best place for developing and conducting extractive activities, based on the detailed EIA/RIMA. • Following a successful drilling campaign, increased global mineral resource by 37 per cent and increased total resources to over 500,000 ounces. • Secured two trial mining licences for the project in May 2018. • Management has many years of experience • Land clearance for portal preparation of operating in the region. was completed. • Its location in reasonably close proximity to the existing Palito Complex provides opportunities to share resources and infrastructure. • Local and regional government are familiar with the Group and supportive of its objectives and plans to develop mining operations in the region. • Significant progress on the remediation and refurbishment of the gold process plant located at site. KEY FACTS • Located only 200 kilometres from Serabi’s Palito operation and linked by paved highway, providing opportunities of synergies for management and infrastructure and potential reduction of unit operating costs. • Past gold discoveries at Coringa including the Mae de Leite, Come Quieto, Demetrio and Valdette veins. • Coringa hosts an Indicated Mineral Resource of 216,000 ounces of gold at 7.95 g/t and an Inferred Mineral Resource of 298,000 ounces of gold at 6.46 g/t. Serabi Gold plc // Report and Accounts 201813 C o r p o r a t e G o v e r n a n c e i F n a n c a i l S t a t e m e n t s KEY OBJECTIVES FOR 2019 • Obtain blasting licence to commence establishing the mine portal. • Complete initial underground mine development to access and expose the orebody. • Complete public hearing and consultation process and secure the LP. • Advance permitting to the stage of the Licença de Instalação (“LI”). This permit allows the construction of the mine, assuming compliance with any conditions imposed by the LP. • Complete new Preliminary Economic Analysis by the end of June 2019. • Secure a finance package to allow construction to commence during the fourth quarter of 2019. • Maintain dialogue with and support of various other government agencies including INCRA (National Institute for Colonisation and Agrarian reform), ITERPA (Pará Land Institute), FUNAI (National Indian Foundation), ICMBio (Chico Mendes Institute for the Conservation of Biodiversity), ANA (National Water Agency), and IPHAN (National Institute of Historic and Artistic Patrimony), among others. Strategic ReportFinancial StatementsCorporate GovernanceCommunity and Social ResponsibilityManagement Discussion and AnalysisSerabi Gold plc // Report and Accounts 2018 14 Our Operations continued Exploration Strategy With little past systematic exploration undertaken in the region, the Tapajos presents a unique and exciting opportunity. Reportedly up to 30 million ounces of gold have been recovered by artisanal operations and with only 7 million ounces of hard rock resources identified to date, there is excellent scope for significant new gold discoveries to be made. AIRBORNE SURVEYS Serabi has now flown airborne electro- magnetic and magnetic surveys (“EM”) over its entire Jardim do Ouro tenement holding totalling 43,000 hectares. In July 2018 the Group flew a 4,300 line kilometre survey to supplement previous similar work undertaken in 2008 and 2010. The EM survey identified an extremely pronounced magnetic high that runs east west across the tenements. This is a regional feature and many of the identified electromagnetic anomalies lie on the flanks of this magnetic high. The EM survey also identified the smaller, but nonetheless very exciting, Cinderella anomaly, which is located traversing the São Chico mining licence area in a south west to north east trend and an extremely interesting EM anomaly trending north south and located to the south east and east of the São Chico tenement. The Group uses the results of the EM surveys as a pathfinder for identifying areas of interest, allowing it to prioritise and plan surface exploration activities. Ground geophysics surveys using Induced Polarisation ("IP") in the vicinity of the São Chico orebody were on-going for much of 2018 and, with a total of 127 line kilometres now completed, a strike length totalling nine kilometres along the São Chico trend has now been covered with IP. Some significant anomalies have been recorded. The Cinderella Shear, located to the south east of São Chico, is a very prominent IP anomaly, coincident with a magnetic high identified from an airborne survey, and now extends for seven kilometres. There has been historical artisanal mining activity around the areas that drain from the anomaly, making this feature extremely significant. Results from geophysical programmes are reviewed and priorities established for further exploration and evaluation. This would normally comprise undertaking soil geochemistry using augur drilling, trenching as well as gathering of near surface samples. In January 2019, an initial soil geochemistry survey over part of the Cinderella area was started and the samples gathered are currently being analysed. Surface drilling programmes are then undertaken to establish mineral resources. The key outcomes of the 2018 programmes conducted around the Palito area have been: (i) the extension of the Pipocas vein to the north and south, where step out traverses have traced the vein further north than the current mine limit, (ii) the southerly extensions of the Ipe/Mogno veins of the Chico da Santa area, and (iii) the southerly and northerly extensions of the G3 vein. At São Chico, surface drilling has focused on the western extension of the São Chico mineralisation, and to date drilling has successfully intersected what appears to be the São Chico ore zone up to 500 metres west of the current mine limit. Together with strong indications of a significant strike extension of the principal vein, drilling has also confirmed adjacent veins that are waiting to be defined. This includes the Highway Vein which appears to be an easterly extension of the main Sao Chico orebody but separated by a fault. Surface drilling during the fourth quarter has recorded multiple intersections of mineable grades over mineable widths. Serabi Gold plc // Report and Accounts 2018Serabi Gold plc // Report and Accounts 2017 15 i F n a n c a i l S t a t e m e n t s Strategic ReportCorporate GovernanceCommunity and Social ResponsibilityManagement Discussion and AnalysisSerabi Gold plc // Report and Accounts 2018 16 The Gold Market Positive Signals for Strength The last calendar year saw the gold price in relatively good health and it remained strong for much of the first six months of the year with much of this strength on the back of the uncertainty over the relationship between the US and North Korea. AT A GLANCE • Central banks added 651t to official gold reserves in 2018, the second highest yearly total on record. Net purchases jumped to their highest level since the end of US dollar convertibility into gold in 1971, as a greater pool of central banks turned to gold as a diversifier. • Annual jewellery demand was virtually unmoved: down just 1t from 2017. Gains in China, the US and Russia broadly offset sharp losses in the Middle East. Indian demand was stable at 598t (-4t). • ETFs and similar products saw annual inflows of 69t down from 206t in 2017. Stock market volatility and signs of faltering economic growth in key markets fuelled a global Q4 recovery, but Europe was the only region to see net growth over the year. • Retail investment in gold bars and coins posted annual growth of 4%. Coin demand surged to reach a five- year high of 236t, the second highest on record. Demand for gold bars held steady at 782t, the fifth year in succession of holding in a firm 780-800t range. • 2018 saw marginal gains in the volume of gold used in technology, crimped by Q4 slowdown. After healthy gains during Q1-Q3, a combination of slowing smartphone sales, the trade war and mounting uncertainty over global economic growth, contributed to a 5% decline in Q4. Source: www.gold.org/goldhub/research/gold-demand- trends/gold-demand-trends-full-year-2018 The lead up to the Singapore Summit between President Trump and Chairman Kim Jong-un signalled an improvement in relations leading to a change in investment risk perceptions and a sell off of gold, resulting in a decline in the gold price to US$1,176 by mid-August. The declining investment demand for gold was also affected by the continued appreciation of the equities markets and the expectation of further interest rates increase in the US in turn leading to a strengthening dollar. Whilst there had been an outflow from gold backed exchange traded funds (“ETFs”) for much of 2018, this pattern did however start to shift during the fourth quarter of 2018. At the end of 2017, it was felt that the valuations attributed to other investment asset classes were a cause for concern with some asset classes having hit multi- year highs during 2017. Whilst there have been some recent market corrections, there continues to be a feeling that stock prices remain elevated whilst interest rates in general and US bond yields remain low. With signals that the previously indicated levels of Federal Reserve interest rate interventions may no longer be required to keep the level of US economic growth in check, concerns that global economies are slowing once again and continued concerns over the valuations of other investment asset classes, there is a strong case for a re-emergence of gold during 2019. It has been on a rising trend since mid-November 2018 and the price has now returned to the levels enjoyed at the start of 2018. This price appreciation is against the backdrop of declining growth rates in China and the US and continued uncertainty in Europe both from Brexit and wider unrest that has been seen in France and may spread to the other major European economies. The US policy of protectionism whilst having a short term positive is expected to create inflationary pressure. The US Dollar continues to be the dominant global currency but there is rising speculation that in the longer term the Chinese renminbi (RMB) could emerge as a regional currency in Asia with the potential that world finances become less dependent on the US Dollar. Central banks have, during 2018, emerged as significant buyers of gold with net demand of over 650 tonnes being a 74 per cent increase, year on year and the highest level since the dissolution of the gold standard. Russia has continued to be the largest buyer, adding a further 274 tonnes, funded almost entirely by its sale of US treasuries. Its motivations are a direct response to financial sanctions and a desire for assets that are free of political risk. There should therefore be some caution in reading too much into this level of central bank buying with Kazakhstan and Turkey being amongst the other significant purchasers. Whilst there has been significant interest and speculation about crypto-currencies the consensus is that they are currently at levels that are not sufficiently significant to influence mainstream fiscal and monetary policies. Should that happen it is expected that central banks would seek to raise the levels of regulation significantly. Whilst these crypto- currencies have established themselves as a new investment class competing for the attention of investors and competing with gold as a speculative alternative currency, it is expected that whilst digital currency will grow in the years to come, it will be as an instrument of the central banks themselves and will allow these digital currencies to have broader appeal and applications. Against this backdrop there continues to be a strong belief that gold will retain its status as a significant monetary asset. Whilst in the near term the US Dollar will continue to dominate the world stage, this in itself creates risk for central banks with rising exposure to the fortunes of the US economy and a need to manage their risk with other asset classes, of which gold is one of the most obvious. The short term outlook for gold, through 2019, looks to be positive though during the first six months it is expected that there will be some relative weakness before the US Federal Reserve actions start to restrict the rate of US growth, move real interest rates lower, and result in a renewed interest in gold for the remainder of the year. For Serabi, however, with its exposure to the Brazilian Real, the gold price in Real remains the key pricing consideration for the Company. Much of the past strength of its exchange rate was attributed to currency inflows attracted by high interest rates. However, with the Serabi Gold plc // Report and Accounts 201817 BRR$ EXCHANGE RATE & GOLD PRICE IN BRR$ JANUARY 2016 TO DATE US$ Gold Price US Dollar per ounce BrR$ per ounce Real Gold Price 4.3 4.2 4.1 4.0 3.9 3.8 3.7 3.6 3.5 3.4 3.3 3.2 3.1 3.0 01/01/2016 01/03/2016 01/05/2016 01/07/2016 01/09/2016 01/11/2016 01/01/2017 01/03/2017 01/05/2017 01/07/2017 01/09/2017 01/11/2017 01/01/2018 01/03/2018 01/05/2018 01/07/2018 01/09/2018 01/11/2018 01/01/2019 01/03/2018 5100 5000 4900 4800 4700 4600 4500 4400 4300 4200 4100 4000 3900 3800 3700 3600 GOLD PRICE IN US$ AND BRR$ JANUARY 2016 TO DATE US$ Gold Price US Dollar per ounce BrR$ per ounce Real Gold Price 1400 1375 1350 1325 1300 1275 1250 1225 1200 1175 1150 1125 1100 1075 1050 1025 1000 01/01/2016 01/03/2016 01/05/2016 01/07/2016 01/09/2016 01/11/2016 01/01/2017 01/03/2017 01/05/2017 01/07/2017 01/09/2017 01/11/2017 01/01/2018 01/03/2018 01/05/2018 01/07/2018 01/09/2018 01/11/2018 01/01/2019 01/03/2018 5100 5000 4900 4800 4700 4600 4500 4400 4300 4200 4100 4000 3900 3800 3700 3600 interest rate declining to 7.0 per cent by the end of 2017, and currently sitting at around 6.5 per cent, without this artificial stimulant, the exchange rate has weakened and become more reflective of the broader economic and political considerations. Against the backdrop of corruption, a change in government was always possible. The size of the victory of President Jair Bolsonaro, at the end of 2018, was perhaps larger than expected but reflected the mood swing of many elements of society against the PT party that had controlled Brazilian politics for so long. Whilst the new president has been elected on the back of being more business friendly, eliminating corruption and reducing government spending particularly through welfare and pension reforms, he remains dependent on the support of various political factions in the National Congress to confirm the legislative changes required to enact reforms. At the current time, therefore, the exchange rate has remained fairly stable and has been significantly outpaced by the appreciation of the gold price. As might be expected, it is often the case that the gold price in Brazilian Real tracks the general trend of the exchange rate, but as shown in Figure 1 there are times when this is not the case. The last few months have seen a clear divergence. The gold price in US Dollars has risen which would often be reflective of a weakening US Dollar currency and therefore countered by a stronger Brazilian Real. The Real has, however, remained within a range between about 3.70 and 3.90 to the US Dollar since mid-November allowing Serabi to benefit during this period from the US Dollar gold price improvement. Having experienced prices of around BrR$3,700 per ounce in early January 2017, the improvement to between BrR$4,800 and BrR$4,900, currently representing an increase of 30 per cent, is very welcome. During this same period the US Dollar price has moved from US$1,130 per ounce to approximately US$1,300 per ounce, a 15 per cent improvement. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report18 The Gold Market continued World gold supply in 2018 of 4,490 tonnes represents a one per cent year on year increase with both mine production and recycled gold showing marginal increases. Mine production for 2018 represents the highest level of annual mine production on record though year on year growth continues to decline. GOLD SUPPLY 2014 – 2018 3,347 tonnes Mine production 1,173 tonnes Recycled gold 2018 2017 2016 2015 2014 3,347 3,319 3,263 3,233 3,141 2018 2017 2016 2015 2014 1,173 1,156 1,295 1,117 1,170 Source: World Gold Council (29) tonnes Net producer hedging (29) (28) 33 14 2018 2017 2016 2015 2014 104 Chinese gold production continued the decline trend that had been apparent in 2017, with output falling a further nine per cent year on year driven by stricter environmental regulation. Production from Indonesia, Peru and South Africa was also down, the latter in part driven by strike action which disrupted some operations. These declines were counterbalanced by increases in output elsewhere. Australia experienced record local gold prices and output increased four per cent and is now supporting increased exploration expenditure. Canada saw new projects coming on-stream helping annual output to increase nine per cent whilst Russian gold production rose 10 per cent. The rapid improvement in gold prices experienced during the first six months of 2016 had resulted in unusual levels of recycled supply, followed by a period of re-balancing during 2017 with levels remaining relatively stable during 2018. If credit is available and relatively cheap and whilst gold prices remain relatively range bound, there is unlikely to be significant stimulus to vary the levels of gold recycling. Levels of producer hedging continue to be low compared with the past and, continuing the trend that started in 2017, net producer de-hedging was down by a further 29 tonnes in 2018. Weak currencies in some key production countries have, however, created opportunities for producers to undertake tactical hedging benefitting from high local gold prices. Serabi Gold plc // Report and Accounts 201819 CHANGE IN ANNUAL GOLD DEMAND, 2017-2018 tonnes 4,600 4,500 4,400 4,300 4,200 4,100 4,000 3,900 3,800 2 5 4 ) 1 ( ) 8 3 1 ( 3 9 3 4 , 3 3 2 7 2 2 0 6 1 4 , 2017 Central banks Bar & coin Technology Jewellery ETFs & similar 2018 Net change (2018 v 2017) Source: World Gold Council GOLD DEMAND For the ninth consecutive year central banks were net purchasers of gold driven by Russia, Turkey and Kazakhstan and the level of central bank purchases was the major contributing factor to an overall four per cent growth in annual gold demand. Total net purchases of 651 tonnes by central banks represented a 74 per cent increase compared with 2017 and an overall increase of 277 tonnes. Whilst these are record levels since the suspension of dollar convertibility into gold in 1971, they have been driven by another year of significant buying by Russia, which it is thought has now sold its US Treasuries portfolio as it “de-dollarises” its reserves. Other notable purchasers during the year were Hungary, India, Poland and Mongolia. Following two years of relatively strong inflows into gold backed ETFs, the rate of inflows slowed to 69 tonnes in 2018, down 67 per cent on the 2017 level. The strengthening gold price in the fourth quarter coincided with strong inflows into ETFs during this period, reversing the sell down of the previous quarter, and on a global basis Europe was the only region to see net growth during 2018, no doubt underpinned by political uncertainty and stock market volatility. The key retail markets of India and China are indicators for the demand for gold in both jewellery and bars and coins. Jewellery demand in China was up three per cent year on year whilst bar and coin demand was steady. India, which saw a one per cent decline in jewellery demand, experienced a fall in bar and coin demand of four per cent year on year. Middle East markets and in particular Iran saw reduced demand for jewellery but in contrast demand for bar and coin investment from Iran increased by approximately 43 tonnes. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report20 Performance Review and KPIs Managing Our Operations The Board assesses the performance of the Group and its senior management by setting annual performance targets appropriate to the individual’s areas of responsibility. These targets focus on those areas that the Board considers are important for the short and long term success of the Group and its operations and will build value for the Group’s stakeholders. In common with many similar companies in the industry, these KPI targets primarily focus on production, management of costs and safety which can be measured and the Board anticipates that, subject to global economic factors that may be outside of management’s general control, attainment of the KPI targets should build returns for the Group’s shareholders. OPERATIONAL PERFORMANCE REVIEW The Board established three key strategic objectives for 2018. A key priority was to maintain and seek to improve the operational performance compared with the preceding year. The second objective was to progress the licensing and permitting of the Coringa gold project acquired by the Group in December 2017 together with undertaking further exploration work to expand the resource base. Finally, and supported by the funds raised from an equity issue completed during the second quarter of the year, management were charged with pursuing organic resource growth centred on defining and developing strike extensions of the Palito and São Chico deposits and to progress a wider regional exploration programme over the Group’s Jardim do Ouro exploration tenements. Mine Performance Gold output for 2018 was slightly higher than 2017, with a modest increase of 100 ounces of gold. With the exception of the third quarter, production was at reasonably consistent levels throughout the year and as Figure 1 illustrates, quarterly gold production has, with only two exceptions, been between 9,200 and 10,300 ounces per quarter for the last three years. At the same time, and as is shown in Figure 2, the quarterly levels of mined tonnage and the average grades have also shown strong consistency over the last three years, with average gold grades generally being between 7.50 g/t and 9.50 g/t. Whilst overall gold production was marginally higher than the preceding year, and the operations performed extremely well throughout the year, tonnage mined and tonnage processed were slightly lower than for 2017. This did not affect production and plant performance in terms of average gold recovered which was identical to 2017 levels FIGURE 1: QUARTERLY GOLD PRODUCTION (koz) 8 9 . 9 9 . . 3 0 1 9 9 . 4 9 . 7 9 . 3 9 . 2 9 . 7 9 . 1 8 . 7 1 0 2 : 2 Q 7 1 0 2 : 3 Q 6 1 0 2 : 1 Q 6 1 0 2 : 2 Q 6 1 0 2 : 3 Q 6 1 0 2 : 4 Q 7 1 0 2 : 1 Q FIGURE 2: QUARTERLY MINED TONNAGE AND GRADE t k 1 3 4 . t k 6 4 4 . t k 7 1 4 . t k 3 1 4 . t k 9 6 3 . t k 6 3 3 . 11.02 7 1 0 2 : 4 Q t k 0 9 4 . 8 1 0 2 : 1 Q t k 7 9 3 . 8 1 0 2 : 2 Q t k 1 6 3 . . 3 0 1 8 1 0 2 : 4 Q t k 3 4 4 . 1 8 . 8 1 0 2 : 3 Q t k 7 2 4 . 9.56 9.61 10.12 9.80 6 1 0 2 : 2 Q 6 1 0 2 : 3 Q 6 1 0 2 : 4 Q 7 1 0 2 : 1 Q 7.80 7 1 0 2 : 2 Q 8.25 7.49 8.12 7 1 0 2 : 3 Q 7 1 0 2 : 4 Q 8 1 0 2 : 1 Q 8 1 0 2 : 2 Q 6.23 8 1 0 2 : 3 Q 7.45 8 1 0 2 : 4 Q t k 5 7 3 . 8.92 6 1 0 2 : 1 Q Mined Tonnage Average Grade Serabi Gold plc // Report and Accounts 2018 21 162,722 Mined ore (tonnes) 2018 2018 2017 2016 7.05Milled grade (g/t) 2018 2018 2017 2016 10,371 Mine development (metres) 168,876 Plant throughput (tonnes) 162,722 168,876 158,864 2018 2018 2017 2016 10,371 9,864 11,209 2018 2018 2017 2016 168,876 172,565 158,966 37,108 Gold production (ounces) 92.60% Plant recovery 7.05 7.11 8.11 2018 2018 2017 2016 37,108 37,004 39,390 2018 2017 2016 92.60% 92,60% 91.30% at over 92 per cent. The shortfall in gold production from the processing of run of mine ore was met by re-processing of some historic tailings material. On a monthly basis the Board reviews key production statistics to ensure that operations are being undertaken in a manner that is efficient and, more particularly, sustainable. In this respect, and in common with any underground mining operation, it is critical that, on a monthly basis, mine development rates are maintained ahead of production. Development rates have been slightly higher than for 2017 assisted by the use of smaller profile drilling and haulage equipment at the Palito deposit. This equipment allows development galleries to have smaller dimensions meaning that the process of preparation, blasting and mucking is faster. Whilst the average mined grade for the year was slightly below the level of 2017, this was affected by lower grades mined in the third quarter, when a series of lower grade areas were simultaneously being mined at the São Chico. Procedures have been put in place to minimise the future occurrence of such a mine sequencing event. Coringa Gold Project Significant progress with Coringa has been made on a number of fronts. On the exploration front, the Group has announced a 37 per cent increase in the total mineral resource attributable to the project, which is now in excess of 510,000 ounces of gold, and importantly the grade of the inferred resources which previous stood at 4.32g/t has been increased to 6.46g/t, representing a 50 per cent improvement. Success in the permitting and licensing aspects continued with the award, in May 2018, of two trial mining licences permitting the Group to commence mine development and limited ore production from Coringa. This was followed at the end of the year with confirmation that the state environmental agency was satisfied with the content of the Environmental Impact Study on the project, allowing the Group to commence the process of co-ordinating the necessary public hearings. These are the next stage in the approval procedures for the issuance of the key Preliminary Licence (“Licençia Prévia”). Further positive news came in May 2018 when an action brought by the Brazilian Ministério Público Federal ("MPF"), seeking to nullify the operating license previously granted to Chapleau Brazil, was denied by the court and the judge also denied any right to appeal the decision. Preparations for starting the mine portal and underground ramp at Coringa are well underway with the area having been cleared and hard rock exposed. Progress has been delayed waiting on the necessary blasting licence from the army, but it is hoped that this will be received soon and work can recommence. Exploration The Group has enjoyed considerable exploration success during the year with significant progress being made with its near mine site exploration programmes and the completion of an airborne electromagnetic and magnetic survey over the Group’s Jardim do Ouro exploration tenements. Drilling around the Palito deposit has extended the Pipocas area to the north with the vein continuing approximately 250 metres from the most northerly exposure underground. Diamond drilling over the G3 vein from surface to the south has intersected economic mineable widths and grades located 200 metres to the south of the current Palito underground workings and only 800 metres from the northern limits of the Currutela Prospect. Management feel that the continuation of the vein to Currutela is likely. Around the São Chico deposit, simple step out drilling, following the strike of the São Chico Main Vein, has allowed the mineralisation to be traced for a further 500 metres to the west of the current mining limit. Ground geophysics surveys in the vicinity of the São Chico orebody were on-going for much of 2018 with some very significant anomalies recorded and this full IP programme has now covered a strike length totalling nine kilometres along the São Chico trend. The surveys have highlighted the exploration potential within the area, defining a significant number of IP chargeable anomalies to the south, east and west of the São Chico deposit. The results suggest the potential to the west remains very good, and provides a comprehensive electrical resistivity and chargeability map of the São Chico district. The area highlighted by the geophysical survey activities as being of the greatest interest is the Cinderella Shear located to the south east of São Chico. This is a very prominent IP anomaly, coincident with a magnetic high identified from an airborne survey, which now extends for seven kilometres. There has been historical artisanal mining activity around the areas that drain from the anomaly, making this feature extremely significant. An initial soil geochemistry survey commenced in January 2019 over part of this area and the samples recovered are currently being analysed. Further details regarding the operational performance during 2018 are set out in the Operational Review on pages 26 to 33. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report22 Performance Review and KPIs continued FINANCIAL PERFORMANCE REVIEW This review should be read in conjunction with the audited financial statements on pages 78 to 115. The Board adopts a variety of metrics to evaluate the financial performance of the Group and considers, on a regular basis, the level of cash holdings of the Group compared with monthly forecasts, management’s control of capital expenditure programmes compared with an annually approved plan, the level of operational costs compared with annually approved plans and headcount and staffing levels. In assessing operational efficiency, the Group has adopted and reports industry standard metrics such as Cash Costs and All-In Sustaining Costs (“AISC”) to review the performance of the operations on a monthly basis. Much of the Group’s expenditure is incurred in Brazilian Reais and accordingly the Group has significant exposure to the fluctuations in the exchange rate between the Brazilian Real and the US Dollar, which is the reporting currency of the Group. In order for the Board to assess underlying performance and, in particular, operational performance and cost control, the Board reviews the financial performance of the Group by reference to results reported in both the US Dollar and the Brazilian Real. During 2018 the Brazilian Real weakened slightly with the average rate for the year being BrR$3.654 to US$1.00 compared with BrR$3.193 to US$1.00 during 2017. ANNUAL COST BREAKDOWN (US$m) ANNUAL COST BREAKDOWN – UNIT COSTS (US$/tonne) $20.28m Mining $125 Mining 2018 2017 2016 $20.28m $18.84m $17.66m 2018 2017 2016 $125 $112 $110 $39 $39 $40 $33 $32 $33 $39Plant 2018 2017 2016 $33Site 2018 2017 2016 $7.03m $6.72m $6.42 $5.38m $5.52m $5.25m $7.03m Plant 2018 2017 2016 $5.38m Site 2018 2017 2016 BORROWINGS (US$m) $6.07m Secured Debt 2018 2017 2016 $1.37m $0.72m Finance Leases $6.07m $5.00m 2018 2017 2016 $0.72m $1.12m $1.25m CASH BALANCES (US$m) $9.8mCash holding (US$) 2018 2018 2017 2016 $4.16m $2.19m $9.8m Serabi Gold plc // Report and Accounts 201823 Notwithstanding that the Group has been able, in the latter part of 2018, to start reducing the size of some of its development galleries and whilst ore tonnage is slightly lower than in 2017, the increased level of mine development resulted in more total rock tonnes being moved. In addition, as the development of the São Chico deposit continues to be primarily vertical, costs unavoidably increase with greater depth and haulage distances. It is for this reason that the potential for lateral development of this deposit is so encouraging as this will help minimise future development cost increases. Fuel price increases, which affect costs for power generation and haulage, and increased labour costs have been the major drivers of cost increases. The Company continues to look for both cost and operational efficiencies, and through a focus on quality, hopes that it can continue to improve margins by making each part of its operations operate in a manner that maximises utilisation and productivity rates. It is for this reason that the ore sorter should have a positive unit cost impact by reducing the plant operating costs per ounce of production. The plant will process the same tonnage but with an elevated head grade will yield higher gold production. Debt levels remain modest for an operation of Serabi’s size and at the end of the year the Group enjoyed a healthy cash balance which subsequent to the end of the year was improved with the realisation of a sale of gold concentrate that had been delayed from 2018, and also reflecting the excellent production levels achieved during the fourth quarter of 2018. As at 31 January 2019, the cash holdings of the Group had increased to US$12.8 million. Further details regarding the financial performance during 2018 are set out in the Financial Review on pages 38 to 45. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report24 Principal Risks and Uncertainties Managing Risk There are many risks inherent with mining operations which to a greater or lesser degree companies can anticipate, plan for and seek to mitigate. These risks may impact on a company only in the short term or may have longer term implications for the success and development of the enterprise and its mining projects. The Board considers that the following risks are those which present the most significant uncertainty for the Company at the current time. RISK COMMENT Changes in gold prices. The profitability of the Group’s operations is dependent upon the market price of gold. Gold prices fluctuate widely and are affected by numerous factors beyond the control of the Group. Currency fluctuations may affect the costs of doing business and the results of operations. Availability of working capital. Reserve calculations and life-of-mine plans using significantly lower metal prices could result in material write-downs of the Group’s investment in mining properties and increased amortisation, reclamation and closure charges. The Group’s major products are traded in prices denominated in US Dollars. The Group incurs most of its expenditures in Brazilian Reals although it has a reasonable level of expenses in US Dollars, UK Pounds and other currencies. The Company is reliant on generating regular revenue and cash flow from its operations on a monthly basis to meet its monthly operating costs, meet debt repayment requirements and to fund capital investment and exploration programmes. It has no overdraft or stand-by credit facilities in place in the event of any operational difficulties or other events that may reduce or delay revenue receipts in the short term. No guarantee that the Group’s applications for exploration licences and mining licences will be granted. There is no guarantee that any application for mining licences, the renewal of existing exploration licences or the granting of new exploration licences will be approved by the Agencia Nacional do Mineracao (“ANM”). The ANM can refuse any application. Persons may object to the granting of any exploration licence and the ANM may take those objections into consideration when making any decision on whether or not to grant a licence. MITIGATION Management closely monitors commodity prices and economic and other events that may influence commodity prices. The Board will use hedging instruments if and when it considers it appropriate. Management closely monitors fluctuations in currency rates and the Board may, from time to time, make use of currency hedging instruments. Management, in designing and planning the Group’s operations, incorporates contingency planning. The Group has multiple mining faces to minimise geological and mining risk to operations, it has a modular plant to ensure gold processing can be maintained to the greatest extent possible at all times and deals with customers for its products who have good credit and standing in the industry. Management also manages the Group’s commitments and obligations to maximise the level of cash holdings at any time and works closely with existing and potential lenders and other potential financing partners to ensure that, to the greatest extent possible, it can have access to additional cash resources or defer debt repayment obligations should any unexpected need arise. Management maintains on-going dialogue with the ANM and other relevant government bodies regarding its operations to ensure that such bodies are well informed and also to help ensure that the Group is informed at an early stage of any issues of concern that such bodies may have. Serabi Gold plc // Report and Accounts 201825 RISK COMMENT MITIGATION Existing exploration licences may not be renewed or approved or converted into mining licences. The exploration licence for the São Chico property expired in March 2014. The Group applied for a full mining licence and the application and all supporting information and reports have been made in accordance with prescribed regulations. The Group has received no indications that the full mining licence will not be granted. The Group employs staff and consultants who are experienced in Brazilian mining legislation to ensure that the Group is in compliance with legislation at all times. Title to any of the Group’s mineral properties may be challenged or disputed. Other permits and licences required to conduct operations may not be renewed or may be revoked or suspended. At the current time mining operations at the São Chico Mine are carried out under a trial mining licence which is renewable annually. If and when exploration licences are granted, they will be subject to various standard conditions including, but not limited to, prescribed licence conditions. Any failure to comply with the expenditure conditions or with any other conditions, on which the licences are held, can result in licence forfeiture. The Group is in the process of applying for a mining licence in respect of the Coringa gold project. There can be no certainty that a mining licence will be issued or as to the time frame in which it will be issued. The Group requires a number of permits and licences to be able to undertake its operations and these are issued by a variety of agencies and departments. The Group is required to provide regular reports and may be subject to inspections to ensure that it is in compliance with its obligations in respect of any licence or permit. Failure to comply with the obligations can result in fines, obligations to undertake remedial action and in cases where a breach is deemed significant can result in suspension until remedied. Permits and licences are issued for fixed periods and therefore subject to regular renewal. The renewal process may impose additional obligations on the Group that had not been imposed under previous licences and permits. The Coringa gold project is an advanced stage development project requiring permitting and construction before production can commence. The Group acquired the Coringa gold project in December 2017. Whilst the Group has been awarded trial mining licences and an initial operating licence, it is still in the early stages of obtaining all the necessary permits and licences required to allow full scale mine development and plant construction to commence and there can be no certainty that it will be granted all the necessary licences and permits or as to the time frame in which these will be issued. Management maintains on-going dialogue with all the government bodies involved with the granting and control of mining operations to ensure that such bodies are well informed of the Group’s activities and plans and also to help ensure that the Group is informed at an early stage of any issues of concern that such bodies may have. The Group employs personnel and consultants experienced in the various aspects of the licensing and permitting process to ensure that it maintains compliance with its obligations. The Group has been operating in the region for a number of years and in general is dealing with the same government agencies and bodies that have oversight of the operations in the Palito Mining Complex. The Group considers that it has developed good relations and understanding with the government bodies and agencies who will grant these licences and these same bodies have been supportive of Serabi’s acquisition of the project. By order of the Board Clive Line Company Secretary 28 March 2019 Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report26 Management Discussion and Analysis Operational Review Production momentum from the end of 2018 has been maintained into 2019, whilst exploration results have been better than expected. HIGHLIGHTS 37,108ozs Total gold production 167,722 tonnes Mine production 7.29g/t Mined ore grade • Drilling at Palito confirms northerly and southerly extensions of the key Pipocas and G3 veins and southerly extensions in the Chico da Santa area. • Successful factory testing of ore sorter completed in December 2018 and the unit is now in transit to site. • Completion of share placings in second quarter 2018 raising more than US$23.5 million for exploration and activity and on-going development of Coringa project. • Regional airborne electromagnetic and magnetic survey identified east- west magnetic high running across the tenement, a 10 kilometre strike of electromagnetic anomalies to the east of São Chico and the magnetic and electromagnetic high of the Cinderella shear zone to the south east of São Chico. • Terrestrial Induced Polarisation surveys around São Chico identified significant anomalies to the west of São Chico and also the coincident chargeability high of the Cinderella zone. • Drilling at Coringa has increased the total mineral resource by 37 per cent. OUTLOOK AND STRATEGY The Palito Complex comprises the Palito deposit and adjacent process plant together with the São Chico deposit located 25 kilometres to the south west. The Palito deposit is currently operating across four sectors with active development and mining of eight of the 26 veins that comprise the Measured, Indicated and Inferred resources of the Palito Mine. Underground drilling of the Palito orebody is helping to identify mineralisation at depth, making the rate and location of future mine development more efficient and also identifying additional smaller parallel vein structures that could be accessed from existing mine development. Within the Palito orebody the G3 vein is the most developed of the 26 veins, being developed to a depth of approaching 300 metres and over a strike length of more than 1.5 kilometres. Further drilling has now extended that strike beyond the 1.5 kilometres and it remains open to the north and south. Management considers that there is strong potential for the Palito veins to continue both at depth and along strike to the south east and the north west, as far as the Currutela and Copper Hill discoveries respectively, opening up a potential four kilometre strike length of mineralisation. At São Chico the mine development has, to date, focused on the central ore shoot of the Main Vein. The Group is driving development galleries east and west towards additional ore shoots that have been identified by surface drilling and management is confident that these ore shoots will provide additional mineable ore at São Chico. Underground drilling is being undertaken at São Chico for short term operational and mine planning purposes focusing on the deeper part of the mine, and the depth of the central ore zone. Surface drilling and a terrestrial Induced Polarisation (“IP”) geophysics survey have highlighted excellent potential for future resource growth at São Chico whilst step out drilling has intersected what appears to be the strike extension of the São Chico orebody approximately 500 metres to the west. The IP survey has highlighted some significant and exciting anomalies to the west and south east which will be drilled during 2019. The Group has been conducting extensive test work to assess the benefits of ore-sorting to further enhance ore feed grade and to reduce waste entering the process plant. This will also free plant capacity for future organic growth. Tests on the Palito ore have been extremely encouraging and further tests on the São Chico ore have also returned good results. This equipment is currently being transported to site and is expected to be commissioned during the second half of 2019. Total gold production for the fourth quarter of 2018 was 10,256 ounces of gold, an increase of 10 per cent compared with the same quarter in 2017, and resulted in total gold production for the year of 37,108 ounces, a small increase in total production compared with 2017. This momentum has been continued into the first quarter of 2019 and it is anticipated that production for the first quarter of 2019 will be approximately 10,000 and therefore in line with the Company’s guidance. Total mining rates over the Palito Complex are, for 2018, approximately 4 per cent below those for 2017, whilst milling rates at 168,253 tonnes for the year are approximately 3.5 per cent lower than for 2017. Management does not consider these variations significant given the nature of the orebodies being mined. The Company was however able to process over 16,000 tonnes of historic flotations tailings during the 12 month period representing a 360 per cent increase compared to 2017. Management had also hoped to boost gold production in the second half of 2018 through an increase in the processing rate of Run of Mine (“ROM”) surface stockpiles. However, at the end of 2018 the stockpile of ore at surface was 7,661 tonnes at a grade of 4.14 g/t gold, a decrease of 1,328 tonnes compared with the levels at 30 September 2018. Management anticipates that the successful commissioning of the ore-sorter will bring improvements to feed grade as well as freeing up some plant capacity, and is key to allowing some future organic growth to be realised without plant expansion. However, with the equipment expected to be commissioned during the second half of 2019, this process enhancement will not have any major impact until the end of the year. Serabi Gold plc // Report and Accounts 201827 Mining Mining of the Palito orebody has been at relatively steady levels for over three years with production and development rates achieving a steady state of mine output. The ore generated from the São Chico orebody in 2016 was derived principally from development. With sufficient development headings now established, the Group started to increase the level of stoping activity in the first quarter of 2017 and consequently the tonnage of ore that could be recovered from stope mining. Mine development from the São Chico orebody in recent quarters has been very encouraging, and there are no indications that the payability of ore development is diminishing with depth. In addition, development is now comfortably ahead of stoping, with over two years of ore now developed and ‘blast ready’ at current production rates. Mined grades achieved for 2018 averaged 7.29 g/t, adversely affected by lower grades mined in the third quarter, when mine scheduling unavoidably resulted in a need to mine through some lower grade blocks in the São Chico orebody, coupled with an increased amount of development ore, which is generally lower grade in the total. Long-hole retreat mining is used on the São Chico orebody, a cheaper and simpler mining method, but whilst efficient it is less flexible in terms of mining selectivity. During the third quarter the Company was retreating two faces at São Chico through economically viable blocks but of a lower grade than anticipated. Management anticipated an improvement in average grades during the final quarter of 2018 and this was realised with average grades improving to 7.45g/t in the final three month period of 2018. The average mined grade for the year of 7.29g/t, is lower than reported for the same period in 2017, and slightly below the average reserve grade for the two orebodies of just over 8.0 g/t, estimated by SRK in the Palito Complex Technical Report issued in January 2018. Whilst the operation tries to maintain an even grade as much as possible, the various blocks of the different veins being mined at any time give rise to monthly and therefore quarterly variation. During the first quarter of 2018, the first new generation mini scoops arrived on site together with a new face drilling jumbo with a narrower profile. This smaller equipment permits smaller mine development, resulting in reduced production costs for development mining combined with lower dilution and higher quality of development ore. More importantly, however, it also greatly assists in minimising dilution in the subsequent stoping of these veins. Following the successful initial deployment of this equipment, the Group has acquired additional units. This equipment will only be deployed at Palito, where the potential benefits of minimising the mining widths are significant, with some of the larger units previously used at Palito being redeployed to São Chico. Plant Operations Total gold production for 2018 was 37,108 ounces of gold, generated from the processing of ROM ore from the Palito and São Chico orebodies, combined with the surface coarse ore stockpiles and a small contribution from the stockpiled flotation tailings accumulated from the processing of Palito Mine production in 2014. Gold production for the year was achieved through the processing of 168,253 tonnes from the Palito and São Chico orebodies with an average grade of 7.06 g/t of gold (twelve months to 31 December 2017: 172,565 tonnes at 7.11 g/t of gold). Whilst ROM ore processed was lower by 3.50 per cent or approximately 4,300 tonnes, during the same period a total of 16,466 tonnes of reprocessed tailings were passed through the plant, an increase of approximately 11,900 tonnes compared with 2017. Plant performance has been excellent throughout the year, averaging approximately 500 tonnes per day. Mill feed is predominantly crushed ROM and is topped up with coarse ore stock and some stockpiled flotation tailings. The Company still has approximately 9,000 tonnes of coarse ore stockpiled on surface and an estimated 30,000 tonnes of flotation tails stockpiled (with an average grade of around 3.0 g/t of gold). Since the operations began, plant capacity has limited the ability to run down the surface ore stocks, a legacy of the fact that mine production began six months before the ore processing. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report28 Management Discussion and Analysis Operational Review continued At the start of 2019 the Company successfully commissioned a ‘scrubber’, an item of equipment that will allow easier processing of stockpiled flotation tailings. During 2018 the Company had, with limited success, tried to feed these flotation tailings into the plant trialling a variety of feed mechanisms. The scrubbing plant is dedicated to classifying and cleaning this material, removing impurities and allowing it to be fed directly into the plant post milling. An encouraging development during 2018 was the test work undertaken by the Group on ore sorting of the Palito and São Chico ores. Current mining operations whilst excellent, and employing the most selective methods possible, with veins typically 0.5 to 0.7 metres wide, a minimum mining width of 1.0 metre results in significant amounts of granite waste still forming part of the mined material coming to surface. Having undertaken test work in Brazil and subsequently at the manufacturer’s facilities in Poland, excellent results have been achieved using X-ray scanning on the Palito ore using relative atomic densities to physically separate crushed sulphide bearing ore and granite waste. The contrast and results have been quite remarkable. Having completed factory testing the unit is now on its way to site and expected to be commissioned during the second half of 2019. Whilst the unit will initially be dedicated to the processing of Palito ore, a colour scanner unit has been added to provide flexibility for future processing of São Chico ore which, in initial testing, was amenable to colour sorting. The Company sees the option to campaign or batch process both ore feeds in the future. The sorter will be installed after the main crushing plant and will remove waste material that, despite best efforts to mine selectively, would otherwise, unavoidably, enter the plant feed. This waste will be removed post-crushing but ahead of milling and will reduce process costs per ounce recovered as well as liberating capacity in a mill constrained operation. In this way it is hoped that, using this technology, the plant can be debottlenecked, mill feed grade elevated as a result, and plant capacity freed up for the future organic growth with the added benefit of potentially reducing the surface stockpiles of ore. Palito Complex Licensing The Palito operation is fully permitted and has a mining licence issued in October 2007, covering 1,150 hectares. In February 2014, the Final Exploration Report (“FER”) for the São Chico gold project was completed and submitted to the Departamento Nacional de Produção Mineral (“DNPM”), who issued notification of their approval of this report in November 2014. This represented the first part of the process of transforming the São Chico exploration licence into a full mining licence. As the next major step in the conversion procedure, Serabi submitted, in September 2015, the Plano Approvimiento Economico, a form of economic assessment prepared in accordance with Brazilian legislation. Additionally, the Group engaged MDM from Belem, an Environmental Consultancy to complete a full socio-economic analysis and Environmental Impact Assessment ("EIA") for São Chico. This is now complete, however SEMAS, the state Environmental Agency informed Serabi in the latter half of 2018 that, in reference to the already submitted Coringa EIA, they could not process two EIAs from the same company simultaneously. It is hoped that SEMAS will assess the São Chico EIA during 2019. With the Guia de Utilização (a trial mining license) already in place, and valid until 6 April 2019, and in accordance with legislation, the renewal application has already been submitted and protocolled. In addition, an application has also been submitted for a second trial mining licence. All mining operations can continue in parallel, whilst the full mining licence application is progressing. The issuing of the mining licence also requires the submission of a risk assessment and management plan, safety assessments, environmental and social impact studies, closure and remediation plans all of which have been submitted to the relevant government bodies. Any further reports requested or updates to existing reports will be submitted promptly upon request. EXPLORATION Cash constraints until late 2017 meant all exploration activity had been essentially suspended since the end of 2011 as the Group focused its immediate efforts on bringing the Palito orebody and subsequently the São Chico orebody into production. The issues of new equity completed in 2018 have allowed management to pick up where exploration was left in 2011, and go significantly further, engaging, not only in ‘headframe’ exploration, but also including regional programmes to help evaluate its whole tenement package. Through this combination of near mine and regional exploration and evaluation, the Group expects to establish a strong pipeline of development opportunities that will allow the Group to grow its production base at a low capital cost, leverage off existing infrastructure and resources to minimise development and operational costs and, with high grades and low volumes, have a low environmental impact. Serabi Gold plc // Report and Accounts 201829 Recent exploration activities fall into four categories: • Drilling: surface diamond drilling programme of approximately 20,000 metres, focusing on extensions of known veins on both the Palito and São Chico orebodies; • Ground geophysics: exploring the ‘anticipated trend and projection’ of the main vein at São Chico; • Geochemistry: Follow-up soil geochemical programme over near mine-site anomalies adjacent to the Palito orebody; • Regional: An airborne electro-magnetic (“EM”) geophysical survey, covering those parts of the JDO tenement holdings that had not previously been covered by similar surveys. Drilling A planned 20,000 metre surface drill programme was divided between both the Palito and São Chico orebodies. At Palito, the programme initially focused on step out drilling on the known veins, with a view to justify subsequent underground development. The key outcomes of the 2018 Palito programme have been: (i) the extension of the Pipocas vein to the north and south, where step out traverses have traced the vein further to the north than the current mine limit, (ii) the southerly extensions of the Ipe/Mogno veins of the Chico da Santa area, and (iii) the southerly and northerly extensions of the G3 vein. Smaller programmes tested the Copper Hill and the Caixas anomalies. Drill intersections on the Pipocas north area show the vein continuing north approximately 250 metres from the most northerly exposure underground. Diamond drilling over the G3 vein from surface to the south has intersected economic mineable widths and grades located 200 metres to the south of the current Palito underground workings and only 800 metres from the northern limits of the Currutela Prospect. Further details are included in the Company’s news release of 31 August 2018. Subsequently three further holes have been drilled on the northern extension of the G3 vein, with all three holes successfully cutting the vein, the best of which reported a grade in excess of 19 g/t over a 0.60 metre vein width, which is very typical for Palito. The G3 vein has now been traced over 1.5 kilometres and remains open to the south and north. Management plans to undertake further exploration drilling during 2019. At the São Chico orebody, the surface drilling has focused on the western and eastern extensions of the São Chico mineralisation, and to date drilling has successfully intersected what appears to be the São Chico ore zone up Image of São Chico mine site showing location of drilling and key results to 500 metres west of the current mine limit. To the east drilling has confirmed an eastward extension of mineralisation up to 200 metres beyond the mine workings. In both cases, these eastern and western extensions will now be further investigated from underground. The latest drilling programme commenced in May 2018. The São Chico main orebody is completely open along strike and the Group has very little geological information outside the immediate mine limits. Nonetheless there are strong indications that substantial strike extensions of the principal vein and adjacent veins are waiting to be defined as shown in the Figure on page 30. More recent drilling has also followed up on some of the initial results from terrestrial Induced Polarisation (“IP”) geophysical surveys which started in May 2018. This has been simple step out drilling following the strike of the São Chico Main Vein and although the drilling is quite broadly spaced, it appears the mineralisation can now be traced for a further 500 metres to the west of the current mining limit. The mineralised intersections encountered in the traverse 300 metres west of the São Chico Mine returned grades of 21.97 g/t and 26.86 g/t of gold over widths of 0.80 metres and 1.10 metres respectively. Further details are set out in the Company’s news releases of 31 August 2018 and 31 October 2018. This strike extension complements the potential parallel structures of Lagoa and Crossroads that are to the north and south of the current mine. During the fourth quarter, surface drilling was focused on the eastern extension at São Chico. A near surface development level (216mRL) had been developed to the Highway Vein, which appears to be a continuation of the main orebody at São Chico, though a faulted contact separates it from the Main Vein. All mine levels below the 216mRL to the lowest current level of -19mRL have not been developed to the other side of the fault. The Group therefore undertook a surface drill programme to test the area below the 216mRL and to the east of the current mine development, for the continuation of the Highway Vein at depth. This programme was very successful with the holes drilled recording intersections of mineable grades over mineable widths. Prior to 2018, the Company had undertaken a surface diamond drill programme in March 2015 at São Chico Mine consisting of 42 diamond drill holes and totalling 7,204 metres. A further 30 underground diamond drill holes were completed during 2015 totalling an additional 1,459 metres of drilling. This earlier drill programme was a combination of in-fill and step-out drilling and the results from this, in conjunction with the on-lode development mining that took place during the remainder of 2015, greatly enhanced the understanding of the orebody and facilitated mine planning for 2016 and 2017. It built on the results and understanding gained from the 2011 and 2013 drilling campaigns and reported numerous high-grade intersections, with some gold grades in excess of 100 g/t, and indications that the grade and resource potential continues at depth. Further details are set out in a news release issued by the Group on 21 October 2015, which is available on the Group’s website www.serabigold.com and has been filed on SEDAR. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report30 Management Discussion and Analysis Operational Review continued The understanding of the orebody has also been assisted by paragenetic studies on mine ore samples including detailed petrological descriptions, SEM and QuemScan analysis. Ground Geophysics and Geochemistry Ground geophysics surveys in the vicinity of the São Chico orebody were on-going for much of 2018 with some very significant anomalies recorded. Approximately 107 line kilometres of IP geophysical survey was completed testing extensions to the east, west and south. This complemented an earlier 20 line kilometre IP survey started in 2016, along the São Chico strike. With a total of 127 line kilometres now completed, a strike length totalling nine kilometres along the São Chico trend has now been covered with IP. These surveys have highlighted the exploration potential within the area, defining a significant number of IP chargeable anomalies to the south, east and west of the São Chico deposit. The results suggest the potential to the west remains very good, and provides a comprehensive electrical resistivity and chargeability map of the São Chico district and, together with the detailed airborne electromagnetic and magnetic surveying also completed in 2018, provides an excellent foundation for the Company’s exploration activities in 2019. However, in the near term, the area highlighted by the geophysical survey activities as being of the greatest interest is the Cinderella Shear located to the south east of São Chico. This is a very prominent IP anomaly, coincident with a magnetic high identified from an airborne survey, which now extends for seven kilometres. There has been historical artisanal mining activity around the areas that drain from the anomaly, making this feature extremely significant. A geochemical soil sampling programme is now underway over Cinderella and this will extend during this year over a number of the other geophysical IP anomalies, designed to further define the anomalous zones and provide better targeting for subsequent drilling that management hope can be undertaken during the year. SÃO CHICO AND THE CINDERELLA ZONE Figure 1 – Image showing current IP results at São Chico and location of the Cinderella zone Figure 2 – 115m depth slice through chargeability model. Red highs indicate high chargeable features which may reflect sulphide bearing mineralised zones Key to zones marked on images FEATURE A – A two kilometre long, east- northeast to west-southwest trending, robust chargeability anomaly coincident with a subtle magnetic high, situated only two kilometres west of the São Chico mine and one kilometre west of the recently reported high grade intersections from West Vein drilling (see news release of 20 September 2018). This anomalous area lies within the São Chico structural corridor at the intersection of several interpreted fault sets, similar to the setting of the current São Chico operations. FEATURE B – An elongate chargeability anomaly, parallel to Feature A and lying on the western edge of the survey area. FEATURE C – A cluster of chargeability anomalies located in the northwest of the survey area and lying within the São Chico strike corridor. FEATURE D – A chargeability/conductivity anomaly on the flanks of the Cinderella anomaly, also hosted within a magnetic high. Serabi Gold plc // Report and Accounts 201831 Figure 3 – VRMI magnetic image showing coincident mid (100-175m depth – orange colour) and late-time (175-250m depth red) EM conductivity anomalies. The above figure includes magnetic images generated by previous surveys conducted by the Company in 2008 and 2011 The scale of some of the features that have been identified is significantly larger than the signatures of the existing Palito and São Chico orebodies. During the year the Company also engaged a geological contractor to undertake soil geochemistry surveys over the Calico anomaly close to Palito. This prospect lies some four kilometres from the Palito deposit, and was one of the most significant anomalies identified during the initial airborne EM survey. Results are still pending, but those received to date have justified some infill sampling to be undertaken which is on-going. Regional Exploration The JDO Project covers a total area of over 43,000 hectares, incorporating the Palito and São Chico mining licence areas. The Palito mining licence was granted on 23 October 2007 covering an area of 1,150 hectares, whilst the São Chico licence is in the process of being converted into a full mining licence. The remainder of the tenement area comprises exploration licences either granted or in application. The JDO Project is located in the Tapajós Mineral Province in the south east part of the Itaituba Municipality in the west of Pará State in central north Brazil. The Company completed, in the third quarter of 2018, an airborne 4,300 line kilometre geophysical VTEM (“EM”) geophysical survey, covering approximately 25,000 hectares of the JDO tenement holdings that had not previously been covered by such a survey. The survey was flown during July and supplements the two airborne geophysical VTEM surveys completed in 2008 and 2010 that covered a total area of 14,650 hectares. From these original surveys the Group has already identified a number of geophysical anomalies which it considers worthy of further investigation and these surveys also provided management with the EM and magnetic signatures of both the Palito and São Chico orebodies, allowing any anomalies identified to be benchmarked. The EM survey identified an extremely pronounced magnetic high that runs east west across the tenements (see Figure 3). This is a regional feature and many of the identified electromagnetic anomalies lie on the flanks of this magnetic high. The EM survey also identified the smaller, but nonetheless very exciting, Cinderella anomaly, which is located traversing the São Chico mining licence area in a south west to north east trend. The airborne survey results highlight an eight kilometre long magnetic and electromagnetic high which is very coincidental with the seven kilometre long chargeability ‘high’ identified by the ground geophysics IP survey. It also identified an extremely interesting EM anomaly trending north-south and located to the south east and east of the São Chico tenement. The Group’s current ground geophysics and drill programmes have not extended out this far and this is therefore untested ground. As a completely new find and considering that it extends for more than 10 kilometres, management considers that this represents a very exciting development. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report32 Management Discussion and Analysis Operational Review continued CORINGA PROJECT DEVELOPMENT AND LICENSING Serabi is continuing the work started by Anfield on the permitting and licensing process and has continued to pursue the formal approval of the Environmental Impact Assessment (“EIA”) submitted late in 2017 and undertake any supplementary work or reports that may be requested. Following the award of the trial mining licence for the project during the second quarter of 2018, management has been informed that the state environmental agency is satisfied with the content of the EIA and the Group is now co-ordinating the necessary public hearings. It is hoped that these hearings can be completed during the first half of 2019 and a positive outcome should then be sufficient for SEMAS to issue the key Preliminary Licence (“Licencia Previa”). On 4 March 2019 Serabi released results from its updated Geological Resource Technical Report on Coringa (the NI 43-101 Technical Report Coringa, Brazil) which is currently being prepared by its consultants, Global Resource Engineering Ltd (“GRE”). The results recorded a NI 43-101 compliant Indicated Resource of 216,000 ounces of gold at an average grade of 7.95 grammes per tonne (“g/t”) and an Inferred mineral resource of 298,000 ounces of gold at an average grade of 6.46 g/t. This update followed the approximate 6,000 metres of surface diamond core drilling which was finally completed early in February 2019. In the meantime, preparations for starting the mine portal and underground ramp at Coringa are well underway with the area having been cleared and hard rock exposed. The Group is now waiting on the necessary blasting licence from the army. It is hoped that this will be received soon and work can recommence. Beginning the ramp under the trial mining licence has a dual purpose. Firstly, the Group will obtain invaluable information about the orebodies in terms of geometry, thickness, and their general nature, which, with vein mining, is very difficult to obtain solely from drill hole data. Secondly, it is a demonstration, to the community and other stakeholders, of the Group’s intent to develop the project, which is considered by management to be a critical step to winning support in the permitting process. On 14 August 2017, Anfield announced that it had received key permits required to commence construction of the Coringa project, being (1) the license of operation for exploration and trial mining, (2) the vegetation suppression permit and (3) fauna capture permit, all issued by the SEMAS. The SEMAS permits contain a list of conditions for the conservation and protection of fauna and flora. In May 2018 trial mining licences for each of the concessions 850568/1990 and 850567/1990, valid until 25 May 2020 and 25 November 2020 respectively, were issued by the DNPM permitting the Group to commence mine development and limited ore production from Coringa. The trial mining licenses and the concurrent operating licence authorises mining of up to 50,000 tonnes of ore per year at Coringa. In the absence of the necessary processing permits, any ore recovered at this stage will be stockpiled for future processing. Under applicable regulations, once the mine is operational, Chapleau Brazil may apply to the DNPM and SEMAS to increase the mining and processing limits. On 23 May 2018, Serabi was informed, following an action brought by the Brazilian Ministério Público Federal ("MPF"), on 27 September 2017, seeking to nullify the operating licence previously granted to Chapleau Brazil by SEMAS, that the court and judge who presided over the hearing on 26 April 2018 denied the MPF any action against SEMAS, the DNPM and Chapleau Brazil and also denied any right to appeal the decision, thus allowing Chapleau to proceed with advancing the project. Progress has also been made in several other areas relating to the development of Coringa. Applications for required camp and start-up water were submitted prior to the date of the Acquisition and the tailings storage permit request was submitted on 11 December 2017. Discussions for long term land access agreements are underway with the Instituto Nacional de Colonização e Reforma Agrária (“INCRA”), a government agency which claims ownership of the surface rights where the project is situated. Coringa Exploration Recent drilling over the Coringa gold project targeted both strike and plunge extensions along the three main ore zones of Meio, Galena and Serra, with the results returning a series of high grade intersections extending the previously modelled ore zones. Significant new intersections returned included: • Galena – 2.0m @ 25.02 g/t Au from 141.50m (COR0367) including 1.0m @ 48.18g/t Au • Serra – 4.0m @ 3.36 g/t Au from 354.0m (COR0370) including 1.28m @7.45g/t Au. • Meio #2 – 0.35m @15.57 g/t Au (COR0372) from 197.05m • Meio #2 – 1.3m @ 32.04g/t Au (COR0373) from 144.75m including 0.5m @ 79.47g/t Au • Meio # 4 – 0.60m @ 4.65 g/t Au (COR0378) from 210.70m • Meio #4 – 0.75m @ 7.82 g/t Au (COR0380) from 174.8m • Meio #4 – 1.40m @ 15.82 g/t Au (COR0381) from 275.0m including 0.70 m @ 20.29 g/t Au • Meio #4 – 1.15m @ 9.69 g/t Au (COR0383) from 154.5m including 0.60 m @ 17.74 g/t Au On 4 March, 2019, the Group announced an updated estimate of the mineral resources of the Coringa project which represented a 37% increase in the total global resource for the project to 514,000 ounces. The full technical report in relation to this new mineral resource estimation is expected to be published on Serabi Gold plc // Report and Accounts 201833 OTHER EXPLORATION PROSPECTS The Group has three other project areas, although activities on each of these projects have been limited in recent periods. Sucuba Project The Sucuba project is located some 10 kilometres to the northwest of Palito and the Company holds two exploration licence applications totalling 10,449 hectares. The Company has conducted exploration work in the past on this area where the main gold anomaly is centred on a small garimpeiro pit. Initial geochemistry highlighted anomalous gold values over an east-west area of 800 metres by 150 metres and a limited historic drill programme returned a number of gold values associated with structural controls including 0.50 metres at 20.42g/t Au. The area would appear to potentially host a polymetallic deposit with high lead, silver and zinc values having been returned. Pizon and Modelo Projects The Pion and Modelo Projects are isolated sites located approximately 250km and 300km to the west and northwest of the Palito Mine with access being primarily by light aircraft. Serabi has submitted final exploration reports and notices of relinquishment and is awaiting final confirmation from the authorities that the relinquishment has been approved. It has always been the intention of the Group to use cash flow generated from its production operations to advance its exploration opportunities. Mike Hodgson Chief Executive 28 March 2019 or before 18 April 2019. The Group has, on the basis of this increased mineral resource, commenced work on the preparation of a new Preliminary Economic Assessment (PEA), the results of which, it is hoped, will be available before the end of the second quarter. The Galena vein was drilled targeting the strike and plunge extension of the vein at depth. The programme successfully intersected high grade mineralisation over mineable widths and with hole COR0367 extended the known mineralisation for a further 100 metres to the south of the previously known limit. Similarly, a series of four holes was completed on the Serra vein set. Drill hole COR0370 targeted the down dip and northern strike extension of the modelled ore zones. It successfully intersected a four metre drilled width of veining and alteration which has extended the mineralisation for a further 150 metres down dip and 140 metres along strike to the north from the previous drill intersections of the Serra mineralisation. A series of nine drill holes was completed along the Meio vein set, targeting the Meio #2 (M2) and Meio #4 (M4) veins. The Meio #1 (M1) vein is the most strike extensive and drilled vein defined to date with numerous intersections along a total strike length of 1,500 metres. The M2 vein which lies parallel to M1 had previously, however, only been defined along a total strike length of 700 metres. The M4 vein is considered to be a southern extension of the M1 vein in a structurally off set position and past drilling had defined the mineralisation over a 900 metre strike length. Drill holes COR0372 and COR0373 targeted the southern strike extension of the M2 vein, successfully intersecting the structure and significantly extending the strike of the M2 vein for a further 480 metres to the south, making the drilled strike of the M2 vein to almost 1,200 metres and it remains open along the southern strike. Drill holes COR0378, COR0380 and COR0381 targeted, over a strike extend of 400 metres, the northern dip extension of M4 vein at depth. This drilling has successfully extended the vein for approximately 200 metres deeper than previously known along this 400 metre strike. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report34 Management Discussion and Analysis Group Mineral Reserves and Resources MINERAL RESOURCE STATEMENT, PALITO MINE, PARA STATE, BRAZIL, AS OF 30 JUNE 2017 Classification Underground Measured Indicated Surface Stockpiles Measured Tailings Measured Combined Measured Indicated Measured and Indicated Underground Inferred Vein Width Quantity Grade Contained Metal m 000't Gold g/t Copper g/t Gold 000'oz Copper t 0.52 0.57 274 371 15.21 10.91 0.77 0.57 134 130 2,110 2,115 – – – – – 12 60 346 371 717 3.15 2.70 12.62 10.91 11.74 – – 0.61 0.57 0.59 1 5 140 130 271 – – 2,110 2,115 4,225 0.77 784 7.02 0.20 177 1,568 1. Mineral Resources have been rounded. Mineral Resources are not Mineral Reserves and have not demonstrated economic viability. Mineral Resources are reported inclusive of Mineral Reserves. All figures are rounded to reflect the relative accuracy of the estimates. Underground Mineral Resources are reported within classification domains inclusive of in-situ dilution at a cut-off grade of 3.10 g/t gold assuming an underground extraction scenario, a gold price of US$1,500/oz, a 3.5:1 Brazilian Real to U.S. Dollar exchange rate, and metallurgical recovery of 91%. Polygonal techniques were used for mineral resource estimates. Surface stockpiles and tailings are reported at a cut-off grade of 1.65 g/t gold assuming a gold price of US$1,500/oz, a 3.5:1 Brazilian Real to US Dollar exchange rate, and metallurgical recovery of 78%. 2. Serabi is the operator and owns 100% of the Palito Mine such that gross and net attributable mineral resources are the same. The mineral resource estimate was prepared by the Company in accordance with the standard of CIM and Canadian National Instrument 43-101, with an effective date of 30 June 2017, and audited and approved by Mr Glen Cole of SRK Consulting (Canada) Inc., who is a Qualified Person under the Canadian National Instrument 43-101. Serabi Gold plc // Report and Accounts 2018 35 MINERAL RESERVES STATEMENT, PALITO MINE, PARA STATE, BRAZIL, AS OF 30 JUNE, 2017 Classification Underground Proven Probable Surface Stockpiles Proven Tailings Proven Combined Proven Probable Proven and Probable Quantity Grade Contained Metal 000't 265 276 12 60 337 276 613 Gold g/t Copper g/t Gold 000'oz Copper t 9.77 7.64 3.15 2.70 8.28 7.64 7.99 0.46 0.39 – – 0.36 0.39 0.37 83 68 1 5 90 68 157 1,219 1,076 – – 1,219 1,076 2,295 1. Mineral Reserves have been rounded to reflect the relative accuracy of the estimates. Proven Underground Mineral Reserves are reported within the Measured classification domain, and Probable Underground Mineral Reserves are reported within the Indicated classification domain. Proven and Probable Underground Mineral Reserves are inclusive of external mining dilution and mining loss and are reported at a cut-off grade of 3.70 g/t gold assuming an underground extraction scenario, a gold price of US$1,250/oz, a 3.5:1 Brazilian Real to US Dollar exchange rate, and metallurgical recovery of 91%. Proven Mineral Reserves surface stockpiles and tailings are reported at a cut-off grade of 1.95 g/t gold assuming a gold price of US$1,250/oz, a 3.5:1 Brazilian Real to US Dollar exchange rate, and metallurgical recovery of 78%. 2. Serabi is the operator and owns 100% of the Palito Mine such that gross and net attributable mineral reserves are the same. The mineral reserve estimate was prepared by the Company in accordance with the standard of CIM and Canadian National Instrument 43-101, with an effective date of 30 June 2017, and audited and approved by Mr Timothy Olson of SRK Consulting (US) Inc., who is a Qualified Person under the Canadian National Instrument 43-101. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report 36 Management Discussion and Analysis Group Mineral Reserves and Resources continued MINERAL RESOURCE STATEMENT, SÃO CHICO MINE, PARA STATE, BRAZIL, AS OF 30 JUNE 2017 Classification Measured Indicated Measured and Indicated Inferred Thickness Quantity Grade Contained Metal m 1.82 1.79 1.81 1.80 000't 60 22 82 123 Gold g/t 13.34 14.70 13.70 13.77 Gold 000'oz 26 10 36 54 1. Mineral Resources have been rounded. Mineral Resources are not Mineral Reserves and have not demonstrated economic viability. Mineral Resources are reported inclusive of Mineral Reserves. All figures are rounded to reflect the relative accuracy of the estimates. Underground Mineral Resources are reported within classification domains inclusive of in-situ dilution at a cut-off grade of 2.85 g/t gold assuming an underground extraction scenario, a gold price of US$1,500/oz, a 3.5:1 Brazilian Real to US Dollar exchange rate, and metallurgical recovery of 95%. Polygonal techniques were used for mineral resource estimates. 2. Serabi is the operator and owns 100% of the São Chico Mine such that gross and net attributable mineral resources are the same. The mineral resource estimate was prepared by the Company in accordance with the standard of CIM and Canadian National Instrument 43-101, with an effective date of 30 June 2017, and audited and approved by Mr Glen Cole of SRK Consulting (Canada) Inc., who is a Qualified Person under the Canadian National Instrument 43-101. MINERAL RESERVES STATEMENT, SÃO CHICO MINE, PARA STATE, BRAZIL, AS OF 30 JUNE 2017 Classification Underground Proven Probable Proven and Probable Quantity Grade Contained Metal 000't 65 25 90 Gold g/t 8.15 9.15 8.43 Gold 000'oz 17 7 24 1. Mineral Reserves have been rounded to reflect the relative accuracy of the estimates. Proven Underground Mineral Reserves are reported within the Measured classification domain, and Probable Underground Mineral Reserves are reported within the Indicated classification domain. Proven and Probable Underground Mineral Reserves are inclusive of external mining dilution and mining loss and are reported at a cut-off grade of 3.45 g/t gold assuming an underground extraction scenario, a gold price of US$1,250/oz, a 3.5:1 Brazilian Real to US Dollar exchange rate, and metallurgical recovery of 95%. 2. Serabi is the operator and owns 100% of the São Chico Mine such that gross and net attributable mineral reserves are the same. The mineral reserve estimate was prepared by the Company in accordance with the standard of CIM and Canadian National Instrument 43-101, with an effective date of 30 June 2017, and audited and approved by Mr Timothy Olson of SRK Consulting (US) Inc., who is a Qualified Person under the Canadian National Instrument 43-101. Serabi Gold plc // Report and Accounts 2018 37 MINERAL RESOURCE STATEMENT, CORINGA MINE, PARA STATE, BRAZIL, AS OF 4 MARCH 2019 Classification Underground Indicated Total Indicated Underground Inferred Vein Width Quantity Grade Contained Metal m 000't 0.7 845 Gold g/t 7.95 0.7 1,436 6.46 Gold 000'oz 216 298 1. Mineral Resources have been rounded. Mineral Resources are not Mineral Reserves and have not demonstrated economic viability. Mineral Resources are reported inclusive of Mineral Reserves. All figures are rounded to reflect the relative accuracy of the estimates. Underground Mineral Resources are reported within classification domains inclusive of in-situ dilution at a cut-off grade of 2.0g/t gold assuming an underground extraction scenario, a gold price of US$1,500/troy oz, an operating cost of $100/t, and metallurgical recovery of 95%. 2. Serabi is the operator and owns 100% of the Coringa gold project such that gross and net attributable mineral resources are the same. The mineral resource estimate was prepared by Global Resource Engineering in accordance with the standard of CIM and Canadian National Instrument 43-101, with an effective date of 4 March, 2019 by Mr Kevin Gunesch and Dr Hamid Samari, who are both Qualified Persons under the Canadian National Instrument 43-101. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report 38 Management Discussion and Analysis Financial Review The twelve month period ended 31 December 2018 has seen higher levels of gold bullion production than the same period of 2017 offset by lower levels of production of copper/gold concentrate reflecting the variations in the ore sources and grades being mined during 2018 compared with 2017. TWELVE MONTH PERIOD ENDED 31 DECEMBER 2018 COMPARED TO THE TWELVE MONTH PERIOD ENDED 31 DECEMBER 2017 Gold production for the twelve month period ended 31 December 2018 was 37,108 ounces which is a small increase compared with production for 2017 of 37,004 ounces. The total amount of ounces sold during the twelve months of 2018 was 33,551 ounces, which is approximately ten per cent less than the 37,161 ounces sold during 2017. The Group has recognised a gross profit for the twelve month period ended 31 December 2018 of US$2,879,340 (2017: US$5,019,087) and an operating loss of US$2,711,602 (2017 operating loss of: US$691,959). The gross profit of US$2,879,340 for the twelve month period ended 31 December 2018 is analysed in table 1. Revenue For the twelve-month period ended 31 December 2018 the Group generated US$9,469,336 (2017: US$15,620,204) in revenue by selling an estimated 6,745 ounces of gold from the sale of 1,040 tonnes of copper/gold concentrate (2017: 11,195 ounces from 1,440 tonnes) and also recognised revenue for 26,806 ounces of gold bullion generating total revenue of US$33,792,407 during the twelve months of 2018, (2017: sale of 25,966 ounces for revenue of US$32,829,664). During the twelve months of 2018, with the Group producing more gold in the form of bullion as opposed to in copper/gold concentrate, there has been a three per cent increase in bullion sales compared with the same period of 2017. At the same time there has been a 40 per cent decrease in sales of copper/gold concentrate. Gross Profit Concentrate Sold (Ounces) Bullion Sold (Ounces) Total Ounces 12 months 12 months ended December ended December 2017 (US$) 2018 (US$) 6,745 26,806 33,551 11,195 25,966 37,161 Variance US$ (4,450) 840 (3,610) Revenue from Ordinary Activity (US$) Gold (in Concentrate) Copper (in Concentrate) Silver (in Concentrate) Total Concentrate Revenue Gold Bullion 8,214,400 1,203,019 51,917 9,469,336 33,792,407 13,661,002 1,852,679 106,523 15,620,204 32,829,664 (5,446,602) (649,660) (54,606) (6,150,868) 962,743 Total Sales 43,261,743 48,449,868 (5,188,125) Costs of Sales Operational Costs Release of/provision for impairment of inventory Shipping Costs Treatment Charges Royalties Amortisation of Mine Property Depreciation of Plant & Equipment (29,491,414) (29,568,195) 76,781 400,000 (898,005) (432,082) (679,515) (6,180,735) (3,100,652) (950,000) (1,344,154) (543,338) (559,811) (7,787,166) (2,678,117) 1,350,000 446,149 111,256 (119,704) 1,606,431 (422,535) Total Operating Costs (40,382,403) (43,430,781) 3,048,378 Gross Profit Table 1 During the twelve months to 31 December 2018 the Group produced 1,134 wet tonnes of copper/gold concentrate, containing an estimated 7,543 ounces; (twelve months to 31 December 2017: 1,420 wet tonnes of copper/gold concentrate, containing 10,050 ounces of gold). The unsold material is held as inventory. Operating Costs Operating costs for the twelve months ended 31 December 2018 of US$29.49 million (2017: US$29.57 million) comprise all mining costs at both the Palito and São Chico Mines, plant processing costs, as well as all general site costs incurred on both mine sites during the twelve month period in the production of the final sales products as shown in table 2. 2,879,340 5,019,087 (2,139,747) Labour Costs Labour costs have increased by US$0.15 million for the twelve month period ended 31 December 2018 in comparison to the same period in the previous year due to each Brazilian employee receiving a three per cent increase in salary in May 2018 as a result of the national collective agreement in Brazil (in May 2017 the labour force received an eight per cent increase). There was also an increased number of operational staff employed during 2018 in comparison to 2017. Whilst production in the fourth quarter of 2018 was higher than the preceding year, a reduction in the relative level of sales has resulted in greater levels of inventory at the end of 2018. Accordingly, a higher level of labour and other operating costs is being carried as a cost of inventory compared with 2017 whilst a variation in exchange rates has also resulted in costs being relatively lower when translated into US Dollars. Serabi Gold plc // Report and Accounts 2018 39 Key Operating Statistics and Costs 12 months ended December 2018 12 months ended December 2017 Variance Variance (%) Tonnes Mined Tonnes Milled Ounces Produced Ounces Sold Operating Costs Labour Mining Consumables & Maintenance Plant Consumables General Site Table 2 Mining Costs Mining consumables and maintenance for the twelve month period ended 31 December 2018 have decreased by US$0.09 million in comparison to the same twelve month period from 2017. This is primarily due to a reduction in sales recognised offset by cost increases relating to power generation and supply during the twelve months of the year as a result the global increase in the price of oil. Maintenance costs have also increased during the twelve months of 2018 in comparison to the same period of the previous year as the underground fleet increased in size and reflecting the age profile of the mining fleet. These increases in mining costs have been offset by the weakening of the Brazilian Real in comparison to the US Dollar by 14 per cent compared with the same twelve month period ending December 2017. Plant processing costs Plant costs for the twelve months of 2018 are broadly similar to the costs for the same period in the previous year. This is primarily due to a reduction in sales recognised for the full year 2018 in comparison to the same period of the previous year. Costs in local currency have increased but have been offset by the 14 percent weakening of the average exchange rate between the Brazilian Real and the US Dollar for the twelve month period ended 31 December 2017 in comparison to the same period in 2018. The main area of cost increases relates to power generation and supply during the twelve months of the year as a result of the global increase in the price of oil. There was also an increase in maintenance costs resulting from the ageing of the equipment. 162,722 168,253 37,108 33,551 167,555 172,949 37,004 37,161 (4,833) (4,696) 104 (3,610) (3%) (3%) 0% (10%) 12 months ended December 2018 12 months ended December 2017 Variance Variance US$’000 US$’000 US$’000 13,006 9,269 4,151 3,064 29,490 12,860 9,358 4,176 3,174 29,568 146 (89) (25) (110) (78) % 1% (1%) (1%) (3%) 0% General Site Costs General site costs for the twelve month period ended 31 December 2018 decreased by three per cent versus the same period in the previous year. This is primarily due to a reduction in sales recognised for the full year 2018 in comparison to the same period of the previous year. Costs in local currency have increased but have been offset by the 14 per cent weakening of the exchange rate between the Brazilian Real and the US Dollar. Cost increases in local currency reflect general increases in inflation between the two periods as well as more third-party contractors required to undertake works on the Group’s tailings management facilities to maintain compliance with new regulations that had come into force. Release of Impairment Provision The Group calculates unit costs of mined production on a cost per tonne basis irrespective of grade and has established stockpiles of low grade run of mine ore which are available for processing in the future. For the year ended 31 December 2017, the Group had recognised a general impairment provision of US$950,000 against the carrying value of these coarse ore stockpiles. At 31 December 2018, the value of the provision against the carrying value of these coarse ore stockpiles was reduced to US$550,000, therefore the reduction in the impairment provision of US$400,000 was released to the Income Statement. Shipping Costs Shipping costs of US$0.89 million (2017: US$1.34 million) include all domestic road and river freight in Brazil from the Palito Mine to the international port at Belem and also international sea freight to the end purchaser as well as air transport and insurance for the bullion sold from the Palito Mine to its final destination in Sao Paulo. The decrease by comparison to the same period in 2017 reflects the reduction in the volume of concentrate shipped; twelve months of 2018 being 1,040 tonnes in comparison to 1,440 tonnes for the same period of the previous year. Treatment Charges Treatment Charges have decreased by 20 per cent between 2017 and 2018 as the Group sold 400 tonnes less, 28 per cent of copper/ gold concentrate in the twelve month period ended 31 December 2018 compared with the 2017 calendar year. Royalties Royalty payments of US$0.68 million (2017: US$0.56 million) comprise statutory levies payable in Brazil. Rates are uniform across all mining operations, however royalties on gold increased during the fourth quarter of 2017, with a new rate of 1.5 per cent on gold replacing the previous rate of 1.0 per cent. The royalty on copper production of 2.0 per cent was not changed. The increase in royalty payments of US$0.12 million compared with 2017 reflects this increase of 0.5 per cent on gold royalties. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report 40 Management Discussion and Analysis Financial Review continued Amortisation Charges for the amortisation of mine property are calculated by reference to the depletion, during the period, of the total estimated mineable resource at each of the Palito and São Chico orebodies. In each case the base carrying cost of the asset is adjusted to include a provision for future mine development costs for each of these ore bodies. The total amortisation charge relating to the Palito and São Chico ore bodies for the twelve months of 2018 is approximately US$6.18 million (2017: US$7.79 million). The reduction year on year in part reflects the weakening of the average exchange rate between the Brazilian Real and the US Dollar by 14 per cent together with the reduction in the reported level of contained gold in the ore mined compared with the same period in 2017. The charge reported in the Income Statement is also adjusted to reflect the level of sales rather than the level of production, with part of the depreciation being carried as an inventory cost and released to the Income Statement when the goods are sold. Depreciation There was also a depreciation charge of US$3.10 million recorded during the twelve months of 2018 on plant and equipment used in the mining and processing (twelve months of 2017: US$2.68 million). The movement reflects the 14 per cent weakening of the Brazilian Real against the US Dollar, offset by an increase in the charge in local currency due to the larger mobile fleet acquired for both the Palito and São Chico Mines over the last twelve months. In addition, the Group has during the fourth quarter made an accelerated charge of approximately US$400,000 in respect of plant and machinery that has reached the end of its useful life. Operating Loss The Group has recognised an operating loss before interest and other income of US$2.71 million (2017: operating loss of US$0.69 million) reflective of the lower level of gross profit from operations and after incurring US$5.54 million (2017: US$5.50 million) in administrative expenses as well as US$0.33 (2017: US$0.38 million) on share based payments. The deemed value assigned to these share options is amortised over the expected option life and is calculated using the Black Scholes model. The charge for the twelve months to 31 December 2018 is in respect of options granted between January 2015 and 31 December 2018. The Group also reported a profit of US$0.27 million from the disposal of assets (2017: US$0.17 million). Administration costs of US$5.54 million for the twelve month period ended 31 December 2018 are at a consistent level to the expense of US$5.50 million incurred during the twelve month period ended 31 December 2017. The Company recorded a foreign exchange loss of US$0.59 million for the twelve months ended 31 December 2018 which compares with a foreign exchange loss of US$0.21 million recorded for the twelve months ended 31 December 2017. These foreign exchange losses are primarily incurred in respect of the cash holdings of the Company in currencies other than US Dollars as at the period end and do not necessarily reflect actual realised profits or losses. The Company holds funds in certain currencies in anticipation of future expenditures that are anticipated to be settled in those currencies. Net interest charges for the twelve month period to 31 December 2018 were US$2.17 million compared with US$0.84 million for the same twelve month period of 2017. An analysis of the composition of these charges is set out in table 3. The interest on the secured loan of US$685,517 (2017: US$314,732) is the cost of twelve months of interest paid in relation to funds advanced under the credit agreement with Sprott, with the increase reflecting the higher levels of loan principal outstanding during the period. On 30 June 2017, the Group entered into a new agreement with Sprott to increase the loan from US$1.37 million to US$5.00 million and further increased this loan to US$8.00 million on 23 January 2018. Serabi Gold plc // Report and Accounts 2018Net Interest Charges 12 months ended December 2018 US$ 12 months ended December 2017 US$ Interest on secured loan Unwinding of discount on outstanding acquisition payment Unwinding of discount on rehabilitation provision Unwinding of the discount on the rehabilitation provision Loss on revaluation of derivatives Amortisation of fair value of derivatives Arrangement fee for secured loan (314,732) (59,255) (130,000) – – (520,000) (180,000) (281,333) (1,474,618) (355,663) (335,204) (59,255) (130,000) – (839,191) (59,255) – 135 (2,385,313) 318,279 538,371 4,780 (1,523,883) (839,056) Gain on revaluation of derivatives Unwinding of the discount on the rehabilitation provision Interest income Net finance expense Table 3 The expense on the unwinding of the discount on acquisition is as a result of the change in the net present value of the final payment due on the acquisition of Chapleau Resources. paid to Sprott during the third quarter of 2018 for the extension of the new US$3 million loan from its original maturity date of 30 September 2018 to 30 June 2020. 41 included within current liabilities representing the discounted net present value of the US$12 million final payment. Non-current assets totalling US$73.77 million at 31 December 2018 (31 December 2017: US$77.29 million) are primarily comprised of property, plant and equipment, which as at 31 December 2018 totalled US$42.34 million (31 December 2017: US$48.98 million), including assets acquired as part of the Chapleau acquisition, as well as development and deferred exploration costs with a value of US$27.71 million (31 December 2017: US$23.90 million), including assets acquired as part of the Chapleau acquisition. The Group has also a provision for a deferred tax asset of US$2.16 million (31 December 2017: US$2.94 million) and a long term receivable in respect of state taxes due in Brazil of US$1.55 million (31 December 2017: US$1.47 million). The weakening of the Brazilian Real from 31 December 2017 when the exchange rate was BrR$3.3074 to US$1.00 to the rate of BrR$3.8742 to US$1.00 at 31 December 2018 has had a negative impact on the net asset position but the main movements are discussed in more detail below. The amortisation of fair value of derivatives of US$520,000 represents the amortisation charge of the fair value ascribed to a gold call option granted to Sprott on 30 June 2017. As part of the US$5 million loan arrangement the Group granted call options to Sprott over 6,109 ounces of gold exercisable at a price of US$1,320 which expire on 31 December 2019. On 30 June 2017, the date these call options were granted, their value was assessed as being US$650,000 and a provision for a derivative financial liability of US$650,000 was recognised in the accounts. On 19 January and at the same time as taking out an additional US$3 million loan with Sprott, a six month extension to the repayment terms for this US$5 million loan was agreed. Under IFRS 9, this variation, being more than 10 per cent of the future cash flows, was considered a substantial modification to the original US$5 million loan. Accordingly, the original loan under the terms of IFRS 9 was considered to be repaid and a new loan for US$5 million taken out but with no derivative instrument attached to it. As a result, the outstanding fair value of the derivative, totalling US$520,000, attaching to the original US$5 million loan was required to be amortised in full upon the deemed repayment of the original loan. The arrangement fee for the secured loan of US$180,000 relates to two payments of US$90,000 to Sprott for the organisation and extension of the loan. US$90,000 relates to the fee paid to Sprott during the first quarter for the new US$3 million loan and the revision to the terms of the existing US$5 million loan. The second fee of US$90,000 relates to the fee The gain on the revaluation of derivatives of US$318,279 (twelve months to 31 December 2017: loss of US$59,255) represents the gain arising on the revaluation of the derivative provision at the 31 December 2018. The initial value of the provision as at 30 June 2017 was US$650,000 which having been revalued to US$709,255 as at 31 December 2017 required a revaluation to US$390,976 at 31 December 2018 resulting in a gain during the twelve month period ended 31 December 2018. The Group’s property, plant and equipment includes the value of its mine assets relating to the Palito Mining Complex at 31 December 2018 of US$22.65 million (2017: US$28.41 million). This includes US$3.81 million of additions in relation to the capital development of the Palito and São Chico ore bodies incurred during the year. Assets in construction as at 31 December 2018 and relating to the Palito Mining Complex had a book value of US$5.70 million (2017: US$3.69 million). The gain on the unwinding of the discount on the rehabilitation provision is as a result of change in the net present value of the rehabilitation provision. LIQUIDITY AND CAPITAL RESOURCES Non-Current Assets On 31 December 2018, the Group’s net assets amounted to US$69.11 million, which compares to US$60.77 million as reported at 31 December 2017. The Group has also reported a loss after taxation of US$5.75 million in the twelve month period to 31 December 2018. On 21 December 2017 (“Closing”), the Group finalised the acquisition of Chapleau Resources for a total value of US$22 million, with US$5 million being paid in cash on 21 December 2017. A further US$5 million in cash was paid on 16 April 2018 and a final payment of US$12 million in cash will be due upon the earlier of either the first gold being produced or 24 months from the date of Closing. As a result of the acquisition of Chapleau there is US$11.00 million payable The Group owns land, buildings, plant and equipment with a value of US$9.31 million (31 December 2017: US$11.19 million). During the twelve months of 2018 the Group has acquired additional plant and machinery to the value of US$2.81 million in relation to its on going operations at the Palito Mining Complex. The gross value ascribed to the Palito Mining Complex is now being amortised over the expected recoverable ounces of each orebody. An amortisation charge totalling US$6.10 million has been recorded for the twelve month period to 31 December 2018 (twelve month period to 31 December 2017: US$7.40 million). Deferred exploration costs as at 31 December 2018 totalled US$27.71 million (31 December 2017: US$23.90 million), which relates to US$16.3 million attributable to the value of the projects acquired as part of the Chapleau acquisition as well as capitalised costs of US$4.61 million (2017: US$2,487) on exploration and evaluation expenditure. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report 42 Management Discussion and Analysis Financial Review continued Working Capital The Group had a working capital position of US$0.32 million at 31 December 2018 compared to US$1.03 million at 31 December 2017, the movement of US$0.71 million being detailed in table 4. The weakening of the Brazilian Real from 31 December 2017 when the exchange rate was BrR$3.3074 to US$1.00 to the rate of BrR$3.8742 to US$1.00 at 31 December 2018, a weakening of 17 per cent, has had a negative impact on the primary areas which make up the working capital position, however the main movements are discussed in more detail to the right. Inventories The level of inventory held by the Group at 31 December 2018 has increased by US$1.58 million since 31 December 2017. A breakdown of the Group’s inventories at 31 December 2018 and at 31 December 2017 is set out in table 5. Inventories of consumables (fuel, spare parts, chemicals, explosives etc.) at 31 December 2018 of US$2.93 million (31 December 2017: US$2.59 million) have increased by approximately US$0.34 million. The Group acquires stocks of certain materials including reagents, explosives and other consumables in quantities that are sufficient for up to three to four months’ consumption requirements to minimise freight and other logistics costs and improve pricing. The levels of inventory have increased reflecting a requirement to keep on hand higher levels of items related to equipment and plant maintenance. During 2017, the Group made a provision of US$950,000 against the value of its stockpiles of mined ore. At 31 December 2018, the value of the provision against the carrying value of these coarse ore stockpiles was reduced to US$550,000, with the reduction in the impairment provision of US$400,000 being released to the Income Statement. The value of the stock of surface ore has decreased by 45 per cent from US$1.09 million to US$0.60 million. The total coarse ore stockpile tonnage has decreased from Working Capital 31 December 2018 31 December 2017 US$ US$ Variance US$ Current assets Inventories Trade and other receivables Prepayments Cash and cash equivalents 8,511,474 758,209 4,166,916 9,216,048 6,934,438 1,277,142 3,237,412 4,093,866 1,577,036 (518,933) 929,504 5,122,182 Total current assets 22,652,647 15,542,858 7,109,789 Current liabilities Trade and other payables Acquisition payment due Secured loan Finance leases and unsecured loan Derivative financial liabilities Accruals 6,273,321 10,997,757 3,636,360 666,438 390,976 372,327 5,347,964 5,000,000 1,980,000 1,980,000 709,255 614,198 (925,357) (5,997,757) (1,656,360) (1,65 318,279 241,871 Total current liabilities 22,337,179 14,517,129 (7,820,050) Working capital 315,468 1,025,729 (710,261) Non-current liabilities Trade and other payables Acquisition payment due Provisions Secured loan Finance leases 955,521 – 1,543,811 2,424,246 48,850 2,753,409 9,997,961 2,047,131 2,500,000 249,412 1,797,888 9,997,961 503,320 75,754 200,562 Total non-current liabilities 4,972,428 17,547,913 12,575,485 Table 4 approximately 15,000 tonnes at 31 December 2017 to approximately 8,000 tonnes at 31 December 2018, a decrease of 48 per cent. Whilst the Group has reduced by US$400,000 the level of impairment provision carried against the value of coarse ore stockpiles, the changing unit production costs and the weakening of the Brazilian Real between 31 December 2017 and 31 December 2018 explains the remainder of the decrease. The value of finished goods awaiting sale at 31 December 2018 of US$3.82 million compares with the value at 31 December 2017 of US$1.74 million. The total value of finished goods held in stock at 31 December 2018 comprises 236 bags of copper/gold concentrate with a value of US$1.45 million (31 December 2017: 142 bags with a value of US$0.66 million) and bullion on hand for smelting which, at 31 December 2018, was 86,744 grammes valued at US$2.37 million in comparison to 39,893 grammes at 31 December 2017 valued at US$1.08 million. During 2014, when the current operations were started, the Group established a stockpile of partly processed material which, having only passed through the flotation processing circuit, retained a gold grade of approximately 2.5 g/t. At 31 December 2017, there were approximately 14,700 tonnes of this stockpile on site with a value of US$0.49 million. During 2018 this particular stockpile was processed in its entirety. The valuation attributable to gold locked up within the processing plant has decreased to US$1.17 million as at 31 December 2018 (31 December 2017: US$1.02 million) reflecting normal operational variances. Inventory 31 December 2018 US$ 31 December 2017 US$ Variance US$ Variance % Stockpile of mined ore Finished goods awaiting sale Other material in process Stockpile of flotation tails Consumables Total Inventory Table 5 600,335 3,819,685 1,162,157 – 5,582,177 2,929,297 1,091,656 1,741,860 1,019,593 494,117 (491,321) 2,077,825 142,564 (494,117) 4,347,226 2,587,212 1,234,951 342,085 8,511,474 6,934,438 1,577,036 (45%) 119% 14% (100%) 28% 13% 23% Serabi Gold plc // Report and Accounts 2018 43 Trade Receivables Trade and other receivables at 31 December 2018 of US$0.76 million have decreased by US$0.52 million from US$1.28 million at 31 December 2017. As at 31 December 2018 the Group was owed US$0.62 million from the sale of its copper/ gold concentrate in comparison to US$1.23 million as at 31 December 2017. Prepayments Prepayments have increased by US$0.93 million from US$3.24 million at 31 December 2017 to US$4.16 million at 31 December 2018. The main reason for this increase is because during the second half of 2018 the Group made several down payments on underground mining equipment, and for the ore sorter as well as more usual supplier deposits for monthly consumable supplies and import taxes. At 31 December 2018 the total amount of supplier down payments totalled US$1.14 million, (2017: US$0.48 million). There has also been an increase of US$0.12 million in prepaid taxes including recoverable taxes of PIS and Cofins (Federal taxes) that remain to be recovered at the period end. Cash at Bank Between 31 December 2017 and 31 December 2018, cash balances have increased by approximately US$5.13 million. During the second quarter of 2018, the Group received a total of US$23.24 million, net of legal fees, for the issue of 474,437,864 shares. The Group also repaid the second instalment of US$5.0 million for the acquisition of Chapleau on 16 April 2018. During the first quarter of 2018, the Group increased the interest-bearing secured loan by a further US$3.0 million from US$5.0 million at 31 December 2017 to US$8.0 million. The additional loan was taken out in January 2018 to replace working capital that had been used to make a US$5.00 million payment for the acquisition of Chapleau Resources as the first instalment of the total consideration of US$22 million payable. The Group has also repaid US$1.94 million of this loan during the twelve months of 2018. During 2018, the Group has also spent US$4.61 million on exploration activities around the Palito Mining Complex, US$4.10 million on mine development, US$4.05 million on plant and equipment and US$2.27 million on pre-operating costs at the Coringa project. The Group also made the second instalment of the acquisition payment to Chapleau of US$4.74 million (US$5.0 million less the working capital adjustment of US$0.26 million). Current Liabilities Current liabilities have increased by US$7.82 million from US$14.52 million at 31 December 2017 to US$22.34 million at 31 December 2018. This mostly reflects that the third and final payment in respect of the acquisition of the Coringa gold project of US$12.00 million is now due within 12 months and has been reclassified as a current liability whereas at the end of the prior year this payment was a non-current liability. In addition, a liability of US$1.33 million relating to the acquisition of a historic third party interest in the São Chico project was re-classified as a current liability. Trade Creditors Trade and other payables amounted to US$6.27 million at 31 December 2018 compared with an amount owed by the Group of US$5.35 million at 31 December 2017, an increase of US$0.92 million. This increase in current trade creditors is primarily because the Group has re-classified as a current liability the amount of US$1.33 million relating to the acquisition of a historic third party net profits interest in the São Chico project. In the previous year this payable was included within long term trade payables. The Group has determined that this liability will now be settled in a series of payments over the coming 24 months. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report44 Management Discussion and Analysis Financial Review continued Interest-Bearing Loan On 30 June 2017, the Group entered into a new loan agreement with Sprott for US$5.00 million expiring 31 December 2019 with the loan repayments commencing over 24 months starting in January 2018. An amendment to this agreement was completed on 22 January 2018 whereby the Group increased its loan with Sprott by US$3 million (“the New Loan”) and at the same time extended the final repayment period on its existing US$5 million loan ("the Existing Loan”) with Sprott by six months from 31 December 2019 to 30 June 2020. On 14 September 2018, the Company exercised its option to extend the term of the New Loan to 30 June 2020 with repayment being in equal monthly instalments commencing on 30 September 2018. Of the total loan US$3.64 million is due in less than 12 months with US$2.16 million due in more than twelve months. A total of US$1.94 million was repaid during the period. Obligations under Finance Leases and Unsecured Equipment Loan Obligations under finance leases and unsecured equipment loans for less than one year have decreased by US$0.20 million from US$0.87 million at 31 December 2017 to US$0.67 million at 31 December 2018. During 2018, the Group has made one new equipment acquisition using lease finance arrangements and has made capital repayments totalling approximately US$0.80 million. All finance leases are held by Serabi Mineração SA (“SMSA”) in Brazil but are denominated in Euro or US Dollar before being converted to Brazilian Reals, the functional currency for SMSA. Derivative Financial Liabilities By way of a fee for the loan agreement with Sprott the Group has granted call options to Sprott over 6,109 ounces of gold exercisable at a price of US$1,320 which expire on 31 December 2019. On 30 June 2017, the date these call options were granted, their value was assessed as being US$650,000 and a provision for a derivative financial liability of US$$650,000 has been recognised in the accounts. At 31 December 2017, the derivative provision was revalued to US$0.71 million. At 31 December 2018, the derivative provision was revalued to US$0.39 million with the decrease in the provision that has arisen in the year of US$0.32 million being reflected as finance income in the Income Statement. Derivatives are valued by reference to available market data. Any change in the value of the derivative is recognised in the statement of comprehensive income in the period in which it occurs. The fair value of the derivative has been measured using level 1 inputs. Acquisition Liability The amount due on acquisition of US$11.00 million relates to the net present value of the US$12 million cash payment due upon the earlier of either the first gold being produced from the Coringa gold project or 21 December 2019. Non-Current Liabilities The Group makes provision for the future estimated rehabilitation costs for its mine sites at Palito and São Chico. The value of the rehabilitation provision carried by the Group at 31 December 2018 was US$1.54 million. The value at 31 December 2017 was US$2.01 million. The variation is as a result of changes in estimates as well as exchange rate variations between the two periods. The Group does not have any asset backed commercial paper investments. NON-IFRS FINANCIAL MEASURES The gold mining industry has sought to establish a common voluntary standard to enable investors to assess and compare the performance of companies engaged in gold mining activities. The Group has elected to provide calculations of Cash Costs and All-In Sustaining Costs and has conformed its calculation of these performance measurements with the guidance notes released by the World Gold Council. The measures seek to capture all the important components of the Group’s production and related costs. In addition, management utilises these and similar metrics as a valuable management tool to monitor cost performance of the Group’s operations. These measures and similar measures have no standardised meaning under IFRS and may not be comparable to similar measures presented by other companies. This measure is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Total Cash Cost and All-In Sustaining Cost Table 6, overleaf, provides a reconciliation between non-IFRS cash cost and non-IFRS all-in sustaining cost to production costs included in cost of sales as disclosed in the consolidated statement of comprehensive income. Clive Line Finance Director 28 March 2019 Serabi Gold plc // Report and Accounts 201845 Total Cash Cost and All-In Sustaining Cost Total operating costs (calculated on a sales basis) Add/(subtract) Finished goods and WIP inventory stock adjustment Grossing up of revenue for metal deductions By-product credits Total cash cost of production Corporate G&A Share-based remuneration Capitalised cost for mine development All-In Sustaining Cost of production 12 months ended December 2018 (US$) 12 months ended 31 December 2017 (US$) 31,501,016 32,015,498 (106,436) 346,468 (1,268,161) 30,472,886 5,359,000 329,620 4,386,397 40,547,903 (347,562) 555,476 (2,663,981) 29,559,430 5,343,871 381,362 4,362,192 39,646,855 12 months ended 31 December 2018 (ounces) 12 months ended 31 December 2017 (ounces) Gold ounces produced 37,108 37,004 12 months Ended 31 December 2018 (US$) 12 months ended 31 December 2017 (US$) Total Cash Cost of production (per ounce) US$821 Total All-In Sustaining Cost of production (per ounce) US$1,093 US$799 US$1,071 Table 6 Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report 46 Modern Slavery and Human Trafficking Statement The Company is committed to the prevention of the use of forced labour and has a zero tolerance policy for human trafficking and slavery. Serabi Gold plc (“Serabi” or the “Company” or, together with its subsidiaries, the “Group”) publishes this statement in compliance with section 54 of the Modern Slavery Act 2015. This statement describes the steps Serabi has taken to prevent modern slavery in its business and supply chains. Where the context so requires, references in this statement to the Company include references to the Company and all of its subsidiaries from time to time. The Company is committed to the prevention of the use of forced labour and has a zero tolerance policy for human trafficking and slavery. The Modern Slavery Act 2015 (Act) requires any commercial organisation in any sector, which supplies goods or services, and carries on a business or part of a business in the United Kingdom, and is above a specified total turnover, to produce and publish an annual slavery and human trafficking statement. 1. Organisational structure Serabi Gold plc is an established gold production and development company, with its shares listed on the stock exchanges operated by AIM in the United Kingdom and the TSX in Canada. Current gold production of 40,000 ounces per annum is derived from the Company’s Palito Complex mining operations located in the Tapajos region, in the southwest of the State of Para in northern Brazil. The Company is developing the Coringa gold project also located in the Tapajos region and currently anticipates that this will be in production in 2020. The Company directly employs approximately 350 staff in its operations in Brazil and has a small head office staff based in London, England. 2. Our policies on slavery and human trafficking 2.1 - The Company will not use or allow the use of forced, compulsory labour, slavery, servitude or human trafficking in the course of its business. This includes sexual exploitation, securing services by force, threats or deception and securing services from children and vulnerable persons. 2.2 - The Company operates the following policies which are relevant to the prevention of slavery and human trafficking in its operations: 2.2.1 - Anti-slavery and human trafficking policy – this policy sets out the steps that the Company has taken, and will take, to prevent human trafficking and slavery within its business and its supply chain. 2.2.2 - Serabi Social Plans – Serabi is a significant employer in the region and provides a number of initiatives each year to support and improve the conditions of local communities, through, inter-alia, supporting education, provision of medical and dental facilities, power and water, and general improvement of roads. 2.2.3 - Procurement Policy - Serabi’s operations are supported by a supply chain which predominantly comprises goods and services required for the mining, processing and recovery of gold. Where practical, Serabi sources goods and services necessary to maintain its operations via supply chains. The Company tries to use local suppliers if possible and appropriate in order to enhance its contribution to socioeconomic welfare in the Tapajos region and the State of Para. The Group currently conducts business with numerous suppliers, with the significant majority of them based in Brazil and cumulatively covering over 90 per cent of the Group’s requirements. The majority of the other suppliers are based in North America and Europe. The Group maintains open channels of communication with its suppliers and encourages them to raise any issues or concerns that arise in the conduct of their business. 2.2.4 - Employment Policy – Employment terms and conditions for the Company’s employees based at its UK office and at its Brazilian mining operations are regulated by and are operated in compliance with all Serabi Gold plc // Report and Accounts 201847 relevant prevailing national and local legislation. Employment terms and conditions provided to staff meet or exceed the national norms. The Group’s mining and processing operations are labour intensive and unionised. 2.2.5 - Whistleblowing – The Company encourages all of its employees to report any concerns related to the activities of the firm. The Company will ensure that any matter raised under this procedure will be investigated thoroughly, promptly and confidentially, and the outcome of the investigation reported back to the individual who raised the issue. Additionally, the Company will ensure that no one will be victimised for raising a matter under this procedure. 2.3 - In addition, internal policies are reviewed regularly to ensure continued compliance with the Modern Slavery Act 2015. 3. Due diligence processes for slavery and human trafficking The Company believes that in order to prevent human trafficking and slavery within its business and its supply chain it is necessary to first understand the areas where the Company is most at risk. Although the work conducted at the Company’s mining operations is labour intensive, the Company feels that the unionised workforce and the Company’s adherence to strict employment policies and regular inspection by the Ministry of Labour negates the risk of modern slavery in this operation. As a consequence, the Company feels its supply chain is the area that presents the most risk. As a result of the due diligence process the Company has conducted, systems have been put in place to: 3.1 - Continue to identify and assess potential risk areas in the Company’s business and supply chains; 3.2 - Continue to adhere to, and enforce the Company’s procurement policy and the Company’s employment policies; 3.3 - Seek to continue the good relationship built with unions and the Ministry of Labour in Brazil; and 3.4 - Protect whistle blowers. 4. SUPPLIER ADHERENCE TO OUR VALUES AND ETHICS 4.1 - To ensure contractors and those in the Company’s supply chain comply with its values and ethics, the Company incorporates into its procurement procedures a requirement for suppliers to positively confirm their own commitments to prevent human trafficking and slavery. 4.2 - In addition efforts are made to confirm that the Company’s suppliers are as committed to the prevention of human trafficking and slavery as the Company, and each supplier’s conduct is carefully considered when awarding or renewing business. 4.3 - Reviews of the Company’s suppliers and its supply chain profile will be conducted annually. 5. TRAINING To ensure a high level of understanding of the risks of modern slavery and human trafficking in its supply chains and business, the Company will provide the necessary training to all relevant employees. 6. PERFORMANCE INDICATORS The Company will use the following key performance indicators to measure how effective it is in ensuring that slavery and human trafficking is not taking place in any part of its business or supply chain: 6.1 - completion of necessary training of the policy by all relevant staff; 6.2 - communication of the policy to suppliers; and 6.3 - continued progress of the social and labour plan of the Group in Brazil. 7. FURTHER STEPS This statement is reviewed annually by the Company’s Chief Executive Officer Michael Hodgson and approved by Serabi’s Board of Directors. This statement is made pursuant to section 54(1) of the Act and constitutes the Company’s antislavery and human trafficking statement for the calendar year ended 31 December 2018. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report48 Social and Environmental Activities Supporting Communities and the Environment Serabi has been active for over 13 years in the State of Para in the region of Tapajos and is dependent on close co-operation with the communities of Jardim do Ouro, Moraes d’Almeida, Novo Progress and Itaituba, in particular, for its continued growth and success. The presence of Serabi’s operations in the Tapajos region has created many employment opportunities to local communities as well as other improvements. These towns provide support services particularly engineering, construction and fabrication as well as staff for the Group’s mining and exploration activities. As with any similar relationship, the support and contracts that Serabi provides stimulate growth and investment to these local communities which in the long term improves the quality and levels of support that these communities can provide. It is a strong objective of the Group to, wherever practical, increase the local content in its operations in order to maximise the economic benefits to local businesses and individuals and to the State of Para. The programme of prioritisation of the workforce, services and equipment has yielded excellent results during the year with the generation of new jobs for local people living in and around the municipality of Itaituba and the number of positions taken by local staff increasing by approximately 25 per cent during the year. ENVIRONMENTAL Brazil has a well-developed and strong environmental regime and whilst overall responsibility for federal regulation and enforcement rests with the Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renovaveis (“IBAMA”), each state also has its own environmental bodies that issue and regulate environmental permits. Serabi seeks to work closely and transparently with Secretaria de Estado de Meio Ambiente e Sustentabilidade (“SEMAS”), the environmental agency for the State of Pará, to ensure that its operations are run in compliance with and above the requirements of prevailing legislation. In addition to Serabi’s on-going environmental monitoring procedures, it agrees annual plans for the remediation of areas of the Palito and São Chico Mines with SEMAS. Some of this work will include remediation of damage caused by activities prior to Serabi’s involvement. Whilst Serabi does not have legal responsibility for these past activities, it considers it good practice to recuperate those areas that were subject to past garimpo operations and for 2019 has commenced a programme to use waste material from its mining operations to remediate some historic artisanal dams that are located within the Palito mine site. Serabi Gold plc // Report and Accounts 201849 During 2018 the Group was involved in an extensive programme to bring its tailings management facilities into full compliance with new Brazilian legislation that had been introduced following the dam failure at Mariana, in the state of Minas Gerais, in 2015. An annual audit of our tailings facilities, undertaken late in 2018 by an accredited Brazilian geotechnical engineering expert, confirmed our tailings management facility to be in good order, and it remains fully licensed and certified. Serabi has established a programme to support scientific research in new species found in the local area and which it hopes will help to increase the local awareness and protection of the flora, fauna and the wider ecosystem in the local region. COMMUNITIES, EDUCATION AND HEALTH Serabi has created a number of programmes targeting different areas such as education, health, dental, environmental, cultural, social and safety in order to assist and positively impact communities in the areas around Serabi’s operations. One of the educational programmes includes the school at Jardim do Ouro which was originally built by Serabi and for which Serabi continues to provide assistance. The school educates children from the neighbouring local communities and regions around and with Serabi’s help gives these children access to books to motivate reading, other learning materials to assist them during classes, school uniform and computers with internet access. The health programme created by Serabi includes a medical facility that was created to provide healthcare services and support to local communities giving new born children and pregnant women priority when needed. The weekly clinics, which use Serabi’s own medical clinic and doctor, dispense general healthcare, allow for the diagnosis and treatment of illness and disease, in particular tropical diseases such as malaria and dengue, and provide pre-natal and post-natal care. In 2018, Serabi continued to provide local communities with access to health care through dental programmes and campaigns focusing on oral health. All the appointments are made in the dental clinic developed by Serabi. With each appointment the children and their parents learn how to develop healthy Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report50 Social and Environmental Activities continued The safety training programme is very important to make sure that all the operations run with the minimum risk possible to the environment. The Company has daily monitoring programmes in place to minimise the risks. The safety training programme aims to train and enable all local employees to observe and report any potential problem or failing in the programme. Daily inspections are undertaken by the Group’s health and safety teams which provide staff with daily briefings and training before the start of each shift, as part of its preventive actions and contingency planning for its mining and exploration activities. Serabi has in 2018 also continued its Christmas campaign which aims to create a memorable day for local communities by providing a Christmas party and a donation of toys to local children. habits to care for their teeth while they are young. These habits can set the stage for good oral healthcare throughout their entire life, and help to avoid many of the problems that result from poor oral health, including gum disease, cavities, and tooth decay. Serabi’s educational environmental programmes aim to make changes that can be implemented both individually and collectively. The main purpose of these programmes is to leave a legacy of sustainability in all communities where the Company has influence. In order to increase the local levels of care for the environment, during 2018 Serabi created a number of initiatives involving the communities. In particular, Serabi created inclusion programmes in partnership with local teachers making decisions related to the environment, with the intention of encouraging local students to be more aware of the environment. This action has resulted in more people involved in environmental programmes held by the schools. Serabi has established a programme which is focused on improved social communication to promote the idea of clear and participative communications between the Company and the communities. The programme involves a monthly meeting with the local leaders with the purpose to update both parties about any progress on agreed programmes or concerns. Serabi has also provided donations to build the 103 PPD station for the Military Police in the District of Moraes Almeida with the main purpose of increasing local safety in the communities. Serabi implemented the expansion of the water supply for the indigenous population of Ethnia Kayapoin in order to improve water facilities into the community. This project provides the expansion and optimisation of water to Ethnia Kayapoin. All the positive aspects of this expansion were examined through interviews with the local community and site visits. Serabi created a programme to incentivise participation in art, music and local and national culture in the communities. The programme was created with the intention to improve cultural understanding and awareness and it was supported by the Ministry of Culture. Serabi donated nearly R$90,000 to invest in musical instruments to the Jardim do Ouro community band to encourage the local community to pursue new experiences through art and music and as result bring the community closer. The programme also offers the opportunity for the local kids to learn theatre to help them in their self-development. Serabi Gold plc // Report and Accounts 201851 PLANNED INITIATIVES FOR 2019 Development of the Local Economy Continue the prioritisation of hiring suppliers and local services from Jardim do Ouro, Moraes Almeida and Itaituba. Continuing improvement to infrastructure – health, education and sanitation for the communities around Palito and São Chico • Continuing improvement to infrastructure – health, education and sanitation for the communities around Palito and São Chico. • Continue actions of medical and dental care at Jardim do Ouro and São Chico communities. • Continue and look to expand the provision of a public power and lighting network for the São Chico community. • Initiation of the process of water abstraction to serve the community of São Chico. • Refurbishment of Health Support Office in Jardim do Ouro community, in partnership with the Health Department of Itaituba. • Continued maintenance of the Transgarimpeiro Highway which links Jardim do Ouro and São Chico to the main BR163 Highway. • Donations of diesel for the police vehicles of the communities of São Chico and Jardim do Ouro in order to help to improve the security/safety in the region. Programmes focusing on Coringa communities • Maintenance programmes for the access roads from the BR163 Highway which support the local “Terra Nossa” community. • Continuing donations to local Indigenous populations to assist them to maintain their traditions and keep their community intact. • Assistance for an ophthalmologist in a project that will provide free glasses and consultation for the local children. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsSerabi Gold plc // Report and Accounts 2018Strategic Report52 Board of Directors and Senior Management Effective Leadership and Management Melvyn Williams Non-executive Chairman A R Mike Hodgson Chief Executive Appointed: March 2011 Experience: Mel was, until June 2011, the Chief Financial Officer and Senior Vice President of Finance and Corporate Development of Brigus Gold. Mel has over 40 years of financial experience, much of that time spent within the mining industry. From November 2003 through January 2004, Mel served as Chief Financial Officer of Atlantico Gold, a private Brazilian mining company which held the Amapari gold project, and was sold to Wheaton River Minerals Ltd. in January 2004. From 2000 to November 2003, he served as Chief Financial Officer of TVX Gold Inc., a gold mining company with five operating mines and an advanced development project in Greece. His background also includes services with Star Mining Corporation, LAC North America, Riominas LSDA and Rossing Uranium, (both of which are Rio Tinto subsidiaries). Qualifications: He is a Chartered Certified Accountant and received an MBA from Cranfield in the United Kingdom. Mel is also a director of Western Troy Capital Resources. Appointed: February 2007 Experience: Mike has worked in the mining industry for over 30 years and has extensive international experience. Most recently he worked as chief operating officer and vice president technical services for Canadian-based Orvana Minerals Corporation. Prior to that, he provided consulting services to a number of mining companies in Europe and South America. Previous appointments include manager of technical services and operations for TVX Gold Inc., mining technical consultant at ACA Howe International Ltd and similar roles at Rio Tinto plc and Zambia Consolidated Copper Mines Ltd. He has, during his career, acquired extensive experience in narrow vein underground mining operations. Qualifications: Originally qualified in mining geology, Mike is a Fellow of the Institute of Materials, Minerals and Mining, a Chartered Engineer of the Engineering Council of UK and a “Qualified Person” in accordance with Canadian National Instrument 43-101 – Standards of Disclosure for Mineral Projects. Clive Line Finance Director and Company Secretary Appointed: March 2005 Experience: Clive is a Chartered Accountant and has been involved in mining and natural resources companies since 1987, overseeing financial and legal affairs of exploration and development projects and producing operations in Africa, Europe and the former Soviet Union. Having worked with Price Waterhouse in both the UK and Australia, he joined Cluff Resources plc in 1987, where he was finance director prior to joining the privately owned Quest Petroleum Group in a similar position in 1993. Following the successful sale of this group he became involved with both Eurasia Mining plc and Northern Petroleum plc, both of which were admitted to AIM in 1996. Between 1999 and 2005 he worked as a divisional finance director within the Interpublic Group, one of the world’s largest marketing services groups, prior to joining Serabi in 2005. Qualifications: He has an Honours degree in Accounting and Finance and is a member of the Institute of Chartered Accountants of England and Wales. Aquiles Alegria Non-executive Nicolas Bañados Non-executive R T Sean Harvey Non-executive A R Appointed: July 2014 Experience: Aquiles has more than 20 years of experience in the mining industry and has acted as exploration manager in a number of mining companies, most recently as Deputy Manager at Antofagasta Minerals. Qualifications: He graduated with a degree in geology from the Universidad de Chile. Appointed: May 2013 Experience: Nicolas is Managing Director of Private Equity and attorney-in-fact at Megeve Investments, a non-discretionary portfolio manager of Fratelli Investments. Formerly, he held the position of VP and Portfolio Manager at Megeve Investments, and research analyst at Consorcio Life Insurance in Chile. He has more than 14 years of experience investing in Latin America and serves as Director for several companies including two private mining companies in Chile, Haldeman Mining Company and Minera Las Cenizas, and Colgener, a power company in Colombia. Qualifications: Nicolas has an MBA from The Wharton School at the University of Pennsylvania and also received a Master’s degree in Financial Economics from Universidad Católica de Chile. Appointed: March 2011 Experience: Sean spent 10 years working in investment and merchant banking, primarily focused on the basic industry (mining) sector and for the last 17 years has held senior executive and board positions with various mining companies. Sean was President and CEO of Orvana Minerals Corp. from 2005 to 2006. Previously, he was President and CEO of TVX Gold at the time of its sale to Kinross Gold in 2003 and, subsequent to that, was President and CEO of Atlantico Gold, a private company involved in the development of the Amapari Project in Brazil that was sold to Wheaton River Minerals Ltd. (presently Goldcorp Inc.). Sean also currently sits on the board of directors of several other mining companies. Qualifications: Sean has an Honours B.A. in economics and geography and an M.A. in economics, both from Carleton University. He also has an L.L.B. from the University of Western Ontario and an M.B.A. from the University of Toronto. He is a member of the Law Society of Upper Canada. Serabi Gold plc // Report and Accounts 201853 OUR DIVERSE BOARD Nationalities Background experience • Geology • Mine Engineering • Investment Banking • Corporate Finance • Accounting • Asset and Investment Management Tenure 1–3 Years 11% (1 Director) 4–9 Years 67% (6 Directors) 10+ Years 22% (2 Directors) Non-Executive 78% (7 Directors) Executive 22% (2 Directors) COMMITTEE MEMBERSHIP A R Audit Committee Remuneration Committee Chairman Member Felipe Swett Non-executive A Roney Almeida Chief Operating Officer Senior Management in Brazil Composition Eduardo Rosselot Non-executive Mark Sawyer Non-executive Appointed: March 2018 Experience: Mark co-founded Greenstone Resources in 2013 after a 16 year career in the mining sector. Prior to establishing Greenstone, Mark was GM and Co-Head Group Business Development at Xstrata plc where he was responsible for originating, evaluating and negotiating new business development opportunities for Xstrata. Prior to Xstrata Mark held senior roles at Cutfield Freeman & Co (a boutique corporate advisory firm in the mining industry) and at Rio Tinto plc. Qualifications: Mark qualified as a lawyer and has a law degree from the University of Southampton. Appointed: October 2012 Experience: Eduardo is a mining engineer with over 25 years’ experience in the mining industry, having worked extensively in the Americas and Europe. Currently he works as an independent consultant for various mining companies and mining funds mainly in South America, and is a partner of the privately owned mining company HMC Gold SCM, with development projects in Chile. Eduardo is also a director of Haldeman Mining Company, a Chilean private copper and gold producer. Prior to that, he worked as VP business development and special projects for Orvana Minerals Corp. Previous appointments include senior positions with European Goldfields Ltd. and TVX Gold Inc. Prior to that he was a partner of the South American based mining consultancy firm NCL Ingeniería y Construcción Ltd. Qualifications: Eduardo has a Mining Engineer degree from Universidad de Chile, and is a member of the Institute of Materials, Minerals and Mining, a Chartered Engineer of the Engineering Council of UK and a "Qualified Person" in accordance with the Canadian National Instrument 43-101 – Standards of Disclosure for Mineral Projects. Appointed: September 2014 Experience: Felipe is a Partner and heads the asset management team at Asset Chile, a Chilean-based investment bank. Felipe joined Asset Chile in 2003 as an Analyst and as part of the corporate finance team and has led the Asset Management division since 2010. Qualifications: Felipe holds a degree in Civil Engineering with a Diploma in Environmental Engineering from the Pontificia Universidad Católica de Chile and an MBA from the Kellogg School of Management, Northwestern University. Experience: Roney has worked in a variety of mining operations both open-pit and underground and, as well as gold, also has experience with other ore types including nickel, iron-ore and limestone having worked with companies such as Anglo American, Vale, Votorantim (including a two year period as a mine manager in Ontario, Canada) and most recently with Compania Siderurgia Nacional in the position of Corporate and Operations Mine Manager. Qualifications: Roney has degrees in Geology and Mine Engineering from the School of Mines of the Federal University of Ouro Preto, in Minas Gerais, Brazil, and an MBA From the Getulio Vargas Foundation in Sao Paulo. Ulisses Melo General Manager Experience: Ulisses, who was previously the Chief Financial Officer of Serabi Mineraçăo Limitada in Brazil, took over the role of General Manager in April 2009. He has overall responsibility for the day-to-day affairs of Serabi in Brazil. Prior to joining Serabi he spent five years working with the international accounting firm Arthur Andersen and a further ten years working with Samarco Mineraçăo, Companhia de Fomento Mineral and Rio Capim Caulim S/A as controller and finance director. Qualifications: Ulisses is a graduate in Economics and Business Administration from the University of PUC Minas Gerais and holds a MBA from the University of Fundação Dom Cabral. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 54 Report on Corporate Governance BOARD OF DIRECTORS The Board of Directors is responsible for the management of the Group on behalf of its shareholders. The objective of the Group is to create long term value for shareholders, and the Board is responsible for delivering that objective by governing the Company and its subsidiaries. The Board is responsible for approving the Group strategy and policies, for safeguarding the assets of the Group, and is the ultimate decision-making body of the Group in all matters except those that are reserved for specific shareholder approval. Matters that are specifically reserved for the Board’s decision include business acquisitions or disposals, authorisation of major capital expenditure and material contractual arrangements, changes to the Group’s capital structure, setting policies for the conduct of business, approval of budgets, remuneration policy of Directors and senior management, and taking on debt and approval of financial statements. Other matters are delegated to the Committees of the Board and Executive Directors, supported by policies for reporting to the Board. The Board consists of two Executive Directors who hold the key operational positions in the Group and seven Non-executive Directors (including a Non-executive Chairman), who bring a breadth of experience and knowledge. The Board, as a matter of practice, meets at least every two to three months and is supplied with appropriate and timely information. Other meetings will be, and are, called by executive management or by any Board member when there is any matter which according to the terms of reference of the Board and the powers delegated to the Executive Directors is required to be discussed with, and considered by, the Board. In 2018, the Board met 10 times excluding the Annual General Meeting and Special Meetings of shareholders. Where appropriate, the Board invites external advisers and/or senior management to attend meetings to discuss matters where their expertise may be beneficial. The responsibilities of Mel Williams as Chairman include providing leadership to the Board, ensuring its effectiveness in all aspects of its role and setting its agenda; ensuring that adequate time is available for discussion of all agenda items; ensuring that the Directors receive accurate, timely and clear information; ensuring effective communication with shareholders; promoting a culture of openness and debate by facilitating the effective contribution to the Board of Non-executive Directors in particular; and ensuring constructive relationships between the Executive and Non-executive Directors. The Company provides independent professional and legal advice to all Directors where necessary, to ensure they are able to discharge their duties. In addition, all Board members have access to the services of the Company Secretary, who is responsible for ensuring all Board procedures are complied with. The Articles of Association provide that any Director who was not appointed or re-appointed at one of the preceding two Annual General Meetings retire and stand for re-election. Any new Directors appointed during the period following the last Annual General Meeting, are required to stand for election at the next Annual General Meeting. CORPORATE GOVERNANCE CODE The Board of Directors of Serabi monitors the business affairs of the Company on behalf of shareholders. The Board currently consists of the Non-executive Chairman, Managing Director, Finance Director and five further Non-executive Directors. None of the Non-executive Directors has held an executive position with the Company in the past. The Directors have responsibility for the overall corporate governance of the Company and recognise the need for the highest standards of behaviour and accountability. The Board of Directors is responsible for the stewardship of the Company through consultation with management of the Company. Any responsibility that is not delegated to management or to the committees of the Board of Directors remains with the Board of Directors, subject to the powers of the shareholders’ meetings. The frequency of Board of Directors’ meetings, as well as the nature of agenda items, varies depending on the state of the Company’s affairs and in light of opportunities or risks which the Company faces. Members of the Board of Directors are in frequent contact with one another and meetings of the Board of Directors are held as deemed necessary. Until September 2018, companies whose shares were listed on AIM had not been obliged to formally adopt or follow a specific corporate governance code but Serabi’s Board always sought, where practical and reasonable, to follow the best practice guidelines set out in the recommendations of the UK Corporate Governance Code (“the Code”). With effect from September 2018 it became mandatory for UK companies whose shares were listed on AIM to adopt and follow a corporate governance code and therefore since 1 September 2018, the Directors, being committed to the principles underlying best practice in corporate governance, adopted the Corporate Governance Code (“the QCA Code”) prepared by the Quoted Companies Alliance (“QCA”). In addition, the Company as a result of the listing of its shares on the TSX is obliged to comply with Canadian National Policy 58-201 – Corporate Governance Guidelines which establishes corporate governance guidelines that apply to all public companies. The Company has instituted corporate governance practices that also, where practical, take consideration of these guidelines. The Company is also subject to the UK City Code of Takeovers and Mergers. Serabi Gold plc // Report and Accounts 201855 The QCA Code sets out 10 principles of Corporate Governance that the Company should adopt. These are listed below together with a short explanation of how the Company applies each of the principles: PRINCIPLE ONE Business Model and Strategy Serabi’s objective is to become a pre-eminent junior gold mining company in Brazil, securing future growth through expansion of its existing projects and, taking advantage of its position as a gold producer, to become involved with and successfully develop, other carefully selected opportunities within the country. With this in mind the Company, 1. is focused on pursuing gold mining opportunities in Brazil appropriate to the Group’s size and capabilities, 2. will identify and evaluate high quality opportunities through exploration or acquisition, 3. expects to plan, finance and build new mines in a timely and cost-effective manner, and 4. will seek continuous operational improvements to maximise value. In this way it anticipates that this will lead to value creation for all stakeholders. SHAREHOLDERS HOST GOVERNMENT AND GOVERNMENT AGENCIES LOCAL COMMUNITIES EMPLOYEES Generation of short term capital appreciation through investment of cash in accretive growth to grow longer term cash generation to sustain distributions to shareholders. PRINCIPLE TWO Generation of tax and royalty receipts to sustain a high quality oversight and regulatory regime. Provide improvements to infrastructure, education and healthcare to improve the living standards and opportunities for local populations. Generate a stable and secure work environment in which employees learn, are mentored and can progress and develop their careers. Understanding Shareholder Needs and Expectations The Board is committed to maintaining good communication and having constructive dialogue with its shareholders. The Company has close on-going relationships with its private shareholders. Institutional shareholders and analysts have the opportunity to discuss issues and provide feedback at meetings with the Company and management undertake roadshows to help facilitate meeting opportunities. All shareholders are encouraged to attend and participate in all shareholder meetings called by the Company and especially its Annual General Meeting. Investors also have access to current information on the Company though its website, www.serabigold.com, and via Mike Hodgson, CEO and Clive Line, CFO who are available to answer investor relations enquiries. PRINCIPLE THREE Considering Wider Stakeholder and Social Responsibilities The Board recognises that the long term success of the Company is reliant upon the efforts of the employees of the Company and its contractors, suppliers, regulators and other stakeholders. The Board and management have put in place a range of processes and systems to ensure that there is close oversight and contact with its key resources and relationships. The Company has staff dedicated to ensuring that it has active relationships with local communities who are within the vicinity of its operations to understand their concerns and expectations, thereby seeking to ensure a mutually beneficial co-operation for both sides. The Company is subject to oversight by a number of different governmental and other bodies who directly or indirectly are involved with the licensing and approval process of mining operations in Brazil. Additionally, given the nature of the Company’s business, there are other parties who, whilst not having regulatory power, nonetheless have interest in seeing that the Company conducts its operations in a safe, responsible, ethical and conscientious manner. The Company makes all reasonable efforts, directly or through its advisers, to engage in and maintain active dialogue with each of these governmental and non-governmental bodies, to ensure that any issues faced by the Company, including but not limited to regulations or proposed changes to regulations, are well understood and ensuring to the fullest extent possible that the Company is in compliance with all appropriate regulation, standards and specific licensing obligations, including environmental, social and safety, at all times. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 201856 Report on Corporate Governance continued PRINCIPLE FOUR Risk Management In addition to its other roles and responsibilities, the Company’s senior management, its Audit Committee and the Board are responsible for ensuring that procedures are in place and are being implemented effectively to identify, evaluate and manage the significant risks faced by the Company. The Company is subject to a number of risks and includes in its quarterly Management Discussion and Analysis (a copy of which is available on the Company’s website at www.serabigold.com) a detailed analysis of the various areas of risk for the Company, its activities and ultimately its stakeholders. A condensed version of these risks is set out in this Annual Report on pages 24 to 25 which summarises the principal risks and the manner in which the Company and its management seeks to mitigate these. This risk matrix is updated as changes arise in the nature of risks or the controls that are implemented to mitigate them. The Audit and Compliance Committee reviews the risk matrix and the effectiveness of scenario testing on a regular basis. The Board considers that an internal audit function is not necessary or practical due to the size of the Company and the close day to day control exercised by the Executive Directors. However, the Board will continue to monitor the need for an internal audit function. The Executive Directors have established appropriate reporting and control mechanisms to ensure the effectiveness of the Company’s control systems. PRINCIPLE FIVE A Well-Functioning Board of Directors The Board is currently comprised of the Chief Executive, Mike Hodgson, the Financial Director, Mr Clive Line and seven Non-executive Directors. Of the Non-executive Directors, Mr Mel Williams, the Chairman, Mr Sean Harvey, Mr Felipe Swett and Mr Aquiles Alegria are considered to be independent, whilst Mr Nicolas Bañados, Mr Eduardo Rosselot and Mr Mark Sawyer, under the QCA Code, by virtue of being appointed representatives of significant shareholders, are not considered to be independent. Biographical details of the current Directors are set out on the Company’s website and on page 52 of this report. Executive and Non-Executive Directors are subject to re-election usually at the Company’s Annual General Meeting, at intervals of no more than three years. Summary terms and conditions of each of the Directors are disclosed annually in the Company’s Annual Reports and also in the Management Information Circular which accompanies the Notice of Annual General Meeting. Copies of both these documents are available on the Company’s website at www.serabigold.com. The Board meets on a regular basis and during 2018 met a total of ten times. It has established an Audit and Compliance Committee, a Remuneration Committee and a Project Steering Committee, particulars of which are set out in this report. The Board has not at this time felt it necessary to establish a separate Nominations Committee and considers that this responsibility can be currently discharged by the Remuneration Committee or, if the circumstances so dictate, the Board as a whole. The Board is responsible for the stewardship of the Company through consultation with management of the Company. Any responsibility that is not delegated to management or to the committees of the Board remains with the Board, subject to the rights of the Shareholders. The frequency of Board meetings, as well as the nature of agenda items, varies depending on the state of the Company's affairs and in light of opportunities or risks which the Company faces. Members of the Board are in frequent contact with one another and meetings of the Board are held as deemed necessary. Additionally, the Board has appointed an Executive Committee to oversee and co-ordinate the day-to-day running of the Group. It is empowered to make decisions over a number of areas without reference to the full Board and specifically to deal with all matters relating to the daily operation of the Group. The Executive Committee comprises the Chief Executive and the Finance Director. The Executive Committee is responsible for the daily operation of the Group and for making recommendations to the Board regarding short and medium term budgets, targets and overall objectives and strategies for the Group. The Chief Executive and the Finance Director are full time employees of the Company whilst each of the Non-executive Directors are considered to be part time but are expected to provide as much time to the Company as is required. The Board is satisfied that, as a whole, it is able to exercise independent judgement. The Articles of Association of the Company have already been specifically amended to restrict the role of the Directors in any situation where there is considered to be a conflict of interest and requiring such conflicted Director(s) to abstain from voting and participation in any meeting or voting where the matter giving rise to the conflict is to be considered. The Company has also entered into Relationship Agreements with each of Fratelli Investments Limited (“Fratelli”) and Greenstone Resources II LP (“Greenstone”), its two principal shareholders, details of which are set out in the Annual Information Form filed by the Company on SEDAR on 29 March 2019 and available on the Company’s website. The Relationship Agreements inter alia require that (i) the Company is capable of carrying on its business independently of each of Fratelli and Greenstone; (ii) transactions between any member of the Group and any member of either Fratelli or Greenstone are made at arm's length on a normal commercial basis and approved by Directors independent of Fratelli or Greenstone as appropriate; (iii) any disputes between Fratelli and / or Greenstone and any member of the Group shall be dealt with by a committee of the independent Directors; (iv) the selection, approval and removal of senior management and Executive Directors shall be subject to the approval of a majority of the Non-executive Directors of the Company; and (v) neither Fratelli nor Greenstone shall take any action as a result of which there would be fewer than two Directors independent of Fratelli and Greenstone. Serabi Gold plc // Report and Accounts 201857 The Board of the Company may meet without management when any Board meetings are held and at any other time if so requested by the Chairman. The Audit Committee and the Remuneration Committee are both comprised solely of Non-executive Directors and the Remuneration Committee will as a matter of its normal business meet without management during the course of the year. Other Non-executive Directors are generally invited to attend meetings of the Remuneration and Audit Committees to permit joint consideration of matters without the presence of management and whilst subject matter will generally be confined to the areas of audit, controls and remuneration the Chairman invites participation on other topics at these meetings. Accordingly, forums do occur every three to four months that comprise meetings of the Non-executive Directors. Attendance at Board and Committee Meetings During 2018, the Board held 10 Board meetings. Attendance by each of the Directors at these meetings and meetings of its committees are as set out in the table below. Director Mel Williams Michael Hodgson Clive Line Aquiles Alegria Nicolas Bañados Sean Harvey Eduardo Rosselot Mark Sawyer(1) Felipe Swett Board Meetings (Attended/Held) Audit Committee Meetings (Attended/Held) Remuneration Committee Meetings (Attended/Held) 9/10 9/10 10/10 5/10 9/10 6/10 6/10 2/8 6/10 4/4 n/a n/a n/a n/a 4/4 n/a n/a 4/4 2/2 n/a n/a n/a 2/2 2/2 n/a n/a n/a (1) Mr Sawyer was only appointed to the Board on 23 March 2018. PRINCIPLE SIX Appropriate Skills and Experience of the Directors The Company believes that the current balance of skills in the Board as a whole reflects a very broad range of commercial and professional skills across geographies and industries and each of the Directors has previous experience in public markets. The Company has an established and stable Board which it considers to be well suited to its fundamental objective of enhancing and preserving long term shareholder value and ensuring that the Company conducts its business in an ethical and safe manner. The Board is considered to be of sufficient number to provide more than adequate experience and perspective to its decision-making process and given the size and nature of the Company, the Board does not consider at this time that it is appropriate to increase the size of the Board or amend its composition. The Board is however conscious of the different perspectives that individuals from different cultural backgrounds and with different work and life experiences can bring. For this reason, when considering any change to its composition it will actively seek to further increase its current diversity to become more inclusive taking into account considerations such as gender, age and ethnicity to ensure that the Board benefits from a broad range of perspectives and experiences appropriate to its activities and needs. As the Board is not currently anticipating any change to its size or composition, it has not yet implemented a written policy regarding the identification and nomination of women directors. In the event that one of the existing members of the Board stands down from their current position, the Company will, at that time, give further consideration to the specific selection of a female member of the Board and the adoption of a formal policy relating to the positive appointment of additional female members of the Board for future opportunities. The Board does consider that its current composition already encompasses significant diversity. Of its nine members, its membership covers three nationalities, and includes three Directors with strong technical mining and geological expertise, two Directors with financial backgrounds and four Directors bringing investment banking and corporate finance experience. All of the Board members have spent significant, and in some cases, all of their careers working within the natural resources industries. With the exception of Mr. Sawyer, who was appointed in March 2018 concurrent with the announcement of the subscription by Greenstone Resources for new ordinary shares, all of the current Non-executive Directors have served for periods of between four to eight years which the Board considers is an indicator of an appropriate level of turnover and renewal while maintaining continuity and knowledge. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 58 Report on Corporate Governance continued The Board has not adopted a target regarding the number of women on the Board of Directors. The Board of Directors does expect more diversity on the Board of Directors over time and each future appointment will be made on the basis of ensuring that its Board is able to provide the widest possible experience and perspective that is consistent with achieving the highest level of professionalism and continues to enhance and preserve long term shareholder value and ensure that the Company conducts its business in an ethical and safe manner. Today, none (zero per cent) of the Company’s Directors are women. The Board is responsible for: (a) ensuring that all new Directors receive a comprehensive orientation, that they fully understand the role of the Board and its committees, as well as the contribution individual Directors are expected to make (including the commitment of time and resources that the Company expects from its Directors) and that they understand the nature and operation of the Company's business; and (b) providing continuing education opportunities for all Directors, so that individuals may maintain or enhance their skills and abilities as directors, as well as to ensure that their knowledge and understanding of the Company's business remains current. Given the size of the Company and the in-depth experience of its Directors, the Company has not deemed it necessary to develop a formal process of orientation for new directors but encourages all its Directors to visit the Company's operations to ensure familiarity and proper understanding. The Directors conduct a discussion of the business of the Company at its meetings to ensure that new Directors are provided with an overview of the Company's operations. From time to time, corporate officers and legal, financial and other experts are invited to attend Board meetings to describe matters in their areas of expertise. The Board ensures that any new Board member receives a written memorandum (the "Memorandum") prepared by the Company's lawyers setting out their responsibilities as a director and ensures that each Director is conversant with the regulations of any stock exchange on which the Company's shares are traded. Directors are entitled to attend seminars that they determine necessary to keep themselves up-to-date with current issues relevant to their services as Directors of the Company. PRINCIPLE SEVEN Evaluation of Board Performance The Board has determined that it shall itself be responsible for assessing the effectiveness and contributions of the Board as a whole, its committees (which currently comprise the Audit Committee, the Remuneration Committee and the Project Steering Committee) and individual Directors. The size of the Board allows for open discussion. The Chairman has regular dialogue with the Chief Executive whereby the Board's role and effectiveness can be considered. The Finance Director also has regular dialogue with the Head of the Audit Committee whereby that Committee's effectiveness can be considered. No formal assessments have been prepared, however the Board will keep this matter under review and especially if either the size of the Board or the number of committees increases which in turn may require a more formalised assessment and evaluation process to be established to ensure continued effectiveness. PRINCIPLE EIGHT Corporate Culture The Board recognises that its decisions regarding strategy and risk will impact the corporate culture of the Company as a whole and that this will impact the performance of the Company. The Board is very aware that the tone and culture set by the Board will greatly impact all aspects of the Company as a whole and the way that employees behave. The corporate governance arrangements that the Board has adopted are designed to ensure that the Company delivers long term value to its shareholders and that shareholders have the opportunity to express their views and expectations for the Company in a manner that encourages open dialogue with the Board. A large part of the Company's activities is centred upon what needs to be an open and respectful dialogue with employees, clients and other stakeholders. Therefore, the importance of sound ethical values and behaviours is crucial to the ability of the Company to successfully achieve its corporate objectives. The Board places great import on this aspect of corporate life and seeks to ensure that this flows through all that the Company does. The Directors consider that at present the Company has an open culture facilitating comprehensive dialogue and feedback and enabling positive and constructive challenge. The Company has adopted, with effect from the date on which its shares were admitted to AIM, a code for Directors' and employees' dealings in securities which is appropriate for a company whose securities are traded on AIM and is in accordance with the requirements of the Market Abuse Regulation which came into effect in 2016. Serabi Gold plc // Report and Accounts 201859 PRINCIPLE NINE Maintenance of Governance Structures and Processes Ultimate authority for all aspects of the Company's activities rests with the Board, with the responsibilities of the Executive Directors arising as a consequence of delegation by the Board. The Board has adopted appropriate delegations of authority which set out matters which are reserved to the Board. The Chairman is responsible for the effectiveness of the Board, while management of the Company's business and primary contact with shareholders has been delegated by the Board to the Chief Executive Officer and the Finance Director. Audit and Compliance Committee The Audit and Compliance Committee reviews the principles, policies and practices adopted in the preparation of the financial statements of Serabi Gold plc and its subsidiaries, as well as ensuring any other formal announcements relating to the financial performance of the Group comply with relevant statutory and regulatory requirements. As part of this review, it focuses in particular on areas of judgement, appropriateness of policies, going concern matters, and any other areas it identifies as risks (e.g. on the grounds of materiality or uncertainty). The Audit Committee also has responsibility for any internal audit function but at this time has determined that in view of the size of the organisation, a separate internal audit team is not required. The Audit and Compliance Committee is also responsible for assisting the Board in discharging its responsibilities with respect to the integrity of the Group’s financial statements, the effectiveness of the systems of governance, risk management and internal control, and monitoring the effectiveness and independence of the external auditors. It receives reports from the executive management and auditors relating to the quarterly and annual accounts and the accounting and internal control systems in use throughout the Company. The Audit and Compliance Committee shall meet not less than four times in each financial year and it has unrestricted access to the Company's auditors. The Audit Committee is required to consist of not less than three Non-executive Directors. During 2018, the Audit and Compliance Committee considered the key areas of risk and judgement relevant to the Group. These included: • the liquidity and going concern of the Group; • the valuation and impairment of the Group’s assets; • the valuation of stocks of material comprising work in progress; • the policy for capitalisation of development costs and policies for amortisation; • determination of the potential recoverability of past tax losses; • approving the estimation and accounting treatment for derivative transactions. In addition to matters raised at the Committee meetings, Serabi’s management submits working papers and notes outlining the key issues, which are circulated to the Committee for consideration ahead of the meetings. The Committee is comprised of Messrs. Swett (Chair), Harvey and Williams. Each member of the Committee is considered to be independent within the meaning of NI 52-110. All members of the Committee are financially literate in that they have the ability to read and understand a set of financial statements that are of the same breadth and level of complexity of accounting issues as can be reasonably expected to be raised by the Company's financial statements. Mr. Swett has worked for over ten years in investment management, initially working as analyst appraising the performance of a wide range of companies and businesses, and now heads the Asset Management team at Asset Chile, a Chilean-based investment bank. He also holds an MBA from the Kellogg School of Management, Northwestern University. Mr Williams is a Chartered Certified Accountant and holds an MBA from Cranfield School of Management. Mr Williams has over 40 years of financial experience much of which has been spent in the mining industry. Until June 2011 he served as the Chief Financial Officer and Senior Vice President of Finance and Corporate Development of Brigus Gold and he has also served as Chief Financial Officer of TVX Gold Inc. Mr Harvey has qualifications in economics and law and had a ten-year career in investment and merchant banking primarily focused in the mining area taking up executive positions within the mining industry. He has served as the Chief Executive Officer for TVX Gold Inc and Orvana Minerals, was the Chairman of Andina Minerals Inc. and served on its audit committee and currently serves on the audit committee of Perseus Mining Limited. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 201860 Report on Corporate Governance continued Remuneration Committee Purpose The Remuneration Committee is responsible for determining and agreeing with the Board the framework for the remuneration of the Chief Executive, all other Executive Directors, the Chairman of the Company (if an Executive Director), the Company Secretary and such other members of the Executive Management as it feels appropriate to consider. Furthermore, it is responsible for setting the structure and determining the total individual remuneration packages of each Director including, where appropriate, bonuses, incentive payments and share options with due regard to the interests of the shareholders and the overall performance of the Group and the Company’s overall philosophy and policy with respect to executive compensation. The Remuneration Committee determines the level of compensation the Chief Executive Officer and the Chief Financial Officer are to receive on an annual basis and relies on the Company's economic performance and the responsibilities and risks involved in being an effective Chief Executive Officer and Chief Financial Officer of a gold production and development company. The Remuneration Committee considers current compensation of both the Chief Executive Officer and the Chief Financial Officer to adequately cover such responsibilities and risks. It also considers recommendations from the Executive Directors in respect of proposals for bonuses, incentive payments and share options to be awarded to senior managers within the Group and makes recommendations on the overall remuneration plans adopted by the Company. The remuneration of the Non-executive Directors is a matter that is dealt with by the Board as a whole. The Remuneration Committee has expertise in, among other things, evaluating overall compensation policies, plans and practices, as well as setting compensation for executive officers; overseeing and administering equity compensation plans; and establishing employment, retention and severance arrangements for executive officers. Composition The Remuneration Committee comprises Messrs. Williams (Chair), Bañados and Harvey. Mr Williams and Mr Harvey are both independent Directors and Mr Bañados whilst not independent by virtue of his executive position with an affiliated entity of the Company has no executive position within the Company and is thus considered independent and objective for the purposes of the Remuneration Committee. Operations The Remuneration Committee meets at least twice a year, or more frequently as required. In 2018, the Remuneration Committee met two times. The Committee evaluated and made recommendations to the Board in respect of bonuses for key executives relating to both their individual and the Group’s performance during the preceding year against pre-determined targets. It also established and recommended targets in respect of the 2018 calendar year for Executive Directors and senior management and evaluated and made recommendations for the award of share options for senior management and Directors. Full disclosure of the policies can be found in the Remuneration Report on pages 63 to 67. Responsibilities The Remuneration Committee is responsible for the following matters: • • to review the performance objectives and determine and agree the appropriate levels of remuneration for the Executive Directors, and the senior management of the Group; to determine the remuneration of the Chairman of the Board, Non-executive Directors, as well as Chairmen and members of all Board Committees, subject to the condition that no person shall participate in discussions relating to his or her own remuneration; • to review the design and management of Group salary structures and incentive schemes, and to ensure proper authorisation for any awards made under such schemes; • to review the recommendations of the Chief Executive of the Group as to the grant of share awards and other bonuses, and to approve such awards as appropriate; and • to review and approve the Remuneration Report in the Serabi Gold plc Annual Report. Serabi Gold plc // Report and Accounts 201861 Nomination Committee The Company does not currently have a Nomination Committee. The Board as a whole is responsible for identifying and recommending candidates for the Board of the Company. The Board reviews and makes determination with respect to: (i) the size and composition of the Board; (ii) the organisation and responsibilities of the appropriate committees of the Board; (iii) the evaluation process for the Board and committees of the Board and the Chairpersons of the Board and such committees; and (iv) creating a desirable balance of expertise and qualifications among Board members. In the nomination process, the Board assesses its current composition and requirements going forward in light of the stage of the Company and the skills required to ensure proper oversight of the Company and its operations. The Board has not at this time considered that the size and complexity of the Company warrants a requirement for a separate Nomination Committee. It is currently envisaged that should any appointment be undertaken that the Remuneration Committee would fulfil the role of the Nomination Committee. Project Steering Committee Purpose In March 2018, the Group established a Project Steering Committee, the role of which is to recommend a governance and reporting framework for the Group’s portfolio of producing assets, its existing exploration portfolio and the recently acquired Coringa Gold Project and assess and review any proposed mergers and acquisitions. Composition The Project Steering Committee is chaired by the Chief Executive Officer and certain of the Group’s substantial shareholders are entitled to appoint nominees to the Project Steering Committee with the Board appointing other qualified representatives. Responsibilities The Project Steering Committee makes recommendations to the Board on matters including, but not limited to: • the overall development strategy that might enhance value for shareholders whilst ensuring the Group’s mineral projects are developed in accordance with a credible financing plan; • the monitoring through formal monthly reviews of i) performance against target costs and schedules, ii) health , safety and environmental performance and iii) project controls; • matters which may or will require further approvals from the Board such as capital overruns and major contract awards; • material changes to the approved scopes, cost and/or schedule when risk or opportunity events occur; • the permitting plan and progress in respect of material permits, including any material communication received from government or permitting agencies in respect of key permits and approvals; • overall HSE performance including system implementation and review of material incidents (high potential risk incidents, lost time injuries and reportable environmental incidents); • stakeholder management and progress against key elements of the stakeholder plan; • the execution plan including contracting strategy, detailed permitting register, controls/reporting, critical path, control budget and use of contingency; • the staffing plan; and • the financing plan and strategy including equity, debt, royalty or off-take financing. Operations The Project Steering Committee has convened twice during the year and meets as frequently as is considered necessary and in particular if there is a need to consider and discuss investment opportunities and project developments in advance of presenting these to the Board as a whole. In addition to reports from the Project Steering Committee, Mr Eduardo Rosselot, a mining engineer and Non-executive Director and Mr Aquiles Alegria, a geologist and Non-executive Director, undertake visits to the Group’s operations and also assist, as required, with evaluations of new investment opportunities and report to the Board and the Project Steering Committee on their findings. Non-executive Directors The Board has not adopted term limits for Directors or other mechanisms of Board renewal. The Board evaluates its performance and composition on a regular basis and will make adjustments as and when indicated. When assessing the independence of each Non-executive Director, length of service is one of the considerations. The Board will when assessing new appointments in the future consider the need to balance the experience and knowledge that each independent Director has of the Company and its operations, with the need to ensure that independent Directors can also bring new perspectives to the business. In accordance with the Companies Act 2006, the Board complies with: a duty to act within its powers; a duty to promote the success of the Company; a duty to exercise independent judgement; a duty to exercise reasonable care, skill and diligence; a duty to avoid conflicts of interest; a duty not to accept benefits from third parties; and a duty to declare any interest in a proposed transaction or arrangement. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 201862 Report on Corporate Governance continued PRINCIPLE TEN Shareholder Communication The Board is accountable to the Company’s shareholders and as such it is important for the Board to appreciate the aspirations of the shareholders and equally that the shareholders understand how the actions of the Board and short term financial performance relate to the achievement of the Group’s longer term goals. The Board reports to the shareholders on its stewardship of the Company through the publication of quarterly operational updates and the quarterly and final financial results. News releases are issued throughout the year and the Company maintains a website (www.serabigold.com) on which press releases, corporate presentations and the Report and Financial Statements are available to view. Additionally, this Report and Financial Statements contains extensive information about the Group’s activities. Enquiries from individual shareholders on matters relating to the business of the Company are welcomed. Shareholders and other interested parties can subscribe to receive notification of news updates and other documents from the Company via email. In addition, the Executive Directors meet with major shareholders to discuss the progress of the Company and provide periodic feedback to the Board following meetings with shareholders. The Annual General Meeting, and other meetings of shareholders that may be called by the Company from time to time, provide an opportunity for communication with all shareholders and the Board encourages the shareholders to attend and welcomes their participation. The Board is committed to maintaining good communication and having constructive dialogue with its shareholders. The Company has close on-going relationships with its private shareholders. Institutional shareholders and analysts have the opportunity to discuss issues and provide feedback at meetings with the Company. In addition to its Annual Report the Company provides detailed quarterly reports outlining operational and financial performance in each quarter. Board Independence Melvyn Williams Sean Harvey Nicolas Bañados Felipe Swett Eduardo Rosselot Aquiles Alegria Mark Sawyer Michael Hodgson Clive Line Position Appointed Status Audit Remuneration Committee Committee Non-executive Chairman Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Chief Executive Financial Director 30 March 2011 30 March 2011 13 May 2013 30 September 2014 20 October 2012 7 July 2014 23 March 2018 1 February 2007 14 March 2005 Independent Independent Not independent(1) Independent Not independent(2) Independent Not independent(3) Executive Executive Member Member – Chair – – – – – Chair Member Member – – – – – – (1) Mr Bañados is appointed as a representative of Fratelli Investments and holds the position of Managing Director of Private Equity. He is therefore not considered to be fully independent by virtue of his relationship with one of the Company’s major shareholders. He has never held an executive position with the Group. (2) Mr Rosselot is appointed as a representative of Fratelli Investments and acts for Fratelli as a consultant on mining matters and investments. He is therefore not considered to be fully independent by virtue of his relationship with one of the Company’s major shareholders. He has never held an executive position with the Group. (3) Mr Sawyer is appointed as a representative of Greenstone Resources II LP and is an officer and shareholder of Greenstone Management Ltd and Greenstone Capital LLP which provide management and advisory service to Greenstone Resources II LP. He is therefore not considered to be fully independent by virtue of his relationship with one of the Company’s major shareholders. He has never held an executive position with the Group. SERVICE CONTRACTS No Director has any service contracts, consultancy agreements or other such arrangements with a notice period in excess of one year. NON-AUDIT SERVICES The Board regularly reviews the provision of non-audit services from its auditors, at least annually through discussion at Committee meetings. The Board is satisfied that the provision of non-audit services by BDO LLP is compatible with the general standard of independence for auditors and does not give rise to any conflict of interest. Serabi Gold plc // Report and Accounts 2018 Directors‵ Remuneration Report For the year ended 31 December 2018 63 Compensation plays an important role in achieving short and long term business objectives that ultimately drive business success. The Group’s compensation philosophy is to foster entrepreneurship at all levels of the organisation by making long term equity-based incentives, through the granting of stock options, a significant component of executive compensation. This approach is based on the assumption that the performance of the Group’s share price over the long term is an important indicator of long term performance. The Group’s compensation philosophy and objectives are based on the following fundamental principles: 1. Compensation programmes align with shareholder interests – the Group aligns the goals of executives with maximising long term shareholder value; 2. Performance sensitive – compensation for executive officers should be linked to operating and market performance of the Group and fluctuate with the performance; and 3. Offer market-competitive compensation to attract and retain talent – the compensation programme should provide market-competitive pay in terms of value and structure in order to retain existing employees who are performing according to their objectives and to attract new individuals of the highest calibre. The Group’s principal goal is to create value for its shareholders. The Group’s compensation philosophy is based on the objectives of linking the interests of the executive officers with both the short and long term interests of the Group, of linking executive compensation to the performance of the Group and the individual and of compensating executive officers at a level and in a manner that ensures the Group is capable of attracting, motivating and retaining individuals with exceptional executive skills. The executive compensation programme is designed to encourage, compensate and reward employees on the basis of individual and corporate performance, both in the short and the long term. Base salaries are aligned with and judged against corporations of a comparable size and stage of development within the mining industry, thereby enabling the Group to compete for and retain executives critical to the Group’s long term success. Incentive compensation is directly tied to corporate performance. Share ownership opportunities are provided to align the interests of executive officers with the longer term interests of shareholders. ELEMENTS OF EXECUTIVE COMPENSATION The elements of compensation earned by the executives of the Group for the financial year ended 31 December 2018 consist of a base salary, along with annual discretionary incentive compensation in the form of a performance based bonus, and a longer term incentive in the form of stock options. This reflects a package consisting of a mix of compensation elements designed to provide executives with an “at risk” component of total compensation that reflects their ability to influence business outcomes and performance, and fixed elements that provide security and enable the Group to attract and retain key employees. The following table outlines how each element of compensation aligns with the Group’s compensation philosophy. Details regarding the operation of each of the compensation elements are set out below the table. ELEMENT OF COMPENSATION PACKAGE Base salary PURPOSE AND LINK TO STRATEGY NATURE OF REVIEW To recognise the market value of the role, reflecting the individual’s skills, experience, authority and responsibilities, to ensure that the business can attract and retain appropriate individuals for executive and non-executive roles. The element is reviewed annually. The Group compiles comparator data from published accounts and industry surveys of peer companies to determine the base salary for each of the Executive Directors. The Group has not used remuneration consultants. Performance related bonus To incentivise and reward, on an annual basis, the performance of individuals, and of the Group, using a range of financial and non-financial metrics. Peer group data is also used to assess the level of fees for the Non-executive Directors. Objectives and measurable targets (“KPIs”) are set, prior to the year under review, to align near term goals with the longer term sustainable future of the Group. The short term incentive component is structured to reward not only increased value for shareholders but also performance with respect to key operational factors and non-financial goals important to long term success. At the end of each year the Committee considers if and to what extent the KPIs have been achieved and in this way establishes a transparent and non-discretionary assessment of an individual’s performance and contribution to the Group. Non-executive Directors do not participate in the bonus scheme. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 201864 Directors‵ Remuneration Report continued For the year ended 31 December 2018 ELEMENT OF COMPENSATION PACKAGE Share options PURPOSE AND LINK TO STRATEGY NATURE OF REVIEW To reward delivery of sustained long term improvements in shareholder returns by aligning performance directly with an increase in the fundamental measure of the generation of shareholder value. The Board seeks to award options on an annual basis and the Group’s LTIP scheme is equity settled. Options vest in three annual equal instalments with the initial vesting on the date of the award. Any option which is unexercised after a period of three years from the date of grant expires. Options are also forfeited if a holder leaves the Group before the options vest or are exercised although the Committee may exercise discretionary powers in certain circumstances. Options issued to date have not been subject to attainment of performance criteria prior to vesting or exercise. The Committee has the right to impose such criteria in respect of new awards. The Group’s scheme is limited to no more than ten per cent of the issued capital and whilst there is no maximum value to which options that may be granted in one year, nor any cap on the level than an individual may hold, the Committee exercises discretion to ensure that annual awards can be made and considers the level and value of existing awards in determining the level of new awards. The Group does not operate any pension plans for its Executive Directors except to the minimum extent required under UK law. The level of pension contribution made to an individual’s defined contribution scheme will generally be linked to an employee’s base salary, though the Committee may, at its election, approve single lump sum payments which can increase the overall level of retirement benefit provided for any individual. The Group provides private medical and life assurance benefits for employees and Executive Directors which may be linked to base salary. Pension provision The provision of pension benefits is a relatively normal constituent of compensation offered by peer companies. The Group will contribute to defined contribution schemes on behalf of its executives as part of the overall remuneration package provided to an employee. Other benefits To provide cost effective and competitive remuneration benefits. COMPENSATION RISK MANAGEMENT The Group believes that its executive compensation programme does not create risk outside the Group’s risk appetite. Some of the risk- management initiatives currently employed by the Group are as follows: • Appointing a Remuneration Committee comprised of independent Directors to oversee the executive compensation programme; • The use of deferred equity compensation to encourage a focus on long term corporate performance as opposed to short term results; • Disclosure of executive compensation to stakeholders; • Use of discretion in adjusting bonus payments up or down as the Remuneration Committee deems appropriate and recommends to the Board; and • Ultimately complete Board accountability. Serabi Gold plc // Report and Accounts 2018Serabi Gold -31.1% S&P 500/Metals & Mining -19.1% Gold -6.9% FTSE Gold Mines -11.9% S&P/TSX Global Mining -12.8% FTSE AIM All Share/Basic Resources -19.9% 160 150 140 65 90 80 70 120 110 130 100 f f r r e e p p e e c c NON-EXECUTIVE REMUNERATION ) ) 0 0 0 0 1 1 o o t t d d e e s s a a b b e e The remuneration package for Non-executive Directors is established by the Board as a whole but Non-executive Directors do not vote on any r r ( ( e e c c changes to their own fees. n n a a m m r r o o Remuneration consists of a fixed fee which is set to reflect prescribed time commitments and the relative responsibilities of each Non-executive Director on the affairs of the Group, fees payable in respect of attendance at meetings and fees payable for service on any formal committees of the Board. Additional consultancy fees are paid if the input required exceeds the anticipated levels. Some of the Non-executive Directors currently hold share options. Whilst the award of share options by the Group to Non-executive Directors is contrary to the recommendations of the QCA Code, the Board believes that, given the nature and size of the Group and the need to conserve cash resources, it is appropriate that the remuneration of the Non-executive Directors be aligned with the success and growth of the Group. The Board notes also that it is normal M ar-19 practice for natural resources companies listed on the Toronto Stock Exchange to award Non-executive Directors share options as part of their remuneration. The Company has therefore concluded that, in order to attract Non-executive Directors of an appropriate stature and experience, it is obliged and necessary to continue to permit the participation of its Non-executive Directors in its equity participation plans. Aug-18 Sep-18 N ov-18 Feb-18 Feb-19 Jun-18 M ay-18 D ec-18 Jan-18 Jan-19 Apr-18 M ar-18 Oct-18 Jul-18 i i r r P P 50 60 30 40 SHARE PRICE PERFORMANCE Serabi Gold (LHS) BRL Gold Gold (RHS) Share performance against gold price – 2018 to date High High Low 200 180 160 140 120 100 80 60 40 20 0 ) ) p p ( ( e e c c i i r r P P Jan-18 Feb-18 M ar-18 Apr-18 M ay-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 N ov-18 D ec-18 Jan-19 Feb-19 M ar-19 Share performance against industry indices – 2018 to date Serabi Gold -31.1% S&P 500/Metals & Mining -19.1% Gold -6.9% FTSE Gold Mines -11.9% S&P/TSX Global Mining -12.8% FTSE AIM All Share/Basic Resources -19.9% ) ) 0 0 0 0 1 1 o o t t d d e e s s a a b b e e r r ( ( e e c c n n a a m m r r o o f f r r e e p p e e c c i i r r P P 160 150 140 130 120 110 100 90 80 70 60 50 40 30 Jan-18 Feb-18 M ar-18 Apr-18 M ay-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 N ov-18 D ec-18 Jan-19 Feb-19 M ar-19 Serabi Gold (LHS) BRL Gold High High Low Gold (RHS) 200 180 160 140 120 100 80 60 40 20 0 ) ) p p ( ( e e c c i i r r P P Jan-18 Feb-18 M ar-18 Apr-18 M ay-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 N ov-18 D ec-18 Jan-19 Feb-19 M ar-19 $1,400 $1,350 $1,300 $1,250 $1,200 $1,150 $1,100 $1,050 $1,000 ) ) z z o o / / $ $ ( ( e e c c i i r r p p d d o o G G l l $1,400 $1,350 $1,300 $1,250 $1,200 $1,150 $1,100 $1,050 $1,000 ) ) z z o o / / $ $ ( ( e e c c i i r r p p d d l l o o G G Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 66 Directors‵ Remuneration Report continued For the year ended 31 December 2018 DIRECTORS AND THEIR INTERESTS Ordinary Shares and Options The Directors of the Company, who held office during the year and as of 31 December 2018, had the following interests in the ordinary shares of the Company according to the register of Directors’ interests: Share options held at 31 December 31 December 31 December Shares held at Shares held at 2018(1) 2017(1) 2018(1) Michael Hodgson 22,066 22,066 Clive Line 38,332 38,332 T Sean Harvey 60,000 60,000 Melvyn Williams 14,750 14,750 Aquiles Alegria 5,000 5,000 Felipe Swett Eduardo Rosselot – – – – Nicolas Bañados(2) 1,122,197 1,122,197 Mark Sawyer(3) – – 25,000 30,000 – 200,000 200,000 400,000 25,000 30,000 – 150,000 150,000 300,000 – 80,000 80,000 100,000 – 65,000 65,000 125,000 – 50,000 50,000 100,000 – 50,000 50,000 100,000 – 50,000 50,000 100,000 – 50,000 50,000 100,000 100,000 Share options held at 31 December 2017(1) Option price(1) 25,000 30,000 195,000 200,000 200,000 – 25,000 30,000 140,000 150,000 150,000 – 80,000 80,000 80,000 – 65,000 65,000 65,000 – 50,000 50,000 50,000 – 50,000 50,000 50,000 – 50,000 50,000 50,000 – 50,000 50,000 50,000 – – UK£3.00 UK£8.20 UK£1.10 UK£1.00 UK£1.00 UK£0.75 UK£3.00 UK£8.20 UK£1.10 UK£1.00 UK£1.00 UK£0.75 UK£1.10 UK£1.00 UK£1.00 UK£0.75 UK£1.10 UK£1.00 UK£1.00 UK£0.75 UK£1.10 UK£1.00 UK£1.00 UK£0.75 UK£1.10 UK£1.00 UK£1.00 UK£0.75 UK£1.10 UK£1.00 UK£1.00 UK£0.75 UK£1.10 UK£1.00 UK£1.00 UK£0.75 UK£0.75 Exercise period 21 Dec 09 to 20 Dec 19 28 Jan 11 to 27 Jan 21 22 Jan 15 to 21 Jan 18 16 May 16 to 15 May 19 07 Apr 17 to 06 Apr 20 02 July 18 to 1 July 21 21 Dec 09 to 20 Dec 19 28 Jan 11 to 27 Jan 21 22 Jan 15 to 21 Jan 18 16 May 16 to 15 May 19 07 Apr 17 to 06 Apr 20 02 July 18 to 1 July 21 22 Jan 15 to 21 Jan 18 16 May 16 to 15 May 19 07 Apr 17 to 06 Apr 20 02 July 18 to 1 July 21 22 Jan 15 to 21 Jan 18 16 May 16 to 15 May 19 07 Apr 17 to 06 Apr 20 02 July 18 to 1 July 21 22 Jan 15 to 21 Jan 18 16 May 16 to 15 May 19 07 Apr 17 to 06 Apr 20 02 July 18 to 1 July 21 22 Jan 15 to 21 Jan 18 16 May 16 to 15 May 19 07 Apr 17 to 06 Apr 20 02 July 18 to 1 July 21 22 Jan 15 to 21 Jan 18 16 May 16 to 15 May 19 07 Apr 17 to 06 Apr 20 02 July 18 to 1 July 21 22 Jan 15 to 21 Jan 18 16 May 16 to 15 May 19 07 Apr 17 to 06 Apr 20 02 July 18 to 1 July 21 02 July 18 to 1 July 21 (1) On 19 June 2018, the Group completed a capital reorganisation with every 20 existing shares being consolidated into one new share (the “Share Consolidation”). For comparative purposes the details of the shares and options held as at 31 December 2017 have been adjusted to reflect the Share Consolidation. (2) Mr. Bañados has a direct interest in 7,214 Ordinary Shares. Mr Bañados is the beneficial owner of 50 per cent of the share capital of Asesorias e Inversiones Asturias Limitada which beneficially owns: (1) directly 7,983 Ordinary Shares; and (2) 25 per cent of the units in Inversiones Villarrica Limitada, a private financial investment fund, which is interested in 1,107,000 Ordinary Shares. (3) Mr Sawyer is a partner of Greenstone Resource LP which is interested in 14,887,970 Ordinary Shares. During the year ended 31 December 2018 the Company’s shares have traded between 85 pence(1) and 30.5 pence(1). (1) The share prices quoted during the year have been adjusted to reflect the Share Consolidation. Serabi Gold plc // Report and Accounts 2018 67 REMUNERATION Director Michael Hodgson Clive Line Aquiles Alegria Nicolas Bañados T Sean Harvey Eduardo Rosselot Mark Sawyer Felipe Swett Melvyn Williams Salary US$ 236,874 229,623 – – – – – – – Fees as Director US$ – – 25,833 28,918 32,773 26,604 18,314 31,617 42,027 Other Fees US$ – – – – – 60,000 – – – Bonus US$ Pension US$ 133,280 93,296 – – – – – – – 10,662 – – – – – – – – IFRS 2 charge for options granted US$ 80,970 60,709 20,246 20,246 27,749 20,246 7,740 20,246 25,933 For the year to For the year to 31 December 31 December 2017 Total US$ 2018 Total US$ Other US$ 5,028 4,190 – – – – – – – 466,813 387,817 46,079 49,164 60,523 106,850 26,055 51,863 67,960 463,313 365,256 57,135 62,321 75,581 108,582 – 62,704 73,569 Total 466,496 206,086 60,000 226,576 10,662 284,085 9,218 1,263,123 1,268,460 Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 68 Directors‵ Report continued For the year ended 31 December 2018 The Directors present their report together with the audited financial statements for the year ended 31 December 2018. RESULTS AND DIVIDENDS The Group loss for the year after taxation amounts to US$5,754,541 (2017: loss of US$2,397,903). The Directors do not recommend the payment of a dividend. The results for the year are set out on page 78 in the Statement of Comprehensive Income. PRINCIPAL ACTIVITIES AND BUSINESS REVIEW The principal activity of the Company is that of a holding and gold sales company and a provider of support and management services to its operating subsidiaries. Together with its subsidiaries (see note 10), it is involved in the development of gold and other metals mining projects in Brazil and the operation of the Palito Mine Complex in the Tapajos region of Brazil. A detailed review of activities, future developments and the Group’s projects is included in the Chairman’s Statement, the Strategic Review and the Management Discussion and Analysis – Operational Review and Financial Review. SUBSTANTIAL SHAREHOLDINGS As at 28 March 2019 the Company was aware of the following holdings of three per cent or more in the Company’s issued share capital: Name Fratelli Investments Limited Greenstone Resources II LP River and Mercantile Garraway Capital Management LLP Anker Holding AG Drake PIPE Fund SHARE CAPITAL Number of shares held 19,318,786 14,887,970 5,724,999 2,940,000 2,523,850 2,298,984 Percentage 32.79% 25.27% 9.72% 4.99% 4.28% 3.90% Details of the share capital and movements in share capital during the period are disclosed in note 20 to the financial statements. During the period the following issues of share options under the Serabi Mining 2011 Share Option Plan were made to Directors and other employees. Date of issue 2 July 2018 COMPANY’S LISTINGS Number issued Price Expiry 1,700,000 UK£0.75 1 July 2021 The Company’s ordinary shares have been traded on AIM since 10 May 2005 and on the TSX since 30 March 2011. GOING CONCERN AND AVAILABILITY OF FINANCE As at 31 December 2018 the Group had cash in hand of $9.2 million and net assets of $69.1 million. The Directors have prepared a cash flow forecast for the period to 31 March 2020. Based on this forecast, which includes planned capital and exploration programmes, the Group may not be able to generate sufficient cash flows to settle, in full, the deferred consideration of US$12 million payable for the acquisition of Coringa which falls due in December 2019. The Directors believe there is a reasonable prospect of the Group securing further funds as and when required in order that the Group can meet all liabilities including the deferred consideration payable for the acquisition of Coringa as and when they fall due in the next 12 months and have prepared the financial statements on a going concern basis. As at the date of this report the outcome of raising further funds remains uncertain and this represents a material uncertainty surrounding going concern. If the Group fails to raise the necessary funds the Group may be unable to realise its assets and discharge its liabilities in the normal course of business. The matters explained indicate that a material uncertainty exists that may cast significant doubt on the Group and Parent’s ability to continue as a going concern. These financial statements do not show the adjustments to the assets and liabilities of the Group or the Parent company if this was to occur. Serabi Gold plc // Report and Accounts 2018 69 DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Group and Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market and in accordance with the rules of the Toronto Stock Exchange. In preparing these financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. WEBSITE PUBLICATION The Directors are responsible for ensuring the Annual Report and the financial statements are made available on a website. Financial statements are published on the Company's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company's website is the responsibility of the Directors. The Directors' responsibility also extends to the ongoing integrity of the financial statements contained therein. PRINCIPAL RISKS AND UNCERTAINTIES The principal risks and uncertainties are outlined in the Strategic Report on pages 24 to 25. MANAGEMENT OF FINANCIAL RISKS Capital management and financial risk disclosures are provided within notes 23 and 26 of the financial statements. CORPORATE GOVERNANCE The Directors have responsibility for the overall corporate governance of the Company and recognise the need for the highest standards of behaviour and accountability. The Directors are committed to the principles underlying best practice in corporate governance and have adopted the Corporate Governance Code (“the QCA Code”) prepared by the Quoted Companies Alliance (“QCA”). In addition, the Company as a result of the listing of its shares on the TSX is obliged to comply with Canadian National Policy 58-201 – Corporate Governance Guidelines which establishes corporate governance guidelines that apply to all public companies. The Company has instituted corporate governance practices that also, where practical, take consideration of these guidelines. BOARD COMPOSITION The Directors who served during the year are shown on page 66. The Board has a wide range of experience directly relevant to the Group and its activities and its structure ensures that no one individual or group of individuals dominate the decision making process. Further details relating to the Board, independence and meetings undertaken during the year are set out in the Report on Corporate Governance on pages 54 to 62. COMMITTEES The Company has established an Audit Committee, a Remuneration Committee, a Project Steering Committee and an Executive Committee. Details of these committees are set out in the Report on Corporate Governance on pages 54 to 62. EMPLOYEES The Group has a policy of equal opportunities throughout the organisation, and is proud of its culture of diversity and tolerance. Employees benefit from regular communication both informally and formally with regard to Company issues (external and internal developments, updates, etc.), including regular news updates distributed at the mine site and in the corporate offices. Employees are made aware of the Company’s share ownership policy, both to ensure compliance with listing rules but also to make them aware of the opportunity to participate in the Company’s share performance. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 201870 Directors‵ Report continued For the year ended 31 December 2018 SHARE DEALING The Company has adopted a share dealing code for Directors and employees in accordance with the AIM Rules and Market Abuse Regulations and takes proper steps to ensure compliance by the Directors and its employees. INTERNAL CONTROLS The Directors acknowledge their responsibility for the Group’s system of internal controls and procedures and for reviewing the effectiveness of these and ensuring that management of its subsidiaries review the internal controls and procedures operating in the subsidiaries. Such controls and procedures are designed to safeguard the Company’s and the Group’s assets and ensure reliability of reporting information, financial and otherwise, for both internal use and external publication. The Group’s management has designed internal controls over financial reporting, in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Throughout the year the design and operating effectiveness of the Group’s internal controls over financial reporting are reviewed. Based on these evaluations the Board has concluded that the internal controls over financial reporting were effective as at 31 December 2018, using the criteria, having taken account of the size and nature of the Group, put forward by the Financial Reporting Council in their revised guidance for directors on internal controls for UK listed companies (issued September 2014). The Group’s management, including the Chief Executive Officer and the Chief Financial Officer, does not expect that its disclosure controls and internal controls over financial reporting will prevent or detect all errors and fraud. A cost effective system of internal controls, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the internal controls over financial reporting are achieved. KEY CONTRACTS The Group has contractual arrangements with key suppliers for its operations notably for fuel, power, reagents and equipment spare parts. It also has an existing commitment to sell its production of copper/gold concentrate to a single customer which was renewed at the start of 2018 for a two year period. However, management considers that alternative suppliers and purchasers could be arranged if necessary and do not therefore consider that the Group is unduly reliant on any single contract or supplier. The Group is reliant on retaining its exploration and mining licences and its operating licences which are subject to compliance with various federal and state regulations and obligations. The Group considers such compliance a high priority in view of this reliance. POST BALANCE SHEET EVENTS Subsequent to 31 December 2018, there has been no item, transaction or event of a material or unusual nature likely, in the opinion of the Directors of the Company, to affect significantly the continuing operation of the entity, the results of these operations, or the state of affairs of the entity in future financial periods. INDEMNIFICATION OF DIRECTORS AND OFFICERS During the financial year, the Group paid a premium in respect of a contract insuring the Directors of the Company, the Company Secretary and all executive officers of the Group against liability incurred as such a Director, Company Secretary or executive officer to the extent permitted under legislation. AUDITOR The auditor, BDO LLP, has confirmed its willingness to remain as auditor to the Company. A resolution to appoint BDO LLP will be put to the Annual General Meeting. DISCLOSURE OF AUDIT INFORMATION As far as each of the Directors is aware, at the time this report was approved: (a) There is no relevant available information of which the auditor is unaware; and (b) They have taken all steps that ought to have been taken to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. By order of the Board Clive Line Company Secretary 28 March 2019 Serabi Gold plc // Report and Accounts 2018Independent Auditor‵s Report To the members of Serabi Gold plc 71 OPINION We have audited the financial statements of Serabi Gold plc (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2018 which comprise the group statement of comprehensive income, the group and company balance sheets, the group and company statements of changes in shareholder’s equity, the group and company cash flow statements and notes to the financial statements including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006. In our opinion: • the financial statements give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 December 2018 and of the group’s loss for the year then ended; • the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. SEPARATE OPINION IN RELATION TO IFRSS AS ISSUED BY THE IASB As explained in note 1 (a) to the group financial statements, the group in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the group financial statements give a true and fair view of the consolidated financial position of the group as at 31 December 2018 and of its consolidated financial performance and its consolidate cash flows for the year then ended in accordance with IFRSs as issued by the IASB. BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. MATERIAL UNCERTAINTY RELATED TO GOING CONCERN We draw attention to note 1 to the financial statements, which explains that the Group may require further funding to settle the deferred consideration of $12m from the acquisition of the Coringa Gold Project, which is due to be paid on the earlier of first day of production or 22 December 2019. The matters explained in note 1 indicate that a material uncertainty exists that may cast significant doubt on the group and parent company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. We considered going concern and working capital requirements to be a Key Audit Matter based on our assessment of the risk and the effect on the audit. We performed the following work in response to this key audit matter: • A review of management’s assessment that going concern is an appropriate basis of preparation. • Corroboration of management’s cash flow forecasts for the group, which include the twelve months from the date of approval of these financial statements, to supporting information and historic data. In particular we corroborated the cash flow forecasts to the life of mine models for Palito and São Chico to ensure forecast cash inflows from production were reasonable and in line with current performance. • Challenging and corroborating management’s assumptions included in the cash flow forecasts and discussing with management their future plans for the group and ensuring that all contractually committed amounts and liabilities are included within the projections; • Reviewing the terms of the group’s current debt facility including historical compliance and expected future compliance with covenants. • Evaluating the adequacy of disclosures made in the financial statements in respect of going concern. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 201872 Independent Auditor‵s Report continued To the members of Serabi Gold plc KEY AUDIT MATTERS In addition to the matter described in the material uncertainty related to going concern section, key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Carrying value of mining properties Key Audit Matter How our audit addressed the key audit matter As at 31 December 2018, the Group’s mining properties and assets under construction totalled $43.04m and details of these assets and the related critical judgements and estimates are disclosed in notes 1(x) and 9. Each year management are required to assess whether there has been any indication that the mining assets may be impaired and consider whether the carrying value exceeds the recoverable amount by considering the future discounted cash flows. The recoverable amount of the assets is dependent on the life of mine plan and various significant judgements and estimates, including the gold price and discount rates. The subjectivity of the judgements and estimates and the significant carrying value of the assets make this a key area of focus for the financial statements and the audit. Our audit work included: • Management carried out their impairment review and concluded there were no indicators of impairment in line with the provisions of IAS 36. We have assessed the mining and exploration operations at Palito, São Chico and Coringa with reference to the impairment indicators as documented in IAS 36. We did not identify any indicators of impairment with reference to Palito, São Chico or Coringa. • We visited the mine sites at Palito and São Chico to understand both the historic performance and future developments and assess whether there are any clear indicators of impairment. • We have reviewed operational data in the year and compared this to the prior year’s mine model and operational data. We have noted that tonnes milled and ounces of gold produced in 2018 are in line with the previous year’s model indicating the mines are operating as intended. • We have reviewed the Departamento Nacional de Produção Mineral (DNPM) website and noted some of the licences had expired or were expiring in the next 12 months. We have obtained the application for renewal for the trial mining licence for the São Chico mine and ensured the applications for expired exploration licences have been submitted. We have verified legal documentation to support that legal title remains in the period under renewal. • We have made enquiries of solicitors in Brazil and noted no material litigation or dispute that would affect mining and exploration operations. • We enquired with management of any known breaches of laws and regulations in the year and none were noted. OUR APPLICATION OF MATERIALITY We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. Our basis for the determination of materiality has remained consistent with the prior year. We consider EBITDA to be the most significant determinant of the group’s financial performance used by shareholders and approximates to operating cash generation. The benchmark percentage for calculating materiality is 5% of EBITDA which is consistent with the prior year. Whilst materiality for the financial statements as a whole was $500,000 (2017: $500,000), each significant component of the group was audited to a lower level of materiality. The parent company materiality was $300,000 (2017: $375,000) with the other components varying from $100,000 to $300,000. These materiality levels were used to determine the financial statement areas that are included within the scope of our audit work and the extent of sample sizes during the audit. Performance materiality is the application of materiality at the individual account or balance level set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. Performance materiality was set at 75% (2017: 75%) of the above materiality levels given there has been limited experience of past misstatements. Serabi Gold plc // Report and Accounts 201873 We agreed with the Audit Committee that we would report to the Committee all individual audit differences identified during the course of our audit in excess of $10,000 (2017: $25,000). We also agreed to report differences below these thresholds that, in our view warranted reporting on qualitative grounds. AN OVERVIEW OF THE SCOPE OF OUR AUDIT Our group audit scope focused on the group’s principal operating locations and legal structure. The group has operating entities based in the UK and Brazil. The parent company, Serabi Mineração SA, containing the Palito and São Chico gold mines, Gold Aura do Brasil Mineracao Ltda and Chapleau Resources Limited, were the entities that were deemed to be significant components by virtue of size and risk. The parent entity was subject to a full scope audit by the group auditor. For Serabi Mineração SA, Gold Aura do Brasil Mineração Ltda and Chapleau Resources Limited, the BDO network firm in Brazil completed full scope audit reporting to the group auditor. We determined our level of involvement in the components to require a visit from the group audit team to review the audit work papers and attend the component clearance meeting along with the component auditor, local and group management. The remaining non-significant subsidiaries of the group were principally subject to analytical review procedures. OTHER INFORMATION The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion, based on the work undertaken and the course of the audit: • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or • the parent company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. RESPONSIBILITIES OF DIRECTORS As explained more fully in the directors’ responsibilities statement set out on page 69, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 201874 Independent Auditor‵s Report continued To the members of Serabi Gold plc continued AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. USE OF OUR REPORT This report is made solely to the parent company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the parent company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the parent company and the parent company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Matt Crane (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor London, UK 28 March 2019 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). Serabi Gold plc // Report and Accounts 201875 Independent Auditor‵s Report In respect of Canadian National Instrument 52-107 (Acceptable accounting principles and auditing standards) OPINION We have audited the financial statements of Serabi Gold plc (the ‘parent company’) and its subsidiaries (the ‘group’) for the year ended 31 December 2018 and 31 December 2017 which comprise the group statement of comprehensive income, the group and company balance sheets, the group and company statements of changes in shareholder’s equity, the group and company cash flow statements and notes to the financial statements including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as issued by the IAASB. Our audit opinion does not cover the parent company financial statements. In our opinion: • the group financial statements present fairly, in all material respects, the financial position of the group as at 31 December 2018 and 31 December 2017 and its financial performance and its cash flows for the years then ended; and • the group financial statements have been properly prepared in accordance with IFRSs as issued by the IAASB. BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (ISAs) as issued by IAASB and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the group financial statements in the UK, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. MATERIAL UNCERTAINTY RELATED TO GOING CONCERN We draw attention to note 1 to the financial statements, which explains that the group may require further funding to settle the deferred consideration of $12m from the acquisition of the Coringa Gold Project, which is due to be paid on the earlier of first day of production or 22 December 2019. The matters explained in note 1 indicate that a material uncertainty exists that may cast significant doubt on the group and parent company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. We considered going concern and working capital requirements to be a Key Audit Matter based on our assessment of the risk and the effect on the audit. We performed the following work in response to this key audit matter; • A review of management’s assessment that going concern is an appropriate basis of preparation. • Corroboration of management’s cash flow forecasts for the group, which include the twelve months from the date of approval of these financial statements, to supporting information and historic data. In particular we corroborated the cash flow forecasts to the life of mine models for Palito and São Chico to ensure forecast cash inflows from production were reasonable and in line with current performance; • Challenging and corroborating management’s assumptions included in the cash flow forecasts and discussing with management their future plans for the group and ensuring that all contractually committed amounts and liabilities are included within the projections; • Reviewing the terms of the group’s current debt facility including historical compliance and expected future compliance with covenants; • Evaluating the adequacy of disclosures made in the financial statements in respect of going concern. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 201876 Independent Auditor‵s Report continued In respect of Canadian National Instrument 52-107 (Acceptable accounting principles and auditing standards) KEY AUDIT MATTERS In addition to the matter described in the material uncertainty related to going concern section, key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Carrying value of mining properties Key Audit Matter How our audit addressed the key audit matter As at 31 December 2018, the Group’s mining properties and assets under construction totalled $43.04m and details of these assets and the related critical judgements and estimates are disclosed in notes 1(x) and 9. Each year management are required to assess whether there has been any indication that the mining assets may be impaired and consider whether the carrying value exceeds the recoverable amount by considering the future discounted cash flows. The recoverable amount of the assets is dependent on the life of mine plan and various significant judgements and estimates, including the gold price and discount rates. The subjectivity of the judgements and estimates and the significant carrying value of the assets make this a key area of focus for the financial statements and the audit. Our audit work included: • Management carried out their impairment review and concluded there were no indicators of impairment in line with the provisions of IAS 36. We have assessed the mining and exploration operations at Palito, São Chico and Coringa with reference to the impairment indicators as documented in IAS 36. We did not identify any indicators of impairment with reference to Palito, São Chico or Coringa. • We visited the mine sites at Palito and São Chico to understand both the historic performance and future developments and assess whether there are any clear indicators of impairment. • We have reviewed operational data in the year and compared this to the prior year’s mine model and operational data. We have noted that tonnes milled and ounces of gold produced in 2018 are in line with the previous year’s model indicating the mines are operating as intended. • We have reviewed the Departamento Nacional de Produção Mineral (DNPM) website and noted some of the licences had expired or were expiring in the next 12 months. We have obtained the application for renewal for the trial mining licence for the São Chico mine and ensured the applications for expired exploration licences have been submitted. We have verified legal documentation to support that legal title remains in the period under renewal • We have made enquiries of solicitors in Brazil and noted no material litigation or dispute that would affect mining and exploration operations. • We enquired with management of any known breaches of laws and regulations in the year and none were noted. OTHER INFORMATION The other information comprises the information included in the Annual Report and the management discussion and analysis, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Serabi Gold plc // Report and Accounts 201877 RESPONSIBILITIES OF MANAGEMENT Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing (ISAs) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the group’s financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group’s and the parent company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in the auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of the auditor’s report. However, future events or conditions may cause the group and the parent company to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation (i.e. gives a true and fair view). • Are required to report on consolidated financial statements, obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for the audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The partner in charge of the audit resulting in this independent auditor’s report is Matt Crane. BDO LLP London, United Kingdom 28 March 2019 Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 201878 Statement of Comprehensive Income For the year ended 31 December 2018 CONTINUING OPERATIONS Revenue Cost of sales Release of/(provision for) impairment of inventory Depreciation and amortisation charges Total cost of sales Gross profit Administration expenses Share-based payments Gain on disposal of fixed asset Operating loss Foreign exchange loss Finance expense Finance income Loss before taxation Income tax expense Loss for the period from continuing operations(1) Other comprehensive income (net of tax) Items that may be reclassified subsequently to profit or loss Exchange differences on translating foreign operations Total comprehensive loss for the period(1) Loss per ordinary share (basic)(1) (2) Loss per ordinary share (diluted)(1) (2) Group For the year ended For the year ended 31 December 31 December 2017 US$ 2018 US$ Notes 43,261,743 (31,501,016) 400,000 (9,281,387) 48,449,868 (32,015,498) (950,000) (10,465,283) 11 (40,382,403) (43,430,781) 2,879,340 (5,538,298) (329,620) 276,976 (2,711,602) (594,596) (2,385,313) 861,430 5,019,087 (5,500,275) (381,362) 170,591 (691,959) (214,488) (839,191) 135 (4,830,081) (924,460) (1,745,503) (652,400) (5,754,541) (2,397,903) 3 4 4 5 (9,607,555) (591,720) (15,362,096) (11.20c) (11.20c) 7 7 (2,989,623) (6.86c) (6.86c) (1) The Group has no non-controlling interests and all profits are attributable to the equity holders of the Parent Company. (2) On 19 June 2018, the Group completed a capital reorganisation with every 20 existing shares being consolidated into one new share. The total number of existing ordinary shares in issue immediately prior to the capital reorganisation was 1,175,281,440. The total number of ordinary shares in issue following the capital reorganisation was 58,764,072. For comparative purposes the weighted average ordinary shares in issue and the diluted ordinary shares in issue for the twelve-month period ended 31 December 2017 has been adjusted to reflect the share consolidation of 20 existing shares being consolidated into one new share. Serabi Gold plc // Report and Accounts 2018 Group Balance Sheet As at 31 December 2018 Non-current assets Deferred exploration costs Property, plant and equipment Taxes receivable Deferred taxation Total non-current assets Current assets Inventories Trade and other receivables Prepayments Cash and cash equivalents Total current assets Current liabilities Trade and other payables Interest-bearing liabilities Acquisition payment outstanding Derivative financial liabilities Accruals Total current liabilities Net current assets Total assets less current liabilities Non-current liabilities Trade and other payables Provisions Acquisition payment outstanding Interest-bearing liabilities Total non-current liabilities Net assets Equity Share capital Share premium reserve Option reserve Other reserves Translation reserve Retained surplus Equity shareholders’ funds attributable to owners of the parent 79 Group 2018 US$ 2017 US$ Notes 8 9 12 5 11 12 13 14 15 17 22 18 15 16 22 17 20 27,707,795 42,342,102 1,555,170 2,162,180 23,898,819 48,980,381 1,474,062 2,939,634 73,767,247 77,292,896 8,511,474 758,209 4,166,916 9,216,048 6,934,438 1,277,142 3,237,412 4,093,866 22,652,647 15,542,858 6,273,321 4,302,798 10,997,757 390,976 372,327 5,347,964 2,845,712 5,000,000 709,255 614,198 22,337,179 14,517,129 315,468 1,025,729 74,082,715 78,318,625 955,521 1,543,811 – 2,473,096 2,753,409 2,047,131 9,997,961 2,749,412 4,972,428 17,547,913 69,110,287 60,770,712 8,882,803 21,752,430 1,363,367 4,763,819 (40,807,123) 73,154,991 5,540,960 1,722,222 1,425,024 4,015,369 (31,199,568) 79,266,705 69,110,287 60,770,712 The financial statements were approved and authorised for issue by the Board of Directors on 28 March 2019 and signed on its behalf by: Clive Line Finance Director 28 March 2019 Company Number 5131528 Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 80 Company Balance Sheet As at 31 December 2018 Non-current assets Deferred exploration costs Property, plant and equipment Investments in subsidiaries Other receivables Total non-current assets Current assets Trade and other receivables Prepayments and prepaid taxes Cash and cash equivalents Total current assets Current liabilities Trade and other payables Interest-bearing liabilities Derivative financial liabilities Acquisition payment outstanding Accruals Total current liabilities Net current liabilities Total assets less current liabilities Non-current liabilities Interest-bearing liabilities Acquisition payment outstanding Total non-current liabilities Net assets Equity Share capital Share premium reserve Merger reserve Option reserve Retained surplus Equity shareholders’ funds attributable to owners of the parent Company Notes 2018 US$ 2017 US$ 8 9 10 12 12 13 14 15 17 18 22 1,568,365 6,949,139 86,511,566 8,269,265 1,568,365 6,903,394 86,960,294 7,606,894 103,298,335 103,038,947 633,853 118,371 7,382,530 1,241,352 107,756 2,936,579 8,134,754 4,285,687 4,065,481 3,636,360 390,976 10,997,757 655,318 12,046,338 1,980,000 709,255 5,000,000 709,949 19,745,892 20,445,542 (11,611,138) (16,159,855) 91,687,197 86,879,092 17 22 2,424,246 – 2,500,000 9,997,961 2,424,246 12,497,961 89,262,951 74,381,131 20 8,882,803 21,752,430 361,461 1,363,367 56,902,890 5,540,960 1,722,222 361,461 1,425,024 65,331,464 89,262,951 74,381,131 A separate statement of comprehensive income for Serabi Gold plc has not been prepared as permitted by Section 408 of the Companies Act 2006. The loss of the Company during 2018 was US$8,819,851 (2017: US$5,055,881). The financial statements were approved and authorised for issue by the Board of Directors on 28 March 2019 and signed on its behalf by: Clive Line Finance Director 28 March 2019 Serabi Gold plc // Report and Accounts 2018 Statements of Changes in Shareholders‵ Equity For the year ended at 31 December 2018 81 Group Share capital US$ Share premium US$ Share option reserve US$ Other Translation reserve US$ reserves US$ losses)/ retained surplus US$ Total equity US$ (Accumulated Equity shareholders’ funds at 31 December 2016 5,540,960 1,722,222 1,338,652 3,051,862 (30,607,848) 82,333,125 63,378,973 Foreign currency adjustments Loss for year Total comprehensive income for the year Transfer to taxation reserve Share options lapsed in period Share option expense – – – – – – – – – – – – – – – – (591,720) – – (2,397,903) (591,720) (2,397,903) – – (294,990) 381,362 – 963,507 – – (591,720) – – – (2,397,903) (963,507) 294,990 – (2,989,623) – – 381,362 Equity shareholders’ funds at 31 December 2017 5,540,960 1,722,222 1,425,024 4,015,369 (31,199,568) 79,266,705 60,770,712 Foreign currency adjustments Loss for year Total comprehensive income for the year Transfer to taxation reserve Shares issued in period Share options lapsed in period Share option expense – – – – – – – – (9,607,555) – – (5,754,541) (9,607,555) (5,754,541) – – – – 3,341,843 20,030,208 – – – – – – – (391,277) 329,620 – 748,450 – – – (9,607,555) – – – – (748,450) (5,754,541) (15,362,096) – – 23,372,051 – 329,620 391,277 – Equity shareholders’ funds at 31 December 2018 8,882,803 21,752,430 1,363,367 4,763,819 (40,807,123) 73,154,991 69,110,287 Other reserves comprise a merger reserve of US$361,461 and a taxation reserve of US$4,402,358 (2017: merger reserve of US$361,461 and taxation reserve of US$3,653,908). The following is a description of each of the reserve accounts that comprise equity shareholders’ funds Share capital The share capital comprises the issued ordinary shares of the Company at par. Share premium The share premium comprises the excess value recognised from the issue of ordinary shares at par. Share option reserve Cumulative fair value of options charged to the statement of comprehensive income net of transfers to the profit and loss reserve on exercised and cancelled/lapsed options. Other reserves Other reserves is comprised of a merger reserve arising on the acquisition of Kenai Resources Limited, representing the difference between the nominal value of the shares issued and their fair value, and a warrant reserve being the cumulative fair value of warrants issued associated with equity shares issued. The Group has also established a taxation reserve. The reserve is used to accumulate taxation savings received by the Group as a result of a lower taxation rate being applied in Brazil through its eligibility for a tax incentive programme (“SUDAM”). SUDAM reduces the Group’s effective tax rate from approximately 34 per cent to approximately 15.25 per cent. The regulations of the incentive programme require the Group to accumulate incentives received through tax savings in a taxation reserve. Translation reserve Cumulative gains and losses on translating the net assets of overseas operations to the presentation currency. Retained surplus Retained surplus/(accumulated losses) comprise the Group’s cumulative accounting profits and losses since inception. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 82 Statements of Changes in Shareholders‵ Equity continued For the year ended at 31 December 2018 Company Share capital US$ Share premium US$ Merger reserve US$ Share option reserve US$ (Accumulated losses)/ retained surplus US$ Total equity US$ Equity shareholders’ funds at 31 December 2016 5,540,960 1,722,222 361,461 1,338,652 70,092,355 79,055,650 Loss for the year Comprehensive loss for year Share options lapsed in period Share option expense – – – – – – – – – – – – – (5,055,881) (5,055,881) – (294,990) 381,362 (5,055,881) 294,990 – (5,055,881) – 381,362 Equity shareholders’ funds at 31 December 2017 5,540,960 1,722,222 361,461 1,425,024 65,331,464 74,381,131 Loss for the year Comprehensive loss for year Shares issued in period Share options lapsed in period Share option expense – – – 3,341,843 – – – 20,030,208 – – – – – – – – (8,819,851) (8,819,851) – – (391,277) 329,620 (8,819,851) – 391,277 – (8,819,851) 23,372,051 – 329,620 Equity shareholders’ funds at 31 December 2018 8,882,803 21,752,430 361,461 1,363,367 56,902,890 89,262,951 Serabi Gold plc // Report and Accounts 2018 Cash Flow Statements For the year ended at 31 December 2018 83 Group Company For the year ended For the year ended For the year ended 31 December 31 December 31 December 31 December 2017 US$ For the year ended 2017 US$ 2018 US$ 2018 US$ Cash outflows from operating activities Operating profit/(loss) Net financial expense Depreciation – plant, equipment and mining properties Inventory impairment expense Other provisions Taxation expense Share-based payments Interest paid Foreign exchange Changes in working capital (Increase)/decrease in inventories (Increase)/decrease in receivables, prepayments and accrued income Increase/(decrease) in payables, accruals and provisions Increase/(decrease) in short term intercompany payables (5,754,541) 1,938,479 9,281,387 (400,000) – 924,460 509,620 (770,100) (155,484) (2,397,903) 1,053,544 10,465,283 950,000 156,404 652,400 381,362 (747,072) (178,753) (8,819,851) 2,562,765 532,046 – – – 509,620 (727,983) (379,383) (2,520,338) (1,425,384) (20,870) – (287,898) (1,968,858) 165,249 – – 600,536 (181,761) (57,037) (5,055,880) 514,811 526,465 – – – 381,362 (273,636) (75,889) – (168,909) (79,711) 5,562,619 Net cash flow from operations 1,607,229 8,243,758 (5,961,048) 1,331,232 Investing activities Acquisition payment for subsidiary net of cash acquired Purchase of property, plant, equipment and projects in construction Mine development expenditure Geological exploration expenditure Pre-operational project costs Proceeds from sale of assets Loans to subsidiaries Interest received and other finance income (4,740,928) (4,048,391) (4,090,860) (4,610,450) (2,274,133) 301,480 – 4,780 (4,994,665) (2,144,753) (4,362,192) (2,487) – 214,566 – 135 (4,740,928) – (577,791) – – – (8,269,265) 4,780 (5,000,000) – (660,181) – – – – 135 Net cash outflow on investing activities (19,458,502) (11,289,396) (13,583,204) (5,660,046) Financing activities Issue of ordinary share capital Costs associated with issue of ordinary shares Draw-down of short term loan facility Repayment of short term secured loan Payment of finance lease liabilities 23,807,346 (615,295) 3,000,000 (1,939,394) (797,945) – – 3,628,511 – (644,340) 23,807,346 (615,295) 3,000,000 (1,939,394) – – – 3,628,511 – – Net cash (outflow)/inflow from financing activities 23,454,712 2,984,171 24,252,657 3,628,511 Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Exchange difference on cash 5,603,439 4,093,866 (481,257) (61,467) 4,160,923 (5,590) 4,708,405 2,936,579 (262,454) (700,303) 3,612,495 24,387 Cash and cash equivalents at end of period 9,216,048 4,093,866 7,382,530 2,936,579 See note 19 for further information on the analysis of net debt. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018   84 Notes to the Financial Statements For the year ended at 31 December 2018 1 SIGNIFICANT ACCOUNTING POLICIES (a) Basis of preparation Serabi Gold plc (the “Company”) is a public limited company incorporated and domiciled in England, the shares of which are listed on AIM, part of the London Stock Exchange, and the Toronto Stock Exchange. The public registered office and principal place of business are disclosed in the shareholder information section of the Annual Report. The principal activities of the Group are described in the Directors’ Report on page 68. The consolidated financial statements are presented in US Dollars. They are prepared on the historical cost basis or the fair value basis where the fair valuing of relevant assets and liabilities has been applied. The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) in force at the reporting date and their interpretations issued by the International Accounting Standards Board (“IASB”) as adopted for use within the European Union and with IFRS and their interpretations issued by the IASB. The Parent Company financial statements have also been prepared in accordance with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. Accounting standards, amendments and interpretations effective in 2018 A number of new and amended standards and interpretations issued by IASB have become effective for the first time for financial periods beginning on (or after) 1 January 2018 and have been applied by the Group in these financial statements. None of these new and amended standards and interpretations had a significant effect on the Group because they are either not relevant to the Group’s activities or require accounting which is consistent with the Group’s current accounting policies. The following new standards and interpretations have been adopted by the Group: • • IFRS 15 has replaced IAS 18 Revenue and IAS 11 Construction Contracts as well as various interpretations previously issued by the IFRS Interpretations Committee. The Group’s accounting policies have remained unchanged from those previously disclosed in the 2017 annual financial statements. Under IAS 18, the timing of revenue recognition from the sale of goods was based primarily on the transfer of risks and rewards, whereas IFRS 15 focuses instead on when control of those goods has transferred to the customer. This different approach has not resulted in a change of timing for revenue recognition for the Group. IFRS 9 has replaced IAS 39 Financial Instruments: Recognition and Measurement. The Group’s principal financial assets comprise long and short term loans, cash and short term deposits, restricted cash as well as trade and other receivables. All of these financial assets continue to be classified and measured at amortised cost. The Group’s principal financial liabilities comprise trade and other payables, loans and borrowings, convertible loans and finance leases and derivative gold call options. With the exception of the gold call options, all of these financial liabilities continue to be classified and measured at amortised cost. The gold call options are classified and measured at fair value through profit or loss. There are no material financial assets subject to the expected credit loss model defined within IFRS 9, except for cash. The level of credit risk that the Group is exposed to has not given rise to material allowances within the expected credit loss model. Management’s assessment of the impact of IFRS 9 of the Company has focused on the change in IFRS 9 around expected credit losses on intercompany balances. There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB that are effective in future accounting periods and which have not been adopted early. None of these are expected to have a significant effect on the Group, in particular: • IFRS 16 Leases (effective for periods beginning on or after 1 January 2019) requires lessees to recognise all lease assets and liabilities on the balance sheet for both finance leases and operating leases. Management have completed an assessment of existing operating contracts and do not anticipate the adoption of IFRS 16 to have a significant impact on the Group’s financial statements as the operating leases held by the Group are of low value and the majority of the existing contracts either relate to service agreements or otherwise do not result in right of use assets or lease liabilities. Going concern and availability of finance As at 31 December 2018 the Group had cash in hand of $9.2 million and net assets of $69.1 million. The Directors have prepared a cash flow forecast for the period to 31 March 2020. Based on this forecast, which includes planned capital and exploration programmes, the Group may not be able to generate sufficient cash flows to settle, in full, the deferred consideration of US$12 million payable for the acquisition of Coringa which falls due in December 2019. The Directors believe there is a reasonable prospect of the Group securing further funds as and when required in order that the Group can meet all liabilities including the deferred consideration payable for the acquisition of Coringa as and when they fall due in the next 12 months and have prepared the financial statements on a going concern basis. As at the date of this report the outcome of raising further funds remains uncertain and this represents a material uncertainty surrounding going concern. If the Group fails to raise the necessary funds the Group may be unable to realise its assets and discharge its liabilities in the normal course of business. The matters explained indicate that a material uncertainty exists that may cast significant doubt on the Group and Parent’s ability to continue as a going concern. These financial statements do not show the adjustments to the assets and liabilities of the Group or the Parent company if this was to occur. Serabi Gold plc // Report and Accounts 201885 1 SIGNIFICANT ACCOUNTING POLICIES CONTD. (b) Basis of consolidation (i) Subsidiaries and acquisitions The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. Control is recognised where an investor is expected, or has rights, to variable returns from its investment with the investee, and has the ability to affect these returns through its power over the investee. Based on the circumstances of the acquisition an assessment will be made as to whether the acquisition represents an acquisition of a business or the acquisition of assets. In the event of a business acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair value at the date of acquisition. Any excess of the cost of the acquisition over the fair values of the identifiable net assets acquired is recognised as a “fair value” adjustment. If the cost of the acquisition is less than the fair value of net assets of the subsidiary acquired, the difference is recognised directly in profit or loss. In the event of an asset acquisition, assets and liabilities are assigned a carrying amount based on relative fair value. The results of subsidiaries acquired or disposed of during the year are included in the statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate. In the Company’s balance sheet, investments in subsidiaries includes the investment in Kenai Resources Limited (“Kenai”), the investment in which was calculated at fair value and the difference between the value of the shares issued and their fair value has been credited directly to a merger reserve. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies into line with those used by the Group. (ii) Transactions eliminated on consolidation Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. (c) Foreign currencies The Group’s presentational currency is US Dollars and has been selected based on the currency of the primary economic environment in which the Group as a whole operates on the basis that the Group’s primary product is generally traded by reference to its pricing in US Dollars. The functional currency of the Company is also considered to be the US Dollar. Transactions in currencies other than the functional currency of a company are recorded at a rate of exchange approximating to that prevailing at the date of the transaction. At each balance sheet date, monetary assets and liabilities that are denominated in currencies other than the functional currency are translated at the amounts prevailing at the balance sheet date and any gains or losses arising are recognised in the income statement. On consolidation, the assets and liabilities of the Group’s overseas operations for which the US Dollar is not the functional currency are translated at exchange rates prevailing at the balance sheet date. Income and expense items are translated at the average exchange rate for the period. Exchange differences arising on the net investment in subsidiaries are recognised in other comprehensive income. The US Dollar/Sterling exchange rate at 31 December 2018 was 1.3328 (2017: 1.3579). The Brazilian Real/US Dollar exchange rate at 31 December 2018 was 3.8742 (2017: 3.3074). (d) Property, plant and equipment (i) Owned assets Items of property, plant and equipment are stated at cost less accumulated depreciation (note 1(d) (iv)) and impairment losses (note 1(h)). Upon demonstration of the feasibility of commercial production, any past deferred exploration, evaluation and development costs related to that operation are reclassified as Projects in Construction. When commercial production commences these expenditures are then subsequently transferred at cost to Mining Properties. They are stated at cost less amortisation charges and any provision for impairment. Amortisation is calculated over the estimated life of the mineable inventory on a unit of production basis. Future forecasted capital expenditure is included in the unit of production amortisation calculation. (ii) Leased assets Assets held under leases, which result in the Group bearing risk and receiving benefit of ownership (finance leases), are capitalised as property, plant and equipment at the estimated present value of underlying lease payments. The corresponding finance lease obligation is included within borrowings. The interest element is allocated to accounting periods during the lease term to reflect a constant rate of interest on the remaining balance of the obligation for each accounting period. (iii) Subsequent costs Costs relating to maintenance and upkeep of the Group’s assets, once such assets have been commissioned and entered into commercial operations, will generally be expensed as incurred. In the event, however, that the costs demonstrably result in extending the original estimated life of such asset or enhances its value, then such expenditure is added to the carrying value of that asset and amortised over its remaining estimated useful life. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 201886 Notes to the Financial Statements continued For the year ended at 31 December 2018 1 SIGNIFICANT ACCOUNTING POLICIES CONTD. (d) Property, plant and equipment contd. (iv) Depreciation Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The estimated useful lives are as follows: Mining assets Processing plant Other plant and assay equipment Heavy vehicles Light vehicles Land and buildings Mining properties Other assets Furniture and fittings Office equipment Communication installations Computers three – seven years two – ten years eight years three years ten – twenty years unit of production five years four years five years three years The Group reviews the economic lives at the end of each annual reporting period. The residual value, if not insignificant, is reassessed annually. Gains and losses on disposal are determined by comparing proceeds with carrying values and are included in profit or loss. (e) Deferred exploration costs All costs incurred prior to obtaining the legal right to undertake exploration and evaluation activities on a project are written off as incurred. Subsequent to the legal rights being obtained, all costs related to the exploration of mineral properties are capitalised on a project-by-project basis and deferred until either the properties are demonstrated to be commercially viable (see note 1(d)(i)) or until the properties are sold, allowed to lapse or abandoned, at which time any capitalised costs are written off to the income statement. Costs incurred include appropriate technical and administrative overheads but not general overheads. Deferred exploration costs are carried at cost, less any impairment losses recognised. At such time as commercial feasibility is established and a development decision is reached, the costs associated with that property will be transferred to and re-categorised as Projects in Construction and upon commercial production being achieved, re-categorised as Mining Property. Property, plant and equipment used in the Group’s exploration activities are separately reported. (f) Trade and other receivables Trade receivables are not interest-bearing and are stated at nominal value at the balance sheet date. Other receivables are not interest-bearing and are stated at amortised cost at the balance sheet date. Receivables in respect of sale of gold/copper concentrate are re-valued using the best estimate of the forecast metal prices for the expected date of settlement (see Revenue policy – note 1(p)). The Group recognises a loss allowance for expected credit losses (“ECL”) on financial assets that are measured at amortised cost which comprise mainly trade receivables. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument. The Group always recognises lifetime ECL on trade receivables. The expected credit losses on these financial assets are estimated using a provision matrix based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of money where appropriate.  (g) Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less and bank overdrafts. Bank overdrafts are shown within interest-bearing liabilities in current liabilities on the balance sheet. Serabi Gold plc // Report and Accounts 201887 1 SIGNIFICANT ACCOUNTING POLICIES CONTD. (h) Impairment At each balance sheet date, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered impairment. Prior to carrying out impairment reviews, the significant cash generating units are assessed to determine whether they should be reviewed under the requirements of IFRS 6 – Exploration for and Evaluation of Mineral Resources or IAS 36 – Impairment of Assets. Such determination is by reference to the stage of development of the project and the level of reliability and surety of information used in calculating value in use or fair value less costs to sell. Impairment reviews performed under IFRS 6 are carried out on a project by project basis, with each project representing a potential single cash generating unit. An impairment review is undertaken when indicators of impairment arise; typically when one of the following circumstances applies: (i) sufficient data exists that render the resource uneconomic and unlikely to be developed (ii) title to the asset is compromised (iii) budgeted or planned expenditure is not expected in the foreseeable future (iv) insufficient discovery of commercially viable resources leading to the discontinuation of activities Impairment reviews performed under IAS 36 are carried out when there is an indication that the carrying value may be impaired. Such key indicators (though not exhaustive) to the industry include: (i) a significant deterioration in the spot price of gold (ii) a significant increase in production costs (iii) a significant revision to, and reduction in, the life of mine plan If any indication of impairment exists, the recoverable amount of the asset is estimated, being the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to its recoverable amount. Such impairment losses are recognised in profit or loss for the year. Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash generating unit) in prior years. A reversal of an impairment loss is recognised in profit or loss for the year. At each balance sheet date the Company reviews the potential recoverability of investments in subsidiaries and intercompany debts by reviewing the underlying value of the assets of those subsidiaries and the future cash generation of those subsidiaries to determine whether there is any indication that those assets have suffered impairment or the debts may not be repaid. As with the Group each subsidiary is reviewed to determine whether they should be reviewed under the requirements of IFRS 6 – Exploration for and Evaluation of Mineral Resources or IAS 36 – Impairment of Assets and this determination and the indicators of impairment are consistent with those applied to the Group. (i) Share capital and share premium The Company’s ordinary shares are classified as equity. Called up share capital is recorded at par value of 10 pence per ordinary share. Monies raised from the issue of shares in excess of par value are recorded as share premium. Costs associated with the raising of capital are netted off this amount. (j) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost with any difference between the proceeds (net of transaction costs) and the redemption value recognised in profit or loss over the period of the borrowings using the effective interest rate method. Where the Group secures borrowings which include any rights of conversion into equity, the fair value of such conversion rights is estimated and reported as a financing cost. In the event that the conversion rights are not exercised this financing cost will reverse as a movement in reserves. Interest on borrowings used specifically to fund the acquisition of non-current assets is capitalised as part of the acquisition cost of the asset otherwise borrowing costs are expensed as incurred. Borrowing costs comprise interest and other costs that the Group incurs in connection with the borrowing of finance. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 201888 Notes to the Financial Statements continued For the year ended at 31 December 2018 1 SIGNIFICANT ACCOUNTING POLICIES CONTD. (k) Employee benefits (i) Share-based payment transactions and share options The Group issues share-based payments including share options to certain employees, which are measured at fair value at date of grant. The fair value determined at the grant date is expensed on a graded vesting basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. The Black-Scholes method is used to calculate fair value. The expected life of the instrument used in the model is adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The entity measures the fair value of the services received by reference to the fair value of the equity instruments granted, because typically it is not possible to estimate reliably the fair value of the services received. The fair value is measured at the date of grant. Where the equity instruments granted do not vest immediately but after a specified number of years, the fair value is accounted for over the vesting period. (ii) Pension costs The Group does not operate any pension plan for its employees although it does make contributions to employee pension plans in accordance with instructions from those employees. The Company has no contractual commitment as to the ability of those funds to provide any minimum level of future benefit to the individual and is contracted only to make the contributions. Company contributions to such schemes are charged against profit as they fall due. (l) Provisions, contingent liabilities and contingent assets Provisions are recognised when: the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and (i) (ii) (iii) the amount can be reliably estimated. • Restoration, rehabilitation and environmental costs Provision for environmental remediation and decommissioning of the Group’s mining and exploration facilities has been estimated using current prices which are inflated and then discounted for the time value of money. While the provision has been based on the best estimates of future costs and economic life, there is uncertainty regarding the amount and timing of these costs. • Employment provision Provision for employment claims is made where sums are claimed by employees or employees by third parties contracted by the Group, based on management’s best estimate of the potential value of any settlement that could arise based on legal opinion. • Derivative provisions Provisions for liabilities in respect of derivative instruments are calculated at the same time as the instrument is granted. Fair value is determined by reference to quoted mid-market prices at each balance sheet date of such derivative instruments. The fair value of the derivatives currently issued by the Group have been measured using level 1 inputs. (m) Trade and other payables Trade and other payables that are not interest-bearing are stated at amortised cost. Any interest charges or late payment penalties are recognised only when agreed with the supplying party or it is considered probable that they will be levied. (n) Inventories Inventories are stated at the lower of cost and net realisable value. Materials that are no longer considered as likely to be used by the Group, or their value is unlikely to be readily realised through a sale to a third party, are provided for. Materials held for consumption within operations are valued based on purchase price or, when manufactured internally, at cost. Costs are allocated on an average basis and include direct material, labour, related transportation costs and an appropriate allocation of overhead costs. Gold bullion, copper/gold concentrate, run of mine ore and any other production inventories are valued at the lower of cost and net realisable value. Dependent on the current stage of any product inventory in the process cycle, cost will reflect, as appropriate, mining, processing, transport and labour costs, as well as an allocation of mine services overheads required to bring the product to its current state. Net realisable value is the estimated selling price in the ordinary course of business, after deducting any costs to completion and any applicable marketing, selling, shipping and other distribution expenses. Serabi Gold plc // Report and Accounts 201889 1 SIGNIFICANT ACCOUNTING POLICIES CONTD. (p) Revenue IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue. IFRS 15 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. The Company has elected to early adopt IFRS 15, with effect from 1 January 2018. IFRS 15 had no impact on prior year results. Revenue represents amounts receivable in respect of sales of gold and by-products. Revenue represents only sales for which contracts have been agreed and for which the product has been delivered to the purchaser in the manner set out in the contract. Revenue is stated net of any applicable sales taxes. All revenue is derived from the sales of copper/gold concentrates produced by the Palito Mine and gold bullion produced from both the Palito Mine and the São Chico Mine. Revenues are recognised in full using contractual pricing terms ruling at the date of sale with adjustments in respect of final contractual pricing terms being recognised in the month that such adjustment is agreed. Fair value adjustments for gold prices in respect of any sale for which final pricing has not been agreed at any balance sheet date is accounted for using the gold price at that balance sheet date. Any unsold production and in particular concentrate, is held as inventory and valued at the lower of production cost and net realisable value until sold. Under the terms of the sales contracts, the Company’s performance obligation is considered to be the delivery of gold and copper/gold concentrate meeting agreed criteria. The Company recognises 100% of the revenue on transfer of title where it is considered highly probable there will be no reversals, having consideration of quality tests performed upon delivery of shipment. The performance obligation and associated revenue from customers is recorded when the title for a shipment is transferred to the customer in accordance with the contract terms. On transfer of title, control is considered to have passed to the customer with the Company having right to payment, but no ongoing physical possession or involvement with the concentrate, legal title and insurance risk having transferred. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due. All sales revenue from incidental production arising during the exploration, evaluation, development and commissioning of a mineral resource prior to commercial production, are taken as a contribution towards previously incurred costs and offset against the related asset accordingly. Interest income is recognised on a time-proportion basis using the effective interest rate method. (q) Expenses (i) Operating lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. (ii) Finance lease payments Lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (iii) Financing expenses Financing expenses comprise interest payable on borrowings calculated using the effective interest rate method and interest receivable on funds invested. It also includes charges arising on the unwinding of discount factors relating to the provisions for future charges. (r) Taxation Income tax on the profit or loss for the year comprises current and deferred tax. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the year end and any adjustments in respect of prior years. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet method. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets are only recognised to the extent that it is probable that future taxable profit will be available against which the asset can be utilised. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 201890 Notes to the Financial Statements continued For the year ended at 31 December 2018 1 SIGNIFICANT ACCOUNTING POLICIES CONTD. (s) Segmental reporting An operating segment is a component of the Group engaged in exploration or production activity that is regularly reviewed by the Chief Operating Decision Maker (“CODM”) for the purposes of allocating resources and assessing financial performance. The CODM is considered to be the Board of Directors. The Group has only one primary business activity namely the conduct of gold mining and exploration in Brazil. For management purposes, however, the Group recognises two separate segments, Brazil and UK. Copper/gold concentrate is produced in Brazil and sales routed through the UK, whilst sales of gold bullion are conducted directly from Brazil. The operating segments are reported in a manner consistent with the internal reporting provided to the CODM. The Group does not report geographic segments by location of customer as its business is the production of gold which is traded as a commodity on a worldwide basis. Sales are ultimately made into the bullion market, where the location of the ultimate customer is unknown. Investments in subsidiaries (t) Investments in subsidiaries are recognised at cost, less any provision for impairment. (u) Financial instruments Financial assets and financial liabilities are recognised in the Group statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are only offset and the net amount reported in the consolidated statement of financial position and statement of comprehensive income when there is a currently enforceable legal right to offset the recognised amounts and the Group intends to settle on a net basis or realise the asset and liability simultaneously. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. Financial assets All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. All recognised financial assets are measured subsequently in their entirety at either amortised cost or fair value, depending on the classification of the financial assets. a) Classification of financial assets Financial assets that meet the following conditions are measured subsequently at amortised cost using effective interest rate method: • The financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and, • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The Group does not hold any financial assets that meet conditions for subsequent recognition at fair value through other comprehensive income (“FVTOCI”). All other financial assets are measured subsequently at fair value through profit or loss (“FVTPL”). Impairment of financial assets b) The Group recognises a loss allowance for expected credit losses (“ECL”) on financial assets that are measured at amortised cost which comprise mainly trade receivables. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument. The Group always recognises lifetime ECL on trade receivables. The expected credit losses on these financial assets are estimated using a provision matrix based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of money where appropriate. The Company recognises lifetime ECL on intercompany loans, based on management’s assessment and understanding of the credit risk attaching to each loan, changes in the level of credit risk between periods and assessment of the scenarios under which management expect the loan to be repaid. Any credit loss will be calculated as the net present value of the difference between the contractual and expected cash flows and the ECL will represent the weighted average of those credit losses based on the respective risks of each scenario. Further details of the reviews undertaking during the year are set out in note 12. c) Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. Serabi Gold plc // Report and Accounts 201891 1 SIGNIFICANT ACCOUNTING POLICIES CONTD. (u) Financial instruments contd. Financial liabilities The classification of financial liabilities at initial recognition depends on the purpose for which the financial liability was issued and its characteristics. All purchases of financial liabilities are recorded on trade date, being the date on which the Group becomes party to the contractual requirements of the financial liability. Unless otherwise indicated the carrying amounts of the Group’s financial liabilities approximate to their fair values. The Group’s financial liabilities consist of financial liabilities measured at amortised cost and financial liabilities at fair value through profit or loss. Financial liabilities that are not (i) contingent consideration of an acquirer in a business combination, (ii) held-for-trading, or (iii) designated as at FVTPL, are measured subsequently at amortised cost using the effective interest method. The Group’s financial liabilities measured at amortised cost comprise loans and other borrowings, equipment loans, finance leases, and other payables and accruals. The effective interest method is a method of calculating the amortised cost of a financial asset/liability and of allocating interest income/expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash receipts/payments through the expected life of the financial asset/liability or, where appropriate, a shorter period. (v) Leases Finance leases are recognised as those leases that transfer substantially all the risks and rewards of ownership. Assets held under finance leases are capitalised and the outstanding future lease obligations are shown in liabilities at the fair value of the lease, or if lower at the present value of the lease payments. They are depreciated over the term of the lease or their useful economic lives, whichever is the shorter. The interest element (finance charge) of lease payments is charged to the income statement on a constant basis over the period of the lease. All other leases are regarded as operating leases and the payments made under them are charged to the income statement in the period on a straight-line basis. The Company does not act as a lessor. (w) Derivatives Derivatives are valued by reference to available market data. Any change in the value of the derivative is recognised in the statement of comprehensive income in the period in which it occurs. (x) Critical accounting estimates and judgements The preparation of financial statements requires management to make judgements and assumptions about the future for the purpose of accounting estimates. These are based on management’s best knowledge of the relevant facts and circumstances. However, these judgements and estimates regarding the future are a source of uncertainty and actual results may differ from the amounts included in the financial statements and adjustment will consequently be necessary. Estimates are continually evaluated, based on experience and reasonable expectations of future events. Accounting estimates are applied in assessing and determining the carrying values of significant assets and liabilities. The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The following are the critical estimates that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in financial statements. Mineral resources Quantification of mineral resources requires a judgement on the reasonable prospects for eventual economic extraction. These judgements are based on assessments made in accordance with the provisions of Canadian National Instrument 43-101. These factors are a source of uncertainty and changes could result in an increase or decrease in mineral resources and changes to the categorisation or mineral resources between Mineral Reserves, Measured and Indicated Mineral Resources and Inferred Mineral Resources. Only Mineral Reserves have been established to have economic viability and only at the time that such estimation is undertaken, and any change in the underlying factors under which the economic assessment was made may give rise to management making a judgement as to the continuing economic viability of such Mineral Reserves and how they should be used for the purpose of forecasts. This would, in turn, affect certain amounts in the financial statements such as depreciation, which is calculated on projected life of mine figures, and carrying values of mining property and plant which are tested for impairment by reference to future cash flows based on projected life of mine figures (see note 21). Mineral Resources have not been established to have economic viability and to the extent that management includes Mineral Resources to calculate projected life of mine figures or in calculations of amortisation or depreciation, management will make judgements based on historical reports, future economic factors and other empirical measures to make estimates as the level of Mineral Resources that it incorporates into its assessments. Inventory valuation (note 11) Valuations of gold in stockpiles and in circuit require estimations of the amount of gold contained in, and recovery rates from, the various stages of work in progress. These estimations are based on analysis of samples and prior experience. A judgement is also required about when stockpiles will be used and what gold price should be applied in calculating net realisable value; these are both sources of uncertainty. The balance that is most sensitive to changes in estimates is the stockpile of mined ore, a prior impairment of which has been partially reversed during the year. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 201892 Notes to the Financial Statements continued For the year ended at 31 December 2018 1 SIGNIFICANT ACCOUNTING POLICIES CONTD. (x) Critical accounting estimates and judgements contd. Utilisation of historic tax losses and recognition of deferred tax assets The recognition of deferred tax assets is based upon whether sufficient and suitable taxable profits will be available in the future against which the reversal of temporary differences can be deducted. Recognition of deferred tax assets therefore involves judgement regarding the future financial performance of the particular legal entity or tax group in which the deferred tax asset has been recognised. Where the temporary differences are related to losses, relevant tax law is considered to determine the availability of the losses to offset against the future taxable profits. The amounts recognised in the consolidated financial statements are derived from the Group’s best estimation and judgement as set out in note 5. Restoration, rehabilitation and environmental provisions (note 16) Management uses its judgement and experience to provide for and amortise the estimated mine closure and site rehabilitation over the life of the mine. Provisions are discounted at a risk-free rate and cost base inflated at an appropriate rate. The ultimate closure and site rehabilitation costs are uncertain and cost estimates can vary in response to many factors including changes to relevant legal requirements or the emergence of new restoration techniques. The expected timing and extent of expenditure can also change, for example in response to changes in ore reserves or processing levels. As a result, there could be significant adjustments to the provisions established which could affect future financial results. The following are the critical judgements that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in financial statements. Impairment of mining assets and other property, plant and equipment An initial judgement is made as to whether the mining assets are impaired based on the matters identified for mining assets in the impairment policy at 1 h) relating to IAS 36 impairment. In the event that there is an indication of impairment, mining assets are assessed for impairment through an estimation of the value in use of the cash generating units (“CGU’s”). The value in use calculation requires the entity to estimate the future cash flows expected to arise from a CGU and a suitable discount rate in order to calculate present value. A CGU is a group of assets that generates cash inflows from continuing use. Given their interdependences and physical proximity, the Palito and São Chico Mines are considered to be one single CGU. Management considers that there was no indicator of impairment identified in the year. Details of the estimates used are included within note 21. The value in use calculation will also be determined by the judgements made by management regarding the levels of Mineral Reserves and Mineral Resources that are included in the value in use calculations and judgements regarding any future changes in legislation or economic circumstances that might impact the operations. As described in note 1(d) (iv), the Group reviews the estimated useful lives of property, plant and equipment at the end of each annual reporting period. Further disclosure is provided in note 21 regarding the key assumptions made in assessing the value in use. Recoverability of deferred exploration expenditure (note 8) The recoverability of exploration expenditure capitalised within intangible assets is assessed based on a judgement about the potential of the project to become commercially viable and if there are any facts or circumstances that would suggest the costs should be impaired. In making this judgement management will consider the items noted in the impairment policy in respect of exploration assets as noted in accounting policy 1(h). Should an indicator of impairment be identified the value in use is estimated on a similar basis as the mining asset as detailed above. Management determined that there were no indicators of impairment in the year. Recoverability of debts including recoverable taxes In making its judgements over the recoverability of any amounts owed to the Group management will assess the creditworthiness of the debtor, the legal enforceability of the Group’s rights and the practicalities and costs of obtaining and enforcing judgements relative to the debt outstanding. Based on these assessments it will estimate the likely recoverability of sums that are due to the Group, the likely time period over when such debts might be received and any provision that needs to be established against the future recoverability. Management has determined that the debts are recoverable and that no provision is required. The new standard IFRS 9 requires the Parent company to make assumptions when implementing the forward-looking expected credit loss model. Recoverability of investments in subsidiaries and inter-company debts In making its judgements over the recoverability of any amounts invested into subsidiary companies by way of share capital or loans advanced to subsidiaries the Company considers the expected future cash flows that can be generated by the underlying projects owned and operated by these subsidiaries and the potential value of exploration and development projects owned and managed by these subsidiaries. As each of the subsidiaries is 100% owned (directly or indirectly) by the Company the creditworthiness of the subsidiary is the same as the creditworthiness of the Company subject only to any restrictions that may be imposed on the repatriation of capital and loans by the host government of the subsidiary. Further details are set out in note (u) above and in note 21. Serabi Gold plc // Report and Accounts 201893 2 SEGMENTAL ANALYSIS The following information is given about the Group’s reportable segments, further details of which are set out in note 1(s). The Chief Operating Decision Maker is the Board of Directors. The Board reviews the Group’s internal reporting in order to assess performance of the business. Management has determined the operating segments based on the reports reviewed by the Board. An analysis of the results for the year by management segment is as follows: Revenue Intra-group sales Operating expenses Release of/(provision for) impairment Depreciation and amortisation Gross profit/(loss) Administration expenses Share-based payments Proceeds from sale of assets Operating profit/(loss) Foreign exchange gain/(loss) Finance expense Finance income Profit /(loss) before taxation Income tax (expense)/benefit 2018 2017 Brazil US$ UK US$ Total US$ Brazil US$ UK US$ Total US$ 33,792,406 7,406,175 (26,330,700) 400,000 (8,749,340) 6,518,541 (2,844,011) – 276,976 3,951,506 77,680 – – 9,469,337 (7,406,175) (5,170,316) – (532,047) (3,639,201) (2,694,287) (329,620) – (6,663,108) (672,276) (2,385,313) 861,430 43,261,743 – (31,501,016) 400,000 (9,281,387) 32,829,665 12,104,907 (27,599,361) (950,000) (9,938,818) 15,620,203 (12,104,907) (4,416,137) – (526,465) 48,449,868 – (32,015,498) (950,000) (10,465,283) 2,879,340 (5,538,298) (329,620) 276,976 (2,711,602) (594,596) (2,385,313) 861,430 6,446,393 (2,737,714) – 170,591 3,879,270 (184,299) – – (1,427,306) (2,762,561) (381,362) – (4,571,229) (30,189) (839,191) 135 5,019,087 (5,500,275) (381,362) 170,591 (691,959) (214,488) (839,191) 135 4,029,186 (924,460) (8,859,267) – (4,830,081) (924,460) 3,694,971 (652,400) (5,440,474) – (1,745,503) (652,400) Profit/ (loss) for the period 3,104,726 (8,859,267) (5,754,541) 3,042,571 (5,440,474) (2,397,903) An analysis of non-current assets by location is as follows: Brazil – operations Brazil – exploration Brazil – taxes receivable Brazil – deferred tax Brazil – total UK An analysis of total assets by location is as follows: Brazil UK Total non-current assets 31 December 31 December 2017 US$ 2018 US$ 42,342,102 27,707,795 1,555,170 2,162,180 48,980,381 23,898,819 1,474,062 2,939,634 73,767,247 – 77,292,896 – 73,767,247 77,292,896 Total assets 31 December 31 December 2017 US$ 2018 US$ 88,285,140 8,134,754 83,090,310 9,745,444 96,419,894 92,835,754 Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 94 Notes to the Financial Statements continued For the year ended at 31 December 2018 2 SEGMENTAL ANALYSIS CONTD. During the year, the following amounts incurred by project location were capitalised as deferred exploration costs: Group Brazil 4,610,450 2,487 During the year, the following amounts were capitalised as land and buildings, mine assets, property, plant, equipment and projects in construction (see note 9): Group For the year ended For the year ended 31 December 31 December 2017 US$ 2018 US$ For the year ended For the year ended 31 December 31 December 2017 US$ 2018 US$ Brazil 8,695,674 7,712,624 Revenue All of the Group’s revenue arises from its activities in Brazil. An analysis of the revenue by reference to the domicile of the entity within the Group that concludes the sale is as follows: Brazil UK Total 31 December 31 December 2017 US$ 2018 US$ 33,792,406 9,469,337 32,829,664 15,620,204 43,261,743 48,449,868 An analysis of major customers (accounting for more than 10 per cent of the Group’s revenues) is as follows: Customer 1 – sale concluded from Brazil Customer 2 – sale concluded from UK Customer 3 – sale concluded from Brazil Total 31 December 2018 31 December 2017 US$ % US$ 33,792,406 9,469,337 – 78.1% 21.9% – 31,358,718 15,620,204 1,470,946 % 64.7% 32.3% 3.0% 43,261,743 100.0% 48,449,868 100.0% Serabi Gold plc // Report and Accounts 2018 3 OPERATING PROFIT a. Group operating (loss)/profit for the year is stated after charging the following: 95 Group For the year ended For the year ended 31 December 31 December 2017 US$ 2018 US$ Staff costs Depreciation (property, plant and equipment) Amortisation of the mine asset Operating lease charges b. Auditor’s remuneration 12,553,426 3,100,652 6,180,735 137,894 13,816,406 2,678,117 7,787,166 191,109 Group For the year ended For the year ended 31 December 31 December 2017 US$ 2018 US$ Fees payable to the Group’s auditor for the audit of the Group’s annual financial statements Fees payable to the Group’s auditor and its associates for other services: audit of the Group’s subsidiaries pursuant to legislation tax compliance services audit-related assurance services 4 FINANCE EXPENSE AND INCOME 133,280 139,358 38,539 8,197 39,984 37,239 9,406 39,141 Group For the year ended For the year ended 31 December 31 December 2017 US$ 2018 US$ Interest on trade financing loan Finance cost on secured loan facility Interest payable on secured loan facility Unwinding of discount on rehabilitation provision Interest payable on finance leases Unwinding of discount on acquisition payment Amortisation of fair value of derivative Arrangement fee for secured loan Interest payable Release of fair value for call options granted Unwinding of discount on rehabilitation provision Finance income on short term deposits Net finance expense – (180,000) (685,517) – – (999,796) (520,000) – – (189,255) (314,732) (335,204) – – – – (2,385,313) (839,191) 318,279 538,371 4,780 – – 135 (1,523,883) (839,056) Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 96 Notes to the Financial Statements continued For the year ended at 31 December 2018 5 TAXATION Current tax UK tax Foreign tax Total current tax Deferred tax Release of deferred tax asset Total deferred tax Income tax charge/(benefit) Group For the year ended For the year ended 31 December 31 December 2017 US$ 2018 US$ – 556,164 – 376,917 556,164 376,917 368,296 275,483 368,296 275,483 924,460 652,400 The tax provision for the current period varies from the standard rate of corporation tax in the UK of 19.00% (2017: 19.25%). The differences are explained as follows: Group For the year ended For the year ended 31 December 31 December 2017 US$ 2018 US$ Loss on ordinary activities before tax Tax thereon at UK corporate tax rate of 19.00% (2017: 19.25%) Factors affecting the tax charge: expenses not deductible for tax purposes timing differences (not recognised) income not taxable lower rate tax overseas unrecognised tax losses carried forward recognised tax losses used in the period Tax charge/(benefit) Unrecognised gross deferred tax position Tax losses brought forward Timing differences brought forward Total unrecognised gross deferred tax position at start of period Tax losses not recognised in the period Movement in timing differences Tax losses carried forward Timing differences carried forward Total unrecognised gross deferred tax position at end of period (4,830,081) (1,745,503) (917,715) (336,010) 624,590 951,402 (237,934) (603,499) 1,109,212 (1,596) 211,794 251,880 (120,019) (263,772) 633,044 275,483 924,460 652,400 US$ US$ 45,014,328 876,207 39,948,068 515,733 45,890,535 6,705,731 (1,287,909) 40,463,801 5,066,261 360,474 51,720,059 (411,702) 45,014,329 876,207 51,308,357 45,890,535 Serabi Gold plc // Report and Accounts 2018 5 TAXATION CONTD. Unrecognised deferred tax assets Tax losses Timing differences Total unrecognised deferred tax asset Recognised deferred tax asset Tax losses brought forward Tax losses (utilised)/recognised in the period Exchange Net recognised deferred tax asset 97 Group For the year ended For the year ended 31 December 31 December 2017 US$ 2018 US$ 10,765,024 (62,784) 9,240,984 138,828 10,612,239 9,379,812 US$ US$ 2,939,634 (368,296) (409,158) 3,253,630 (275,483) (38,513) 2,162,180 2,939,634 The deferred tax asset has been recognised in the financial statements only to the extent that the Group has reasonable certainty as to the level and timing of future profits that might be generated and against which this asset may be recovered. 6 EMPLOYEE INFORMATION The average number of persons, including Executive Directors, employed by the Group during the year was: Group Company Management and corporate administration Exploration Mine operations and maintenance Mine management and administration Plant and processing Total Staff costs Wages and salaries Cost of incentive scheme shares Social security costs Termination costs Pension contributions Total For the year ended For the year ended For the year ended 31 December 31 December 31 December 31 December 2017 Number For the year ended 2018 Number 2018 Number 2017 Number 20 18 284 15 60 397 9 12 263 14 67 365 3 – 10 1 – 14 3 – 10 1 – 14 Group Company For the year ended For the year ended For the year ended 31 December 31 December 31 December 31 December 2017 US$ For the year ended 2017 US$ 2018 US$ 2018 US$ 9,163,096 329,620 2,645,612 348,640 66,458 10,113,644 381,362 3,008,806 227,339 85,255 2,642,660 329,620 98,565 – 66,458 2,477,857 381,362 93,167 – 85,255 12,553,426 13,816,406 3,137,303 3,037,641 No company within the Group operates a pension plan for the Directors or the employees. For those Executive Directors and UK based employees who have an entitlement to pension provision, the premiums are paid directly to the personal pension plans selected by or agreed with the individuals. The Company’s obligation is limited to making fixed payments to these individual plans. Serabi Mineração SA, Chapleau Exploração Mineral Ltda and Gold Aura do Brasil Mineração Ltda all contribute via social security payments to the state pension scheme which operates in Brazil and to which all its employees are entitled. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 98 Notes to the Financial Statements continued For the year ended at 31 December 2018 6 EMPLOYEE INFORMATION CONTD. Directors’ remuneration The compensation of the Directors is: For the year ended For the year ended 31 December 31 December 2017 US$ 2018 US$ Salary and other benefits Post-employment benefits Total 968,376 10,662 925,190 10,302 979,038 935,492 The remuneration of the highest paid Director during the year was US$466,813 (2017: US$463,313). The Company made cash contributions to his money purchase pension scheme of US$10,662 (2017: US$10,302). During the year ended 31 December 2018, two of the Directors (2017: two) were entitled to accrue retirement benefits under money purchase schemes. 7 EARNINGS PER SHARE For the year ended For the year ended 31 December 31 December 2017 2018 (Loss)/profit attributable to ordinary shareholders (US$) Weighted average ordinary shares in issue Basic (loss)/profit per share (US cents) Diluted ordinary shares in issue Diluted (loss)/profit per share (US cents) (5,754,541) (2,397,903) 51,396,253 (11.20) 34,935,088(1) (6.86) 51,396,253(2) 34,935,088(2) (6.86) (11.20) (1) On 19 June 2018, the Group completed a capital reorganisation with every 20 existing shares being consolidated into one new share. For comparative purposes the weighted average ordinary shares in issue and the diluted ordinary shares in issue for the year ended 31 December 2017, has been adjusted to reflect the share consolidation of 20 existing shares being consolidated into one new share. (2) As the effect of dilution is to reduce the loss per share, the diluted loss per share is considered to be the same as the basic loss per share. 8 INTANGIBLE ASSETS Deferred exploration costs Cost Opening balance Additions from acquisitions Exploration and evaluation expenditure Pre-operational project costs Re-allocation from tangible assets Foreign exchange movements Total as at end of period Group Company 31 December 31 December 31 December 31 December 2017 US$ 2018 US$ 2018 US$ 2017 US$ 23,898,819 – 4,610,450 2,274,133 136,276 (3,211,883) 9,990,789 14,030,112 2,487 – – (124,569) 1,568,365 – – – – – 1,568,365 – – – – – 27,707,795 23,898,819 1,568,365 1,568,365 The value of these assets is dependent on the development of mineral deposits. Past exploration and evaluation expenditures for a project are transferred to mining property and projects in construction at the commencement of the mine and process plant construction activities for that project. Serabi Gold plc // Report and Accounts 2018 99 9 TANGIBLE ASSETS Property, plant and equipment – Group 2018 Cost Balance at 31 December 2017 Additions Reallocation to deferred assets Disposals Foreign exchange movements At 31 December 2018 Depreciation Balance at 31 December 2017 Charge for period Released on asset disposals Foreign exchange movements At 31 December 2018 Land and buildings – at cost US$ Mining property – at cost US$ Projects in construction – at cost US$ Plant and equipment – at cost US$ Total US$ 3,375,457 – – – (493,833) 49,919,201 3,811,215 – (478,023) (6,644,479) 9,376,581 2,340,088 (136,276) (44,613) (1,154,908) 21,309,961 2,814,371 – – (2,756,713) 83,981,200 8,965,674 (136,276) (522,636) (11,049,933) 2,881,624 46,607,914 10,380,872 21,367,619 81,238,029 (1,641,036) – – 331,641 (21,504,984) (6,098,269) 454,785 3,195,069 (1,309,395) (23,953,399) – – – – – (11,854,799) (3,243,332) – 1,464,998 (35,000,819) (9,341,601) 454,785 4,991,708 (13,633,133) (38,895,927) Net book value at 31 December 2018 1,572,229 22,654,515 10,380,872 7,734,486 42,342,102 Net book value at 31 December 2017 1,734,421 28,414,217 9,376,581 9,455,162 48,980,381 During the year ended 31 December 2018, the Group acquired assets under finance leases totalling US$426,541 (2017: US$358,658). The net book value of assets acquired under finance leases at 31 December 2018 was US$2,349,363 (2017: US$2,370,102). Depreciation charged on leased assets for the period was US$447,281 (2017: US$683,291). The Group only leases underground mining equipment. As at 31 December 2018, the future minimum lease payments due in respect of outstanding lease contracts for mining equipment was US$424,904. The net present value of these lease contracts is US$303,809. Liabilities due in less than one year Labilities due in more than one year 2017 Cost Balance at 31 December 2016 Additions Additions arising on acquisition Disposals Foreign exchange movements At 31 December 2017 Depreciation Balance at 31 December 2016 Charge for period Released on asset disposals Foreign exchange movements At 31 December 2017 Future minimum lease payments US$ 376,054 48,850 Net present value of future lease payments US$ 265,089 38,720 424,904 303,809 Land and buildings – at cost US$ Mining property – at cost US$ Projects in construction – at cost US$ Plant and equipment – at cost US$ Total US$ 2,977,040 458,393 – – (59,976) 46,527,183 4,362,192 – (235,808) (734,366) 2,828,333 700,943 5,687,827 – 159,478 18,904,812 2,191,066 518,273 – (304,220) 71,237,368 7,712,624 6,206,100 (235,808) (939,084) 3,375,457 49,919,201 9,376,581 21,309,961 83,981,200 (1,649,735) (25,845) – 34,544 (14,737,325) (7,403,395) 199,911 435,825 (1,641,036) (21,504,984) – – – – – (9,454,168) (2,580,383) – 179,752 (25,841,228) (10,009,623) 199,911 650,121 (11,854,799) (35,000,819) Net book value at 31 December 2017 1,734,421 28,414,217 9,376,581 9,455,162 48,980,381 Net book value at 31 December 2016 1,327,305 31,789,858 2,828,333 9,450,644 45,396,140 Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 100 Notes to the Financial Statements continued For the year ended at 31 December 2018 9 TANGIBLE ASSETS CONTD. Property, plant and equipment – Company 2018 Cost Balance at 31 December 2017 Additions At 31 December 2018 Depreciation Balance at 31 December 2017 Charge for period At 31 December 2018 Net book value at 31 December 2018 Net book value at 31 December 2017 2017 Cost Balance at 31 December 2016 Additions At 31 December 2017 Depreciation Balance at 31 December 2016 Charge for period At 31 December 2017 Net book value at 31 December 2017 Net book value at 31 December 2016 Mining property – at cost US$ Projects in construction – at cost US$ Plant and equipment – at cost US$ Total US$ 8,054,485 577,791 43,610 – 2,919,482 – 11,017,577 577,791 8,632,276 43,610 2,919,482 11,595,368 (1,700,411) (112,717) (1,813,128) – – – (2,413,772) (419,329) (4,114,183) (532,046) (2,833,101) (4,646,229) 6,819,148 43,610 86,381 6,949,139 6,354,074 43,610 505,710 6,903,394 Mining property – at cost US$ Projects in construction – at cost US$ Plant and equipment – at cost US$ Total US$ 7,394,304 660,181 43,610 – 2,919,482 – 10,357,396 660,181 8,054,485 43,610 2,919,482 11,017,577 (1,538,232) (162,179) (1,700,411) – – – (2,048,912) (364,860) (3,587,144) (527,039) (2,413,772) (4,114,183) 6,354,074 43,610 505,710 6,903,394 5,856,072 43,610 870,570 6,770,252 The net book value of assets acquired under finance leases as at 31 December 2018 was US$ nil (2017: US$504,170). Depreciation charged on leased assets for the period was US$419,329 (2017: US$364,286). Serabi Gold plc // Report and Accounts 2018 101 10 INVESTMENTS HELD AS FIXED ASSETS The Group consists of the following subsidiary undertakings: Name Incorporated Registered Office Address Activity % holding Serabi Mineração SA Brazil Kenai Resources Ltd British Columbia, Canada Gold Origin Limited British Virgin Islands Gold Aura do Brasil Mineração Ltda Brazil Gold Origin Mexico SA de CV Mexico Serabi Mining Ltd British Virgin Islands Chapleau Resources Ltd British Colombia, Canada Chapleau Resources (USA) Inc Alaska, USA Chapleau Exploração Mineral Ltda Brazil (1) Indirectly held. Dormant Investment Gold mining and exploration Rodovia Transgarimpeira, km 22, Gold mining and exploration Bairro Jardim do Ouro – Itaituba/PA CEP 68181-000 Brazil Royal Centre, P.O Box 11125, Suite 1750-1055 W Georgia Street, Vancouver, Canada Craigmuir Chambers, Road Town, Tortola, British Virgin Islands Rodovia Transgarimpeira, KM 54 Comunidade São Chico – Itaituba/PA CEP 68181-000 Brazil Paseo de la Reforma, 450 Col. Lomas de Chapultepec C.P. 11000 Mexico Craigmuir Chambers, Road Town, Tortola, British Virgin Islands Royal Centre, P.O Box 11125, Suite 1750-1055 W Georgia Street, Vancouver, Canada 1029 West 3rd Avenue Suite 400 Anchorage, Alaska USA Avenida Jornalista Ricardo Marinho no 360, loja 113 Barra da Tijuca Rio de Janeiro RJ Brazil CEP 22.361-350 Gold mining and exploration Gold exploration Investment Investment Dormant 100%(1) 100% 96.1%(1) 99.9%(1) 100%(1) 100% 100% 100%(1) 100%(1) Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 102 Notes to the Financial Statements continued For the year ended at 31 December 2018 10 INVESTMENTS HELD AS FIXED ASSETS CONTD. Cost at start of period Acquisition of subsidiary Adjustment of acquisition price(1) Cost at end of period Impairment provision at start of period Reallocation of impairment provision in period Impairment provision at end of period Net book value at end of period Company 31 December 31 December 2017 US$ 2018 US$ 96,555,294 – (259,072) 76,557,599 19,997,961 – 96,296,488 96,555,560 (9,595,266) (189,656) (9,595,266) – (9,784,922) (9,595,266) 86,511,566 86,960,294 (1) As a result of a shortfall in the working capital position of Chapleau Resources Ltd as at the date of acquisition, the initial acquisition price was adjusted and the total purchase price reduced by the working capital shortfall. The value of these investments is dependent on the development of the Group’s mineral deposits in Brazil. The Company established an initial impairment provision against the carrying value of its investments in subsidiary entities in 2008. Subsequent to that date the Company has made further acquisitions and invested new capital into certain of its subsidiaries. At the end of 2018 the Company has made an assessment as to whether there exists any indicators that could give rise to a potential impairment of or restriction on the future recoverability of the value of the investments that it holds in subsidiary entities and in particular the investments made since 2008. The Board has determined that based on its assessment, it is not aware of any indicators of further impairment. 11 INVENTORIES Consumables Stockpile of mined ore Stockpile of flotation tails Other material in process Finished goods awaiting sale Group 31 December 31 December 2017 US$ 2018 US$ 2,929,297 600,335 – 1,162,157 3,819,685 2,587,212 1,091,656 494,117 1,019,593 1,741,860 8,511,474 6,934,438 The Group has recorded, during 2018, a release of an impairment provision of US$400,000 in respect of stockpiled run of mine ore (2017: established an impairment provision of US$950,000). Further details regarding the nature of the inventories and valuations are provided in the Financial Review on pages 38 to 45. Serabi Gold plc // Report and Accounts 2018 103 12 TRADE AND OTHER RECEIVABLES Group Company 31 December 31 December 31 December 31 December 2017 US$ 2017 US$ 2018 US$ 2018 US$ Current Trade receivables Other receivables Trade and other receivables Non-current Taxes receivable Amounts owed by subsidiaries Impairment provision at start of period Reallocation of impairment provision in period Impairment prevision at end of period 620,818 137,391 1,230,614 46,528 623,115 10,738 1,230,614 10,738 758,209 1,277,142 633,853 1,241,352 1,555,170 – 1,474,062 – – 16,660,987 – 16,188,272 1,555,170 1,474,062 16,660,987 16,188,272 – – – – – – (8,581,378) 189,656 (8,581,378) – (839,722) (8,581,378) Other receivables 1,555,170 1,474,062 8,269,265 7,606,894 The Group, in common with all businesses in Brazil, is subject to a number of State and Federal taxes on goods that it purchases. As an exporter of goods, it is exempt from any sales taxes on its products. As a result, it is due tax rebates by both Federal and State tax bodies. In general, the Company is able to utilise its tax debts by way of offset against other taxes that it owes. The Group has however determined, based on the actions of the State tax authorities and the expected future operational expenditures over the next 12 months, that certain State taxes that it is able to recover and is owed at 31 December 2018, are not expected to be recovered through such an offset arrangement during the next 12 months and has therefore categorised the balance owed in respect of these State taxes as being due in more than 12 months. The Group has received legal advice confirming that these taxes owed to the Group by the State of Para are fully recoverable. The adoption of IFRS 9 has impacted the Company as a result of the existing incurred loss approach under IAS 39 being replaced by the forward looking expected credit loss model approach of IFRS 9. The expected credit loss model is required to be applied to the intercompany loan receivables which are classified as held at amortised cost. There were no additional credit loss allowances as a result of the application of the expected credit loss model approach of IFRS 9 which requires the parent to make an allowance for lifetime expected credit losses. At 31 December 2018, Serabi Gold plc (SG plc) has two loans outstanding to subsidiaries that are not fully impaired. These loans are owed by Serabi Mineração SA (“SMSA”)and Chapleau Exploração Mineral Ltda.(“CEML”). Both advances were made during the year on an interest free loan basis and at the time of the initial and each subsequent advance the Company has determined that there was no significant credit risk attaching to each of the loan advances being made. In determining the credit risk attaching to each of the loans management has considered different scenarios through which the loans will be recovered: a) Loan to SMSA – Scenario 1 – the loan will be repaid from the cash flow generated by SMSA and/or by set off against amounts owed by SG plc to SMSA for the purchase of copper/gold concentrate within the next 12 months. Scenario 2 – the loan will be repaid from the cash flow generated by SMSA and/or by set off against amounts owed by SGplc to SMSA for the purchase of copper/gold concentrate but because of unexpected adverse commodity price or exchange rate fluctuations the payment will be made within more than 12 months. b) Loan to CEML – Scenario 1 – the loan is repaid within the next five years from the successful start up of the Coringa project. Scenario 2 – the loan is repaid in less than 12 months from the sale of equipment and machinery. Credit loss allowances for amounts owed from other subsidiary undertakings amount to US$8,391722.. Transactions between subsidiaries are interest bearing and repayable over five years from the date of cash advanced. See note 1(u) for details. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 104 Notes to the Financial Statements continued For the year ended at 31 December 2018 13 PREPAYMENTS AND PREPAID TAXES Group Company 31 December 31 December 31 December 31 December 2017 US$ 2018 US$ 2018 US$ 2017 US$ Recoverable state and federal taxes Supplier down payments Other prepayments and employee advances Prepayments 14 CASH AND CASH EQUIVALENTS 2,530,816 1,133,018 503,082 2,414,336 480,910 342,166 – – 118,371 – – 107,756 4,166,916 3,237,412 118,371 107,756 Group Company 31 December 31 December 31 December 31 December 2017 US$ 2018 US$ 2018 US$ 2017 US$ Cash and cash equivalents 9,216,048 4,093,866 7,382,530 2,936,579 15 TRADE AND OTHER PAYABLES Group Company 31 December 31 December 31 December 31 December 2017 US$ 2018 US$ 2018 US$ 2017 US$ Current Trade payables Property acquisition(1) Other payables Employee benefits Other taxes and social security Amounts due to subsidiaries Trade and other payables Non-current (Between one and five years) Property acquisition(1) Other taxes and social security Trade and other payables 2,453,299 1,337,520 963,827 848,989 669,686 – 2,800,293 – 971,119 786,405 790,147 – 520,995 – – 55,230 – 3,489,256 628,202 – – 75,153 – 11,342,983 6,273,321 5,347,964 4,065,481 12,046,338 930,771 24,750 2,617,495 135,914 955,521 2,753,409 – – – – – – (1) The Group has entered into an agreement to acquire from Mr Waldimiro Morais Martins a 30 per cent net profits interest (the “NPI”) arising from production of gold and base metals extracted from the São Chico mining concession which had been granted to Mr Martins under the terms of an agreement entered into by Gold Aura do Brasil Mineração Ltda (“GOAB”) in October 2012. Serabi Gold plc // Report and Accounts 2018 105 Group Company 31 December 31 December 31 December 31 December 2017 US$ 2017 US$ 2018 US$ 2018 US$ 29,330 – (4,293) 25,037 28,946 – 384 29,330 – – – – – – – – Group Company 31 December 31 December 31 December 31 December 2017 US$ 2017 US$ 2018 US$ 2018 US$ 2,017,801 1,823,017 255,787 (538,371) (216,443) (101,324) 335,204 (39,096) (499,027) 194,784 1,518,774 2,017,801 1,543,811 2,047,131 – – – – – – – – – – – – – – 16 NON-CURRENT PROVISIONS Employment and claims provision Opening balance As a result of changes in estimates As a result of exchange variations Closing balance Environmental rehabilitation provision Opening balance Provided for in year as a result of changes in estimates as a result of unwinding of the discount as a result of exchange variations Total provided for in year Closing balance Total non-current provisions Employment and claims provision The employment and claims provision covers claims that may be brought by: i) Former employees of Serabi Mineração SA and Gold Aura do Brasil Mineração Ltda against these companies. Brazilian labour law entitles a former employee to lodge within two years of leaving the company claims for alleged unpaid remuneration and compensation in the event of dismissal. The Group whilst contesting each claim has made provision in respect of all known claims. ii) Third parties against Serabi Mineração SA and Gold Aura do Brasil Mineração Ltda where sums are claimed over and above contracted amounts. Whilst the Group will contest these claims it has made an additional provision as a best estimate of the potential value of any settlement that could arise based on legal opinion. The environmental rehabilitation provision has been established to cover any asset decommissioning and rehabilitation obligations for the Palito and São Chico Mines. Such obligations include the dismantling of infrastructure, removal of residual materials and remediation of disturbed areas. The provision does not allow for any additional obligations expected from future developments. The timing and scope of the rehabilitation is uncertain and is dependent on mine life and quantities extracted from the mine. Cost estimates are formally reviewed at regular intervals and the provisions are adjusted accordingly. 17 INTEREST-BEARING LIABILITIES Secured loan facility On 30 June 2017 the Group entered into a new agreement with the Sprott Resource Lending Partnership (“Sprott”) for a US$5 million loan expiring 31 December 2019 (to include US$1.37 million being the remaining loan principal under the previous arrangement). The Sprott loan carries interest at a rate of 10 per cent per annum and is repayable in 24 monthly instalments commencing 31 January 2018. The Sprott loan was taken out to provide additional funding for the continued development of the Palito Mine and the São Chico gold project, to finance an additional drilling programme at São Chico and for general corporate purposes. Serabi provided to Sprott certain covenants and undertakings, consistent with normal bank lending arrangements, including an undertaking to maintain at all times and a minimum of US$1 million in unrestricted cash and cash equivalents. The Sprott loan is subject to standard events of default. Serabi has been and remains in compliance with all the terms of the Facility. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 106 Notes to the Financial Statements continued For the year ended at 31 December 2018 17 INTEREST-BEARING LIABILITIES CONTD. Secured loan facility contd. On 23 January 2018, the Company completed an amendment to its existing US$5 million loan (the “Existing Facility”) with Sprott to extend the term of the facility. The facility is now repayable in 30 equal monthly instalments ending 30 June 2020. Sprott also extended an additional US$3 million in credit to the Company (the “New Facility”). The New Facility was initially to be repaid in full on 30 September 2018 but on 14 September 2018 the Company exercised an extension option as a result of which the New Facility is repayable in equal monthly instalments commencing 30 September 2018 with a final payment due 22 months later on 30 June 2020. The Existing Facility was, and continues to be, secured against the assets of the Company, including the shares of its subsidiary companies at that time. These assets are now also security for the New Facility and the shares of Chapleau Resources Ltd. (“Chapleau”) acquired on completion of the Acquisition have now also been pledged to Sprott as security for both the Existing Facility and the New Facility. Group Company 31 December 31 December 31 December 31 December 2017 US$ 2018 US$ 2018 US$ 2017 US$ Current Secured loan facility Unsecured loan facility Obligations under finance leases Due in less than one year Non-current (Between one and five years) Secured loan facility Obligations under finance leases Due in more than one year 3,636,360 290,834 376,054 1,980,000 – 865,712 3,636,360 – – 1,980,000 – – 4,302,798 2,845,712 3,636,360 1,980,000 2,424,246 48,850 2,500,000 249,412 2,164,246 – 2,500,000 – 2,473,096 2,749,412 2,164,246 2,500,000 Each finance lease is secured against the underlying assets that are the subject of that lease. Group Company 31 December 31 December 31 December 31 December 2017 US$ 2018 US$ 2018 US$ 2017 US$ Secured loan facility Amount outstanding at beginning of period Derecognition of substantial modified loan – Repayment of principal Recognition of new loan Additional draw-down of short term loan Initial fair value of derivative associated with loan Amounts repaid during the year Amortisation of fair value of derivative in period 4,480,000 1,371,489 4,480,000 1,371,489 (4,480,000) 5,000,000 3,000,000 – (1,939,394) – – – 3,628,511 (650,000) – 130,000 (4,480,000) 5,000,000 3,000,000 – (1,939,394) – – – 3,628,511 (650,000) – 130,000 Value of secured loan facility at 31 December 2018 6,060,606 4,480,000 6,060,606 4,480,000 The charge of US$130,000 incurred in 2017 represents an amortisation charge of the fair value ascribed to the call option granted to Sprott on 30 June 2017. On 30 June 2017, the Group entered into a new loan agreement with Sprott for a US$5 million loan facility. As part of this arrangement the Group granted call options to Sprott over 6,109 ounces of gold exercisable at a price of US$1,320 which expire on 31 December 2019. On 30 June 2017, the date these call options were granted, their value was assessed as being US$650,000 and a provision for a derivative financial liability of US$$650,000 was recognised in the financial statements. On 19 January and at the same time as taking out an additional US$3 million loan with Sprott, a six month extension to the repayment terms for this US$5 million loan was agreed. Under IFRS 9, this variation being more than 10 per cent of the future cash flows was considered a substantial modification to the original US$5 million loan. Accordingly, the original loan under the terms of IFRS 9 was considered to be repaid and a new loan for US$5 million taken out but with no derivative instrument attached to it. As a result, the outstanding fair value of the derivative attaching to the original US$5 million loan was required to be amortised in full upon the deemed repayment of the original loan. Serabi Gold plc // Report and Accounts 2018 107 18 PROVISION FOR DERIVATIVES Gold Call Options Group Company 31 December 31 December 31 December 31 December 2017 2018 2018 2017 Fair value at start of period (Decrease)/Increase in fair value during period Fair value at end of period 709,225 (318,279) 650,000 59,255 709,225 (318,279) 650,000 59,255 390,976 709,225 390,976 709,225 Fair value is determined by reference to quoted mid-market prices at each balance sheet date for gold call options with the same expiry date. The fair value of the derivative has been measured using level 1 inputs. 19 ANALYSIS OF CHANGES IN LIABILITIES ARISING FROM FINANCIAL ACTIVITIES Cash and cash equivalents Finance leases and other unsecured facilities Secured loan due within one year Provision for derivatives Secured loan due after one year Total 20 SHARE CAPITAL At 1 January 2018 4,093,866 (1,115,124) (1,980,000) (709,225) (2,500,000) Cash flows 5,603,439 797,945 (1,060,606) – – At Other 31 December 2018 changes (481,257) (398,559) (595,758) 318,249 75,758 9,216,048 (715,738) (3,636,360) (390,976) (2,424,246) (2,210,483) 5,340,778 (1,081,567) 2,049,728 The Companies Act 2006 (as amended) abolishes the requirement for a company to have an authorised share capital and on 3 March 2014, the Company adopted new articles of association to reflect this. Each of the ordinary shares caries equal rights and entitles the holder with voting and dividend rights and rights to participate in the profits of the Company and in the event of a return of capital equal rights the participate in any sum being returned to the holders of the ordinary shares. There is no restriction, imposed by the Company, on the ability of the holder of any ordinary share to transfer the ownership, or any of the benefits of ownership to any other party. Allotted, called up and fully paid Ordinary shares in issue at start of period Shares issued in period before 19 June 2018 Share consolidation(1) Shares in issue post consolidation Shares issued in period after 19 June 2018 2018 2017 Number $ Number $ 698,701,772 476,579,668 (1,116,517,368) 5,540,960 698,701,772 – 3,322,795 – – 58,764,072 145,479 8,863,755 698,701,772 – 19,048 5,540,960 – – 5,540,960 – Ordinary shares in issue at end of period 58,909,551 8,882,803 698,701,772 5,540,960 (1) On 19 June 2018, the Group completed a capital reorganisation with every 20 existing shares with a par value of 0.5 pence being consolidated into one new share with a 10 pence par value (the “Share Consolidation”). The total number of existing ordinary shares in issue immediately prior to the capital reorganisation was 1,175,281,440. The total number of ordinary shares in issue following the capital reorganisation was 58,764,072. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 108 Notes to the Financial Statements continued For the year ended at 31 December 2018 20 SHARE CAPITAL CONTD. Options to subscribe for ordinary shares In 2011 the Company established a share option scheme (the “Serabi 2011 Share Option Plan”) the terms of which were re-approved by shareholders at the Annual General Meeting of the Company held on 15 June 2017. With the exception of replacement options issued by the Company pursuant to the acquisition of Kenai Resources Ltd in July 2013, all of which have now expired, all options granted by the Company since that time have been issued under the Serabi 2011 Share Option Plan. Certain options granted pursuant to other plans operated by the Company prior to the establishment of the Serabi 2011 Share Option Plan remain in issue as at 31 December 2018. Details of the number of share options and the weighted average exercise price (“WAEP”) outstanding under the Serabi 2011 Share Option Plan are as follows: 31 December 31 December 31 December 31 December 2017 WAEP UK£ 2018 Number WAEP UK£ 2017 Number 2018 Outstanding at the beginning of the period(1) Granted during the period(1) Expired during the period(1) Outstanding at the end of the period(1) Exercisable at end of the period(1) 2,401,750 1,700,000 (750,000) 1.284 0.750 1.100 2,409,250 782,500 (790,000) 3,351,750 1.050 2,401,750 1,957,587 1.240 1,619,250 1.290 1.000 1.100 1.284 1.260 (1) For comparative purpose the details of the options in issue prior to 19 June 2018 have been adjusted to reflect the Share Consolidation. Options granted during 2018 have been valued using the Black Scholes method. The following parameters were used to determine the total charge to be applied over the vesting period Share price at date of grant Option exercise price Expected life of options Expected volatility Expected dividend yield Risk free rate Grant date Fair value per share option Exchange rate used Total charge over the vesting period £0.6150 £0.75 3 years 66% 0% 0.75% 2 July 2018 £0.1924 1.3200 US$431,830 Volatility was determined by a review of the Group’s share price performance over the two preceding years. Details of the number of share options and the weighted average exercise price (“WAEP”) outstanding issued under other option arrangements prior to 2011 are as follows: 31 December 31 December 31 December 31 December 2017 WAEP UK£ 2018 Number WAEP UK£ 2017 Number 2018 Outstanding at the beginning of the period(1) Expired during the period(1) Outstanding at the end of the period(1) Exercisable at end of the period(1) 85,000 – 85,000 85,000 3.000 – 3.000 3.000 85,000 – 85,000 85,000 3.000 – 3.000 3.000 (1) For comparative purpose the details of the options in issue prior to 19 June 2018, have been adjusted to reflect the Share Consolidation. Serabi Gold plc // Report and Accounts 2018 109 20 SHARE CAPITAL CONTD. Options to subscribe for ordinary shares contd. Options granted have no market performance criteria and have been valued using the Black-Scholes model. The fair value of options is charged to the profit and loss account or capitalised as an intangible asset as appropriate over the vesting period. The assumptions inherent in the use of these models are as follows: Grant date 02/07/18 07/04/17 16/05/16 28/01/11 28/01/11 21/12/09 Vesting period (years) First vesting date Expected life (years) 2 2 2 2 2 2 02/07/18 07/04/17 16/05/16 28/01/11 28/01/11 21/12/09 3 3 3 3-5 3-5 3-5 Risk free rate 0.75% 0.75% 0.75% 1.00% 1.00% 1.00% Exercise price UK£0.75 UK£1.00 UK£1.00 UK£8.20 UK£7.40 UK£3.00 Volatility of share price Fair value 66% UK£0.192 66% UK£0.358 66% UK£0.394 50% UK£1.700 50% UK£1.880 50% UK£1.600 Options vested 566,667 521,665 782,500 64,250 22,500 85,000 Options granted 1,700,000 782,500 782,500 64,250 22,500 85,000 2,042,582 3,436,750 Expiry 01/07/21 08/04/20 15/05/19 27/01/21 27/01/21 20/12/19 During the year a charge of US$329,620 (2017: US$381,362) has been recorded in these financial statements in respect of these options of which US$Nil (2017: US$Nil) has been capitalised as deferred exploration expenditures. 21 IMPAIRMENT Impairment of Tangible Assets As detailed in the accounting policies the Directors are required to undertake a review for impairment at least annually where events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In such a situation the asset’s carrying value is written down to its estimated recoverable amount (being the higher of the fair value less cost to sell and value in use). The Directors have considered each of the Group’s deferred exploration assets and production and development assets on a project-by-project basis. They have considered that there are three potential cash generating units (“CGU”) for the purpose of their assessment. Palito and São Chico are considered to be a single CGU forming the Palito Mining Complex. Whilst the orebodies are separately located, they share significant common processing and support infrastructure and will be treated by the Company as a single operating business unit. This single cash generating unit therefore comprises all of the Palito Mine pre-operating costs, exploration expenditures on establishing the current declared resource base, land and buildings and plant and machinery associated with the mining and gold processing operations, together with the acquisition cost of São Chico and the exploration, pre-development and development expenditures incurred by Serabi since acquisition. The Directors are satisfied that these mining activities are operating in line with expectations and having completed their assessment for impairment indicators that there are no other indicators that might lead to a potential impairment of this CGU. The second cash generating unit represents the Coringa gold project acquired by the Group in December 2017. The Company has undertaken further evaluation of this project during 2018, resulting in an increase in the total mineral resource by 37 per cent to over 500,000 ounces of gold. The Directors are satisfied that this project will be able to operate in line with management’s expectations and having completed their assessment for impairment indicators that there are no other indicators that might lead to a potential impairment of this CGU. The third cash generating unit represents the exploration expenditures on areas within the Palito environs and the wider Jardim do Ouro tenement holdings, but which have not yet been exploited and do not form part of the current declared reserves and resources. Having completed their assessment for impairment indicators the Directors are satisfied that there is no indication of impairment across these projects. 22 ACQUISITION OF CHAPLEAU RESOURCES LIMITED On 21 December 2017, Serabi completed the acquisition (“Closing”) of all the issued and outstanding common shares of Chapleau Resources Limited (“Chapleau”) a wholly owned subsidiary of Anfield Gold Corp. (“Anfield”) (the “Transaction”). Chapleau through its wholly owned subsidiary Chapleau Exploração Mineral Ltda, holds the Coringa gold project located in the Tapajos gold province in Para, Brazil. Serabi made an initial payment to Anfield on Closing of US$5 million in cash (“Initial Consideration”) and a further US$5 million in cash was paid in April 2018 in accordance with the contractual terms of the Transaction. A final payment of US$12 million in cash will be due upon the earlier of either the first gold being produced or 24 months from the date of Closing, and represents the remaining “Deferred Consideration”. The total proposed consideration for the acquisition amounts to US$22 million in aggregate. The acquisition of Chapleau has been accounted for as an Asset Purchase and the assets and liabilities of Chapleau were consolidated within the Group financial statements from 21 December 2017, being the effective date of the acquisition. The Deferred Consideration has been discounted at a 10 per cent cost of capital. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 110 Notes to the Financial Statements continued For the year ended at 31 December 2018 23 CAPITAL MANAGEMENT The Group has historically sourced equity capital through share issues on the London Stock Exchange and the Toronto Stock Exchange and the Board had managed the capital structure of the Group and aligned this with the risk profiles of its underlying assets. The Group’s objectives when managing its capital are to maintain financial flexibility to achieve its development plans, safeguard its ability to continue to operate as a going concern through management of its costs whilst optimising its access to capital markets by endeavouring to deliver increases in value of the Group for the benefit of shareholders. In establishing its capital requirements, the Group will take account of the risks inherent in its plans and proposed activities and prevailing market conditions. The Group anticipates that, whilst it may seek to raise further finance in the future, it now has access to sufficient funding for its immediate needs. With current market conditions and prices, the Group expects to have sufficient cash flow to finance its on-going operational requirements, repay its secured loan facility and to, at least in part, fund exploration and development activity on its other gold properties. It will seek to raise debt finance where possible to finance further capital development of its projects taking due consideration of the ability of the Group to satisfy the obligations and undertakings that would be imposed in connection with such borrowings. The Company’s shares are listed on both AIM and the TSX which management considers increases the potential of the Group to raise finance through further issues of shares in the future. Management considers that with cash flow being generated from its operations in the near-term this also enhances the ability of the Group to raise debt finance in the future. 24 COMMITMENTS AND CONTINGENCIES Capital commitments The Group holds certain exploration prospects which require the Group to make certain payments under rental or purchase arrangements allowing the Group to retain the right to access and undertake exploration on these properties. Failure to meet these obligations could result in forfeiture of any affected prospects. Management estimates that the cost over the next 12 months of fulfilling the current contracted commitments on these exploration properties in which the Group has an interest is US$0.59 million (2017: US$0.21 million). Operating lease commitments The Group has commitments under non-cancellable operating leases in respect of office premises as follows: Group Company 31 December 31 December 31 December 31 December 2017 US$ 2018 US$ 2018 US$ 2017 US$ Commitments falling due: Within one year Between one year and five years Total 130,063 51,219 167,428 304,944 67,973 11,329 96,742 301,623 181,283 472,372 79,302 398,365 Contingencies Employment legislation in Brazil allows former employees to bring claims against an employer at any time for a period of two years from the date of cessation of employment and regardless of whether the employee left the company voluntarily or had their contract terminated by the company. The Group considers that it operates in compliance with the law at all times but is aware that historically claims have been made against all companies in Brazil on a regular basis. Whilst not accepting legal liability the Group makes provision or accrues for all known claims although further claims may arise at any time. Serabi Gold plc // Report and Accounts 2018 111 25 RELATED PARTY TRANSACTIONS During the period the Company has made loans to subsidiaries of US$8.27 million (2017: US$Nil). There were no loans converted into new shares issued by subsidiaries during 2018 (2017: US$Nil). The Company has loans receivable from subsidiaries totalling US$16,660,987 (2017: US$16,188,272) before any provision for the impairment of these loans (see note 12). The Company has purchased, during the year from its subsidiary SMSA, 1,040 tonnes of copper/gold concentrate for a consideration of US$7,406,175 (2017: 1,440 tonnes; US$12,028,870). Key management remuneration Key management comprises the Executive, Non-executive Directors, the COO and the Country Manager only. Their compensation is: For the year ended For the year ended 31 December 31 December 2017 US$ 2018 US$ Short term employee benefits Post-employment benefits Share-based payments Total 26 FINANCIAL RISK MANAGEMENT 1,239,806 10,662 304,180 1,195,684 10,302 332,968 1,554,648 1,538,953 The Group is exposed to risks that arise from its use of financial instruments. This note describes the Group's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements. There have been no substantive changes in the Group's exposure to financial instrument risk nor its objectives, policies and processes for managing those risks or the method used to measure them from the previous period unless otherwise stated in this note. Principal financial instruments The principal financial instruments used by the Group from which financial instrument risk arises are as follows: • Trade and other receivables • Cash and cash equivalents • Restricted cash • Trade and other payables • Loans and borrowings • Finance leases and asset loans • General objectives, policies and processes The Board has overall responsibility for the determination of the Group's risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Group's finance function. The Board receives regular information from the Group's management through which it reviews the effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets. The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. The Group is exposed to commodity price volatility, interest rate risks, credit risks, liquidity risks and currency risks arising from the financial instruments it holds. The main financial risks arising from the Group’s activities remain unchanged from the previous financial year, namely, commodity prices, currency, liquidity, credit and interest rates. The Board reviews and agrees policies for managing each of these risks and these are summarised below: Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 112 Notes to the Financial Statements continued For the year ended at 31 December 2018 26 FINANCIAL RISK MANAGEMENT CONTD. Commodity price risk By the nature of its activities the Group and the Company are exposed to fluctuations in commodity prices and, in particular, the price of gold and copper as these could affect its ability to raise further finance in the future, its future revenue levels and the viability of its projects. The Group has not, to date, entered into any long term arrangements designed to protect itself from changes in the prices of these commodities. The Group does, however, closely monitor the prices of these commodities and the Board does regularly review the Group’s strategy towards hedging and the nature and cost of the hedging products available to the Company. Whilst not representing a financial instrument all inventory as at 31 December 2018, which is unsold, is subject to future variation in commodity prices and accordingly the results for the period and the equity position of the Group may be affected by any change in commodity prices subsequent to the end of the period. Interest rate risk During 2018 and 2017 the Group and the Company have taken out fixed rate finance leases for the acquisition of some equipment and have utilised floating rate short term trade finance in respect of sales of copper/gold concentrate production. The Group has entered into a US$8 million loan with Sprott, further details of which are set out in note 17 (Interest-bearing liabilities). As at 31 December 2018, the amount of US$5.80 million (2017: US$4.48 million) was outstanding in respect of the Sprott loan. Group 2018 Financial assets Cash Receivables Total Financial liabilities Payables Derivatives Interest-bearing liabilities Total Group 2017 Financial assets Cash Receivables Total Financial liabilities Payables Derivatives Interest-bearing liabilities Total Weighted average effective Non-interest bearing US$ interest rate % Fixed interest maturity Floating US$ One year or less US$ Over one to five years US$ Total US$ 0.1% – – 758,209 9,216,048 – 758,209 9,216,048 – – – – – – 9,216,048 758,209 9,974,257 – – 9.62% 18,598,926 390,976 – 18,989,902 – – – – – – 4,302,798 – – 2,213,096 18,598,926 390,976 6,515,894 4,302,798 2,213,096 25,505,796 Weighted average effective Non-interest bearing US$ interest rate % Fixed interest maturity Floating US$ One year or less US$ Over one to five years US$ Total US$ 0.1% – – 1,277,142 4,093,866 – 1,277,142 4,093,866 – – – – – – 4,093,866 1,277,142 5,371,008 – – 9.37% 24,422,787 709,225 – 25,132,012 – – – – – – 2,845,712 – – 2,749,414 24,422,787 709,225 5,595,126 2,845,712 2,749,414 30,727,138 Serabi Gold plc // Report and Accounts 2018 113 26 FINANCIAL RISK MANAGEMENT CONTD. Interest rate risk contd. Company 2018 Financial assets Cash Receivables Total Financial liabilities Payables Derivatives Interest-bearing liabilities Total Company 2017 Financial assets Cash Receivables Total Financial liabilities Payables Derivatives Interest-bearing liabilities Total Weighted average effective Non-interest bearing US$ interest rate % Fixed interest maturity Floating US$ One year or less US$ Over one to five years US$ Total US$ 0.1% – – 13,240,886 7,382,530 – 13,240,886 7,382,530 – – – – – – 7,382,530 13,240,886 20,623,416 – – 10% 23,906,221 390,976 – 24,297,197 – – – – – – 3,636,360 – – 2,164,246 23,906,221 390,976 5,800,606 3,636,360 2,164,246 30,097,803 Weighted average effective Non-interest bearing US$ interest rate % Fixed interest maturity Floating US$ One year or less US$ Over one to five years US$ Total US$ 0.1% – – 8,848,246 2,936,579 – 8,848,246 2,936,579 – – – – – – 2,936,579 8,848,246 11,784,825 – – 10% 28,463,503 709,225 – 29,172,728 – – – – – – 1,980,000 – – 2,500,000 28,463,503 709,225 4,480,000 1,980,000 2,500,000 33,652,728 Liquidity risk Historically the Group has relied primarily on funding raised from the issue of new shares to shareholders but has also received short term loans from its shareholders and other recognised lenders. It also uses floating rate short term trade finance and fixed rate finance leases to finance its activities. The Group has entered into a US$8 million loan with Sprott, further details of which are set out in note 17 (Interest-bearing liabilities). As at 31 December 2018, the amount of US$5.80 million (2017: US$4.48 million) was outstanding in respect of the Sprott loan. As at 31 December 2018, in addition to the Sprott loan, the Company had obligations under fixed rate finance leases amounting to US$0.72 million (2017: US$1.12 million) (see note 17). The following table sets out the maturity profile of the financial liabilities as at 31 December 2018: Due in less than one month Due between one month and three months Due between three months and one year Total due within one year Due more than one year Total 2018 Group US$ Company US$ 2017 Group US$ 1,590,640 3,115,764 17,630,775 2,586,481 4,565,503 20,390,597 1,174,801 7,051,493 6,290,835 Company US$ 2,121,776 8,605,740 9,718,026 22,337,179 3,168,617 27,542,581 2,164,246 14,517,129 15,500,782 20,445,542 12,497,961 25,505,796 29,706,827 30,017,911 32,943,503 Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 114 Notes to the Financial Statements continued For the year ended at 31 December 2018 26 FINANCIAL RISK MANAGEMENT CONTD. Currency risk Although the Company is incorporated in the United Kingdom, its financial statements and those of the Group are presented in US Dollars which is also considered to be the functional currency of the Company as funding of activities of its subsidiaries is generally made in US Dollars, all sales for the Group are denominated in US Dollars and future remittances of dividends, loans or repayment of capital from the subsidiaries are expected to be received in US Dollars. Share issues have historically been priced solely in Sterling but an issue of Special Warrants undertaken in December 2010 and an issue of new Ordinary Shares and Warrants on 30 March 201, were priced in Canadian Dollars. The Company expects that future issues of Ordinary Shares may be priced in Sterling or Canadian Dollars. Expenditure is primarily in Brazilian Real and also in US Dollars, Sterling, Euros and Australian Dollars. The functional currency of the Company’s operations is US Dollars, which is also the reporting currency for the Group. The Group’s cash holdings at the balance sheet date were held in the following currencies: US Dollar Canadian Dollar Sterling Australian Dollar Euro Brazilian Real Total Group 31 December 31 December 2017 US$ 2018 US$ 3,798,585 57,953 3,460,533 11,199 57,070 1,830,708 2,635,299 44,578 126,198 28,101 105,977 1,153,713 9,216,048 4,093,866 The Group is exposed to foreign currency risk on monetary assets and liabilities, including cash held in currencies other than the functional currency of operations. The Group seeks to manage its exposure to this risk by ensuring that the majority of expenditure and cash holdings of individual subsidiaries within the Group are denominated in the same currency as the functional currency of that subsidiary. Income is generated in US Dollars. However, this exposure to currency risk is managed where the income is generated by subsidiary entities whose functional currency is not US Dollars, by either being settled within the Group or by ensuring settlement in the same month that the sale is transacted where settlement is with a third party. The following table shows a currency analysis of net monetary assets and liabilities by functional currency of the underlying companies: Functional Currency Currency of net monetary asset/(liability) US Dollar Canadian Dollar Sterling Australian Dollar Euro Brazilian Real Total Brazilian Real Canadian $ United States $ Total 31 December 31 December 31 December 31 December 2018 US$ 2018 US$ 2018 US$ 2018 US$ – – – – (1,225,811) 4,384,192 689 12,966 – – – – (12,686,554) 57,953 2,228,990 11,199 57,257 – (12,685,865) 70,919 2,228,990 11,199 (1,168,554) 4,384,192 3,158,381 13,655 (10,331,155) (7,159,119) The above indicates that the Group’s and the Company’s primary exposure is to exchange rate movements between UK Pounds sterling and the US Dollar and the Euro and the Brazilian Real. Serabi Gold plc // Report and Accounts 2018 26 FINANCIAL RISK MANAGEMENT CONTD. Currency risk contd. The table below shows the impact of changes in exchange rates on the result and financial position of the Group and the Company. 10% weakening of US Dollar 10% strengthening of US Dollar 10% weakening of Brazilian Real 10% strengthening of Brazilian Real 115 Against Sterling US$ 148,603 (127,000) Against Euro US$ (139,186) 139,186 The Group’s main subsidiaries operate in Brazil with their expenditure being principally in Brazilian Real and their financial statements are maintained in that currency. The Group’s policy for dealing with exchange differences is outlined in the statement of Significant Accounting Policies under the heading “Foreign currencies”. The Group does not presently utilise swaps or forward contracts to manage its currency exposures, although such facilities are considered and may be used where appropriate in the future. The Group seeks to minimise its exposure to currency risk by closely monitoring exchange rates and holding surplus funds in currencies considered most appropriate to their expected future utilisation. Credit risk The Group’s exposure to credit risk is limited to its cash and cash equivalents and trade and other receivables amounting to US$15,696,343 (2017: US$10,082,482). It is the Group’s policy to only deposit surplus cash with financial institutions that hold acceptable credit ratings. The Group currently sells nearly all of its gold bullion to a single customer. The Group seeks to receive full settlement by bank transfer on delivery of its product to the purchaser to minimise its exposure to any credit risk on that customer. The Group currently sells all of its copper/gold concentrate production to a single customer, a publicly quoted trading group located in Japan. Settlement terms are in accordance with industry norms. The customer has a strong reputation within the industry and has a good credit risk history. As at the balance sheet date there were no amounts owed to the Group that were overdue (2017: amount overdue: US$Nil). The Company’s exposure to credit risk amounted to US$16,404,019 (2017: US$11,892,581). Of this amount US$ (2017: US$7,606,894) is due from subsidiary companies, US$7,382,530 represents cash holdings (2017: US$2,936,579) and a significant portion of the remainder is represented by trade debtors for the sale of copper/gold concentrate. Since the inception of its operations the Group has incurred no credit losses nor at any time has the Group been required to consider any impairment of any financial asset. The Group makes its selection of its preferred customers and other credit risk counterparties having given appropriate consideration to their creditworthiness and reputation. On this basis it considers that the credit risk associated with its cash and cash equivalents and in respect of its trade and other receivables to be low. At no time has any customer or credit counterparty been in default of contractual payment terms or sought to vary such terms. The Group would consider a customer to be in default of their obligations in the event that they failed to make payment on the due date without prior notification and agreement or having sought a variation of payment terms failed to make settlement by the revised date. The Group would consider any other credit risk counterparty to be in default of their obligations in the event that they failed to make payment promptly in accordance with contractual arrangements. In the event that the Group considered that an event had occurred which might indicate that there was no reasonable expectation of recovery, the Group would recognise an impairment at that time. At this time and given publicly available knowledge of its counterparties and their affairs the Group does not consider that it will incur any credit losses in the next 12 month period not does it consider that any of its credit risk as at 31 December 2018 has been impaired subsequent to the end of the year. The Company is exposed to credit risk through amounts due from its subsidiary undertakings. Refer to note 1 and note 12 for details on the credit loss allowance made. 27 ULTIMATE CONTROLLING PARTY Fratelli Investments Ltd owns 19,318,786 ordinary shares representing 32.8 per cent of the voting shares in issue and Greenstone Resources II LP owns 14,887,970 ordinary shares representing 25.3 per cent of the voting shares. Both shareholders are completely independent and neither is therefore considered to be a controlling party. 28 POST BALANCE SHEET EVENTS Subsequent to 31 December 2018, there has been no item, transaction or event of a material or unusual nature likely, in the opinion of the Directors of the Company, to affect significantly the continuing operation of the entity, the results of these operations, or the state of affairs of the entity in future financial periods. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018 116 Glossary “Ag” “AISC” “Au” “assay” “CIM” means silver. means All-In Sustaining Cost – a non IFRS performance measurement established by the World Gold Council. means gold. in economic geology, means to analyse the proportions of metal in a rock or overburden sample; to test an ore or mineral for composition, purity, weight or other properties of commercial interest. means the Canadian Institute of Mining, Metallurgy and Petroleum. “CIP” or “Carbon in Pulp” means a process used in gold extraction by addition of cyanide. “chalcopyrite” is a sulphide of copper and iron. “Cu” “cut-off grade” “deposit” means copper. the lowest grade of mineralised material that qualifies as ore in a given deposit; rock of the lowest assay included in an ore estimate. is a mineralised body which has been physically delineated by sufficient drilling, trenching, and/or underground work, and found to contain a sufficient average grade of metal or metals to warrant further exploration and/ or development expenditures; such a deposit does not qualify as a commercially mineable ore body or as containing ore reserves, until final legal, technical, and economic factors have been resolved. “DNPM” means the Departamento Nacional de Producao Mineral. “electromagnetics” is a geophysical technique tool measuring the magnetic field generated by subjecting the sub-surface to electrical currents. “garimpeiro” “geochemical” “geophysical” “geophysical techniques” is a local artisanal miner. refers to geological information using measurements derived from chemical analysis. refers to geological information using measurements derived from the use of magnetic and electrical readings. include the exploration of an area by exploiting differences in physical properties of different rock types. Geophysical methods include seismic, magnetic, gravity, induced polarisation and other techniques; geophysical surveys can be undertaken from the ground or from the air. “gold equivalent” refers to quantities of materials other than gold stated in units of gold by reference to relative product values at prevailing market prices. “gossan” “grade” “g/t” is an iron-bearing weathered product that overlies a sulphide deposit. is the concentration of mineral within the host rock typically quoted as grams per tonne (g/t), parts per million (ppm) or parts per billion (ppb). means grams per tonne. “hectare” or a “ha” is a unit of measurement equal to 10,000 square metres. “indicated mineral resource” “inferred mineral resource” is that part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics, can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters, to support mine planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough for geological and grade continuity to be reasonably assumed. is that part of a mineral resource for which quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity. The estimate is based on limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. “IP” refers to induced polarisation, a geophysical technique whereby an electric current is induced into the sub-surface and the conductivity of the sub-surface is recorded. “measured mineral resource” is that part of a mineral resource for which quantity, grade or quality, densities, shape, and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and economic parameters, to support production planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough to confirm both geological and grade continuity. Serabi Gold plc // Report and Accounts 2018117 “mineralisation” the concentration of metals and their chemical compounds within a body of rock. “mineralised” refers to rock which contains minerals e.g. iron, copper, gold. “mineral reserve” “mineral resource” “mt” “NI 43-101” “ore” “oxides” “ppm” “saprolite” “sulphide” “tailings” “tpd” “vein” “VTEM” is the economically mineable part of a measured or indicated mineral resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. A mineral reserve includes diluting materials and allowances for losses that may occur when the material is mined. is a concentration or occurrence of diamonds, natural solid inorganic material or natural fossilised organic material including base and precious metals, coal, and industrial minerals in or on the Earth’s crust in such form and quantity and of such a grade or quality that it has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and continuity of a mineral resource are known, estimated or interpreted from specific geological evidence and knowledge. means million tonnes. means Canadian Securities Administrators’ National Instrument 43-101 – Standards of Disclosure for Mineral Projects. means a metal or mineral or a combination of these of sufficient value as to quality and quantity to enable it to be mined at a profit. are near surface bed-rock which has been weathered and oxidised by long term exposure to the effects of water and air. means parts per million. is a weathered or decomposed clay-rich rock. refers to minerals consisting of a chemical combination of sulphur with a metal. are the residual waste material that is produced by the processing of mineralised rock. means tonnes per day. is a generic term to describe an occurrence of mineralised rock within an area of non-mineralised rock. refers to versa time domain electromagnetic, a particular variant of time-domain electromagnetic geophysical survey to prospect for conductive bodies below surface. Management Discussion and AnalysisCommunity and Social ResponsibilityCorporate GovernanceFinancial StatementsStrategic ReportSerabi Gold plc // Report and Accounts 2018118 Shareholder Information COMPANY Serabi Gold plc UK Office 2nd Floor 32 Ludgate Hill, London EC4M 7DR Tel: Fax: +44 (0)20 7246 6830 +44 (0)20 7246 6831 Serabi Mineração S.A. Av Antonio de Pádua Gomes, no. 737 Jardim das Araras, Cidade Itaituba CEP 8180-120 Pará Brazil REGISTERED OFFICE 66 Lincoln’s Inn Fields London WC2A 3LH Email: contact@serabigold.com Web: www.serabigold.com COMPANY NUMBER 5131528 BOARD OF DIRECTORS Mel Williams – Non-executive Chairman Mike Hodgson – Chief Executive Clive Line – Finance Director Aquiles Alegria – Non-executive Director Nicolas Bañados – Non-executive Director Sean Harvey – Non-executive Director Eduardo Rosselot – Non-executive Director Mark Sawyer – Non-executive Director Felipe Swett – Non-executive Director COMPANY SECRETARY Clive Line NOMINATED ADVISER Beaumont Cornish Limited 10th Floor 30 Crown Place London EC2A 4EB AUDITOR BDO LLP 55 Baker Street London W1U 7EU SOLICITORS – UK Farrer & Co 66 Lincoln’s Inn Fields London WC2A 3LH LEGAL COUNSEL – CANADA Peterson McVicar LLP 18 King Street East, Suite 902 Toronto, Ontario M5C 1C4 BROKERS – UK Peel Hunt LLP Moor House, 120 London Wall London EC2Y 5ET REGISTRARS – UK Computershare Investor Services PLC PO Box 82, The Pavilions Bridgwater Road Bristol BS99 7NH REGISTRAR & TRANSFER AGENT – CANADA Computershare Investor Services Inc 100 University Avenue, 8th Floor Toronto Ontario M5J 2Y1 Serabi Gold plc // Report and Accounts 2018 Design and Production www.carrkamasa.co.uk Serabi Gold plc 2nd Floor 30-32 Ludgate Hill London EC4M 7DR t +44 (0)20 7246 6830 f +44 (0)20 7246 6831 e contact@serabigold.com www.serabigold.com 

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