Teranga Gold Corporation
Annual Report 2018

Plain-text annual report

20Annual Report 18 TABLE OF CONTENTS Letter to Shareholders Management’s Discussion and Analysis Management’s Responsibility for Financial Reporting Independent Auditors’ Report Consolidated Financial Statements Notes to the Consolidated Financial Statements Corporate Directory 3 8 54 55 57 61 100 This annual report contains certain statements that constitute forward-looking information. Please refer to the cautionary note regarding Forward-Looking Statements on page 52. All amounts are in U.S. dollars unless otherwise stated. BUILDING a multi-asset mid-tier gold producer in West Africa Annual Report 2018 1 2018 ACHIEVEMENTS Sabodala Gold Operations  Delivered 245,230 ounces of gold, exceeding production guidance at an all-in sustaining cost (excluding non-cash inventory movements and amortized advanced royalty costs) of $940 per ounce(1)  Generated net cash flow of almost $50 million(2) Wahgnion Gold Operations  Filed an updated NI 43-101 Technical Report  Increased gold reserves by 450,000 ounces, extending the mine life to 13 years and improving the initial 5-year operating profile  Advanced construction on schedule and on budget Golden Hill Advanced Exploration Project  Acquired the remaining interest from joint venture partner, increasing ownership to 100%  Entered into an earn-in agreement for the adjacent property contiguous to the north  Aggressive exploration program which produced good drill results in preparation for an initial mineral resource estimate (released February 2019) Côte d’Ivoire Early Stage Exploration  Good progress advancing Miminvest properties  Commenced technical work at Afema properties (1) This is a non-IFRS financial measure. Please refer to the reconciliation of non-IFRS financial measures at the end of the MD&A. (2) Net cash flow is free cash flow net of financing activities. Free cash flow is a non- IFRS financial measure, please refer to the reconciliation of non-IFRS financial measures at the end of the MD&A. 2 Annual Report 2018 LETTER TO SHAREHOLDERS As we move ahead, focused on achieving our vision, it is important to remember both our achievements and the people behind them. 2018 was long on accomplishments. We delivered on our annual performance metrics while also making great progress towards achieving our vision of becoming a multi-asset mid-tier gold producer in West Africa. Sabodala: Cumulative Gold Production Surpasses 1.6 Million Ounces Sabodala, our flagship mine, achieved its third consecutive year of record gold production with per ounce cost metrics well below forecast. As a result, Sabodala generated net cash flow of almost $50 million(1). The strong operating and financial results were due to our team’s commitment to productivity and ongoing performance improvements. Sabodala continues to successfully replace reserves and extend its mine life. In 2010, Sabodala had gold mineral reserves of 1.46 million ounces. Since that time, after producing 1.66 million ounces of gold, Sabodala still has a significant measured and indicated mineral resource of over 4 million ounces(2), over half of which is gold mineral reserves(2). Sabodala is a long life asset with potential for further growth. One of the best opportunities we have with respect to Sabodala’s resource base is the conversion of resources at Niakafiri, our largest deposit on the mine license. Currently, we are relocating the village that sits atop Niakafiri. The resettlement is well underway and the new village infrastructure is taking shape. Once complete, in the first half of 2020, we will be in a position to resume the Niakafiri drill program. With a mine life currently in excess of 10 years remaining, Sabodala’s performance and free cash flow will continue to be fundamental to the pursuit of our growth strategy. Wahgnion: Second Gold Mine on Track for First Pour in 2019 In early 2018, we completed the financing and commenced major construction of our second gold mine, Wahgnion. To date, construction of Wahgnion, located in the southwestern portion of Burkina Faso, is on budget and running ahead of schedule. The majority of construction risks are behind us and therefore our focus has shifted to operations readiness. Our original estimate for completion was the end of 2019, however, we are currently a quarter ahead of schedule and the mine plan is being revised to accommodate an earlier than planned commissioning of the plant. We announced construction of Wahgnion when it had an initial mineral reserve base of 1.16 million ounces. In 2018, following an infill drill program, Wahgnion’s mineral reserves increased by almost 40% to 1.61 million ounces(3). (1) (2) (3) Net cash flow is free cash flow net of financing activities. Free cash flow is a non-IFRS financial measure, please refer to the reconciliation of non-IFRS financial measures at the end of the MD&A. Reference is to Measured and Indicated Mineral Resources only, exclusive of Inferred Mineral Resources. Please refer to pages 28-29 in the Company's Annual Information Form dated March 29, 2019 for the current full resource and reserve statements. Please refer to pages 28-29 in the Company’s Annual Information Form dated March 29, 2019 for the current full reserve statement on the Wahgnion Gold Operations. Annual Report 2018 3 Much like Sabodala, we believe that Wahgnion has the makings of a long life gold mine. As part of our ongoing goal to further extend Wahgnion’s 13-year mine life and optimize the mine plan, we will conduct a multi-year drilling program concentrating on previously identified exploration targets, which are within trucking distance of the plant. The addition of Wahgnion to Teranga’s production assets will improve our production profile and diversify our operating and country risk. Wahgnion is expected to increase our consolidated production by 50% and double free cash flow. This free cash flow will be instrumental in funding the next phase of our growth pipeline. Golden Hill: Potentially Our Third Gold Mine As part of the Gryphon acquisition in 2016, which brought us Wahgnion, we also acquired 51% of a property called Golden Hill, situated in the heart of the Houndé belt in Burkina Faso. Little drilling had been completed previously on Golden Hill, however, we were excited about immediately commenced an exploration program. the prolific potential of the area and The drill program included approximately 650 drill holes totaling more than 70,000 metres. There were numerous encouraging exploration updates throughout 2017 and 2018 and it did not take long to see the potential of Golden Hill. With an eye to the future, we acquired the remaining interest from our joint venture partner and increased our ownership to 100%. Additionally, to leverage off of what we believe will be our next mine, we also acquired an earn-in on an adjacent property to the north. What attracted us to this property is the geology, the structure and the mineralization. It is very similar to what we have been seeing on our Golden Hill permits. The proximity of the property is also attractive – it is within trucking distance of a potential mill location at Golden Hill. Golden Hill has advanced at rapid speed. After only 18 months of drilling, we have an early-stage initial mineral resource estimate that provides a solid base at good grade for us to build on. Next steps include further drilling as well as internal technical work. The goal this year is to move the Golden Hill project into the feasibility stage of development. With continued exploration success, we believe that Golden Hill could ultimately be Teranga’s third producing gold mine. Côte d’Ivoire: Exploring the Underexplored Our organic growth pipeline also includes two joint ventures with permits covering 2,600 km2 of land in Côte d’Ivoire. With over one-third of the Birimian Greenstone Belt falling within the country’s borders, Côte d’Ivoire has significant potential for discoveries. Our land packages straddle well-known shear zones and trends and we are excited about the potential of this underexplored region. Results from our early-stage exploration programs in Côte d’Ivoire are promising and we look forward to updating you on our progress. 4 Annual Report 2018 Sharing the Benefits of Responsible Mining: Making Change Happen While we are miners at heart, sharing the benefits of responsible mining is in our DNA. Our ultimate goal is to leave a positive legacy that will continue to benefit and shape the future of local communities. In Senegal, after ten years of working in collaboration with the local communities, the Sabodala region is now one of the healthiest in the country with health clinics, widespread anti-malaria spray programs, access to potable water, and greater food security that will benefit generations to come. With the advent of our second mine, we have expanded our CSR focus to include the communities surrounding Wahgnion in Burkina Faso. Together with ERM, a leading global provider of environmental, health, safety, risk, and social consulting services, we are hard at work advancing livelihood restoration programs with 180 hectares acquired and allocated for farming, a 10-hectare cassava plantation, cattle drinking facilities developed to support husbandry and income generation programs developed specifically for 800 women. Teranga is striving to make a positive material difference in the local communities and countries in which it operates. Focused on Creating Value for Shareholders Teranga’s share price was recognized as one of the top 50 best performing stocks on the OTCQX in 2018. Despite a significant decline in the price of gold in the second half of the year, Teranga’s shares ended the year up 35%, outperforming our West African peer group, the major gold indices, and the price of gold. Clearly, Teranga has come a long way in a short time and investors are beginning to take notice. Three years ago, we were a single asset producer in one country. Today, not only are we on the verge of having two producing assets, we also have a robust organic pipeline of gold exploration projects in three countries. Teranga’s pipeline has the potential to support our goal of achieving mid-tier status in the next five years. Teranga offers investors a unique combination of value and growth and is a compelling investment opportunity. Gratitude to Our Employees and Partners At the outset of this letter, we highlighted the importance of remembering the people who are instrumental to our success. We would like to express our deepest appreciation to all of our employees, contractors, suppliers and business partners, as well as, our host governments and the Government of Canada. On behalf of the Board and management team, we thank our fellow shareholders for their ongoing support and confidence as we continue to execute on our vision of becoming a multi-asset mid-tier gold producer in West Africa. ALAN HILL Chairman RICHARD YOUNG President & Chief Executive Officer Annual Report 2018 5 2019 GOALS Sabodala Gold Operations • • Produce 215,000 to 230,000 ounces of gold at an all-in sustaining cost (excluding non-cash inventory movements and amortized advanced royalty costs) of $825 - $900 per ounce(1) Ongoing resettlement of the village atop the Niakafiri deposit Wahgnion Gold Operations • • Achieve first gold pour on time and on budget Produce 30,000 to 40,000 ounces of gold at an all-in sustaining cost (excluding non-cash inventory movements and amortized advanced royalty costs) of $750 - $825 per ounce(1) Golden Hill Advanced Exploration Project • • • Complete initial mineral resource estimate (released February 2019) Complete preliminary technical and economic assessments Advance to feasibility stage of development Côte d’Ivoire Early Stage Exploration • (1) Continue advancing Miminvest and Afema properties This is a non-IFRS financial measure. All-in sustaining costs per ounce sold calculated at the mine site level includes only total cash costs per ounce and sustaining capital expenditures. All-in sustaining costs for Sabodala includes sustaining capital expenditures but excludes growth capital related to the Sabodala village resettlement. Corporate administration and share-based compensation expense are separate and are not allocated to the mine site level costs. All-in sustaining costs also includes non-cash inventory movements and non-cash amortization of advanced royalties. Please refer to the reconciliation of non-IFRS financial measures at the end of the MD&A. 6 Annual Report 2018 Page 7 Job Number: 590180 Dashed Line=Trim Solid Line=Bleed Allowance Output Date: Mar_29_2019 Management‘s Discussion and Analysis December 31, 2018 MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 2018 AND 2017 This Management’s Discussion and Analysis (“MD&A”) provides a discussion and analysis of the financial conditions and results of operations to enable a reader to assess material changes in the financial condition and results of operations as at and for the three and twelve months ended December 31, 2018 and 2017. This MD&A should be read in conjunction with the audited consolidated financial statements and notes thereto (“Statements”) of Teranga Gold Corporation (“Teranga” or the “Company”) as at and for the twelve months ended December 31, 2018 and 2017. The Company’s Statements and MD&A are presented in United States dollars (“USD”), unless otherwise specified, and have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”). Additional information about Teranga, including the Company’s Annual Information Form for the year ended December 31, 2017, as well as all other public filings, is available on the Company’s website at www.terangagold.com and on the SEDAR website (www.sedar.com). This report is dated as of February 22, 2019. All references to the Company include its subsidiaries unless the context requires otherwise. On May 2, 2017, the Company completed a five-for-one share consolidation. All share and per share amounts reflect the effect of the consolidation. The MD&A contains references to Teranga using the words “we”, “us”, “our” and similar words and the reader is referred to using the words “you”, “your” and similar words. OVERVIEW OF THE BUSINESS Teranga is a multi-jurisdictional West African gold company focused on production and development as well as the exploration of approximately 6,400 km2 of land located on prospective gold belts. Since its initial public offering in 2010, Teranga has produced more than 1.6 million ounces of gold from its Sabodala operation in Senegal. Focused on diversification and growth, the Company is advancing construction of its second mine, Wahgnion Gold Operations (“Wahgnion”), which is located in Burkina Faso, as well as carrying out exploration programs in three West African countries: Burkina Faso, Côte d’Ivoire and Senegal. The Company had more than 4.0 million ounces of gold reserves1 as of June 30, 2018. Teranga applies a rigorous capital allocation framework for its investment decisions and is focused on funding future organic growth plans responsibly. Steadfast in its commitment to set the benchmark for responsible mining, Teranga operates in accordance with the highest international standards and aims to act as a catalyst for sustainable economic, environmental, and community development as it strives to create value for all of its stakeholders. Teranga is a member of the United Nations Global Compact and a leading member of the multi-stakeholder group responsible for the submission of the first Senegalese Extractive Industries Transparency Initiative revenue report. MISSION Our mission is to create value through responsible mining for all of our stakeholders by setting the benchmark for corporate social responsibility. VISION Our vision is to become a multi-asset mid-tier West African gold producer with a portfolio of assets offering diversified production, strong operating margins and long-term sustainable free cash flows. 1 Refer to the Company’s website at www.terangagold.com for further details. 8 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 STRATEGY Our strategy is to maximize shareholder value by increasing long-term sustainable free cash flows through diversification and growth while remaining fiscally conservative through the commodity cycle. To achieve our strategic objectives, we are focused on: (i) maximizing free cash flow from our flagship Sabodala operation; (ii) increasing production with the completion of Wahgnion by the end of 2019; (iii) progressing Golden Hill, our most advanced exploration project, towards feasibility; (iv) unlocking additional value through resource conversion drill programs and exploration in Burkina Faso, Senegal and Côte d’Ivoire; and (v) funding our future growth plans responsibly. FINANCIAL AND OPERATING HIGHLIGHTS Financial Data Revenue Cost of sales Gross profit Net (loss)/profit attributable to shareholders of Teranga Per share Adjusted net profit attributable to shareholders of Teranga1 Per share1 EBITDA 1 Operating cash flow before changes in w orking capital excluding inventories Operating cash flow Sustaining capital expenditures (excluding deferred stripping) Capitalized deferred stripping - sustaining Grow th capital expenditures Cash and cash equivalents, as at Operating Data Gold Produced Gold Sold Average realized gold price1 Cost of sales per ounce Total cash costs1 All-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs)1 Three m onths ended Decem ber 31, Tw elve m onths ended Decem ber 31, 2018 2017 Change 2018 2017 Change ($000s) ($000s) ($000s) ($000s) ($) ($000s) ($) ($000s) ($000s) ($000s) ($000s) ($000s) ($000s) ($000s) 76,140 88,280 (14%) 312,628 291,683 (59,374) (64,149) (7%) (230,517) (222,113) 16,766 24,131 (31%) 82,111 69,570 (10,639) 5,758 (0.10) 0.05 1,229 8,717 0.01 0.08 12,516 26,630 25,384 41,784 24,708 32,452 5,727 3,985 13,526 7,655 N/A N/A (86%) (86%) (53%) 3% 29% 44% 77% 11,794 31,932 0.11 0.30 18,075 30,106 0.17 0.28 111,855 95,335 96,649 82,610 92,060 71,379 18,846 25,382 45,978 29,428 53,174 10,509 406% 137,334 24,623 46,615 87,671 7% 4% 18% (63%) (63%) (40%) (40%) 17% 17% 29% (26%) 56% 458% (47%) Three m onths ended Decem ber 31, Tw elve m onths ended Decem ber 31, 2018 2017 Change 2018 2017 Change (oz) (oz) 59,442 67,934 61,696 68,944 ($ per oz) 1,232 1,279 ($ per oz sold) ($ per oz sold) 962 692 930 689 (13%) (11%) (4%) 3% 1% 245,230 233,267 246,073 231,078 1,271 1,261 937 660 961 721 ($ per oz sold) 998 860 16% 940 943 5% 6% 1% (3%) (8%) (0%) 1 This is a no n-IFRS financial measure and do es no t have a standard meaning under IFRS. P lease refer to No n-IFRS Financial M easures at the end o f this M D&A . FOURTH QUARTER HIGHLIGHTS Financial Highlights • • • • • Revenue of $76.1 million was 14 percent lower than the prior year period due to lower ounces sold and lower average realized prices. Gross profit of $16.8 million was 31 percent lower than the prior year period due to lower revenues and higher depreciation and amortization expenses. Net loss attributable to shareholders was $10.6 million ($0.10 loss per share) for the fourth quarter compared to net profit of $5.8 million ($0.05 per share) in the prior year period. The decrease was primarily attributable to lower gross profit of $7.4 million, higher net losses on forward gold sales contracts of $3.7 million and higher non- cash accretion expense of $1.7 million mainly as a result of the adoption of IFRS 15. Adjusted net profit attributable to shareholders1 was $1.2 million ($0.01 per share) for the fourth quarter compared to $8.7 million ($0.08 per share) in the prior year period. The decrease was mainly due to lower gross profit. Adjusted net profit attributable to shareholders1 excludes gains or losses on gold forward sales contracts, accretion expense, net foreign exchange losses, the impact of foreign exchange movements on deferred taxes and other non- cash fair value changes. In October, the Golden Hill portion of the secured development finance facility with Taurus Funds Management Pty Ltd. (the “Taurus Facility”) was increased by an additional $10 million in order to fund the acquisition of the 1 This is a non-IFRS financial measure. Please refer to the reconciliation of non-IFRS financial measures at the end of this MD&A. Annual Report 2018 9 Management‘s Discussion and Analysis December 31, 2018 remaining 49 percent interest in the Golden Hill and Gourma exploration projects, in Burkina Faso, from Boss Resources Limited (“Boss Resources”). • • Cash flow related to operating activities, before changes in working capital excluding inventories, increased 3 percent year-over-year to $25.4 million. Cash and cash equivalents totalled $46.6 million, a decrease of $33.1 million from the third quarter 2018 balance of $79.7 million, as construction activities continued to ramp up during the quarter at the Company’s second mine, Wahgnion. Operating Highlights • • • • Teranga finished 2018 with a solid production in the fourth quarter. Gold production for the fourth quarter totalled 59,442 ounces, which was 13 percent lower than the prior year period. The Company reported recorded gold production of 245,230 ounces for 2018, exceeding the high end of its increased production guidance range of 235,000 to 240,000 ounces for the year and achieved its third consecutive year of record production. Cost of sales per ounce were $962 and $937 for the quarter and year, respectively, with full year cost of sales below the lower end of the Company’s 2018 guidance range. Total cash costs per ounce1 for both the quarter and year were below the lower end of the Company’s 2018 guidance. All-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs)1 per ounce were $998 and $940 for the quarter and year, respectively, with full year costs falling below the lower end of the full year guidance range, mainly due to higher grades mined and processed. Total ounces mined over the last 18 months ended December 31, 2018 were approximately 26 percent better than the reserves model due to solid grade control processes and conservative resource modelling. Growth Highlights • • • • At Wahgnion, first gold pour is well on track for the fourth quarter 2019. Front-end engineering and detailed design was completed in the fourth quarter. Steel fabrication was completed and has largely been delivered to site. Plant construction is on schedule, concrete pours are nearing completion, structural steel installation have commenced and the leach tanks have been installed. During the fourth quarter, the Company completed its acquisition of the remaining 49 percent interest in the Golden Hill and Gourma exploration projects from Boss Resources for AUD10 million ($7.2 million). Teranga now owns a 100 percent interest in each of the Golden Hill and Gourma exploration projects. During the fourth quarter, the Company released an updated National Instrument 43-101 Standards of Disclosure for Mineral Projects Technical Report (“NI 43-101”) for the Wahgnion project reflecting the previously announced results of an updated mineral reserve estimate and feasibility study for Wahgnion. Open-pit reserves increased by almost 40 percent, or 450,000 ounces of gold, following a 33 percent increase in mineral resources announced in the second quarter 2018. The first five years production forecast was improved and Wahgnion’s mine life was extended from 9 years to 13 years. Teranga’s exploration program at the Golden Hill property in Burkina Faso, the Company’s most advanced exploration project, continues to generate very good grade drill results at a number of prospects. The Company released an initial resource estimate for the Golden Hill’s most advanced prospects on February 21, 2019. 1 This is a non-IFRS financial measure. Please refer to the reconciliation of non-IFRS financial measures at the end of this MD&A. 10 Annual Report 2018 OUTLOOK 2019 The following table outlines the Company’s performance compared to the 2018 summary production and cost guidance: Year Ended December 31, 2018 Management‘s Discussion and Analysis December 31, 2018 Sabodala Operating Results Total mined Grade mined Strip ratio Ore milled Head grade Recovery rate Gold produced A Cost of sales per ounce sold Total cash costs per ounce sold B All-in sustaining costs C Non-cash inventory movements and amortized advanced royalty costs C All-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs) C Mining Mining long haul Milling General and Administration Mine Production Costs Sabodala Capital Expenditures Sustaining capital Site development costs D Total Sabodala Capital Expenditures E Growth Capital Expenditures Wahgnion early works F Wahgnion construction G Total Growth Capital Expenditures Corporate and Other Corporate administration expense Regional administration costs Community social responsibility expense Exploration and evaluation H 2018 Actual 37,268 3.62 18.4 4,069 2.03 92.3 245,230 937 660 1,006 (66) 940 2.57 2.59 12.95 5.30 175.2 9.6 9.2 18.8 29.2 107.6 136.8 13.6 1.9 3.7 14.7 Third quarter 2018 Guidance 37,000 – 39,500 2.50 – 3.00 16.5 – 18.5 4,200 – 4,400 1.70 – 1.90 90.0 – 91.5 235,000 – 240 000 950 – 1,025 700 – 750 1,000 – 1,075 (50) 950 – 1,025 2.25 – 2.50 2.50 – 3.50 11.00 – 12.50 4.25 – 4.50 162.0 – 172.0 10.0 – 15.0 10.0 – 15.0 20.0 – 30.0 ~30.0 140.0 – 160.0 170.0 – 190.0 11.0 – 13.0 ~2.0 4.0 – 5.0 ~15.0 (‘000t) (g/t) waste/ore (‘000t) (g/t) % (oz) $/oz sold $/oz sold $/oz sold $/oz sold $/oz sold ($/t mined) ($/t hauled) ($/t milled) ($/t milled) $ millions $ millions $ millions $ millions $ millions $ millions $ millions $ millions $ millions $ millions $ millions Notes to Guidance Table Above: A. 22,500 ounces of Sabodala gold production was to be sold to Franco-Nevada Corporation (“Franco-Nevada”) at 20% of the spot gold price. B. Total cash costs per ounce sold is a non-IFRS financial measure and does not have a standard meaning under IFRS. C. All-in sustaining costs per ounce is a non-IFRS financial measure and does not have a standard meaning under IFRS. All-in sustaining costs per ounce sold presented in this table is calculated at the asset level and as such includes only total cash costs per ounce and sustaining capital expenditures. Corporate administration and share-based compensation expense is presented separately in this table and is not allocated to the individual assets. All-in sustaining costs also include non-cash inventory movements and non-cash amortization of advanced royalties. D. Site development costs include village resettlement costs for the Sabodala village. E. Excludes capitalized deferred stripping costs, included in mine production costs. F. Early works expenditures for 2018 included anticipated expenditures for the construction of Wahgnion prior to initial drawdown under the Taurus Facility which was executed in May 2018. G. Wahgnion construction expenditures included anticipated expenditures for Wahgnion post completion of the Taurus Facility. H. Exploration and evaluation costs included both expensed exploration, primarily attributable to exploration work on exploration permits, and capitalized reserve development, which is work performed on mine licenses. This forecast financial information was based on the following material assumptions for the remainder of 2018: gold price: $1,250 per ounce; light fuel oil price $0.87/L; heavy fuel oil price $0.60/L; Euro:USD exchange rate of 1:1.17. Other important assumptions: any political events were not expected to impact operations, including movement of people, supplies and gold shipments; grades and recoveries was expected to remain consistent with the life-of-mine plan to achieve the forecast gold production; and no unplanned delays in or interruption of scheduled production. Annual Report 2018 11 Management‘s Discussion and Analysis December 31, 2018 The following table outlines the Company’s estimated 2019 summary production and cost guidance: 2019 Guidance 37,000 – 39,500 3,000 – 3,500 1.50 – 2.00 9.5 – 12.0 4,100 – 4,300 1.80 – 2.00 89.0 – 91.0 215,000 – 230,000 1,050 – 1,125 725 – 775 900 – 975 (75) 825 – 900 (‘000t) (‘000t) (g/t) waste/ore (‘000t) (g/t) % (oz) $/oz sold $/oz sold $/oz sold $/oz sold $/oz sold ($/t mined) ($/t hauled) 2.50 – 2.75 1.50 – 2.00 ($/t milled) 12.00 – 13.00 ($/t milled) 4.50 – 5.00 $ millions 165 – 180 $ millions $ millions $ millions 10 – 15 15 – 20 25 – 35 (‘000t) (‘000t) (g/t) (‘000t) (g/t) % (oz) $/oz sold $/oz sold $/oz sold $/oz sold $ millions $ millions $ millions $ millions $ millions $ millions $ millions $ millions 6,800 – 7,200 500 – 650 1.80 – 2.00 500 – 650 1.80 – 2.00 ~ 90.0 30,000 – 40,000 1,175 – 1,250 1,050 – 1,125 (300) 750 - 825 115 – 120 ~ 30 145 – 150 13 – 14 3.5 – 4.5 2 – 3 4 - 5 5 – 15 Sabodala Operating Results Total mined Ore mined Grade mined Strip ratio Ore milled Head grade Recovery rate Gold produced A Cost of sales per ounce sold Total cash costs per ounce sold B All-in sustaining costs C Non-cash inventory movements and amortized advanced royalty costs C All-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs) C Mining Mining long haul Milling General and administration Mine Production Costs Capital Expenditures Sustaining Capital F Resettlement Capital Total Capital Expenditures Wahgnion Operating Results Total mined Ore mined Grade mined Ore milled Head grade Recovery rate Gold produced A Cost of sales per ounce sold All-in sustaining costs C Non-cash inventory movements and amortized advanced royalty costs C All-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs) C Wahgnion Capital Expenditures Construction Pre-Operating Costs Total Wahgnion Capital Expenditures Corporate and Other Corporate administration expense Share-based compensation expense D Regional administration costs Community social responsibility expense Exploration and evaluation E 12 Annual Report 2018 Consolidated Gold produced Management‘s Discussion and Analysis December 31, 2018 (oz) 245,000 – 270,000 Cost of sales per ounce sold All-in sustaining costs C Non-cash inventory movements and amortized advanced royalty costs C All-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs) C $/oz sold $/oz sold $/oz sold $/oz sold 1,050 – 1,125 1,000 – 1,100 (100) 900 – 1,000 Notes to Guidance Table Above: A. 22,500 ounces of Sabodala gold production are to be sold to Franco-Nevada at 20% of the spot gold price. All Wahgnion gold production is subject to a gold offtake payment agreement with Taurus Funds (“Offtake Agreement”) (see Financial Instruments section for more details). B. Total cash costs per ounce sold is a non-IFRS financial measure and does not have a standard meaning under IFRS. C. All-in sustaining costs per ounce is a non-IFRS financial measure and does not have a standard meaning under IFRS. All-in sustaining costs per ounce sold calculated at the mine site level includes only total cash costs per ounce and sustaining capital expenditures. All-in sustaining costs for Sabodala includes sustaining capital expenditures but excludes growth capital related to the Sabodala village resettlement. Corporate administration and share-based compensation expense are presented separately in this table and are not allocated to the mine site level costs. All-in sustaining costs presented on a consolidated basis includes corporate administration and share-based compensation expense. All-in sustaining costs also includes non-cash inventory movements and non-cash amortization of advanced royalties. D. Share-based compensation expense assumes a constant share price of C$4.00 per Teranga share. E. Exploration and evaluation costs includes both expensed exploration, primarily attributable to exploration work on exploration permits, and capitalized reserve development, which is work performed on mine licenses. F. Excludes capitalized deferred stripping costs, included in mine production costs. This forecast financial information is based on the following material assumptions for the remainder of 2019: gold price: $1,250 per ounce; Brent Crude Oil: $62 per barrel; Euro:USD exchange rate of 1:1.15. Other important assumptions: any political events are not expected to impact operations, including movement of people, supplies and gold shipments; grades and recoveries is expected to remain consistent with the life-of-mine plan to achieve the forecast gold production; and no unplanned delays in or interruption of scheduled production. 2019 Guidance Analysis Estimates of future production, cost of sales, cash costs1, all-in sustaining costs1 and all-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs)1 are based on mine plans that reflect the expected method by which we will mine reserves at each site. Actual gold production and associated costs may vary from these estimates due to a number of operational and non-operational risk factors. Since the Wahgnion project is presently in the construction stage and is not expected to start commissioning until later this year, guidance for annual plant throughput and gold production in 2019 is subject to standard risk factors associated with project construction and start up challenges experienced with a new operating mine. Sabodala The Company’s mine plan for Sabodala is designed to maximize free cash flows1. Free cash flows1 from our Sabodala mine will be used to fund the Company’s growth strategy, including funding through to completion of construction of the Company’s second mine, Wahgnion. At Sabodala, mining activities during 2019 will include mining of five deposits: Golouma West, Sabodala Phase 4, Kerekounda, Maki Medina and Koulouqwinde. Golouma West will be mined throughout 2019 and will comprise approximately 50 percent of total tonnes mined and more than 75 percent of total ounces mined. Sabodala Phase 4 will start out the year mining at higher elevations at high-strip ratios before reaching the lower benches and lower-strip ratios towards the end of the year. The high-grade Kerekounda and Koulouqwinde deposits will complete mining activities in the first half of 2019 while the Maki Medina deposit is scheduled to commence mining activities during the fourth quarter. Total tonnes mined are expected to be similar to the 37.3 million tonnes mined in 2018 at between 37.0 and 39.5 million tonnes in 2019. Ore tonnes mined will be almost twice as much compared to 2018 but at lower ore grades due to completion of mining activities at Gora in 2018. Mill throughput is expected to increase slightly with ongoing optimization activities at the semi-autogenous grinding (“SAG”) and ball mill circuit to between 4.1 and 4.3 million tonnes, compared to 4.1 million tonnes in 2018. Mill grades are expected to be slightly lower than 2018 at between 1.80 and 2.00 grams per tonne as higher grade material is supplemented with lower grade stockpiled material. Gold production at Sabodala is expected to be between 215,000 and 230,000 ounces, with slightly higher production during the first quarter compared to the remaining three quarters. Gold production at Sabodala is anticipated to be approximately 10 percent lower than 2018 as the Company looks to maintain a balance between providing cash flow 1 This is a non-IFRS financial measure. Please refer to the reconciliation of non-IFRS financial measures at the end of this MD&A. Annual Report 2018 13 Management‘s Discussion and Analysis December 31, 2018 necessary to complete Wahgnion’s development, while also retaining a high-grade stockpile to support quarterly and annual production targets, as has been done in recent years. Total production costs at Sabodala are expected to be in the range of $165 to $180 million in 2019, similar to 2018. Sustaining capital expenditures in 2019 for the Sabodala mine are expected to be similar to 2018 at between $10 and $15 million, as well as an additional $15 to $20 million required to continue relocation and construction activities of the Sabodala village. Sustaining capital expenditures exclude capitalized deferred stripping costs included in total production costs. Cost of sales are expected to be in the range of $1,050 to $1,125 per ounce. Total cash costs1 are expected to be in the range of $725 to $775 per ounce. All-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs)1 for Sabodala, which exclude allocations of corporate administration and share-based compensation expense, are expected to be between $825 to $900 per ounce, similar to 2018. Wahgnion The Wahgnion development project is progressing well and is being managed by an owner’s management team with responsibility for delivering site infrastructure, which includes tailings, mine site services, and initiation of mine operations. Mining activities have been ongoing since August 2018, with material sourced from the Nangolo and Nogbele North pits. The early start of the mining production has provided construction material for the tailings storage facility, allow the Nangolo pit to be used as a water storage starting in mid-2019, and build-up of an ore stockpile for the start of production. Management is preparing the commissioning schedule for plant production ramp-up to nameplate capacity after mechanical completion. With the project well on track, management is preparing a new mine plan for 2019 to mine more material than planned in last year’s technical report to accommodate an earlier than planned commissioning of the plant. Based on current progress of construction, production ramp up through the fourth quarter 2019 is expected to exceed the original estimate in last year’s technical report. Assuming an earlier commissioning of the plant and a ramp up in production exceeding original estimates, gold production at Wahgnion is anticipated to commence during the fourth quarter with gold production expected to range from 30,000 to 40,000 ounces for 2019. Cost of sales are expected to be between $1,175 and $1,250 per ounce and all-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs)1, excluding allocations of corporate overhead and share-based compensation expense, are expected to be between $750 and $825 per ounce. The remaining construction capital to be spent at Wahgnion is anticipated to be $115 to $120 million. Total construction capital for the project remains largely in line with the estimates outlined in the feasibility study, other than some unfavourable variances for fuel and foreign exchange, which are moderately impacting equipment, labour and material costs. The majority of the project contingency remains unused. Operating cost of mining, and other costs incurred prior to commencement of production is estimated to be approximately $30 million. The increase to pre-production operating costs from the feasibility study is due to costs related to staffing for operations prior to commencement of production and operating activities ahead of full commissioning. Corporate and Other Administrative costs for 2019 are expected to be in the range of $13 to $14 million, similar to 2018. Most of the Company’s administration costs are denominated in Canadian dollars. Share-based compensation expense is expected to be in the range of $3.5 and $4.5 million. The actual amount expensed is dependent on movements in the Company’s share price. 1 This is a non-IFRS financial measure. Please refer to the reconciliation of non-IFRS financial measures at the end of this MD&A. 14 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 Regional office costs, including the Dakar, Ouagadougou and Abidjan offices, are expected to total approximately $2.0 to $3.0 million, slightly higher than in 2018, mainly due to higher expensed Ouagadougou office costs, which in 2018 had been capitalized as part of Wahgnion’s development costs. Corporate social responsibility costs are expected to increase by up to $0.5 million to between $4.0 and $5.0 million reflecting activities deferred from 2018 to 2019. The Company’s exploration and evaluation budget is expected to be in the range of $5 to $15 million for 2019, and is considered discretionary in order to preserve cash flow to complete the development of Wahgnion, should it be required. Consolidated With the anticipated commencement of production operations at Wahgnion, consolidated gold production is expected to be higher than 2018 at between 245,000 and 270,000 ounces at consolidated cost of sales between $1,050 and $1,125 per ounce and all-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs)1 between $900 and $1,000 per ounce, which includes administration and share-based compensation expense. Sensitivity 2019 Hypothetical Impact on all-in Impact on Assumption Change sustaining costs cash flow Gold revenue Gold price effect on royalties Fuel cost based on Brent oil price EUR exchange rate $1,250/oz $1,250/oz $62/bbl 1.15:1 $100/oz $100/oz 10% 10% n/a $6/oz $18/oz $37/oz $22.5M $1.3M $4.6M $9.1M 1 This is a non-IFRS financial measure. Please refer to the reconciliation of non-IFRS financial measures at the end of this MD&A. Annual Report 2018 15 Management‘s Discussion and Analysis December 31, 2018 REVIEW OF OPERATING RESULTS Sabodala Gold Operations Operating Results Ore mined Waste mined - operating Waste mined - capitalized Total mined Grade mined Ounces mined Strip ratio Ore milled Head grade Recovery rate Gold produced1 Gold sold Average realized price2 Cost of sales per ounce Total cash costs2 All-in sustaining costs2 All-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs)2 Mining Mining long haul Milling G&A Three m onths ended Decem ber 31, Tw elve m onths ended Decem ber 31, 2017 % Change 2018 2017 % Change (‘000t) (‘000t) (‘000t) (‘000t) (g/t) (oz) (w aste/ore) (‘000t) (g/t) (%) (oz) (oz) 2018 532 5,110 5,298 712 6,773 2,813 10,940 10,298 2.22 4.10 37,832 93,865 19.6 1,028 1.95 92.0 13.5 1,077 2.11 93.1 59,442 67,934 61,696 68,944 ($/oz) 1,232 ($/oz sold) ($/oz sold) ($/oz sold) 962 692 1,105 1,279 930 689 938 ($/oz sold) 998 860 ($/t mined) ($/t hauled) ($/t milled) ($/t milled) 2.27 1.44 13.36 6.18 2.46 3.16 11.36 4.70 (25%) (25%) 88% 6% (46%) (60%) 45% (5%) (7%) (1%) (13%) (11%) (4%) 3% 1% 18% 16% (8%) (54%) 18% 31% 1,921 18,893 16,454 37,268 3.62 2,101 23,520 11,865 37,486 3.48 223,349 235,262 18.4 4,069 2.03 92.3 16.8 4,221 1.87 92.1 245,230 233,267 246,073 231,078 1,271 1,261 937 660 961 721 1,006 1,024 940 943 2.57 2.59 12.95 5.30 2.36 2.97 11.34 4.26 (9%) (20%) 39% (1%) 4% (5%) 10% (4%) 9% 0% 5% 6% 1% (3%) (8%) (2%) (0%) 9% (13%) 14% 24% 1 Go ld pro duced represents change in go ld in circuit invento ry plus go ld reco vered during the perio d. 2 A verage realized price, to tal cash co sts per o unce, all-in sustaining co sts per o unce, and all-in sustaining co sts (excluding no n-cash invento ry mo vements and amo rtized advanced ro yalty co sts) per o unce are no n-IFRS financial measures that do no t have a standard meaning under IFRS. P lease refer to No n-IFRS Financial M easures at the end o f this M D&A . Three months ended December 31, 2018 Golouma West Kerekounda Sabodala Koulouqwinde Total Golouma West Ore mined (‘000t) 282 70 100 80 532 945 Gora 344 Waste mined - operating (‘000t) 2,724 733 1,060 593 5,110 8,818 1,677 Waste mined - capitalized (‘000t) 1,070 - 4,228 - 5,298 8,158 - Twelve months ended December 31, 2018 Golouma South Kerekounda Sabodala Koulouqwinde Total 72 17 - 380 100 80 1,921 6,728 1,060 593 18,893 - 8,296 - 16,454 Total mined Grade mined Ounces mined (‘000t) 4,076 803 5,388 673 10,940 17,921 2,021 89 7,108 9,456 673 37,268 (g/t) (oz) 1.95 17,721 5.33 11,991 0.77 2,461 2.20 5,659 2.22 37,832 2.21 8.05 67,157 89,044 2.98 6,888 4.27 52,140 0.77 2,461 2.20 5,659 3.62 223,349 Ore mined Waste mined - operating Waste mined - capitalized Total mined Grade mined Ounces mined (‘000t) (‘000t) (‘000t) (‘000t) (g/t) (oz) Goloum a West 187 2,972 1,003 4,162 2.16 Three m onths ended Decem ber 31, 2017 Goloum a Gora South Kerekounda 103 Total 712 Goloum a West 384 Tw elve m onths ended Decem ber 31, 2017 Goloum a Gora 698 South Kerekounda Total 668 351 2,101 795 6,773 861 11,778 2,598 8,283 23,520 - - 1,810 2,813 5,757 2,387 - 3,721 11,865 3,191 6.39 237 2.86 2,708 10,298 7,002 14,863 3,266 12,355 37,486 2.60 4.10 2.10 5.14 3.02 2.59 3.48 295 2,896 127 110 13,006 60,587 11,664 8,608 93,865 25,914 115,398 64,772 29,178 235,262 Total mined (as above) Capitalized pre-stripping Total mined (including pre-strip tonnes) (‘000t) (‘000t) (‘000t) 10,940 10,298 - - 10,940 10,298 6% N/A 6% 37,268 37,486 (1%) - 2,604 (100%) 37,268 40,090 (7%) Three m onths ended Decem ber 31, Tw elve m onths ended Decem ber 31, 2018 2017 % Change 2018 2017 % Change 16 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 Operating results for the three months ended December 31, 2018 Mining In the three months ended December 31, 2018, mining activities were focused primarily on Sabodala Phase 4, Golouma West, Kerekounda and Koulouqwinde. In the three months ended December 31, 2017, mining activities were focused on Golouma West, Gora Phase 3, Kerekounda and Golouma South. Total tonnes mined in the fourth quarter 2018 were 6 percent higher than the prior year comparative period, representing a new record, due primarily to a ramp up at Sabodala Phase 4 with the application of two shovels under favourable mining conditions, improved productivity at Golouma West and the increased usage of excavators in mining. Ore tonnes mined were 25 percent lower in the fourth quarter 2018 compared with the fourth quarter 2017 due primarily to the completion of mining activities at Gora Phase 3 in July 2018, a reduced mining rate at depth at Kerekounda and a high strip ratio during the early stages of Sabodala Phase 4. Mined ore grades were 46 percent lower in the fourth quarter 2018 compared with the fourth quarter 2017 due primarily to the completion of the relatively high grade Gora and Golouma South pits in the third and second quarters, respectively. Total ounces mined over the 18 months ended December 31, 2018 were approximately 26 percent higher than estimated in the reserves models due to ongoing dilution control, ore recovery processes and conservative resource modelling. Processing Ore tonnes milled decreased by 5 percent in the fourth quarter 2018 compared with the prior year period due primarily to the completion of a significant crushing circuit maintenance program and a higher proportion of harder rock in the mill feed in the current year period. Head grade decreased by 7 percent in the fourth quarter 2018 compared with the prior year period due primarily to a lower proportion of high grade ore sourced from Gora, partially offset by higher grade ore sourced from Kerekounda at depth. Gold production decreased by 13 percent to 59,442 ounces in the fourth quarter 2018 compared with the prior year period due primarily to lower average head grades, ore tonnes milled and recovery rates. Costs – site operations Total mining costs (excluding long haul costs) decreased by 3 percent to $24.8 million in the fourth quarter 2018 compared with the prior year period due primarily to favourable mining conditions resulting in reduced fleet maintenance costs, favourable currency movements and lower explosives costs due to a reduction in blasted tonnes. Accordingly, lower total mining costs (excluding long haul costs) combined with a 6 percent increase in tonnes mined during the fourth quarter 2018 resulted in an 8 percent decrease in unit costs compared with the prior year period. Total long haul costs decreased by 64 percent to $0.6 million in the fourth quarter 2018 compared with the prior year period due primarily to the completion of mining at the Gora satellite deposit. Total processing costs increased by 12 percent to $13.7 million in the fourth quarter 2018 compared with the prior year period due primarily to the impact of higher fuel prices and the completion of power station and crushing circuit maintenance programs during the fourth quarter 2018. Accordingly, on a unit cost basis, processing costs increased by 18 percent in the fourth quarter 2018 compared with the prior year period due to higher total processing costs and a 5 percent decrease in tonnes milled. Total mine site general and administrative costs increased by 26 percent to $6.4 million in the fourth quarter 2018 compared with the prior year period due primarily to non-cash supplies inventory obsolescence provision recorded during the quarter partially offset by favourable currency movements and lower consulting costs. On a unit cost basis, mine site general and administrative costs increased by 31 percent in the fourth quarter 2018 compared with the prior year period due to a 5 percent decrease in tonnes milled and higher total general and administrative costs. Total cost of sales per ounce sold increased by 3 percent to $962 per ounce in the fourth quarter 2018 compared with the prior year period due primarily to an 11 percent decrease in the volume of gold ounces sold and higher depreciation and amortization expense, mostly offset by lower mine operation expenses. Annual Report 2018 17 Management‘s Discussion and Analysis December 31, 2018 Total cash costs1 for the fourth quarter 2018 were $692 per ounce, an increase of 1 percent compared with the prior year period due primarily to higher mine production costs and net inventory movements, and a decrease in the volume of gold ounces sold partially offset by higher capitalized deferred stripping costs and lower royalties. All-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs)1 for the fourth quarter 2018 were $998 per ounce, an increase of 16 percent compared with the prior year period. The increase was due primarily to an 11 percent decrease in gold ounces sold. Operating results for the twelve months ended December 31, 2018 Gold production in 2018 was a record 245,230 ounces, exceeding the high end of the Company’s increased full year production guidance range of 235,000 to 240,000 ounces. Gold production increased by 5 percent in 2018 compared with the prior year. Mining In the twelve months ended December 31, 2018, mining activities were focused primarily on Golouma West, Sabodala Phase 4, Kerekounda, the final benches of Gora Phase 3 and Koulouqwinde. In the comparative twelve months ended December 31, 2017, mining activities were focused on Gora, Kerekounda, Golouma West and Golouma South. Excluding pre-stripping tonnes, total tonnes mined in 2018 were 1 percent lower than the prior year. Including 2.6 million tonnes of pre-stripping waste capitalized in 2017 at Golouma West, total tonnes mined decreased by 7 percent in 2018 compared with the prior year. Despite the increase in mining activities in the fourth quarter 2018, due to a focus on higher productivity areas within the Sabodala and Golouma West pits, total tonnes mined for the full year 2018 decreased compared with the prior year. The lower material movement was due to: i) lower mechanical availability for the shovels than expected during the first nine months of 2018; ii) during the first half of the year, mining activities were focused on narrower benches near the bottom of the Gora Phase 3 and Golouma South pits, which required the use of smaller equipment, resulting in lower shovel productivity; and iii) during the third quarter, mining activities were impacted by difficult ground conditions resulting from a significant increase in rainfall relative to the same prior year period. Ore tonnes mined were 9 percent lower in 2018 compared with 2017 in large part due to lower material movement during 2018. Mined ore grades were 4 percent higher in 2018 compared with 2017 due primarily to the final high grade benches at Gora Phase 3 and positive grade reconciliations at Golouma West and Kerekounda. Processing Ore tonnes milled decreased by 4 percent in 2018 compared with the prior year due primarily to a higher proportion of hard rock in the mill feed and the impact of increased rainfall on the crushing circuit during the third quarter 2018. Head grade increased by 9 percent in 2018 compared with the prior year due primarily to a greater proportion of high grade ore sourced from Kerekounda and Gora. Gold production increased by 5 percent to a record 245,230 ounces in 2018 compared with the prior year due primarily to higher average head grades and recovery rates, partially offset by lower ore tonnes milled during the year. Costs – site operations Total mining costs (excluding long haul costs) increased by 8 percent to $95.9 million in 2018 compared with the prior year due primarily to the capitalization of $6.7 million in pre-production stage mining costs associated with the Golouma West pit in 2017. Also negatively impacting total mining costs were lower shovel productivity in the narrow lower benches of Gora Phase 3 in 2018, higher fuel costs and the impact of unfavourable currency movements compared to the prior year period. Accordingly, higher total mining costs (excluding long haul costs) combined with a 1 percent decrease in tonnes mined during 2018 resulted in a 9 percent increase in unit costs compared with the prior year. Total long haul costs decreased by 16 percent to $4.7 million in 2018 compared with the prior year due primarily to the completion of mining at the Gora satellite deposit. 1 This is a non-IFRS financial measure. Please refer to the reconciliation of non-IFRS financial measures at the end of this MD&A. 18 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 Total processing costs increased by 10 percent to $52.7 million in 2018 compared with the prior year due primarily to the impact of higher fuel prices, unfavourable currency movements and increased power consumption resulting from the processing of harder ore. Accordingly, on a unit cost basis, processing costs increased by 14 percent in 2018 compared with the prior year due to higher total processing costs and a 4 percent decrease in tonnes milled in 2018. Total mine site general and administrative costs increased by 17 percent to $21.6 million in 2018 compared with the prior year due primarily to unfavourable currency movements, higher surface taxes payable on the Company’s operating pits in 2018 and a non-cash supplies inventory obsolescence provision. Accordingly, on a unit cost basis, mine site general and administrative costs increased by 24 percent in 2018 compared with the prior year due to higher total general and administrative costs and a 4 percent decrease in tonnes milled. Total cost of sales per ounce sold decreased by 3 percent to $937 per ounce in 2018 compared with the prior year due primarily to a 6 percent increase in the volume of gold ounces sold and lower mine operation expenses, partially offset by higher depreciation and amortization expense. Total cash costs1 for 2018 were $660 per ounce, a decrease of 8 percent compared with the prior year due primarily to an increase in the volume of gold ounces sold, an increase in capitalized deferred stripping costs and a decrease in net inventory movements, partially offset by higher mine production costs. All-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs)1 for 2018 were $940 per ounce, a slight decrease compared with the prior year. The decrease was due primarily to an increase in the volume of gold ounces sold and lower mine operation expenses between years, mostly offset by higher capitalized deferred stripping costs, administrative and share-based compensation expenses. REVIEW OF FINANCIAL RESULTS (US$000s) Revenue Mine operation expenses Depreciation and amortization Cost of sales Gross profit Three m onths ended Decem ber 31, Tw elve m onths ended Decem ber 31, 2018 2017 % Change 2018 2017 % Change 76,140 88,280 (14%) 312,628 291,683 7% (43,216) (48,166) (10%) (164,349) (168,689) (16,158) (15,983) 1% (66,168) (53,424) (59,374) (64,149) (7%) (230,517) (222,113) 16,766 24,131 (31%) 82,111 69,570 Exploration and evaluation expenditures (4,544) (5,928) (23%) (13,160) (12,373) Administration expenses (4,594) (3,941) 17% (13,618) (10,702) Corporate social responsibility expenses (1,028) (615) 67% (3,700) (2,906) Share-based compensation Finance costs Net foreign exchange gains/(losses) Other (expense)/income (Loss)/profit before incom e tax Income tax expense Net (loss)/profit for the period (1,158) (935) 24% (4,851) (2,580) (3,772) (1,241) 204% (15,783) (3,907) 262 (491) N/A (2,680) (4,632) (8,040) (1,612) 399% 8,458 4,496 (6,108) 9,368 N/A 36,777 36,966 (4,140) (3,410) 21% (23,312) (2,436) (10,248) 5,958 N/A 13,465 34,530 Net profit attributable to non-controlling interests (391) (200) 96% (1,671) (2,598) Net (loss)/profit attributable to shareholders of Teranga (10,639) 5,758 N/A 11,794 31,932 Basic (loss)/earnings per share (0.10) 0.05 N/A 0.11 0.30 (US$000s) Mine operation expenses Mine production costs Royalties Regional administration costs Capitalized deferred stripping Inventory movements Three m onths ended Decem ber 31, Tw elve m onths ended Decem ber 31, 2018 2017 % Change 2018 2017 % Change 45,562 44,742 2% 175,179 161,155 4,590 5,895 (22%) 19,809 19,180 508 689 (26%) 1,868 1,996 50,660 51,326 (1%) 196,856 182,331 (13,526) (7,655) 77% (45,978) (29,428) 6,082 4,495 35% 13,471 15,786 (7,444) (3,160) 136% (32,507) (13,642) Total m ine operation expenses 43,216 48,166 (10%) 164,349 168,689 (3%) 24% 4% 18% 6% 27% 27% 88% 304% (42%) 88% (1%) 857% (61%) (36%) (63%) (63%) 9% 3% (6%) 8% 56% (15%) 138% (3%) 1 This is a non-IFRS financial measure. Please refer to the reconciliation of non-IFRS financial measures at the end of this MD&A. Annual Report 2018 19 Management‘s Discussion and Analysis December 31, 2018 (US$000s) Depreciation and am ortization expenses Depreciation and amortization - property, plant and equipment and mine development expenditures Depreciation and amortization - deferred stripping assets Inventory movements - depreciation Capitalized deferred stripping - depreciation Total depreciation and am ortization expenses Three m onths ended Decem ber 31, Tw elve m onths ended Decem ber 31, 2018 2017 % Change 2018 2017 % Change 9,380 10,730 (13%) 43,264 39,152 5,159 14,539 10,016 20,746 2,369 (4,333) (750) (430) 1,619 (4,763) 16,158 15,983 (48%) (30%) N/A 74% N/A 1% 27,118 22,555 70,382 61,707 (1,486) (6,306) (2,728) (1,977) (4,214) (8,283) 66,168 53,424 11% 20% 14% (76%) 38% (49%) 24% Financial Results for the three months ended December 31, 2018 Revenue Revenue for the three months ended December 31, 2018 decreased by 14 percent over the prior year period due to an 11 percent decrease in ounces sold and a 4 percent decrease in average realized prices compared to the prior year period. Spot price per ounce of gold Average Low High Average Realized Mine Operation Expenses Three m onths ended Decem ber 31, 2018 $1,226 $1,186 $1,279 $1,232 2017 % Change $1,276 $1,241 $1,303 $1,279 (4%) (4%) (2%) (4%) For the three months ended December 31, 2018, mine operation expenses, before capitalized deferred stripping and inventory movements, decreased by 1 percent over the prior year period to $50.7 million primarily due lower royalties expense from lower gold sales, a decrease in hauling costs due to completion of mining at Gora and favourable currency movements. The decrease was partially offset by higher fuel prices, major planned maintenance of the processing plant and supplies inventory obsolescence provision. The amount of mining costs capitalized as deferred stripping costs will fluctuate from period to period depending on whether mining is above or below the life-of-phase strip ratio in a particular pit. During the fourth quarter, mining activities were above the life-of-phase strip ratios at the Golouma West and Sabodala deposits resulting in 5.3 million tonnes, or $13.5 million of deferred stripping costs, being capitalized in the current period. In the prior year period, mining activities were above the life-of-phase strip ratio at the Kerekounda and Golouma West deposits resulting in 2.8 million tonnes, or $7.7 million of deferred stripping costs, being capitalized in the prior year period. Costs capitalized are amortized to expense as the deposit is mined. The largest component of inventory movement costs relates to changes in ore stockpiles. Increases in the number of ounces in stockpiles results in a reduction of operating costs as mining costs are capitalized to inventory on the balance sheet while decreases to ore in stockpiles, as stockpiled ore is processed, increase operating costs as historic costs are amortized to the income statement. Inventory movements in the fourth quarter resulted in an increase to mine operation expenses of $6.1 million compared to $4.5 million in the prior year period, as a result of the drawdown and processing of low grade ore stockpiles during the periods. 20 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 Depreciation and amortization expenses Total depreciation and amortization expense for the fourth quarter was $16.2 million, or $0.2 million higher than the prior year period. Depreciation and amortization expense for property, plant and equipment and mine development expenditures decreased due to lower gold ounces produced during the quarter. Depreciation and amortization of deferred stripping assets decreased by $4.9 million mainly due to the end of mining activities at Gora partially offset by an increase in gold ounces mined from the Golouma West and Kerekounda pits compared to the prior year period. Depreciation related to inventory movements resulted in an increase of $2.4 million, as a result of a decrease of stockpiled ounces in inventory. In the prior year period, depreciation related to inventory movements resulted in a decrease of $4.3 million due to a build-up of stockpiled ounces in inventory. Exploration and evaluation Exploration and evaluation expenditures for the fourth quarter were $4.5 million, $1.4 million lower than the prior year period. Refer to the Exploration section for additional details. Administration expense Administration expense for the fourth quarter was $4.6 million, $0.7 million higher than the prior year period. Higher administration expense in the current period is mainly due to increased personnel costs due to the growth of the Company beyond the Sabodala Gold operations in Senegal, and other miscellaneous corporate support costs. Share-based compensation Share-based compensation expense for the fourth quarter was $1.2 million, $0.2 million higher than the prior year period due to an increase in the Company’s share price during the current quarter. Finance costs Finance costs for the fourth quarter were $3.8 million, $2.5 million higher than the prior year period mainly due to a $2.1 million non-cash accretion expense related to the gold stream liability from the streaming arrangement with Franco- Nevada Corporation (“Franco-Nevada”) as a result of adopting IFRS 15 prospectively in 2018. As a consequence of the adoption of IFRS 15, the Company will continue to record non-cash accretion expense at a rate of approximately 9 percent on the gold stream liability for as long as the gold stream liability remains outstanding. For additional details, please see the Critical Accounting Policies and Estimates section of this MD&A. During the fourth quarter 2018, the Company expensed $1.0 million of interest and amortization of deferred financing costs related to the Taurus Facility. An additional $3.2 million of interest and amortization of deferred financing costs related to the Taurus Facility directly attributable to the development of Wahgnion has been capitalized. Net foreign exchange gains/(losses) Net foreign exchange gains of $0.3 million were recorded during the fourth quarter 2018 compared to net foreign exchange losses of $0.5 million in the period year period. The increase was due to strengthening of the US dollar against the Euro compared to weakening of the US dollar against the Euro in the prior year period. Other expenses Other expenses for the fourth quarter was $8.0 million compared to $1.6 million in the prior year period. The increase in other expenses was mainly due to unrealized losses on forward gold sales contracts of $9.9 million due to the increase in gold prices during the fourth quarter 2018, partially offset by realized gains on forward gold sales contracts of $2.8 million compared to unrealized losses of $3.5 million in the prior year period. The prior year period also included a $2.5 million gain on sale of marketable securities. Income tax expense The Company records a current income tax expense on taxable income earned in Senegal at a rate of 25 percent. Current income tax is calculated using local tax rates on taxable income, which is estimated in accordance with local statutory requirements and is denominated in the Senegalese currency (CFA Franc). The tax basis of all assets and non-current intercompany loans are recorded using historical exchange rates and translated to the functional currency using the period end exchange rate, and as a result, the Company’s deferred tax balances will fluctuate due to changes in foreign exchange rates. Current income taxes are also affected by changes in foreign exchange rates as unrealized foreign exchange gains as well as losses, recorded in accordance with local statutory requirements, are taxable / deductible for Annual Report 2018 21 Management‘s Discussion and Analysis December 31, 2018 purposes of calculating income tax in Senegal. The Company also has a number of development and exploration projects in Burkina Faso and Côte d’lvoire, which currently do not generate any profit subject to income tax. Effective January 1, 2018, Teranga’s West African entities in Senegal, Burkina Faso and Côte d’Ivoire converted to new accounting standards under the Organization for the Harmonization of Business Law in Africa (“SYSCOHADA”). The new SYSCOHADA standards bring West African accounting standards and principles in greater alignment to IFRS. As a result, certain transitional changes impacted current and deferred income taxes for the three and twelve months ended December 31, 2018. For the three months ended December 31, 2018, the Company recorded income tax expense of $4.1 million, comprised of current income tax expense of $0.5 million and a deferred income tax expense of $3.6 million. In the prior year period, the Company recorded income tax expense of $3.4 million, comprised of current income taxes expense of $3.7 million net of a recovery of deferred income tax of $0.3 million. Lower current income tax expense in the current quarter was mainly due to higher depreciation expense resulting from the conversion to SYSCOHADA. The higher depreciation costs resulted in lower net asset values leading to higher deferred taxes in the current period. Net (loss)/profit Consolidated net loss attributable to shareholders was $10.6 million ($0.10 loss per share) for the fourth quarter 2018 compared to net profit of $5.8 million ($0.05 per share) in the prior year period. The decrease was primarily attributable to lower gross profits of $7.4 million as a result of lower gold sales, higher losses on gold forward sales contracts of $3.7 million, non-cash accretion expense of $2.1 million as a result of the adoption of IFRS 15, higher interest and deferred financing costs of $0.6 million as a result of the Taurus Facility partially offset by decrease in exploration expenses of $1.4 million. Adjusted net profit attributable to shareholders1 was $1.2 million ($0.01 per share) for the fourth quarter 2018 compared to $8.7 million ($0.08 per share) in the prior year period. The decrease was mainly due to lower gross profit, as a result of lower gold sales. Adjusted net profit attributable to shareholders1 excludes gains and losses on gold forward sales contracts, accretion expense, net foreign exchange gains/(losses), the impact of foreign exchange movements on deferred taxes and other non-cash fair value changes. Financial Results for the twelve months ended December 31, 2018 Revenue Revenue for the twelve months ended December 31, 2018 increased by 7 percent over the prior year period due to a 6 percent increase in ounces sold and 1 percent higher average realized prices compared to the prior year period. Spot price per ounce of gold Average Low High Average Realized Mine operation expenses Tw elve m onths ended Decem ber 31, 2018 $1,268 $1,178 $1,355 $1,271 2017 % Change $1,257 $1,151 $1,346 $1,261 1% 2% 1% 1% For the twelve months ended December 31, 2018, mine operation expenses, before capitalized deferred stripping and inventory movements, increased by 8 percent over the prior year period to $196.9 million, primarily due to unfavourable currency movements, higher fuel prices and capitalization of pre-production stage mining costs associated with the Golouma West pit in the first nine months of 2017. 1 This is a non-IFRS financial measure. Please refer to the reconciliation of non-IFRS financial measures at the end of this MD&A. 22 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 The amount of mining costs capitalized as deferred stripping costs will fluctuate from period to period depending on whether mining is above or below the life-of-phase strip ratio in a particular pit. During the year, mining activities were above the life-of-phase strip ratios at the Sabodala and Golouma West deposits resulting in 16.5 million tonnes, or $46.0 million of deferred stripping costs being capitalized in the current period. In the prior year period, mining activities were above the life-of-phase strip ratio at the Kerekounda, Gora and Golouma West deposits resulting in 11.9 million tonnes or $29.4 million of deferred stripping costs being capitalized in the prior year period. The increase in unit mining costs further increased the value of capitalized deferred stripping costs compared to the prior year period. Costs capitalized are amortized to the income statement as the deposit is mined. Inventory movements in the twelve months ended December 31, 2018 resulted in an increase to mine operation expenses of $13.5 million compared to $15.8 million in the prior year period. The decrease in inventory movements compared to the prior year period was primarily due to a decrease in net drawdowns of stockpiled ounces as stockpiled ore was processed. Depreciation and amortization expenses Total depreciation and amortization expense for the twelve months ended December 31, 2018 was $66.2 million, $12.7 million higher than the prior year period. Depreciation and amortization expense of property, plant, and equipment and mine development expenditures increased, as a result of a higher asset depreciation base and more ounces produced. Depreciation and amortization of deferred stripping assets increased by $4.6 million mainly related to the incremental impact of Golouma West going into production in September 2017 and higher gold ounces mined from Kerekounda, partially offset by a decrease in amortization of previously capitalized deferred stripping costs at Gora and Golouma South as mining activities decreased in these pits compared to the prior year period. Depreciation related to inventory movements decreased by $4.8 million as a result of higher unit amortization and a decrease in drawdown of stockpiled ounces in inventory in 2018 compared to the prior year period. Exploration and evaluation Exploration and evaluation expenditures for the twelve months ended December 31, 2018 were $13.2 million, $0.8 million higher than the prior year period. Refer to the Exploration section for additional details. Administration expense Administration expense for the twelve months ended December 31, 2018 was $13.6 million, $2.9 million higher than the prior year period. Higher administration expense in the current period was mainly due to increased personnel costs due to the growth of the Company beyond the Sabodala Gold operations in Senegal and other miscellaneous corporate support costs, as well as the reversal of an over-accrual in the prior year period. Share-based compensation Share-based compensation expense for the twelve months ended December 31, 2018 was $4.9 million, $2.3 million higher than the prior year period due to an increase in the Company’s share price during 2018 compared to a decrease in the Company’s share price in the prior year period. The Company granted Deferred Share Units (“DSUs”) to non-executive directors and Restricted Share Units (“RSUs”) and stock options to employees to allow participation in the long-term success of the Company and to promote alignment of interests between directors, employees and shareholders. Annual Report 2018 23 Management‘s Discussion and Analysis December 31, 2018 The following table summarizes RSU’s, DSU’s and fixed bonus plan units: RSUs DSUs Fixed Bonus Plan Units Tw elve m onths ended Decem ber 31, 2018 As of Decem ber 31, 2018 Grant Units Grant Price 1 Outstanding Total Vested2 821,000 193,000 - C$4.19 C$4.19 - 1,467,014 756,998 323,500 969,665 676,581 322,732 1 Grant price determined using a vo lume weighted average trading price o f the Co mpany’ s shares fo r the 5-day perio d ended o n the grant date. 2Directo rs have the o ptio n to elect to receive their Directo r co mpensatio n in the fo rm o f DSUs. These DSUs vest as they are granted. A ll remaining DSUs that are granted vest o n the first anniversary o f the grant date. RSUs will generally vest as to 50 percent in thirds o ver a three-year perio d and as to the o ther 50 percent, in thirds upo n satisfactio n o f annual pro ductio n and co st targets, except fo r RSUs granted o n M arch 29, 2018 and future grants, which vest as to 25 percent in thirds o ver a three-year perio d, 50 percent in thirds upo n satisfactio n o f annual pro ductio n and co sts targets and 25 percent in thirds upo n satisfactio n o f matching the average perfo rmance o f the VanEck Vecto rs Junio r Go ld M iners ETF (“ GDXJ” ). B o th DSUs and RSUs and are payable in cash. The Co mpany used the December 31, 2018 clo sing share price o f C$ 4.03 to value the vested DSUs and RSUs. The following table summarizes stock option awards to employees of the Company: Balance as at December 31, 2017 Exercised Granted 1 Forfeited Balance as at December 31, 2018 Num ber of Options Weighted Average Exercise Price 4,454,491 (242,867) 1,321,000 (324,738) 5,207,886 C$9.20 C$3.25 C$4.22 C$6.34 C$8.39 1 The exercise price o f new co mmo n share sto ck o ptio ns granted during the perio d was determined using a vo lume weighted average trading price o f the Co mpany’ s shares fo r the 5-day perio d immediately preceding the day o n which the o ptio n is granted. Of the 5,207,886 common share stock options issued and outstanding as at December 31, 2018, 3,704,864 are vested and 315,022 vest over a three-year period, and 1,188,000 vest over a four-year period. Under IFRS, the graded method of amortization is applied to new grants of stock options and fixed bonus plan units, which results in approximately 52 percent of the cost of the stock options and fixed bonus plan units recorded in the first twelve months from the grant date. Finance costs Finance costs for the twelve months ended December 31, 2018 were $15.8 million, $11.9 million higher than the prior year period mainly due to a $9.0 million adjustment to record non-cash accretion expense of the gold stream liability from the Franco-Nevada streaming arrangement as a result of adopting IFRS 15 prospectively in 2018, an increase in bank charges of $1.3 million and additional borrowing costs of $1.8 million as a result of the Taurus Facility. During the twelve months ended December 31, 2018, interest incurred and amortization of deferred financing costs related to the Taurus Facility recorded as expense were $2.3 million. An additional $7.1 million of interest incurred and amortization of deferred financing costs related to the Taurus Facility directly attributable to the development of Wahgnion has been capitalized. As a result of the adoption of IFRS 15, the Company continues to record non-cash accretion expense at a rate of approximately 9 percent on the gold stream liability for so long as the gold stream liability remains outstanding. For additional details, please see the Critical Accounting Policies and Estimates section of this MD&A. Net foreign exchange losses Net foreign exchange losses of $2.7 million were recorded in 2018 by the Company compared to $4.6 million in the period year period. The decrease was mainly due to larger movements during the prior year period between the US dollar and the Euro compared to the current year. Other income Other income for the twelve months ended December 31, 2018 was $8.5 million compared to $4.5 million in the prior year period. The increase in other income was mainly due to gains on forward gold sales contracts of $7.5 million and a decrease in the fair value of the share warrant liability of $1.1 million in 2018. The prior year period also included a $1.2 million milestone payment received pursuant to an option agreement with Algold Resources Ltd and $2.5 million gain on sale of marketable securities. 24 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 Income tax expense The Company records a current income tax expense on taxable income earned in Senegal at a rate of 25 percent. Current income tax is calculated using local tax rates on taxable income, which is estimated in accordance with local statutory requirements and is denominated in the Senegalese currency (CFA Franc). The tax basis of all assets and non-current intercompany loans are recorded using historical exchange rates and translated to the functional currency using the period end exchange rate, and as a result, the Company’s deferred tax balances will fluctuate due to changes in foreign exchange rates. Current income taxes are also affected by changes in foreign exchange rates as unrealized foreign exchange gains as well as losses, recorded in accordance with local statutory requirements, are taxable / deductible for purposes of calculating income tax in Senegal. The Company also has a number of development and exploration projects in Burkina Faso and Côte d’lvoire, which currently do not generate any profit subject to income tax. For the twelve months ended December 31, 2018, the Company recorded income tax expense of $23.3 million, comprised of current income tax expense of $13.0 million and deferred income tax expense of $10.3 million. In the prior year period, an income tax expense of $2.4 million was comprised of a current income tax expense of $6.9 million and a recovery of deferred income taxes of $4.5 million. Higher current income tax expense in the current period was mainly due to higher profit subject to tax combined with realized and unrealized foreign exchange gains, due to movement of the US dollar against the local currency, partially offset by higher depreciation as a result of conversion to SYSCOHADA. Higher deferred income tax expense was mainly due to unrealized foreign exchange gains recognized in the current period for tax purposes as well as lower net book value of assets as a result of higher depreciation. In the prior year period, unrealized foreign exchange losses lowered both current and deferred taxes. Net profit Consolidated net profit attributable to shareholders was $11.8 million ($0.11 per share) for the twelve months ended December 31, 2018 compared to $31.9 million ($0.30 per share) in the prior year period. The decrease was primarily attributable to an increase in income tax expense of $20.9 million, as an increase in gross profit of $12.5 million from higher revenues and gains on gold forward sales contracts of $7.5 million was partially offset by non-cash accretion expense of $8.9 million, from the adoption of IFRS 15, and marginally higher expenses. Adjusted net profit attributable to shareholders1 was $18.1 million ($0.17 per share) for 2018 compared to $30.1 million ($0.28 per share) in the prior year period. The decrease was mainly attributable to higher income tax expense and finance costs, partially offset by higher gross profits as a result of higher revenues. Adjusted net profit attributable to shareholders1 excludes gains and losses on gold forward sales contracts, accretion expense, net foreign exchange losses, the impact of foreign exchange movements on deferred taxes and other non-cash fair value changes. 1 This is a non-IFRS financial measure. Please refer to the reconciliation of non-IFRS financial measures at the end of this MD&A. Annual Report 2018 25 Management‘s Discussion and Analysis December 31, 2018 FINANCIAL CONDITION REVIEW Summary Balance Sheet Balance Sheet Cash and cash equivalents Trade and other receivables Inventories Deferred tax assets Marketable securities Other assets1 Total assets Trade and other payables Borrow ings Provisions Gold stream liability Gold offtake payment liability Share w arrant liability Current income tax liabilities Other liabilities Total liabilities Total equity As at Decem ber 31, 2018 As at Decem ber 31, 2017 46,615 87,671 9,079 5,484 151,713 160,662 16,196 26,491 324 964 715,960 534,960 939,887 816,232 75,094 54,165 87,097 14,307 42,568 34,303 88,762 46,209 13,699 - 1,969 - 13,124 7,634 10,447 10,059 332,760 166,677 607,127 649,555 1 Includes P ro perty, P lant and Equipment, Other Current A ssets and Other No n-Current A ssets. Balance Sheet Review Cash The Company’s cash balance at December 31, 2018 was $46.6 million, $41.1 million lower than the balance at the start of the year. Refer to the Liquidity and Cash Flow sections below for further details. Trade and Other Receivables The trade and other receivables balance of $9.1 million includes $2.8 million and $3.0 million in Senegalese and Burkinabe value added tax (“VAT”) recoverable, respectively. In February 2016, the Company received an exemption for the payment and collection of refundable Senegalese VAT. This exemption is governed by an amendment to the Company’s mining convention and expires on May 2, 2022. The Senegalese VAT receivable at the end of December 31, 2018 primarily relates to Senegalese VAT amounts paid prior to May 2017. Burkinabe VAT represents amounts paid within 24 months prior to commencement of operations at Wahgnion. On December 20, 2017, the Company received an exoneration from Burkinabe VAT directly related to mining services during the construction phase from the Burkinabe government on Wahgnion. Other Assets Other assets increased by $181.0 million to $716.0 million as at December 31, 2018. The increase was largely attributable to additions to property, plant and equipment of $251.7 million, mainly a result of the Company’s on-going construction of Wahgnion and $14.4 million from the acquisition of the Afema project, partially offset by depreciation expense of $72.1 million, and an increase in gold hedge derivative assets of $2.6 million. 26 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 Borrowings Borrowings increased by $72.8 million to $87.1 million as at December 31, 2018. The increase was attributable to a $112.2 million drawdown of the Taurus Facility, net of $25.1 million of deferred financing costs. The balance at December 31, 2017 consisted of the $15.0 million under a revolving credit facility with Société Générale S.A. (“Revolver Facility”), net of $0.7 million in deferred financing costs. In May 2018, the Revolver Facility was repaid and the associated deferred financing costs were recorded as expenses of the current period (see Liquidity and Capital Resources Outlook section for more details). As at Decem ber 31, 2018 As at Decem ber 31, 2017 Revolver credit facility Principal outstanding Deferred financing costs Total Revolver Credit Facility Secured developm ent finance facility Principal outstanding Deferred financing costs Total Secured Developm ent Finance Facility Total Borrow ings Deferred financing costs detail: Financing costs Fair value of gold offtake payment liability Share w arrants issued Accumulated amortization of deferred financing costs Total deferred financing costs Gold Stream Liability - - - 112,200 (25,103) 87,097 87,097 15,000 (693) 14,307 - - - 14,307 As at Decem ber 31, 2018 As at Decem ber 31, 2017 12,278 14,015 3,105 (4,295) 25,103 2,321 - - (1,628) 693 During the twelve months ended December 31, 2018, the Company delivered 22,500 ounces of gold to Franco-Nevada and recorded revenue of $28.2 million, consisting of $5.7 million received in cash proceeds and $22.5 million recorded as a reduction of gold stream liability. As a result of adopting IFRS 15, a cumulative adjustment to re-measure the gold stream liability of $56.1 million was recognized on January 1, 2018 with a corresponding decrease in opening retained earnings. The adoption of IFRS 15 also resulted in a non-cash $9.0 million expense during the twelve months ended December 31, 2018 related to the accretion of the gold stream liability from the passage of time. Gold Offtake Payment Liability In conjunction with the Taurus Facility, the Company entered into the Offtake Agreement on May 31, 2018 (see Financial Instruments section for more details). The balance of $13.7 million at December 31, 2018 represents the fair value of the Offtake Agreement at the end of the reporting period. The Company has estimated the fair value of the Offtake Agreement using a discounted cash flow model based on Wahgnion’s life of mine production up to the first 1,075,000 ounces of gold, a discount rate of 9.0 percent and the average spread between gold spot price per ounce and the lowest gold price per ounce during the preceding eight days for each trading day in the past ten-year period. Amounts owing to Taurus Funds will be settled in cash; Taurus Funds does not take physical delivery of gold ounces sold at any time. Annual Report 2018 27 Management‘s Discussion and Analysis December 31, 2018 Share Warrant Liability In conjunction with the Taurus Facility, the Company granted two million units of unlisted four-year share warrants to Taurus Funds on April 16, 2018. Each warrant allows the holder to acquire one common share of the Company at an exercise price of C$5.22 (see Financial Instruments section for more details). At December 31, 2018, the share warrants have been fair valued at $2.0 million, using the Black-Scholes option pricing model. Current income tax liabilities Current income tax liabilities increased by $5.5 million to $13.1 million as at December 31, 2018. The increase was largely attributable to a provision for current income tax payable of $13.0 million, which was partially offset by $7.5 million settlement of prior year’s tax payable in cash and redemption of VAT certificates. In November 2018, Sabodala received qualified status under an “export free enterprise” investment program in Senegal, which provides certain benefits to Sabodala, including lower rates for customs duties, business taxes and potentially lower income tax rates provided Sabodala continues to export more than 80 percent of its gold production. This status is valid until October 2021. REVIEW OF QUARTERLY FINANCIAL RESULTS (US$000s, except w here indicated) 2018 2017 Q4 2018 Q3 2018 Q2 2018 Q1 2018 Q4 2017 Q3 2017 Q2 2017 Q1 2017 Revenue 76,140 64,196 86,050 86,242 88,280 61,041 72,040 70,322 Average realized gold price ($/oz)1 1,232 1,209 1,301 1,326 1,279 1,277 1,260 1,226 Cost of sales Net profit / (loss) 59,374 51,676 59,997 59,470 64,149 49,225 54,281 54,458 (10,639) 7,866 11,586 2,981 5,758 10,370 9,640 5,592 Net earnings / (loss) per share2 (0.10) 0.07 0.11 0.03 0.05 0.10 0.09 0.05 Operating cash flow 41,784 17,371 19,181 13,719 32,452 10,235 7,434 21,258 1 A verage realized go ld price is a no n-IFRS financial measure that do es no t have a standard meaning under IFRS. P lease refer to No n-IFRS P erfo rmance M easures at the end o f this M D&A . 2 On M ay 8, 2017, the Co mpany co mpleted a five-fo r-o ne co nso lidatio n o f co mmo n shares o f the Co mpany. Our revenues over the last several quarters reflect the variation in quarterly production and fluctuations in gold price. Cost of sales were driven by production volumes and were also influenced by fuel costs, foreign currency movements and operational efficiencies. Operating cash flow levels fluctuate depending on the price of gold and production levels each quarter. The decrease in revenue during the third quarters 2018 and 2017 were primarily related to the rainy season in West Africa, which typically has a negative impact on processing throughput rates due to the necessity of processing a higher proportion of harder rock. Net loss recorded during the fourth quarter 2018 was mainly due to net losses on gold forward sales contracts of $7.1 million. Higher operating cash flows in the fourth quarter 2017 were mainly due to higher gold ounces sold. The decrease in operating cash flows in the second quarter 2017 was mainly due to the timing of income tax payments related to 2016. BUSINESS AND PROJECT DEVELOPMENT Wahgnion Gold Project Resource and Reserve Update The Company improved the Wahgnion’s economics following completion of the infill drill program designed to convert inferred resources to indicated resources and reserves. Based on drill results from a 73,000 metre infill drill program completed in 2017, the updated combined measured and indicated mineral resource is now 50.5 million tonnes at a grade of 1.51 g/t for 2.44 million contained ounces of gold. The updated gold reserves are 31.1 million tonnes at a grade of 1.61 g/t for 1.6 million ounces and is derived from four deposits (Nogbele, Fourkoura, Samavogo, and Stinger) within the Wahgnion mine license. The updated mineral reserve estimate and feasibility study represents an increase of approximately 40 percent in gold reserves compared to the previous study. The update also extends the mine life from 9 to 13 years and improves the first five-year production and cost profiles. 28 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 Teranga released an updated mineral reserve estimate and feasibility study for the Wahgnion development project on October 31, 2018. Construction and Development Update First gold pour is well on track for the fourth quarter 2019, in line with the NI 43-101 technical report released on October 31, 2018. Total construction capital remains largely in line with the estimates outlined in the feasibility study, other than some unfavourable variances for fuel and foreign exchange, which are moderately impacting equipment, labour and material costs. The majority of the project contingency remains unused. Construction is being managed by an owner’s management team with responsibility for delivering site infrastructure, which includes tailings, mine site services, and initiation of mine operations. Lycopodium Limited is responsible for the plant construction under the engineering, procurement, and construction management (“EPCM”) arrangement. Key project achievements are: • Over 2.5 million hours worked without a lost time incident. • Development is on schedule with approximately $132 million spent to date of a total commitment value of $209 million, representing approximately 82 percent of total project costs. • • • • • • • • The project is at peak construction with over 1,700 workers on site (including local casual labour). As the project schedule nears the final phases of construction and commissioning, planning focus has shifted to operations readiness that includes the final stages operations personnel hiring and promoting existing staff, including placing priority on key positions post construction. Engineering and drafting was completed in the fourth quarter and all civil, structural and mechanical drawings have been issued for construction. Steel fabrication was completed and has been largely delivered to site. Plant construction is on schedule with delivery of most process equipment already on site (including generator sets, the SAG and ball mills), concrete pours are nearing completion, structural steel installation have commenced and all carbon-in-leach tanks are installed. Construction of the tailings storage facility has neared completion. The outer embankments have been completed, liner installation is approximately 35 percent complete and construction of the internal decant access ramp will commence when fresh rock is available in the second quarter 2019. The main camp area and essential services are now complete, with near completion of the mine services areas, site infrastructure and administration buildings. Power station concrete work is over 80 percent complete, the generator sets have been installed and structural steel has commenced for the pipe racks, building frame and fuel storage facilities. Construction of resettlement sites continued through the quarter with completion of multiple dwellings and successful resettlement of families. Construction remains ongoing in two separate settlement areas; completion of the first area is expected in the first quarter 2019 while completion of the second area is expected to be completed in the second quarter 2019. Management is preparing the commissioning schedule for plant production ramp-up to nameplate capacity after mechanical completion. With the project well on track, management is preparing a new mine plan for 2019 to mine more material than planned in last year’s technical report to accommodate an earlier than planned commissioning of the plant. Based on current progress of construction, production ramp up through the fourth quarter 2019 is expected to exceed the original estimate in last year’s technical report. Afema Project The Afema project is located in southeast Côte d’Ivoire and covers more than 1,400 km2, consisting of the Afema mining license (“Afema ML”) and three exploration permits – Ayame, Mafere and Aboisso (collectively, the “Afema Permits”). On January 25, 2018, the Company, Sodim Limited (“Sodim”) and the Government of Côte d’Ivoire concluded an amendment to the existing mining convention applicable to the Afema ML (“Amended Convention”). Pursuant to the Amended Convention, and the Government of Côte d’Ivoire’s agreement to extend initial construction timelines under the initial convention, the Company, as operator of the Afema project, must deliver an economic evaluation on an initial Afema project within 15 months of the Amended Convention (“Economic Evaluation”). Upon delivery of the Economic Evaluation, the Company and Sodim have up to 12 months to commence construction and up to 36 months to deliver initial production. Annual Report 2018 29 Management‘s Discussion and Analysis December 31, 2018 On March 22, 2018, the Company entered into an agreement with Sodim to acquire the Afema ML and Afema Permits. Under the terms of the agreement, the Company maintains its interest in the Afema ML and Afema Permits through the completion of a three-year $11.0 million exploration and community relations work program, increasing its interest to 70 percent on the Afema ML through the delivery of a confirmation study, feasibility study or updated feasibility study on the Afema project and Teranga’s commitment to fund its 70 percent interest in the proposed project through construction. Upon reaching this point, Sodim can either elect to either (i) maintain its 30 percent equity interest on a fully participatory basis, (ii) maintain a 5 percent interest on a free carry basis, or (iii) receive a 3 percent net smelter returns royalty on the Afema project. As at December 31, 2018, the Company was on track in meeting its commitments under the work program to retain its 51 percent interest and continues to work towards the completion of an economic and technical study of a project within the Afema ML. Teranga expects to solely fund and manage the exploration programs and technical studies under the Afema project. Management is in the process of assessing previous work within the original Afema ML, including an update of the previously defined oxide resources, analysis of the historical metallurgical test work and an initial review of the baseline environmental work. Management expects a determination of potential for future Canadian Institute of Mining and Metallurgy compliant resources through a resource delineation program and a potential processing solution for the oxide ore during 2019. Agreement with ACC Resources Limited In 2018, the Company signed an agreement with ACC Resources Limited and ACC Ressources Sarl to establish a shared exploration entity within the Dossi permit area in Burkina Faso. Teranga will endeavour to determine the technical and economic viability of processing ore identified and anticipated to be identified from target areas leveraging the anticipated infrastructure to be developed in connection with the positive completion of a feasibility study for its adjacent Golden Hill exploration and development project in Burkina Faso. The Dossi permit is contiguous with the northernmost part of the three Golden Hill exploration permits. EXPLORATION Exploration highlights during fourth quarter 2018 included the Company announcing more encouraging drill results from Golden Hill in Burkina Faso and continuing the advancement of both the Afema ML and Afema Permits in Côte d’Ivoire. Burkina Faso Wahgnion Mine License Reserve Development The second phase of grade control drilling at the Nogbele deposit was initiated in December 2018 with 128 reverse circulation holes comprising 3,867 metres completed during the fourth quarter of 2018. Nogbele grade control drilling will continue into early 2019. Very positive milestones were attained in 2018 including the revised resource estimate which resulted in a 33 percent increase in measured and indicated resources to the current estimate of 2.44 Mozs (50.5 MTonnes grading 1.51 g/t Au) and the subsequent 40 percent increase in the Wahgnion gold reserves to the current estimate of 1.61 Mozs (31.07 MTonnes grading 1.61 g/t Au). The Company announced the increase in gold reserves for Wahgnion and released an updated NI 43-101 technical report reflecting a revised resource estimation, updated gold reserves, as well as a new mine plan for Wahgnion on October 31, 2018. For further details, please refer to the Teranga Gold Corporation news releases dated September 24, 2018 and October 31, 2018. Golden Hill Property During the fourth quarter 2018, the Company continued the advanced exploration program at Golden Hill with further diamond core and reverse circulation drilling at the Ma Main and Ma North prospects. A total of 47 diamond core holes comprising 6,639 metres were completed at the Ma Main (30 holes totalling 4,227 metres) and Ma North prospects (17 holes totalling 2,412 metres). In addition, the Company completed 14 reverse circulation holes comprising 1,866 metres at the Ma Main prospect. In addition, during the fourth quarter, the Company announced positive drilling results at the Ma Main, Ma North and Jackhammer Hill prospects. For further details, please refer to the Teranga Gold Corporation news release dated December 4, 2018. Drilling activity continued at a very rapid pace in 2018 with a total of 303 diamond core holes (38,485 metres) and 52 reverse circulation holes (5,263 metres) completed at a number of advanced prospects at Golden Hill. Positive results from the advanced exploration drilling program completed thus far at nine Golden Hill prospects has enabled release of 30 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 an initial resource estimate for the project’s most advanced prospects. On February 21, 2019, the Company announced an early-stage initial resource estimate for Golden Hill (effective November 30, 2018) comprised of 6.4 million tonnes at a grade of 2.02 g/t in the indicated category for 415,000 ounces and 11.95 million tonnes grading at 1.68 g/t in the inferred category for 644,000 ounces of gold. During the year, the Company issued a total of seven news releases outlining results from the positive drilling campaign at Golden Hill. A cumulative table of all available drill results, comprising all drilled prospect areas, is located on the Company’s website at www.terangagold.com under “Exploration”. Côte d’Ivoire In addition to its interest in the Afema project (inclusive of a 1,400 km2 land package comprised of the Afema ML and Afema Permits), the Company holds, by way of an exploration agreement, three greenfield exploration tenements totalling nearly 1,200 km2 in Côte d’Ivoire. Afema ML Property During the fourth quarter 2018, the Company continued with geological and structural evaluations focusing on oxide- mineralization expansion opportunities along the Afema Shear Zone as well as both the separate and distinct Niamienlessa and Woulo Woulo structural trends. Preliminary field exploration programs continued at a series of historic and new target areas throughout the Afema ML. Initial drilling began in the fourth quarter with 12 reverse circulation holes totalling 453 metres completed at the Aniuri and Asupiri prospects and 19 mechanical trenches (1,056 metres) were excavated, mapped and sampled. In addition, the stream sediment bulk leach extractable gold (“BLEG”) sampling program was initiated across the Afema ML. The 2018 exploration program has achieved many of its goals including data accumulation, revised resource estimation, preliminary metallurgical evaluation, initiation of excavator trenching and reverse circulation resource-focused drilling. Afema Regional Properties (Ayame, Mafere, Aboisso) During the fourth quarter 2018, the Company initiated a property-wide stream sediment BLEG sampling program to cover all three exploration permits. Guitry Property The primary exploration target at the Guitry property is an extensive gold-in-soil geochemical anomaly covering an approximate 3 kilometre by 7 kilometre area. Results from the first ever drill program at Guitry, designed to evaluate the central 1,000 metre strike extent within the extensive gold-in-soil anomaly, included: 24 metres grading 2.02 g/t Au (GUAC008), 4 metres grading 5.80 g/t Au (GUAC015) and 20 metres grading 6.37 g/t Au (GUAC018). The Company initiated a mechanical trenching program late in the fourth quarter of 2018. Completion of the mechanical trenching program, with plans to follow-up favourable results with reverse circulation and diamond core drilling, will be undertaken in 2019. Sangaredougou Property In the fourth quarter 2018, the Company completed a ground magnetics geophysical survey, an infill and step-out soil sampling program and started a hand-pitting program within the current geochemically anomalous gold-in-soil trends. The Company plans further hand-pitting, mechanical trenching and follow-up drilling in 2019. Dianra Property During the fourth quarter 2018, a series of hand pits were excavated across a favourable northeast to southwest trending structural zone hosting a high priority gold-in-soil geochemical anomaly with an approximate 6 kilometre strike length. The Company plans a mechanical trenching exploration program and follow-up drilling in 2019. Annual Report 2018 31 Management‘s Discussion and Analysis December 31, 2018 HEALTH AND SAFETY Sabodala Health and safety remains the principal priority at Sabodala and all personnel are involved on the extensive campaigns to integrate a safety awareness culture as part of their daily activities. Safety is the first topic of all meetings and site reports, whether they are on a daily, weekly, monthly or annual basis. The Company’s operational health and safety program focuses on proactive, people-based safety management using a documented systematic approach. Furthermore, advanced supervisor safety training was started along with supervisor forums to assist supervisors on key skills to become an effective leader. The Company also initiated a wellness program to raise awareness on issues impacting health and well-being, including the health benefits of physical activity, healthy eating, smoking cessation, responsible alcohol use and positive mental health. In 2019, the focus will be consequence management training and appointing risk champions to manage risk changes. The ergonomic and occupational hygiene program is expected to be initiated by the second quarter 2019 and safety representative development continues to move forward. Wahgnion Wahgnion continues to uphold Teranga’s reputation for safety performance and the belief that safety is our responsibility. During 2018, Wahgnion had reached multiple milestones without incurring a single Lost Time Injury (“LTI”). During the fourth quarter 2018, Wahgnion achieved 2 million hours free of LTIs and has continued to surpass this milestone into 2019. As construction activities wind down and operational activities ramp up through the latter part of 2019, safe work education of the operational team will be a primary focus. CORPORATE SOCIAL RESPONSIBILITY Teranga’s Corporate Social Responsibility (“CSR”) program continues to set a high standard for socially responsible mining. As a proud supporter and participant in the 2030 United Nations Sustainable Development Goals program, Teranga specifically focuses on four areas: eradicating hunger, providing quality education, creating good jobs and economic growth and consummating partnerships for goals. Senegal Community Relations In 2018, Teranga continued its community investment program working with the funding of numerous projects in and around the Sabodala mine site, spending a total of $1.2 million on social programs during the year. Major highlights of the Sabodala community investment program include the following: • • • • Food and Income Generation: developed a new market garden in Khossanto, a community located 20 km from the Sabodala mine, donated eight sets of equipment for agricultural transformation (mills, grinders, and peelers) as part of the program’s focus on female empowerment, and drilled numerous bore holes for cattle drinking points. Education: constructed three classrooms and provided funding of 90 bursary programs for children to attend high school. Hygiene and Sanitation: constructed two maternity wards, drilled several boreholes to provide access to clean water for local communities and, in collaboration with a regional organization, initiated a program to finance free medical treatment in the Sabodala village and the regional capital city of Kedougou. Through this initiative, more than 1,200 people consulted with a doctor and benefitted from treatment and medication. Sport and Culture: financed the pilgrimage of 18 village chiefs and Imams of the communities around Sabodala to Mecca. The Gora fund, designed to assist the local communities in developing new sustainable economic activities, was active throughout the year including funding the purchase of a bus to provide transportation throughout the region, and the provision of grain mills for the women. The Gora fund will continue to support the local communities over the next several years well beyond the closure of the Gora pit in the third quarter of 2018. 32 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 Sabodala Village Resettlement In 2018, resettlement activities ramped up significantly, with the support of the international consultancy firm, ERM Group, Inc. (“ERM”). During the year, negotiations with the communities led to an agreement on housing design, resettlement site locations and compensation. Construction of the new resettlement site began during the second half of 2018 and as community buildings are nearing completion, construction of private residences has begun. The Sabodala village resettlement is expected to be completed by mid-2020. Currently the Sabodala village sits atop Niakafiri, the largest deposit on the Sabodala mine license. Once the resettlement is complete in mid-2020, the Company will resume infill drilling and mining activities at the Niakafiri deposit. Burkina Faso Community Relations Teranga is taking its strong social program in Senegal and replicating its approach in Burkina Faso, the home of its soon to be second mine, Wahgnion. In 2018, we expanded the Wahgnion community relations program and strengthened our relationships with the local communities and administration. We also created and implemented the Wahgnion community relations framework, which provides a roadmap for the long-term success of our social programs in Burkina Faso. This framework includes formal plans relating to stakeholder engagement, local employment, local procurement, social investment and social closure guidelines. As part of the framework process, Teranga implemented a local pre-selection committee for unskilled labor, composed of community representatives, which have recruited more than 550 people for the Wahgnion project. In addition, the Company signed an agreement to fund a commune development plan, a government planning document on socio- economic development of the area. This plan will be entirely funded by Teranga and is expected to be completed in late 2019. It will define the priorities of the commune for the next five years and establish the foundation for Teranga’s community investment priorities in the area. In 2018, Teranga contributed $120,000 to finance school equipment, a community ambulance, road rehabilitation efforts, as well as, a number of smaller community initiatives. In 2019, Teranga will continue to pursue community investments and will be retaining a local consultant to perform a local procurement study to identify the key opportunities in the area. Wahgnion Area Resettlement In 2018, Wahgnion area resettlement activities ramped up with the support of ERM. All elements of resettlement compensation including housing design, new relocation sites and compensation were negotiated concurrently with all affected communities. The framework for all villages to be resettled, irrespective of timing of relocation, has been agreed upon. The first two resettlement sites, Songha (51 households) and Zievogo (43 households), are under construction, with 17 households resettled. All community buildings and private residences are expected to be completed by mid- 2019. Additional communities will be resettled over the course of the next five years, in advance of mining activities in those areas. Livelihood restoration activities are well underway with the payment of financial compensations for the first lands acquired, the replacement of 150 hectares of land and several accompanying programs, including financial literacy training. Other initiatives include new crop projects, such as cassava farming, transformation of agricultural products for women (such as cassava flour) and market gardening. The construction of the first communal irrigated plot is underway and should be ready for the 2019 agricultural season. In 2019, relocation activities will advance in accordance with the mine plan. Golden Hill At Golden Hill, Teranga’s advanced exploration project about 250 km east of Wahgnion, the Company will increase the scope of its community relations activities with a full-time recruit and launch stakeholder engagement activities. Annual Report 2018 33 Management‘s Discussion and Analysis December 31, 2018 Côte d’Ivoire Community Relations In 2018, we began our community development activities in Côte d’Ivoire. On the Afema project, a consultant was retained to perform a social assessment of the area and the needs for community investment. Several community investment projects were completed, including the funding of health supplies to support local clinics. Furthermore, a number of cultural events were sponsored. MARKET REVIEW – IMPACT OF KEY ECONOMIC TRENDS Gold Price The price of gold is the largest factor in determining our profitability and cash flow from operations. During 2018, the average London PM fix price of gold was $1,268 per ounce, with gold trading between a range of $1,178 and $1,355 per ounce. This compares to an average of $1,257 during 2017, with a low of $1,151 per ounce and a high of $1,346 per ounce. The price of gold is subject to volatile price movements over short periods of time and is affected by numerous industry and macro-economic factors that are beyond our control including, but not limited to, currency exchange rate fluctuations, the relative strength of the U.S. dollar, the supply of and demand for gold and macroeconomic factors such as the level of interest rates and inflation expectations. The Company has entered into gold forward contracts to provide greater certainty of cash flows from the Company’s Sabodala mine as construction activities at Wahgnion continues. On December 19, 2018, the U.S. Federal Reserve raised its benchmark interest rate by a quarter of a percentage point, to a range of 2.25 percent to 2.50 percent. This marked the fourth interest rate increase in 2018 and for the ninth time since the 2008 to 2009 financial crisis. The U.S. Federal Reserve has raised rates with steady regularity as the U.S. economy has remained strong. A mix of factors, including a global economic slowdown, a trade war between the U.S. and China, mild inflation, and volatile stock markets has led the U.S. Federal Reserve to consider slowing its rate increases in 2019 to avoid weakening the economy. It is expected that the U.S. Federal Reserve will adjust its rate policy to the latest economic data and be more flexible. After the two rate increases that the U.S. Federal Reserve now envisions for 2019, it foresees one final increase by 2020, which would raise the benchmark rate to 3.1 percent. By 2021, four U.S. Federal Reserve officials envision reversing course and decreasing rates to help stimulate the economy. Gold prices has benefitted from the macroeconomic and geopolitical developments late in 2018, with gold prices gaining 5 percent in December to end 2018 at $1,281 per ounce. Overall, we anticipate the gold price will remain at, or slightly above, current spot prices in the near-term and are bullish over the medium to long-term based on supply and demand fundamentals expectations for U.S. monetary policy. While the gold market is affected by fundamental global economic changes, we are also aware that the market is strongly impacted by expectations, both positive and negative. We appreciate that institutional commentary can affect such expectations. As such, our priority is to execute on our strategy of maximizing shareholder value through effective management of our Sabodala gold mine, completion of the Wahgnion gold mine and prudent capital allocation in connection with our development and exploration programs. Oil Price Fuel costs related to power generation and operation of the mobile fleet are the single largest cost to the Sabodala mine. Fuel purchased to operate the power plant and mobile equipment fleet totaled approximately $38.9 million in 2018 or approximately 24 percent of gross mine production costs. The Sabodala operation is located in remote, southeastern Senegal and it is necessary to generate our own power. Six, 6-megawatt Wartsila generator engines provide power for operations. In 2018, operations consumed approximately 32 million litres of heavy fuel oil (“HFO”). This equated to a cost of approximately $0.164 per kilowatt hour, which is less than the cost of grid electricity in industrialized Senegal. Sabodala’s mobile fleet runs on light fuel oil (“LFO”) and the operations consumed approximately 21.2 million litres of LFO in 2018. We source our HFO and LFO from an international fuel supplier with a local distribution network in Senegal. Our main benchmark for fuel prices is Brent crude. The average Brent crude price was $71 per barrel in 2018, reaching a high of $86 per barrel and dropping to below $55 per barrel. Worldwide crude oil prices are expected to average $61 per barrel in 2019 according to the Short-term Energy Outlook by the U.S. Energy Information Administration while banks see Brent crude prices averaging $68 to $73 per barrel in 2019. The key drivers behind the anticipated increase 34 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 are the Organization of the Petroleum Exporting Countries, Russia and other producers launching new production cuts that aim to remove 1.2 million barrels of crude oil per day from worldwide markets, as well as production cuts in Canada due to deficiencies in storage and distribution infrastructure. Pipeline bottlenecks are also impacting U.S. crude oil production growth. New pipelines expected in the second half of 2019 is expected to bring oil from the Permian Basin to markets putting downward pressure on crude oil prices. The biggest factor to crude oil prices remains a trade war between the U.S. and China. An economic slowdown in China could also have a negative impact on energy markets as Asia drives global oil consumption. The government in Senegal sets prices for various types of fuels consumed in the country, and they review these prices every 4 weeks. Price stabilization levies are applied in times of low market prices. The Company does not have any oil hedges in place. Management may consider entering into oil hedge contracts should the price and terms be deemed advantageous. Currency A significant portion of operating costs and capital expenditures of the Sabodala Gold Mine’s operations are denominated in currencies other than U.S. dollars. Historical accounts payable records demonstrate that Sabodala has approximately 40 to 50 percent Euro currency exposure via the West African CFA Franc, which is pegged directly to the Euro currency. Overall, the Euro weakened from to 1.25 to 1.13 against the USD as the U.S. Federal Reserve raised interest rates despite the European Central Bank winding down its quantitative easing policy, and the U.S. economy stayed firm despite stock market volatility towards the end of 2018. Furthermore, European economic indicators indicate a weak growth outlook in Eurozone economic activity. All the Company’s operations are located in West Africa where the CFA Franc is the local currency used. As a result, costs will continue to be exposed to foreign exchange rate movements. We monitor currency exposure on an ongoing basis. We had previously hedged a portion of its exposure to the Euro using forward contracts, however we currently do not have any currency hedges in place. We will regularly assess currency exposures and may consider entering into hedge programs should the price and terms be acceptable. LIQUIDITY AND CASH FLOW Cash Flow (US$000s) Cash Flow Operating activities before changes in w orking capital excluding inventories Changes in non-cash w orking capital excluding inventories Operating Investing Financing Effect of exchange rates on cash holdings in foreign currencies Change in cash and cash equivalents during the period Cash and cash equivalents - beginning of period Cash and cash equivalents - end of period Three m onths ended Decem ber 31, Tw elve m onths ended Decem ber 31, 2018 2017 2018 2017 25,384 16,400 41,784 (79,726) 6,709 (1,901) (33,134) 79,749 46,615 24,708 7,744 32,452 96,649 (4,589) 92,060 (18,159) (215,296) (289) 80,140 707 14,711 72,960 87,671 2,040 (41,056) 87,671 46,615 82,610 (11,231) 71,379 (75,836) (3,808) 748 (7,517) 95,188 87,671 (US$000s) Three m onths ended Decem ber 31, Tw elve m onths ended Decem ber 31, Changes in w orking capital excluding inventory (Increase)/decrease in trade and other receivables (Increase)/decrease in other assets Increase/(decrease) in trade payables and other (Decrease)/increase in provisions Increase/(decrease) in current income taxes payable Net change in w orking capital excluding inventory 2018 (195) (890) 17,098 (85) 472 16,400 2017 97 2,132 1,852 (3) 3,666 7,744 2018 (5,367) 741 (7,372) 106 7,303 (4,589) 2017 (1,769) 2,978 (5,128) (88) (7,224) (11,231) Annual Report 2018 35 Management‘s Discussion and Analysis December 31, 2018 Sources and Uses of Cash Cash Flow - Details (US$000's) Sabodala Corporate Wahgnion Exploration Consolidated Cash Flow Three m onths ended Decem ber 31, 2018 600 9,707 (3,535) 41,784 Operating Investing 35,012 (19,253) - Expenditures for mine development - sustaining (16,291) - Expenditures for property, plant and equipment - sustaining (2,962) - Expenditures for mine development - growth - Expenditures for property, plant and equipment - growth - Acquisition of intangibles - Investment in Boss Gold and Boss Minerals Financing - Proceeds from drawdown of borrowings - Financing costs paid - Interest paid on borrowings Effect of exchange rates on cash holdings in foreign currencies Change in cash and cash equivalents during the period - - - - - - - - (53,231) (7,242) (79,726) - - (8,041) (45,133) (57) - - - - - - (7,242) - - 6,709 - - - - - - - (1,901) 576 80 (2,557) 16,335 7,389 (46,081) (10,777) (33,134) Cash Flow - Details (US$000's) Sabodala Corporate Wahgnion Exploration Consolidated Cash Flow Three m onths ended Decem ber 31, 2017 Operating Investing 42,279 (4,440) (3,362) (2,025) 32,452 (11,515) 3,873 (9,996) - Expenditures for mine development - sustaining (8,946) - Expenditures for property, plant and equipment - (2,570) - - 1 - (289) (289) - 634 73 - - (4,526) (18,159) (521) (8) - - (5,470) (513) - - - - - - - - - - (289) 707 31,109 (494) (13,358) (2,546) 14,711 - - - - - - - 6,709 10,000 (869) (2,422) (93) (10) - - (14) 3,990 - sustaining - Expenditures for mine development - growth - Expenditures for property, plant and equipment - growth - Expenditures for intangibles - Proceeds from sale of marketable securities Financing - Interest paid on borrowings Effect of exchange rates on cash holdings in foreign currencies Change in cash and cash equivalents during the period 36 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 Cash Flow - Details (US$000's) Sabodala Corporate Wahgnion Exploration Consolidated Cash Flow Operating Investing 105,720 (8,129) 9,424 (14,955) 92,060 (63,966) (1,171) (137,300) (12,859) (215,296) Tw elve m onths ended Decem ber 31, 2018 - Expenditures for mine development - sustaining (54,572) (552) - - - Expenditures for property, plant and equipment - sustaining (9,312) (293) - - - Expenditures for mine development - growth - - (23,138) - - Expenditures for property, plant and equipment - growth - - (113,837) (454) - Investment in marketable securities - (77) - - - Expenditures for intangibles - Investment in Afema Project - Cash from in Afema Project (82) (249) (325) - - - - (5,303) - - - 140 - Investment in Boss Gold and Boss Minerals - - - (7,242) Financing (301) 80,441 - - 80,140 - Proceeds from drawdown of borrowings - 112,200 - - - Repayment of borrowings - Financing costs paid - (15,000) - - - (12,278) - - - Proceeds from stock options exercised - 609 - - - Interest paid on borrowings (301) (5,090) - - Effect of exchange rates on cash holdings in foreign currencies Change in cash and cash equivalents during the year 3,926 514 (2,400) - 2,040 45,379 71,655 (130,276) (27,814) (41,056) Cash Flow - Details (US$000's) Sabodala Corporate Wahgnion Exploration Consolidated Cash Flow Operating Investing 97,871 (14,398) (4,564) (7,530) 71,379 (54,167) 2,982 (24,110) (541) (75,836) Tw elve m onths ended Decem ber 31, 2017 - Expenditures for mine development - sustaining (43,425) (337) - (28) - Expenditures for property, plant and equipment - sustaining (10,519) (202) - - - Expenditures for mine development - growth - - (17,199) - - Expenditures for property, plant and equipment - growth - - (6,911) (513) - Investment in marketable securities - (393) - - - Expenditures for intangibles (223) (76) - - - Proceeds from sale of marketable securities - 3,990 - - Financing (3,815) 7 - - (3,808) - Proceeds from stock options exercised - 7 - - - Dividend payment to the Government of Senegal (2,700) - - - - Interest paid on borrowings (1,115) - - - Effect of exchange rates on cash holdings in foreign currencies Change in cash and cash equivalents during the year 581 167 - - 748 40,470 (11,242) (28,674) (8,071) (7,517) During the three and twelve months ended December 31, 2018, Sabodala generated net cash of $16.3 million and $45.4 million, respectively, compared to $31.1 million and $40.5 million in the comparative periods, respectively. The Company expects Sabodala to continue to generate free cash flow, which is expected to be used to fund expenditures of the corporate office, the Company’s exploration budget for 2019 and, together with funds available under the Taurus Facility, contribute towards the development of Wahgnion. Higher cash used in the exploration segment during the current year was mainly due to $7.2 million paid to acquire the remaining 49 percent interest in the Golden Hill and Gourma projects in the fourth quarter of 2018, $5.3 million paid to acquire a 51 percent interest in the Afema project in the first quarter of 2018, with the remainder primarily for exploration at Golden Hill. Annual Report 2018 37 Management‘s Discussion and Analysis December 31, 2018 Operating Cash Flow Cash provided by operations for the three months ended December 31, 2018 increased to $25.4 million before net changes in working capital other than inventories, compared to $24.7 million in the prior year quarter. Net cash provided by operating activities, after changes in working capital, increased to $41.8 million compared to $32.5 million in the prior year quarter. The increase in operating cash flow was primarily due to decreased payments to suppliers partially offset by lower revenues compared to the prior year period. Cash provided by operations for the twelve months ended December 31, 2018 increased to $96.6 million before net changes in working capital other than inventories, compared to $82.6 million in the prior year period. Net cash provided by operating activities, after changes in working capital, increased to $92.1 million compared to $71.4 million in the prior year period. The increase in operating cash flow was primarily due to higher revenues and lower income taxes paid of $9.3 million partially offset by higher royalties paid and increased payments to suppliers. Investing Cash Flow (US$000s) Investing Activities Sustaining Capital (Sabodala) Mine site capital expenditure - sustaining Mine site capital expenditure - project Development capital Capitalized reserve development (mine site exploration) Sustaining Capital Expenditures, before Deferred Stripping Capitalized deferred stripping Total Sustaining Capital Expenditures Grow th Capital Feasibility Reserve development Construction readiness Early w orks Construction Capitalized Wahgnion operational costs Total Grow th Capital Expenditures Acquisition of intangibles Investment in marketable securities Proceeds from sale of marketable securities Investment in Boss Gold and Boss Minerals Investment in Afema Project Cash aquired from Afema Project Investing Activities Three m onths ended Decem ber 31, Tw elve m onths ended Decem ber 31, 2018 2017 2018 2017 2,952 10 3,212 (447) 5,727 13,526 19,253 - - - - 50,622 2,552 53,174 57 - - 7,242 - - 79,726 2,552 135 333 965 3,985 7,655 11,640 340 2,440 2,484 5,245 - - 9,230 371 8,236 1,009 18,846 45,978 64,824 - 543 - 29,158 97,198 10,435 10,660 705 7,904 6,113 25,382 29,428 54,810 2,446 6,417 10,409 5,351 - - 10,509 137,334 24,623 - - (3,990) - - - 18,159 656 77 - 7,242 5,303 (140) 215,296 - 393 (3,990) - - - 75,836 Net cash used in investing activities for the three months ended December 31, 2018 was $79.7 million, $61.6 million higher than the prior year period, mainly due to expenditures for Wahgnion, capitalized deferred stripping costs related to Golouma West and Sabodala and acquisition of the remaining 49 percent interest in the Golden Hill and Gourma projects. The prior year period included $4.0 million received from the disposal of marketable securities. Net cash used in investing activities for the twelve months ended December 31, 2018 was $215.3 million, $139.5 million higher than the prior year period, mainly due to expenditures for Wahgnion, acquisition of the remaining 49 percent interest in the Golden Hill and Gourma projects, acquisition of the Afema project, and capitalized deferred stripping costs related to Golouma West and Sabodala partially offset by lower sustaining capital expenditures. The prior year period included $4.0 million received from the disposal of marketable securities. Financing Cash Flow Net cash flow from financing activities in the three months ended December 31, 2018 was $6.7 million and included the drawdown of $10.0 million from the amended Taurus Facility to fund the acquisition of the remaining 49 percent interest in the Golden Hill and Gourma projects and $3.3 million of interest and commitments fees paid related to the Taurus Facility. 38 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 Net cash flow from financing activities in the twelve months ended December 31, 2018 was $80.1 million and included the total drawdowns of $112.2 million from the Taurus Facility, repayment of the $15.0 million Revolver Facility and financing and interest costs paid of $17.7 million mainly related to the Taurus Facility. LIQUIDITY AND CAPITAL RESOURCES OUTLOOK We require sufficient liquidity and capital resources to not only run our existing operations but to also execute on our growth strategy, which includes (i) maximizing free cash flow from our flagship Sabodala operation; (ii) increasing production with the completion of Wahgnion by the end of 2019; (iii) progressing Golden Hill, our most advanced exploration project, towards feasibility; (iv) unlocking additional value through resource conversion drill programs and exploration in Burkina Faso, Senegal and Côte d’Ivoire; and (v) funding our future growth plans responsibly. (i) Optimizing Our Sabodala Operation Our ability to generate free cash flow from operations as forecast is a function of our ability to execute on our mine plan at Sabodala and the price of gold. At Sabodala, the mine plan was re-sequenced in 2017 to bring the development of the Niakafiri open pit deposit forward and to defer underground development. The resettlement of the Sabodala village is in progress. Overall, these changes are expected to increase the amount of free cash flow generated over the next 5 years. (ii) Increasing Production Through The Timely Completion of Wahgnion On Budget In 2017, Teranga’s board approved construction of Wahgnion. With the Taurus Facility in place, the Company commenced major construction activities earlier in the year, with the goal of reaching first gold pour by the end of 2019. During the fourth quarter, the Company spent $53 million on construction related activities. Since commencement of the Wahgnion project, Teranga has invested approximately $142 million in construction expenditures at the Wahgnion project. (iii) Targeted Exploration Programs Based on the success of the exploration programs in Burkina Faso and Senegal, the reserve development and exploration budget for 2019 is expected to be approximately $5-15 million. Furthermore, the Taurus Facility includes $25 million to be used towards future advancement of a feasibility study for Golden Hill. The Company has also invested in exploration projects in the region with the recent acquisitions of the Afema project in Côte d’Ivoire, the Dossi permit area located adjacent to the Golden Hill property in Burkina Faso, and the remaining 49 percent interest in the Golden Hill and Gourma exploration projects in Burkina Faso. We have the following sources of liquidity: i. Cash Balance. As at December 31, 2018, we had a consolidated cash balance of $46.6 million. ii. Cash Flows from Sabodala (unhedged). Using a $1,250 per ounce gold price, we expect Sabodala to generate $88 million1 in free cash flows2 over 2018 and 2019, and $230 million1 in free cash flows2 between 2018 and 2022 (exclusive of Sabodala Gold Hedges below). iii. Sabodala Gold Hedges. During the third quarter of 2017 and first quarter of 2018, the Company entered into forward gold sales contracts for about 50 percent of anticipated production over seven quarters at an average gold price of $1,340 per ounce. Using a gold price assumption of $1,250 per ounce, this hedge program provides $17.03 million in additional free cash flow2 to the amount noted above for Sabodala from January 2018 through to September 2019. 1 The Sabodala free cash flow is an estimate that is based on the updated life of mine plan and reserve estimate for the Sabodala project, as set out in the Technical Report of Teranga for the Sabodala Project, Senegal, West Africa, dated August 30, 2017 (the “Sabodala Technical Report”). See in particular Section 21 of the Sabodala Technical Report - Capital and Operating Costs. 2 This is a non-IFRS financial measure. Please refer to the reconciliation of non-IFRS financial measures at the end of this MD&A. 3 The Company executed forward gold sales contracts totalling 187,500 ounces of gold commencing January 1, 2018 through December 31, 2019, at an average price of $1,340 per ounce of gold. The forward gold sales contracts can be settled at the option of Teranga in either cash or by physical delivery of gold. As part of this forward gold sales program, 25,000 ounces of gold previously due for settlement during the fourth quarter of 2017 was rolled over to now settle during the first quarter 2019. The Company settled 26,500 ounces of gold in each of the four quarters of 2018 as well as scheduled 26,500 ounces of gold for settlement in the second quarter 2019. Lastly, the Company has scheduled 30,000 ounces for settlement during the third quarter 2019. The incremental free cash flow benefit to Teranga is calculated by multiplying the total ounces under the forward sales program of 187,500 ounces of gold by the difference between the hedge price of $1,336 per ounce and the Company’s long-term gold price assumption of $1,250 per ounce. Annual Report 2018 39 Management‘s Discussion and Analysis December 31, 2018 iv. Wahgnion Financing. On April 16, 2018, the Company concluded an agreement with various funds managed by Taurus Funds in respect of the Taurus Facility1. The Taurus Facility included the following: • • • $165 million to be used towards funding the development of Wahgnion and to repay all of the Company’s current outstanding bank debt, totalling $15 million drawn on its Revolver Facility (“Wahgnion Tranche”); $25 million to be used toward future advancement of a feasibility study for Golden Hill (“Golden Hill Tranche”); and $10 million equipment lease facility carve out for which the Company received a Commitment Letter from Caterpillar Financial Services Corporation (“CAT”) on August 23, 2018. The equipment lease facility with CAT was subsequently increased to $12.5 million. The Company expects to execute the equipment lease facility agreement by the end of the first quarter 2019. In October 2018, the Golden Hill Tranche of the Taurus Facility was increased by an additional $10 million to fund the acquisition of the remaining 49 percent interest in the Golden Hill and Gourma projects from Boss Resources. With Wahgnion well on schedule, and potentially being ahead of schedule, the Company has, in principle, agreed with Taurus Funds an amendment to the Taurus Facility whereby the Golden Hill Tranche will be temporarily repurposed and available for Wahgnion’s development costs. Drawdowns, if any, under the Golden Hill Tranche are to be repaid no later than September 30, 2019, at which point the Golden Hill Tranche reverts back to its original purpose. The Company expects to execute the amendment to the Taurus Facility by the end of the first quarter 2019. In connection with this amendment, the Company plans to issue to Taurus Funds an aggregate of 150,000 units of unlisted four-year warrants to acquire Teranga’s common shares at an exercise price that is the greater of: (i) Teranga’s volume-weighted average share price (“VWAP”) on the Toronto Stock Exchange (“TSX”) for the five trading days prior to the date of execution of the amendment to the Taurus Facility; and (ii) 120 percent of the Teranga’s VWAP on the TSX for the 20 trading days prior to the date of execution of the amendment to the Taurus Facility. Additional warrants will be issued only upon drawdown of the repurposed Golden Hill Tranche. All drawdowns of funds under the Taurus Facility are subject to satisfaction of customary conditions precedent, including a funding ratio of Wahgnion project costs funded by the Company as compared to project costs funded by the Taurus Facility. In the event that the Company is unable to meet its share of project costs under this funding ratio, the Company would be required to procure additional funds through: (i) the temporary repurpose of the Golden Hill Tranche; (ii) equity; (iii) subordinated financial indebtedness; or (iv) any other equity instrument approved by Taurus Funds. Should the Company be unsuccessful in drawing down on some or all of the funds, planned development activities may be postponed or cancelled. On May 7, 2018, the Company satisfied all conditions precedent for its first drawdown under the Taurus Facility. The first drawdown under the Wahgnion Tranche was $70 million, $15 million of which was used to repay the Revolver Facility. On September 5, 2018, the Company completed a second drawdown under the Wahgnion Tranche of $32.2 million. On October 2, 2018, the Company drew down $10 million under the Golden Hill Tranche. As at December 31, 2018, the Company is in compliance with all covenants under the Taurus Facility. On February 20, 2019, the Company completed a third drawdown under the Wahgnion Tranche of $34.6 million. v. External Financing. As results from ongoing exploration programs in Côte d’Ivoire, including the economic evaluation of the Afema project, and/or other growth opportunities that become available, the Company may consider an external financing to supplement cash flow from operations as required. This external financing may be in the form of external equity or subordinated indebtedness. There is no assurance that a financing alternative chosen by management will be available to the Company, on favourable terms or at all. The Company’s liquidity is impacted by several macro-economic factors, which include, but are not limited to, gold market prices, interest rates, foreign exchange rates and corporate tax policies in the jurisdictions we operate. Other contributing factors to our liquidity include the cost of inputs to our Wahgnion capital project and operating requirements for our Sabodala mine. 1 For material terms of the Taurus Facility, refer to March 12, 2018 new release at www.terangagold.com. 40 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 OFF-BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements. FINANCIAL INSTRUMENTS The Company manages its exposure to financial risks, including liquidity risk, credit risk, currency risk, market risk, interest rate risk and price risk through a risk mitigation strategy. The Company generally does not acquire or issue derivative financial instruments for trading or speculation. As at December 31, 2018, the Company has outstanding forward gold sales contracts with Macquarie for a total of 81,500 ounces of gold at an average gold price of approximately $1,347 per ounce, settling 25,000 ounces settling in first quarter 2019, 26,500 ounces settling in second quarter 2019 and finally 30,000 ounces settling in third quarter 2019. As a result, the Company has hedged about 50 percent of anticipated Sabodala production over the next three quarters at gold prices averaging approximately $1,347 per ounce to provide improved revenue certainty during construction of Wahgnion. In conjunction with the Taurus Facility, the Company granted two million unlisted four-year share warrants to Taurus Funds on April 16, 2018. Each warrant allows the holder to acquire one common share of the Company at an exercise price of C$5.22. As the currency of the exercise price of the warrants is different from the Company’s functional currency, the share warrants have been classified as a derivative financial liability for accounting purposes. As a result, the share warrants are recorded at fair value at the end of each reporting period. Upon exercise, the warrant liability will be reclassified to share capital. Should the warrants expire unexercised, the associated warrant liability will be recorded as other income in the consolidated statements of comprehensive income. There is no circumstance under which the Company would be required to pay any cash upon exercise or expiry of the warrants. At December 31, 2018, the share warrants have been fair valued at $2.0 million, using the Black-Scholes option pricing model. In conjunction with the Taurus Facility, the Company entered into the Offtake Agreement with Taurus Funds on May 31, 2018. Under the terms of the Offtake Agreement, Taurus Funds is entitled to an amount, in cash, equal to the difference between the actual spot sales price per ounce and the lowest a.m. and p.m. London Bullion Market Association gold price per ounce during the eight business days preceding the sale date for all Wahgnion gold ounces produced and sold, up to 1,075,000 ounces. Sales proceeds received by Teranga will be reduced by any amounts owed to Taurus Funds under the Offtake Agreement. Taurus Funds does not take actual delivery of gold ounces sold at any time. The Offtake Agreement was classified as a derivative financial liability as the amount due to Taurus Funds is variable and determined based on the price spread between the spot price of gold on the date of sale and the lowest spot price of gold over periods of time in the future. As a result, the gold offtake payment liability is recorded at fair value at the end of each reporting period. The Company has estimated the fair value of the Offtake Agreement using a discounted cash flow model based on the Wahgnion life of mine production up to the first 1,075,000 ounces of gold. As at May 31, 2018, the estimated fair value of the Offtake Agreement was $14.0 million, which was recognized as a deferred financing cost. As at December 31, 2018, the estimated fair value was $13.7 million. Annual Report 2018 41 Management‘s Discussion and Analysis December 31, 2018 CONTRACTUAL OBLIGATIONS AND COMMITMENTS As at December 31, 2018, the Company had the following payments due on contractual obligations and commitments: SABODALA GOLD OPERATIONS (“SGO”), SABODALA MINING COMPANY (“SMC”), WAHGNION GOLD OPERATIONS SA (“WGO”) AND THE OROMIN JOINT VENTURE GROUP LTD. (“OJVG”) OPERATING COMMITMENTS The Company has the following operating commitments in respect of the SGO, SMC, WGO and the OJVG: • • • • Pursuant to the Company’s Senegal Mining Concession, a royalty of 5 percent is payable to the Republic of Senegal based on the value of gold shipments, evaluated at the spot price on the shipment date for SGO. Pursuant to the completion of the acquisition of the OJVG, the Company is required to make initial payments totaling $10.0 million related to the waiver of the right for the Republic of Senegal to acquire an additional equity interest in the exploration licenses converted to mine licenses when the ore is processed through the Sabodala mill. The initial payment is to be used to finance social projects in the mine site region, which are determined by the Republic of Senegal and will be paid either directly to suppliers for the completion of specific projects or to specified ministries of the Republic of Senegal. An additional payment will become payable when the actual cumulative production from the OJVG, net of mining royalties, multiplied by the Company’s weighted average gold prices, multiplied by 1 percent, exceeds the initial payments. Pursuant to the Company’s Senegal Mining Concession, $1.2 million is payable annually for community projects and infrastructure to support local communities surrounding the Company’s operations and social development of local authorities in the surrounding Kedougou region. In addition to the Company’s corporate social responsibility spending, Teranga has agreed to establish a social development fund which includes making a payment of $15.0 million to the Republic of Senegal at the end of the mine operational life. As at December 31, 2018, $8.1 million was accrued which is the discounted value of the $15.0 million future payment. 42 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 • • • • • $0.4 million is payable annually for training of Senegalese Directorate of Mines and Geology officers and Mines Ministry and $30,000 is payable annually for logistical support of the territorial administration of the region for SGO. On May 1, 2016, SGO entered into a commitment with local communities around its Gora deposit to provide annual social assistance funding. An amount of $0.2 million is payable for each year of operations. Any amounts not paid is carried forward to future years. $0.3 million is payable annually, until 2019, to the Ministry of Environment pursuant to a forestry protocol with the Government of Senegal. Pursuant to the Company’s Burkina Faso Mining Concession, a sliding net smelter royalty of 3 to 5 percent of gold sales, based on the daily spot price of gold, is payable to the government of Burkina Faso. In addition, pursuant to the 2015 Burkina Faso Mining Code, 1 percent of monthly turnover (before tax) is to be contributed to the mining fund for local development. Offtake Obligation • Under the Offtake Agreement, Taurus Funds is entitled to an amount, in cash, equal to the difference between the actual spot sales price per ounce and the lowest a.m. and p.m. London Bullion Market Association gold price per ounce during the eight business days preceding the sale date for all Wahgnion gold ounces produced and sold, up to 1,075,000 ounces. CONTINGENT LIABILITIES Outstanding tax assessments In April 2016, the Company received a withdrawal of the 2011 tax assessment for all but $1.0 million, which remains in dispute. No amounts were accrued relating to this matter. Reserve payment A reserve payment is payable to the Republic of Senegal, calculated on the basis of $6.50 for each ounce of new reserves until December 31, 2012 and 1 percent of the trailing twelve-month gold price for each ounce of new reserve beyond December 31, 2012 on the Sabodala mine license. As at December 31, 2018, $1.9 million was accrued as a current liability. CRITICAL ACCOUNTING POLICIES AND ESTIMATES New standards, interpretations and amendments thereof, adopted by the Company in the current year Adoption of IFRS 9, Financial Instruments (“IFRS 9”) In November 2009 and October 2010, the IASB issued the first phase of IFRS 9, Financial Instruments. In November 2013, the IASB issued a new general hedge accounting standard, which forms part of IFRS 9. The final version of IFRS 9 was issued in July 2014 and includes a third measurement category for financial assets (fair value through other comprehensive income (“FVOCI”)) and a single, forward-looking expected loss impairment model. The adoption date for IFRS 9 was January 1, 2018. Upon adoption, investments in publicly traded equity securities held by the Company have been classified as FVOCI. These investments are recorded at fair value and changes in the fair value of these investments are recognized permanently in other comprehensive income. The following table shows the original measurement categories under IAS 39, Financial Instruments: Recognition and Measurement, and the new measurement categories under IFRS 9 as at January 1, 2018, for each class of the Company’s financial assets and financial liabilities. Annual Report 2018 43 Management‘s Discussion and Analysis December 31, 2018 Financial Assets Cash and cash equivalents Trade and other receivables Financial derivative assets Marketable securities Financial liabilities Trade and other payables Borrow ings Gold offtake payment liability Share w arrant liability Measurem ent Category(i) IAS 39 IFRS 9 Loans and receivables Loans and receivables Amortized costs Amortized costs Fair value through profit or loss Fair value through profit or loss Available for sale assets FVOCI Amortized costs Amortized costs n/a n/a Amortized costs Amortized costs Fair value through profit or loss Fair value through profit or loss (i) There were no adjustments to the carrying amounts of the financial instruments as a result of the change in classification from IAS 39 to IFRS 9. Adoption of IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) The Company adopted IFRS 15 as at January 1, 2018 on a modified retrospective basis in accordance with the transitional provisions of IFRS 15. Results for reporting periods beginning after January 1, 2018 are presented under IFRS 15, while prior reporting period amounts have not been restated and continue to be reported under IAS 18 – Revenue. The Company has determined that the gold streaming arrangement with Franco-Nevada falls within the scope of IFRS 15 as it constitutes a contract with a customer to deliver an uncertain quantity of gold ounces in the future. The upfront payment constitutes a gold stream liability whereby the performance obligation is in the form of future deliveries of refined ounces under the streaming agreement. Under the Franco-Nevada gold streaming arrangement, the Company is required to deliver ounces of production annually commencing in 2014 from the Company’s existing properties in Senegal in exchange for an up-front deposit of $135 million. Under the arrangement, Franco-Nevada pays the Company cash at the prevailing spot price of gold at the date of delivery on 20 percent of the ounces delivered. For the remaining 80 percent of the ounces delivered to Franco- Nevada, the deferred revenue balance is drawn down based on the prevailing spot price for gold. Once the deferred revenue has been drawn down to $nil, the Company will record sales of 20 percent of spot price, equal to the cash payments, for 6 percent of ounces produced. As the total amount paid up-front by Franco-Nevada for the future deliveries (the promised consideration) differs from the stand-alone selling price of the product purchased (i.e. the expected forward price as applied to total anticipated future deliveries), the Company concluded that this arrangement provided the entity with a significant benefit of financing and therefore contains a significant financing component (“SFC”) as defined under IFRS 15. The consideration transferred, in this case the gold stream liability, should be adjusted for the effects of a SFC, and its effects should be accounted for separately. In order to estimate the effect of the SFC, the Company has determined a discount rate of approximately 9 percent based on management’s best estimates of information available at the inception of the streaming arrangement related to the anticipated future deliveries, and the forward prices for gold (estimated at $1,250 per ounce). This discount rate is not subsequently changed for changes in timing, price or quantities of deliveries, and is applied to the gold stream liability to reflect the effects of financing in each period. Deliveries due in connection with the up-front deposit are recorded in revenue based on the forward prices originally established at the time of entering into the contract (i.e. $1,250 per ounce), being the estimated stand-alone selling price of the deliveries as determined at contract inception (after separating the SFC). The outstanding gold stream liability will accrue interest at the discount rate determined, reflecting the cost of financing. Changes in quantity and timing of future deliveries due under the arrangement affect the consideration transferred in exchange for each ounce delivered, and constitute the resolution of uncertain events and the remaining gold stream liability is remeasured using the revised production profile combined with the original estimated discount rate, and original estimated forward prices. A re-measurement of the remaining gold stream liability will result in a cumulative catch-up adjustment to revenue recorded on satisfied performance obligations and will be recorded as either revenue or a reversal of revenue in the period of the change in the remaining gold stream liability. 44 Annual Report 2018 The effect of initially applying IFRS 15 resulted in the following cumulative adjustment as at January 1, 2018: Management‘s Discussion and Analysis December 31, 2018 • • Increase to gold stream liability of $56.1 million Decrease to retained earnings of $56.1 million Future accounting policies not yet adopted IFRS 16, Leases (“IFRS 16”) In January 2016, the IASB issued IFRS 16 which supersedes IAS 17, Leases, and related interpretations. The new standard provides a single-on-balance sheet model which eliminates the distinction between operating and finance leases, by requiring lessees to recognize assets and liabilities for all leases unless the underlying asset has a low value or the lease term is twelve months or less. At the commencement date of a lease, a lessee will recognize a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term (i.e. the right- of-use asset). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessor accounting remains largely unchanged and the distinction between operating and finance leases is retained. The Company has adopted the standard on its effective date of January 1, 2019 based on a modified retrospective approach. The cumulative impact of adoption will be recognized as at January 1, 2019 and comparatives will not be restated. The Company will elect to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within twelve months as of the date of initial application and lease contracts for which the underlying asset is of low-value. The Company has certain minor camp accommodation and storage leases that are considered as low- value. In 2018, the Company progressed in implementation of IFRS 16. This work consisted of reviewing contracts, aggregating data to support the evaluation of the accounting impacts and performing preliminary calculations of the impact to the financial statements. At this stage, the Company expects the main impacts of IFRS 16 will relate to office leases and mobile fleet contracts. Based on the work completed to date, the Company estimates that it will record the following cumulative impact to the financial statements, effective January 1, 2019 (these results are preliminary and are subject to change): • • Increase to Property, Plant and Equipment (right-of-use assets) of $5.0 million - $6.0 million Increase to Lease Liabilities of $5.0 million - $6.0 million Upon implementation of IFRS 16, the main impacts are expected to be as follows: • • • • Assets and liabilities will increase as some leases currently classified as operating leases will be recognized on the balance sheet. There will be a reduction in mine operation or administration expenses and an increase in finance costs as operating lease costs are replaced with depreciation and lease interest expense. The classification between cash flow from operating activities and cash flow from financing activities will change. Commonly used financial ratios and performance metrics for the Company, using existing definitions, will be impacted including net debt, EBITDA, and operating cash flows. The amounts recognized as assets and liabilities under IFRS 16 are subject to the following judgements, assumptions and estimates: • • • Judgement as to whether the contracts contain leases as defined under the new standard; Assumptions used to calculate the discount rate; and Estimation of the lease term. Annual Report 2018 45 Management‘s Discussion and Analysis December 31, 2018 IFRIC 23, Uncertainty over Income Tax Treatments In June 2017, the IASB issued the International Financial Reporting Interpretations Committee Interpretation 23 (“IFRIC 23”) which clarifies application of the recognition and measurement requirement in IAS 12, Income Taxes. IFRIC 23 explains how to recognize and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment. An uncertain tax treatment is any tax treatment applied by an entity where there is uncertainty over whether that treatment will be accepted by a tax authority. IFRIC 23 applies to all aspects of income tax accounting where there is an uncertainty regarding the treatment of an item, including taxable profit or loss, the tax bases of assets and liabilities, tax losses and credits and tax rates. IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019. The Company is currently evaluating the impact of applying IFRIC 23 to the consolidated financial statements. The Company will apply IFRIC 23 from its effective date. Accounting estimates The following are critical judgments and estimations that management has made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements and that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year: Ore reserves Management estimates its ore reserves based upon information compiled by qualified persons as defined in accordance with NI 43-101 requirements. The estimated quantities of economically recoverable reserves are based upon interpretations of geological models and require assumptions to be made regarding factors such as estimates of short and long-term exchange rates, estimates of short and long-term commodity prices, future capital requirements and future operating performance. Changes in reported reserve estimates can impact the carrying value of property, plant and equipment, mine development expenditures, provision for mine restoration and rehabilitation, the recognition of deferred tax assets, as well as the amount of depreciation and amortization charged to net profit within the consolidated statements of comprehensive income. Units-of-production Management estimates recoverable proven and probable mineral reserves in determining the depreciation and amortization of mining assets, including buildings and property improvements and certain plant and equipment. This results in a depreciation/amortization charge proportional to the recovery of the anticipated ounces of gold. The life of the asset is assessed annually and considers its physical life limitations and present assessments of economically recoverable reserves of the mine property at which the asset is located. The calculations require the use of estimates and assumptions, including the amount of recoverable proven and probable mineral reserves. The Company’s units-of- production calculations are based on contained ounces of gold milled. Mine restoration and rehabilitation provision Management assesses its mine restoration and rehabilitation provision each reporting period. Significant estimates and assumptions are made in determining the provision for mine rehabilitation as there are numerous factors that will affect the ultimate liability payable. These factors include estimates of the extent, the timing and the cost of rehabilitation activities, technological changes, regulatory change, cost increases and changes in discount rates. Those uncertainties may result in actual expenditures differing from the amounts currently provided. The provision at the reporting date represents management’s best estimate of the present value of the future rehabilitation costs required. Changes to estimated future costs are recognized in the statement of financial position by adjusting the rehabilitation asset and liability. Impairment of non-current assets Non-current assets are tested for impairment if there is an indicator of impairment. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made which is considered to be the higher of the fair value less costs to sell and value in use. These assessments require the use of estimates and assumptions such as long-term commodity prices, discount rates, future capital requirements, and operating performance. Fair value is determined as the amount that would be obtained from the sale of the asset in an arm’s-length transaction between knowledgeable and willing parties. Fair value for mineral assets is generally determined as the present value of estimated future cash flows arising from the continued use of the asset. Cash flows are discounted by an appropriate discount rate to determine the net present value. Management has assessed its CGUs as being all sources of mill feed through a central mill, which is the lowest level for which cash inflows are largely independent of other assets. 46 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 Production start date Management assesses the stage of each mine development project to determine when a mine moves into the production stage. The criteria used to assess the start date of a mine are determined based on the unique nature of each mine development project. The Company considers various relevant criteria to assess when the mine is substantially complete, ready for its intended use and moves into the production phase. Some of the criteria include, but are not limited to, the following: • • • completion of a reasonable period of testing of the mine plant and equipment; ability to produce metal in saleable form; and ability to sustain ongoing production of metal. When a mine development project moves into the production stage, the capitalization of certain mine construction costs ceases and costs are either regarded as inventory or expensed, except for capitalizable costs related to mining asset additions or improvements or mineable reserve development. It is also at this point that depreciation/amortization commences. Stripping costs in the production phase of a surface mine Management assesses the costs associated with stripping activities in the production phase of surface mining. Deferred stripping is defined as the excess waste material moved above the average strip ratio to provide access to further quantities of ore that will be mined in future periods, which are estimated by management. Taxes Management is required to make estimations regarding the tax basis of assets and liabilities and related income tax assets and liabilities and the measurement of income tax expense and indirect taxes. This requires management to make estimates of future taxable profit or loss, and if actual results are significantly different than its estimates, the ability to realize any deferred tax assets or discharge deferred tax liabilities on the Company’s consolidated statement of financial position could be impacted. Contingencies Contingencies can be either possible assets or possible liabilities arising from past events which, by their nature, will only be resolved when one or more future events not wholly within the Company’s control occur or fail to occur. The assessment of such contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims, that may result in such proceedings or regulatory or government actions that may negatively impact the Company’s business or operations, the Company with assistance from its legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims or actions as well as the perceived merits of the nature and amount of relief sought or expected to be sought, when determining the amount, if any, to recognize as a contingent liability or assessing the impact on the carrying value of assets. Contingent assets are not recognized in the consolidated financial statements. Determination of purchase price allocation Business combinations require the Company to determine the identifiable asset and liability in fair values and the allocation of the purchase consideration over the fair value of the assets and liabilities. This requires management to make judgements and estimates to determine the fair value, including the amount of mineral reserves and resources acquired, future metal prices, future operating costs, capital expenditure requirements and discount rates. Annual Report 2018 47 Management‘s Discussion and Analysis December 31, 2018 NON-IFRS FINANCIAL MEASURES The Company provides some non-IFRS financial measures as supplementary information that management believes may be useful to investors to explain the Company’s financial results. Beginning in the second quarter of 2013, we adopted an “all-in sustaining costs” measure consistent with the guidance issued by the World Gold Council (“WGC”) on June 27, 2013. The Company believes that the use of all-in sustaining costs is helpful to analysts, investors and other stakeholders of the Company in assessing its operating performance, its ability to generate free cash flow from current operations and its overall value. This measure is helpful to governments and local communities in understanding the economics of gold mining. The “all-in sustaining costs” is an extension of existing “cash cost” metrics and incorporate costs related to sustaining production. “Total cash costs per ounce sold” is a common financial performance measure in the gold mining industry but has no standard meaning under IFRS. The Company reports total cash costs on a sales basis. We believe that, in addition to conventional measures prepared in accordance with IFRS, certain investors use this information to evaluate the Company’s performance and ability to generate cash flow. Accordingly, it 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. The measure, along with sales, is considered to be a key indicator of a Company’s ability to generate operating profits and cash flow from its mining operations. Total cash costs figures are calculated in accordance with a standard developed by The Gold Institute, which was a worldwide association of suppliers of gold and gold products and included leading North American gold producers. The Gold Institute ceased operations in 2002, but the standard is considered the accepted standard of reporting cash cost of production in North America. Adoption of the standard is voluntary and the cost measures presented may not be comparable to other similarly titled measure of other companies. The WGC definition of all-in sustaining costs seeks to extend the definition of total cash costs by adding corporate general and administrative costs, reclamation and remediation costs (including accretion and amortization), exploration and study costs (capital and expensed), capitalized stripping costs and sustaining capital expenditures and represents the total costs of producing gold from current operations. All-in sustaining costs exclude income tax payments, interest costs, costs related to business acquisitions and items needed to normalize profits. Consequently, this measure is not representative of all of the Company’s cash expenditures. In addition, the calculation of all-in sustaining costs and all- in costs does not include depreciation expense as it does not reflect the impact of expenditures incurred in prior periods. Therefore, it is not indicative of the Company’s overall profitability. The Company also expands upon the WGC definition of all-in sustaining costs by presenting an additional measure of “all-in sustaining costs (excluding cash / (non-cash) inventory movements and amortized advanced royalty costs)”. This measure excludes cash and non-cash inventory movements and amortized advanced royalty costs which management does not believe to be true cash costs and are not fully indicative of performance for the period. “Total cash costs per ounce”, “all-in sustaining costs per ounce” and “all-in sustaining costs (excluding cash / (non- cash) inventory movements and amortized advanced royalty costs)” are intended to provide additional information only and do not have any standardized definition under IFRS and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. The measures are not necessarily indicative of operating profit or cash flow from operations as determined under IFRS. Other companies may calculate these measures differently. The following tables reconcile these non-IFRS financial measures to the most directly comparable IFRS measure. “Average realized price” is a financial measure with no standard meaning under IFRS. Management uses this measure to better understand the price realized in each reporting period for gold and silver sales. Average realized price is calculated on revenue and ounces sold to all customers, except Franco-Nevada, as gold ounces sold to Franco-Nevada is recognized in revenue at 20 percent of the prevailing gold spot price on the date of delivery and 80 percent at $1,250 per ounce. The average realized price is intended to provide additional information only and does not have any standardized definition under IFRS; it should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Other companies may calculate this measure differently. “Earnings before interest, taxes, depreciation and amortization” (“EBITDA”) is a non-IFRS financial measure, which excludes income tax, finance costs (before accretion expense), interest income and depreciation and amortization from net profits. EBITDA is intended to provide additional information to investors and analysts and do not have any standardized definition under IFRS and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Management believes that EBITDA is a valuable indicator of our ability to generate liquidity by producing operating cash flow to: fund working capital needs, service debt obligations, and fund capital expenditures. “Free cash flow” is a non-IFRS financial measure. The Company calculates free cash flow as net cash flow provided by operating activities less sustaining capital expenditures. The Company believes this to be a useful indicator of our ability generate cash for growth initiatives. Other companies may calculate this measure differently. 48 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 Starting in 2018, the Company adopted “adjusted net profit attributable to shareholders” and “adjusted basic earnings per share” as new non-IFRS financial measures. These non-IFRS financial measures are used by management and investors to measure the underlying operating performance of the Company. Presenting these measures from period to period is expected to help management and investors evaluate earnings trends more readily in comparison with results from prior periods. The Company calculates “adjusted net profit attributable to shareholders” as net (loss)/profit attributable to shareholders adjusted to exclude specific items that are significant, but not reflective of the underlying operations of the Company, including: the impact of unrealized and realized foreign exchange gains and losses, gains and losses on derivative instruments, accretion expense on long-term obligations, impairment provisions and reversals thereof, and other unusual or non-recurring items. Commencing the second quarter 2018, the Company also excluded the impact of foreign exchange movements on deferred taxes and other non-cash fair value changes from adjusted net profit attributable to shareholders as management does not believe these factors to be reflective of the underlying performance of the Company. “Adjusted basic earnings per share” is calculated using the weighted average number of shares outstanding under the basic method of earnings per share as determined under IFRS. RECONCILIATION OF NON-IFRS FINANCIAL MEASURES 1. The reconciliation cash costs per ounce, cost of sales per ounce, all-in sustaining costs, and all-in sustaining costs (excluding non-cash inventory movements and amortized advanced royalty costs) follows below: (US$000s, except w here indicated) Three m onths ended Decem ber 31, Tw elve m onths ended Decem ber 31, Gold produced1 (oz) Gold sold (oz) Cash costs per ounce sold Mine operation expenses Less: Regional administration costs Total cash costs Total cash costs per ounce sold Cost of sales per ounce sold Cost of sales 2018 2017 2018 2017 59,442 67,934 245,230 233,267 61,696 68,944 246,073 231,078 43,216 48,166 164,349 168,689 (508) (689) (1,868) (1,996) 42,708 47,477 162,481 166,693 692 689 660 721 59,374 64,149 230,517 222,113 Total cost of sales per ounce sold 962 930 937 961 All-in sustaining costs Total cash costs Administration expenses2 Share-based compensation Capitalized deferred stripping Capitalized reserve development Mine site sustaining capital All-in sustaining costs 42,708 47,477 162,481 166,693 5,048 4,600 15,290 12,580 1,158 935 4,851 2,580 13,526 7,655 45,978 29,428 (447) 965 1,009 6,113 6,174 3,006 17,837 19,256 68,167 64,638 247,446 236,650 All-in sustaining costs per ounce sold 1,105 938 1,006 1,024 All-in sustaining costs (excluding non-cash inventory m ovem ents and am ortized advanced royalty costs) All-in sustaining costs Amortization of advanced royalties Inventory movements - non-cash All-in sustaining costs (excluding non-cash inventory m ovem ents and am ortized advanced royalty costs) All-in sustaining costs (excluding non-cash inventory m ovem ents and am ortized advanced royalty costs) per ounce 1 Go ld pro duced represents change in go ld in circuit invento ry plus go ld reco vered during the perio d. 2 A dministratio n expenses include regio nal administratio n co sts and exclude co rpo rate depreciation. 68,167 64,638 247,446 236,650 (515) (867) (2,745) (3,003) (6,082) (4,495) (13,471) (15,786) 61,570 59,276 231,230 217,861 998 860 940 943 2. Free cash flow is a non-IFRS financial measure that does not have a standard meaning under IFRS. Teranga defines free cash flow as net cash flow provided by operating activities less sustaining capital expenditures. 3. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is calculated as follows: Annual Report 2018 49 Management‘s Discussion and Analysis December 31, 2018 (US$000s) Net (loss)/profit for the period Add: finance costs (before accretion expense) Less: finance income Adjust: income tax expense Add: depreciation and amortization Earnings before interest, taxes, depreciation and am ortization Three m onths ended Decem ber 31, Tw elve m onths ended Decem ber 31, 2018 (10,248) 1,700 (38) 4,140 16,962 2017 5,958 863 (44) 3,410 16,443 2018 13,465 6,060 (74) 23,312 69,092 2017 34,530 3,042 (192) 2,436 55,519 12,516 26,630 111,855 95,335 4. Adjusted net profit and adjusted basic net earnings per share are calculated as follows: (US$000s) Net (loss)/profit attributable to shareholders Adjustments (net of tax) for: Loss/(gains) on derivative instruments Accretion expense Acquisition Net foreign exchange losses Impact of foreign exchange on deferred taxes Change in fair value of share w arrant liability Change in fair value of gold offtake payment liability Adjusted net profit attributable to shareholders Basic (loss)/earnings per share Adjusted basic earnings per share OUTSTANDING SHARE DATA Three m onths ended Decem ber 31, Tw elve m onths ended Decem ber 31, 2017 31,932 2018 (10,639) 2018 11,794 2017 5,758 7,149 2,077 - 422 1,847 137 236 1,229 (0.10) 0.01 3,488 340 - 497 (1,366) - - 8,717 0.05 0.08 (9,299) 9,646 - 3,008 4,379 (1,136) (317) 18,075 0.11 0.17 (1,832) 778 52 4,536 (5,360) - - 30,106 0.30 0.28 At December 31, 2018, the Company had 107,586,769 outstanding shares. TRANSACTIONS WITH RELATED PARTIES During the year ended December 31, 2018, there were transactions totaling $50 thousand between the Company and an entity controlled by Alan R. Hill, the Company’s Chairman, for consulting services. The Company has an exploration agreement with Miminvest SA (“Miminvest”), a related party, to identify and acquire gold exploration stage mining opportunities in Côte d'Ivoire. Miminvest is a company established to invest in gold and natural resources in West Africa and is controlled by the Mimran family and Mr. David Mimran, a director and the largest shareholder of Teranga. Miminvest holds five existing exploration permits, representing 1,838 km2 in Côte d'Ivoire. Under the terms of the exploration agreement, a separate entity was created and is owned and funded by Teranga. Miminvest transferred its permits into the entity and in exchange retains a net smelter royalty interest of 3 percent and is expected to provide ongoing in-country strategic advice. Furthermore, the entity will pursue additional exploration projects in Côte d'Ivoire outside of the existing Miminvest permits. SHAREHOLDINGS Teranga’s 90 percent shareholding in SGO, the company operating the Sabodala gold mine, is held 89.5 percent through a Mauritian holding company, Sabodala Gold Mauritius Limited (“SGML”), and the remaining 0.5 percent by individuals nominated by SGML to be on the board of directors in order to meet the minimum shareholding requirements under Senegalese law. On death or resignation, a share individually held would be transferred to another representative of SGML or added to its current 89.5 percent shareholding according to the circumstances at the time. Teranga’s 90 percent shareholding in Wahgnion Gold Operations SA, the company developing Wahgnion, is held 89.8 percent through a Mauritian holding company, Loumana Holdings Ltd. (“Loumana”), and the remaining 0.2 percent by individuals nominated by Loumana to be on the board of directors in order to meet the minimum shareholding requirements under Burkinabe law. On death or resignation, a share individually held would be transferred to another representative of Loumana or added to its current 89.8 percent shareholding according to the circumstances at the time. 50 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 CEO/CFO CERTIFICATION The Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) are responsible for establishing and maintaining disclosure controls and procedures (“DC&P”) and internal control over financial reporting (“ICFR”), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the Company. The Company’s CEO and CFO certify that, as at December 31, 2018, the Company’s DC&P have been designed to provide reasonable assurance that material information relating to the Company is made known to them by others, particularly during the period in which the interim filings are being prepared; and information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation. They also certify that the Company’s ICFR have been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. The control framework the Company’s CEO and CFO used to design the Company’s ICFR is The Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework issued on May 14, 2013. There is no material weakness relating to the design of ICFR. There has been no change in the Company’s design of the ICFR that occurred during the three and twelve months ended December 31, 2018, which has materially affected, or is reasonably likely to materially affect the Company’s ICFR. The Company has limited the scope of the design of ICFR and DC&P to exclude the controls, policies and procedures of the entities acquired as part of the Afema project acquisition. The balance sheet and operating results of the entities are included in the consolidated financial statements of Teranga for the three and twelve months ended December 31, 2018, following the acquisition on March 22, 2018. The scope limitation is in accordance with Section 3.3 of NI 52- 109, Certification of Disclosure in Issuer’s Annual and Interim Filings, which allows an issuer to limit its design of ICFR and DC&P to exclude the controls, policies and procedures of a company acquired not more than 365 days before the end of the financial period to which the certificate relates. Summary financial information of the Afema project in the consolidated financial statements were as follows: (US$000's) Current assets - as at December 31, 2018 Non-current assets - as at December 31, 2018 Current liabilities - as at December 31, 2018 Net loss - three months ended December 31, 2018 Net loss - tw elve months ended December 31, 2018 RISKS AND UNCERTAINTIES 676 14,414 (1,259) 1,044 1,794 The Company identified a number of risk factors to which it is subject to in its Annual Information Form dated March 29, 2018 and filed for the year ended December 31, 2017. These various financial and operational risks and uncertainties continue to be relevant to an understanding of our business, and could have a significant impact on profitability and levels of operating cash flow. These risks and uncertainties include, but are not limited to: fluctuations in metal prices (principally the price of gold), capital and operating cost estimates, borrowing risks, production estimates, need for additional financing, uncertainty in the estimation of mineral reserves and mineral resources, the inherent danger of mining, infrastructure risk, insured and uninsured risks, environmental risks and regulations, government regulation, ability to obtain and renew licenses and permits, foreign operations risks, title to properties, competition, dependence on key personnel, currency, repatriation of earnings, adverse changes to taxation laws, West African political risks, war or other forms of civil unrest, economic, social or political instability, terrorism, hostage taking, risk of a disease outbreak impacting our West African workforce and stock exchange price fluctuations. Annual Report 2018 51 Management‘s Discussion and Analysis December 31, 2018 FORWARD-LOOKING STATEMENTS This MD&A contains certain statements that constitute forward-looking information within the meaning of applicable securities laws ("forward-looking statements"), which reflects management's expectations regarding Teranga's future growth, results of operations (including, without limitation, future production and capital expenditures), performance (both operational and financial) and business prospects (including the timing and development of new deposits and the success of exploration activities) and opportunities. Wherever possible, words such as “objective to”, “likely”, “intend to”, “potential”, “belief”, “believe”, “expects”, “estimates”, “plans”, “anticipated”, “ability” and similar expressions or statements that certain actions, events or results “should”, or "will" have been used to identify such forward-looking information. Specific forward-looking statements in this MD&A include forecasting 2019 gold production, cost guidance and anticipated timing for first gold pour and ramp up to nameplate production at Wahgnion. Forward-looking statements include, without limitation, all disclosure regarding possible events, conditions or results of operations, future economic conditions and anticipated courses of action. Although the forward-looking statements contained in this MD&A reflect management's current beliefs based upon information currently available to management and based upon what management believes to be reasonable assumptions, such forward-looking statements are based upon assumptions, opinions and analysis that management believes to be reasonable and relevant but that may prove to be incorrect. These assumptions include, among other things, the ability to obtain any requisite governmental approvals, the accuracy of mineral reserve and mineral resource estimates, gold price, exchange rates, fuel and energy costs, future economic conditions, the ability to resettle the community within anticipated timeline, anticipated future estimates of free cash flow, and courses of action. Teranga cautions you not to place undue reliance upon any such forward-looking statements. The risks and uncertainties that may affect forward-looking statements are more fully described in Teranga's Annual Information Form dated March 29, 2018, and in other filings of Teranga with securities and regulatory authorities which are available at www.sedar.com. Teranga does not undertake any obligation to update forward-looking statements should assumptions related to these plans, estimates, projections, beliefs and opinions change. Nothing in this MD&A should be construed as either an offer to sell or a solicitation to buy or sell Teranga securities. All references to Teranga include its subsidiaries unless the context requires otherwise. QUALIFIED PERSONS STATEMENT The technical information contained in this MD&A relating to the Sabodala and Wahgnion open pit mineral reserve estimates is based on, and fairly represents, information compiled by Mr. Stephen Ling, P. Eng who is a member of the Professional Engineers Ontario. Mr. Ling is a full time employee of Teranga and is not "independent" within the meaning of NI 43-101. Mr. Ling has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a "Qualified Person" under NI 43-101 Standards of Disclosure for Mineral Projects. Mr. Ling has consented to the inclusion in this MD&A of the matters based on his compiled information in the form and context in which it appears in this MD&A. The technical information contained in this MD&A relating to Sabodala, Wahgnion and Golden Hill’s mineral resource estimates is based on, and fairly represents, information compiled by Ms. Patti Nakai-Lajoie. Ms. Nakai-Lajoie, P. Geo., is a Member of the Association of Professional Geoscientists of Ontario. Ms. Nakai-Lajoie is a full time employee of Teranga and is not "independent" within the meaning of NI 43-101. Ms. Nakai-Lajoie has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which she is undertaking to qualify as a "Qualified Person" under NI 43-101 Standards of Disclosure for Mineral Projects. Ms. Nakai- Lajoie has consented to the inclusion in this MD&A of the matters based on her compiled information in the form and context in which it appears in this MD&A. The technical information contained in this MD&A relating to the Sabodala underground ore reserves estimates is based on, and fairly represents, information compiled by Jeff Sepp, P. Eng., of Roscoe Postle Associates Inc. (“RPA”), who is a member of the Professional Engineers Ontario. Mr. Sepp is “independent” within the meaning of NI 43-101. Mr. Sepp has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity he is undertaking to qualify as a “Qualified Person” under NI 43-101 Standards of Disclosure for Mineral Projects. Mr. Sepp has consented to the inclusion in this MD&A of the matters based on his compiled information in the form and context in which it appears in this MD&A. 52 Annual Report 2018 Management‘s Discussion and Analysis December 31, 2018 Teranga's Burkina Faso exploration programs were managed by Peter Mann, FAusIMM. Mr. Mann was a full time employee of Teranga and is not "independent" within the meaning of NI 43-101. Mr. Mann has sufficient experience which is relevant to the style of mineralization and type of deposit under consideration and to the activity which he is undertaking to qualify as a "Qualified Person" under NI 43-101. The technical information contained in this MD&A relating to exploration results are based on, and fairly represents, information compiled by Mr. Mann. Mr. Mann has verified and approved the data disclosed in this release, including the sampling, analytical and test data underlying the information. The RC and diamond core samples are assayed at the BIGS Global Laboratory in Ouagadougou, Burkina Faso. Mr. Mann has consented to the inclusion in this MD&A of the matters based on his compiled information in the form and context in which it appears in this MD&A. Teranga's disclosure of mineral reserve and mineral resource information is governed by NI 43-101 under the guidelines set out in the Canadian Institute of Mining, Metallurgy and Petroleum (the "CIM") Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council, as may be amended from time to time by the CIM ("CIM Standards"). There can be no assurance that those portions of mineral resources that are not mineral reserves will ultimately be converted into mineral reserves. Teranga confirms that it is not aware of any new information or data that materially affects the information included in the technical reports for the Sabodala Project (August 30, 2017) and the Wahgnion Project (October 31, 2018) pursuant to National Instrument 43-101 - Standards of Disclosure for Mineral Projects (the “Technical Reports”), or fourth quarter 2018 results, market announcements and, in the case of estimates of Mineral Resources, that all material assumptions and technical parameters underpinning the estimates in the relevant market announcements concerning the Technical Reports continue to apply and have not materially changed. Annual Report 2018 53 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying consolidated financial statements of the Company have been prepared by management in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. Management acknowledges responsibility for the preparation and presentation of the consolidated financial statements, including responsibility for significant accounting judgments and estimates and, where relevant, the choice of accounting principles. Management maintains an appropriate system of internal controls to provide reasonable assurance that transactions are authorized, assets safeguarded, and proper records maintained. The Audit Committee of the Board of Directors has met with the Company’s independent auditors to review the scope and results of the annual audit and to review the consolidated financial statements and related financial reporting matters prior to submitting the consolidated financial statements to the Board for approval. The Company’s independent auditors, Ernst & Young LLP, have conducted an audit in accordance with generally accepted auditing standards, and their report follows. RICHARD YOUNG President and Chief Executive Officer NAVIN DYAL Chief Financial Officer 54 Annual Report 2018 INDEPENDENT AUDITOR’S REPORT To the Shareholders of Teranga Gold Corporation We have audited the consolidated financial statements of Teranga Gold Corporation and its subsidiaries (the “Group”), which comprise the consolidated statements of financial position as at December 31, 2018 and 2017, and the consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2018 and 2017, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (“IFRS”). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, 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. Other Information Management is responsible for the other information. The other information comprises: • Management’s Discussion and Analysis for the year ended December 31, 2018 • The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report Our opinion on the consolidated 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 consolidated financial statements, our responsibility is to read the other information, and in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. We obtained Management’s Discussion & Analysis to the date of this auditor’s report. 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 in this auditor’s report. We have nothing to report in this regard. The Annual Report is expected to be made available to us after the date of the auditor’s report. If based on the work we will perform on this other information, we conclude there is a material misstatement of other information, we are required to report that fact to those charged with governance. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’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 management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Annual Report 2018 55 Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated 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 Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • • • • • • Identify and assess the risks of material misstatement of the consolidated 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 management. Conclude on the appropriateness of management’s 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 ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated 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 our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 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 our 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. The engagement partner on the audit resulting in this independent auditor’s report is Don Linsdell. (signed) Ernst & Young LLP Ernst & Young LLP Chartered Professional Accountants Licensed Public Accountants February 21, 2019 Toronto, Canada 56 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Revenue Mine operation expenses Depreciation and amortization Cost of sales Gross profit Exploration and evaluation expenditures Administration expenses Corporate social responsibility expenses Share-based compensation Finance costs Net foreign exchange losses Other income Profit before income tax Income tax expense Net profit for the year Net profit attributable to: Shareholders Non-controlling interests Net profit for the year Note 7 8 9 For the years ended December 31, 2018 2017 312,628 291,683 (164,349) (168,689) (66,168) (53,424) (230,517) (222,113) 82,111 69,570 (13,160) (12,373) 10 (13,618) (10,702) 34 11 (3,700) (2,906) (4,851) (2,580) (15,783) (3,907) (2,680) (4,632) 12 8,458 4,496 (45,334) (32,604) 36,777 36,966 13 (23,312) (2,436) 13,465 34,530 11,794 31,932 1,671 2,598 13,465 34,530 Other comprehensive (loss) /income for the year Change in fair value of marketable securities, net of tax (717) 2,455 Reclassification to income, net of tax Other comprehensive loss for the year Total comprehensive income for the year Total comprehensive income attributable to: Shareholders Non-controlling interests - (2,764) (717) (309) 12,748 34,221 11,077 31,623 1,671 2,598 Total comprehensive income for the year 12,748 34,221 Earnings per share from operations attributable to the shareholders of the Company during the year - basic earnings per share - diluted earnings per share 27 27 0.11 0.30 0.11 0.30 The accompanying notes are an integral part of these consolidated financial statements Annual Report 2018 57 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Current assets Cash and cash equivalents Trade and other receivables Inventories Marketable securities Other current assets Total current assets Non-current assets Inventories Property, plant and equipment Deferred income tax assets Other non-current assets Total non-current assets Total assets Current liabilities Trade and other payables Current income tax liabilities Gold stream liability Provisions Total current liabilities Non-current liabilities Borrowings Gold offtake payment liability Share warrant liability Gold stream liability Provisions Other non-current liabilities Total non-current liabilities Total liabilities Equity Issued capital Foreign currency translation reserve Other components of equity Retained earnings Equity attributable to shareholders Non-controlling interests Total equity Total equity and liabilities Note 14 15 16 17 15 18 19 17 20 24 25 21 22 23 24 25 20 26 2018 46,615 9,079 65,608 324 10,945 132,571 86,105 700,464 16,196 4,551 807,316 939,887 75,094 13,124 14,860 7,240 110,318 87,097 13,699 1,969 73,902 35,328 10,447 222,442 332,760 497,257 (998) 5,800 78,533 580,592 26,535 607,127 939,887 2017 87,671 5,484 57,024 964 9,686 160,829 103,638 520,834 26,491 4,440 655,403 816,232 54,165 7,634 24,206 4,919 90,924 14,307 - - 22,003 29,384 10,059 75,753 166,677 496,333 (998) 18,299 122,835 636,469 13,086 649,555 816,232 The accompanying notes are an integral part of these consolidated financial statements Approved by the Board of Directors ALAN HILL Director ALAN THOMAS Director 58 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Issued capital Beginning of year Exercise of stock options End of year Foreign currency translation reserve Beginning of year End of year Other components of equity Beginning of year Equity-settled share-based compensation expense Investment revaluation reserve on change in fair value of marketable securities, net of tax Acquisition of non-controlling interest in Boss Gold and Boss Minerals End of year Retained earnings Beginning of year Adjustment due to IFRS 15 Profit attributable to shareholders End of year Non-controlling interests Beginning of year Acquisition of Afema Non-controlling interest - portion of profit for the year Acquisition of non-controlling interest in Boss Gold and Boss Minerals Note 2018 2017 For the years ended December 31, 496,333 496,326 34 924 7 497,257 496,333 (998) (998) (998) (998) 18,299 17,514 790 1,094 (717) (309) 6b (12,572) - 5,800 18,299 122,835 90,903 24 (56,096) - 11,794 31,932 78,533 122,835 13,086 13,188 6,448 - 1,671 2,598 5,330 - 6a 6b Dividend payment to the Government of Senegal - (2,700) End of year Total equity as at December 31 26,535 13,086 607,127 649,555 The accompanying notes are an integral part of these consolidated financial statements Annual Report 2018 59 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) CONSOLIDATED STATEMENTS OF CASH FLOWS Note 18 18 9 9 11 34 24 13 12 12 12 32 6b 21 21 Cash flows related to operating activities Net profit for the year Add (deduct) items not affecting cash: Depreciation of property, plant and equipment Depreciation of capitalized mine development costs Inventory movements - depreciation Capitalized deferred stripping - depreciation Amortization of advanced royalties Unrealized gains on derivative instruments Amortization of intangibles Amortization of deferred financing costs Accretion expenses Share-based compensation Amortization of gold stream liability Deferred income tax expense/(recovery) Gain on sale of marketable securities Unrealized gains on revaluation of share warrant liability Unrealized gains on revaluation of gold offtake payment liability Interest on borrowings Decrease in inventories Cash flows related to operating activities before changes in working capital excluding inventories Changes in working capital excluding inventories Net cash provided by operating activities Cash flows related to investing activities Expenditures for property, plant and equipment Expenditures for mine development Expenditures for intangibles Acquisition of non-controlling interest in Afema Project Cash acquired from Afema Investment in marketable securities Investment in Boss Gold and Boss Minerals Proceeds from sale of marketable securities Net cash used in investing activities Cash flows related to financing activities Drawdown of finance facility Repayment of borrowings Financing costs paid Proceeds from stock options exercised Interest paid on borrowings Dividend payment to the Government of Senegal Net cash provided by (used in) financing activities Effect of exchange rates on cash holdings in foreign currencies Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of year Cash and cash equivalents at the end of year Taxes paid in Cash The accompanying notes are an integral part of these consolidated financial statements 60 Annual Report 2018 For the years ended December 31, 2018 13,465 27,475 44,605 (1,486) (2,728) 2,746 (2,553) 396 1,893 9,723 4,851 (22,500) 10,295 - (1,136) (317) 1,485 10,435 96,649 (4,589) 92,060 (123,896) (78,262) (656) (5,303) 140 (77) (7,242) - (215,296) 112,200 (15,000) (12,278) 609 (5,391) - 80,140 2,040 (41,056) 87,671 46,615 5,942 2017 34,530 23,165 39,492 (6,306) (1,977) 3,003 (1,832) 220 463 865 2,580 (22,606) (4,525) (2,469) - - 1,131 16,876 82,610 (11,231) 71,379 (18,145) (60,989) (299) - - (393) - 3,990 (75,836) - - - 7 (1,115) (2,700) (3,808) 748 (7,517) 95,188 87,671 15,202 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL INFORMATION Teranga Gold Corporation (“Teranga” or the “Company”) is a Canadian-based gold company listed on the Toronto Stock Exchange (TSX: TGZ) and in the United States on the OTCQX market (OTCQX: TGCDF). Teranga is principally engaged in the production and sale of gold, as well as related activities such as exploration and mine development. Teranga operates the Sabodala Gold Mine in Senegal and is developing its second mine, the Wahgnion Gold Project (formerly known as the Banfora Gold Project) in Burkina Faso. In addition, the Company has a number of early to advanced stage exploration properties in Burkina Faso, Côte d’Ivoire and Senegal. The address of the Company’s principal office is 77 King Street West, Suite 2110, Toronto, Ontario, Canada, M5K 2A1. 2. BASIS OF PREPARATION a. Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The consolidated financial statements comprise the financial statements of the Company and its subsidiaries and were approved by the Board of Directors on February 21, 2019. Certain comparative amounts have been restated to conform to the current year’s presentation. b. Basis of Presentation All amounts in the consolidated financial statements and notes thereto are presented in United States dollars unless otherwise stated. The consolidated financial statements have been prepared on the basis of historical cost, except for certain financial assets and liabilities that are measured at fair value as disclosed elsewhere in the notes to the financial statements. The consolidated financial statements have been prepared based on the Company’s accounting policies set out in Note 3. c. Functional and Presentation Currency The functional currency of each of the Company’s entities is measured using the currency of the primary economic environment in which that entity operates. The functional currency of all entities within the group is the United States dollar, which is also the Company’s presentation currency. d. Critical Accounting Judgments and Key Sources of Estimation Uncertainty The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses and income during the period. These judgments, estimates and assumptions are based on management’s best knowledge of the relevant facts and circumstances, having regard to prior experience. While management believes that these judgments, estimates and assumptions are reasonable, actual results may differ from the amounts included in the consolidated financial statements. Judgments made by management in the application of IFRS that have significant effects on the consolidated financial statements and estimates with a significant risk of material adjustments, where applicable, are contained in the relevant Annual Report 2018 61 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) notes to the financial statements. Refer to Note 5 for critical judgments in applying the entity’s accounting policies, and key sources of estimation uncertainty. 3. SIGNIFICANT ACCOUNTING POLICIES a. Basis of Consolidation The consolidated financial statements are prepared by consolidating the financial statements of Teranga Gold Corporation and its subsidiaries as defined in IFRS 10 “Consolidated Financial Statements”. The consolidated financial statements include the information and results of each subsidiary from the date on which the Company obtains control and until such time as the Company ceases to control such entity. In preparing the consolidated financial statements, all inter-company balances and transactions between entities in the group, including any unrealized profits or losses, have been eliminated. Non-controlling interests in the net assets (excluding goodwill) of consolidated subsidiaries are identified separately from the Company’s equity therein. Non-controlling interests consist of the fair value of net assets acquired at the date of the original business combination and the non-controlling interests’ share of changes in equity since the date of the business combination. Total comprehensive profit/(loss) is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance. b. Business Combination The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the fair values at the acquisition date, the day on which the Company obtains control, of the assets transferred to the Company, the liabilities assumed by the Company to former owners of the acquiree and the equity interests issued by the Company in exchange for control over the acquiree. The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value, except as follows: • • • Deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with International Accounting Standards (“IAS”) 12 Income Taxes and IAS 19 Employee Benefits, respectively. Assets or disposal groups that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that standard. Liabilities or equity instruments related to share-based remuneration of the acquiree or share-based remuneration of the Company entered into to replace such arrangements of the acquiree are measured in accordance with IFRS 2 Share-based Payment. In cases where the sum of the consideration transferred, the amount of non-controlling interest in the acquiree and the fair value of equity interests in the acquiree held previously by the Company exceeds the net value of identifiable assets and liabilities at the acquisition date, goodwill is measured at the excess amount. A gain is recorded through the consolidated statements of income if the cost of the acquisition is less than the fair values of the identifiable net assets acquired. c. Foreign Currency Transactions Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transaction. Foreign currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined. 62 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) d. Cash and Cash Equivalents Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, which are subject to an insignificant risk of changes in value and have a remaining maturity of 90 days or less at the date of acquisition. Where applicable, bank overdrafts are shown within borrowings in current liabilities in the consolidated statement of financial position. e. Inventories Gold bullion, gold in circuit and ore in stockpiles are physically measured or estimated and valued at the lower of cost and net realizable value. Cost represents the weighted average cost and includes direct costs and an appropriate portion of overhead costs, depreciation and amortization on property, plant and equipment used in the production process and depreciation and amortization of capitalized stripping costs. As ore is removed from inventory, costs are relieved based on the average cost per ounce in the stockpile. By-product metals inventory on hand obtained as a result of the production process to extract gold are valued at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion, if any, and applicable costs to sell. Materials and supplies are valued at the lower of cost and net realizable value. Any provision for obsolescence is determined by reference to specific inventory items identified. A regular and ongoing review is undertaken to establish the extent of surplus items and a provision is made for any potential loss upon disposal. f. Property, Plant and Equipment Property, plant and equipment are measured on the historical cost basis less accumulated depreciation and impairment losses, if any. The cost of property, plant and equipment constructed by the Company includes the cost of materials, direct labour and borrowing costs where appropriate. Assets under construction and assets purchased that are not ready for use are capitalized under capital work in progress. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to net profit within the statement of comprehensive income during the financial period in which they are incurred. Proceeds from sales of gold produced prior to achieving commercial production is recognized as revenues in the income statement. Depreciation The depreciable amount of property, plant and equipment is depreciated over their useful lives of the asset commencing from the time the respective asset is ready for use. The Company uses the units-of-production (“UOP”) method when depreciating mining assets which results in a depreciation charge based on the contained ounces of gold milled. Capitalized mining costs relating to a pit are depreciated on a UOP basis over the pit-specific proven and probable gold reserves. Mining assets include buildings and property improvements, and plant and equipment. The Company uses the straight-line method when depreciating office furniture and equipment, motor vehicles and mobile equipment. Annual Report 2018 63 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) Depreciation for each class of property, plant, and equipment is calculated using the following method: Class of Property, Plant and Equipm ent Buildings and property improvements Plant and equipment Office furniture and equipment Motor vehicles Mobile equipment Method UOP UOP Straight-line Straight-line Straight-line Years n/a n/a 3 - 8 years 5 years 5 – 8 years The assets’ residual values, depreciation method and useful lives are reviewed and adjusted, if appropriate, at each reporting date. Capital work in progress is not depreciated. g. Exploration and Evaluation Expenditures and Mine Development Expenditures Exploration and evaluation expenditures in relation to each separate area of interest are expensed in net profit within the consolidated statements of comprehensive income. Upon the determination of the technical feasibility and commercial viability of a project, further costs to develop the asset are recognized as mine development expenditures. The development phase is determined to have commenced (i.e. the technical feasibility and commercial viability of extracting a mineral resource is considered to have occurred), when proven and probable reserves are determined to exist, the rights of tenure are current and it is considered probable that the costs will be recouped through successful development and exploitation of the area, or alternatively by sale of the property. Mine development expenditure assets comprise of costs incurred to secure the mining concession, acquisition of rights to explore, studies, exploratory drilling, trenching and sampling and associated activities and an allocation of depreciation and amortization of assets related to these activities. General and administrative costs are only included in exploration and evaluation costs where they are related directly to the operational activities in a particular area of interest. Capitalized exploration and evaluation expenditures costs will be amortized using the UOP method over the estimated proven and probable reserves once the asset is in a location and condition necessary for it to be capable of operating in a manner intended the Company. h. Deferred Stripping Activity The cost of stripping activity in the production phase of surface mining will be recognized as an asset, only if, all of the following are met: • • • it is probable that the future economic benefit (improved access to the ore body) associated with the stripping activity will flow to the entity; the entity can identify the component of the ore body (mining phases) for which access has been improved; and the costs relating to the stripping activity associated with that component can be measured reliably. Once the cost associated with the stripping activity is capitalized as an asset, the cost or revalued amount will be amortized on a units-of-production basis in the subsequent period. i. Intangible Assets Intangible assets are recorded at cost less accumulated amortization and impairment losses, if any. Amortization is charged on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method is reviewed at the end of each annual reporting period with any changes in these accounting estimates being accounted for on a prospective basis. 64 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) j. Impairment of Long-lived Assets At each reporting date, the Company reviews the carrying amounts of its long-lived assets to determine whether there is any indication that those assets have incurred an impairment loss or if there is a reversal of existing impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. The recoverable amount is the higher of the fair value less costs of disposal and the value in use. Where the asset does not generate cash inflows that are independent from other assets, the Company estimates the recoverable amount of the Cash Generating Unit (“CGU”) to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGU or otherwise they are allocated to the smallest group of CGUs for which a reasonable and consistent allocation basis can be identified. If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognized immediately in net profit within the statement of comprehensive income. Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset or CGU in prior years. A reversal of an impairment loss is recognized immediately in net profit within the statement of comprehensive income. k. Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to prepare for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognized in net profit within the statement of comprehensive income in the period in which they are incurred. l. Employee Benefits A liability is recognized for benefits accruing to employees in respect of wages and salaries, annual leave and long-term service leave when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities recognized in respect of employee benefits are measured using the remuneration rate expected to apply at the time of settlement. m. Provisions Provisions are recognized when the Company has a present obligation, legal or constructive, as a result of past events for which it is probable that the Company will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the present value of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. n. Restoration and Rehabilitation A provision for restoration and rehabilitation is recognized when there is a present obligation as a result of exploration, development and production activities undertaken, it is probable that an outflow of economic benefits will be required to settle the obligation, and the amount of the provision can be measured reliably. The estimated future obligations include the costs of removing facilities, abandoning sites and restoring the affected areas. The provision for future restoration costs is the best estimate of the present value of the expenditure required to settle the restoration obligation at the reporting date, based on current legal or constructive obligation. Future restoration costs are reviewed at each reporting period and any changes in the estimate are reflected in the present value of the restoration provision at each reporting date. Annual Report 2018 65 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) o. Income Tax Current income tax Current income tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. Current income tax is calculated on the basis of the law enacted or substantively enacted at the reporting date in the countries where the Company’s subsidiaries operate and generate taxable income. Deferred income tax Deferred income tax is recognized, in accordance with the liability method, on temporary differences arising between the tax basis of assets and liabilities and their carrying amounts in the consolidated financial statements. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither the accounting nor the taxable profit or loss. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the reporting date and expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis. p. Financial Instruments On January 1, 2018, the Company adopted IFRS 9 Financial Instruments (“IFRS 9”), which replaced IAS 39 Financial Instruments: Recognition and Measurement” (“IAS 39”), on a retrospective basis using certain available transitional provisions. In accordance with the transitional provisions, the comparative information for prior periods have not been restated and the information presented for 2017 reflects the requirements of IAS 39 rather than IFRS 9. The nature and effect of the changes to IFRS 9 are as follows: Financial Instrument Classification and Measurement IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. The adoption of IFRS 9 did not have a significant effect on the Company’s accounting policies related to financial liabilities. IFRS 9 provides a revised model for the classification and measurement of financial assets that eliminates the previous categories of financial assets under IAS 39 of “available-for-sale”, “held-to-maturity”, or “loans and receivables.” Under IFRS 9, on initial recognition, a financial asset is classified as and measured at: amortized cost, fair value through profit and loss (“FVTPL”), or fair value through other comprehensive income (“FVOCI”). The revised model for classifying financial assets results in classification according to their contractual cash flow characteristics and the business models under which they are held. A financial asset is measured at amortized cost if it meets both of the following conditions and is not designated as FVTPL: • • it is held within a business model whose objective is to hold assets to collect contractual cash flows; and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. On initial recognition of an equity investment that is not held for trading, an irrevocable election is available to measure the investment at FVOCI whereby changes in the investment’s fair value (realized and unrealized) will be recognized 66 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) permanently in other comprehensive income with no reclassification to profit or loss. The election is available on an investment-by-investment basis. All financial assets not classified as amortized cost or FVOCI are classified as and measured at FVTPL. This includes all derivative assets. On initial recognition, a financial asset that otherwise meets the requirements to be measured at amortized cost or FVOCI may be irrevocably designated as FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. Under IFRS 9, the Company has classified and measured its financial assets as described below: • • • • Cash and cash equivalents, restricted cash and short-term investments are classified as and measured at amortized cost. Previously under IAS 39, these assets were classified and measured at amortized cost. Trade receivables and certain other assets are classified as and measured at amortized cost. Previously under IAS 39, these assets were classified as loans and receivables and measured at amortized cost. Long-term investments in equity securities, where the Company cannot exert significant influence, are designated as financial assets at FVOCI and are measured at fair value. Previously under IAS 39, the investments were classified as available-for-sale and measured at FVOCI. On transition to IFRS 9, the Company continues to designate its long-term investments as FVOCI. Trade payables, accrued liabilities and long-term debt are classified as and measured at amortized cost. • Derivative assets and liabilities include derivative financial instruments that do not qualify as hedges, or are not designated as hedges, and are classified as FVTPL. The adoption of IFRS 9 did not result in a change in the carrying values of any of the Company’s financial instruments on the transition date. Impairment of Financial Assets IFRS 9 replaced the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ (“ECL”) model. The new impairment model applies to financial assets classified as and measured at amortized cost, contract assets and investments in debt instruments measured at FVOCI, but not to investments in equity instruments. Under IFRS 9, credit losses are recognized earlier than under IAS 39. The adoption of the ECL model under IFRS 9 did not have an impact on the carrying values of any of the Company’s financial assets on the transition date. Derivative financial instruments Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognized in net profit within the statement of comprehensive income immediately as the Company does not apply hedge accounting. The fair value of derivatives is presented as a non-current asset or a non-current liability, if the remaining maturity of the instrument is more than twelve months and it is not expected to be realized or settled within twelve months and as a current asset or liability when the remaining maturity of the instrument is less than twelve months. Debt and equity instruments Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. q. Marketable Securities Investments may be classified as a marketable security based on their highly liquid nature and because such securities represent the investment of cash that is available for current operations. Changes in market value, excluding other-than- temporary impairments, are recorded through other comprehensive income. Annual Report 2018 67 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) r. Share-based Payments Stock option plan The Company operates an equity-settled, share-based compensation plan for remuneration of its directors, management and employees. The fair value of the options granted is measured using the Black-Scholes option pricing model, taking into account the terms and conditions upon which the options are granted. The fair value of the options is adjusted by the estimate of the number of options that are expected to vest as a result of non-market conditions and is expensed over the vesting period using an accelerated method of amortization. Share-based compensation relating to stock options is charged to net profit within the consolidated statements of comprehensive income. Restricted share units (RSUs) The Company grants cash-settled awards in the form of RSUs to officers and certain employees of the Company. Under the Company’s RSU plan, each RSU granted has a value equal to the value of one Teranga common share. A portion of the RSUs vest equally over a three-year period and are settled in cash upon vesting. The RSU plan also includes a portion of RSUs that vest equally based on the Company’s achievement of performance-based criteria over a three-year period. RSUs are measured at fair value using the market value of the underlying shares at the date of the award grant. At each reporting period, the awards are revalued based on the period end share price with a corresponding charge to share- based compensation expense. RSUs that vest based on the achievement of performance conditions are revalued based on the current best estimate of the outcome of the performance condition at the reporting period. The cost of the award is recorded on a straight-line basis over the vesting period and is recorded within non-current liabilities on the consolidated statements of financial position, except for the portion that will vest within twelve months which is recorded within current liabilities. The remaining unamortized expense for the award is recorded on a straight-line basis over the remaining vesting period and is recorded within share-based compensation on the consolidated statements of comprehensive income. Deferred share units (DSUs) The Company grants cash-settled awards in the form of DSUs to directors of the Company. Under the Company’s DSU plan, each DSU granted has a value equal to the value of one Teranga common share. Directors have the option to elect to receive their director compensation in the form of DSUs. These DSUs vest as they are granted. All remaining DSUs that are granted vest on the first anniversary of the grant date. DSUs are measured at fair value using the market value of the underlying shares at the date of the grant of the award. At each reporting period, the awards are revalued based on the period end share price with a corresponding charge to share-based compensation expense. The cost of the award is recorded on a straight-line basis over the vesting period and is recorded within current liabilities on the consolidated statements of financial position. The expense for the award is recorded on a straight-line basis over the vesting period and is recorded within share-based compensation on the consolidated statements of comprehensive income. Fixed Bonus Units (FBUs) The Company operates a cash-settled, share-based compensation plan for certain management and employees. The fair value of the FBUs granted is measured using the Black-Scholes option pricing model, taking into consideration the terms and conditions upon which the FBUs are granted. The fair value of the FBUs is adjusted by the estimate of the number of FBUs that are expected to vest as a result of non-market conditions and is expensed over the vesting period. Share-based compensation relating to the FBUs is charged to the consolidated statements of comprehensive income and revalued at the end of each reporting period based on the Black-Scholes valuation. 68 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) s. Revenue Gold and silver bullion sales Revenue is recognized when persuasive evidence exists that all of the following criteria are met: • • • • • • the shipment has been made; the significant risks and rewards of ownership of the product have been transferred to the buyer; neither continuing managerial involvement to the degree usually associated with ownership, nor effective control over the gold or silver sold, has been retained; the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the sale will flow to the Company; and the costs incurred or to be incurred in respect of the sale can be measured reliably. Gold streaming arrangement Effective January 1, 2018, the Company adopted IFRS 15 and applied the standard on the gold streaming arrangement with Franco-Nevada Corporation. Refer to Notes 4 and 24 for further details. Interest income Interest income is recognized in other expenses within the consolidated statements of comprehensive income. t. Royalties Royalties Royalties, whether paid to the government of a country in which Teranga operates or to third party interests, are based on gold and silver sales and the liability is accrued as revenues are recognized. Royalties are separately reported as expenses and not deducted from revenue. Advanced royalties The Company is required to make payments related to the waiver of the right for the Republic of Senegal to acquire an additional equity interest in the exploration licenses converted to mine licenses when the ore is processed through the Sabodala mill. The former Oromin Joint Venture Group (“OJVG”) and Gora properties are subject to advanced royalties. The initial payment is accrued as a current and non-current liability and the advanced royalty is recorded within other current assets based on expected production from the properties over the next twelve months and the remaining amount is recorded within other non-current assets. The advanced royalty balance will be expensed through net profit based on actual production from the properties. u. Earnings per Share Basic earnings per share is determined by dividing the profit or loss attributable to equity holders of the Company by the weighted average number of common shares outstanding during the financial period. Diluted earnings or loss per share is calculated by dividing the profit or loss attributable to equity holders of the parent by the weighted average number of shares that would be issued on conversion of all the dilutive potential shares into ordinary shares. The dilutive effect of stock options is determined using the treasury stock method. Annual Report 2018 69 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) 4. NEW STANDARDS AND INTERPRETATIONS a. New standards, interpretations and amendments thereof, adopted by the Company in the current year IFRS 9, Financial Instruments In November 2009 and October 2010, the IASB issued the first phase of IFRS 9, Financial Instruments. In November 2013, the IASB issued a new general hedge accounting standard, which forms part of IFRS 9. The final version of IFRS 9 was issued in July 2014 and includes a third measurement category for financial assets (FVOCI) and a single, forward- looking expected loss impairment model. The adoption date for IFRS 9 was January 1, 2018. Upon adoption, investments in publicly traded equity securities held by the Company have been classified as FVOCI. These investments are recorded at fair value and changes in the fair value of these investments are recognized permanently in other comprehensive income. The following table shows the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 as at January 1, 2018, for each class of the Company’s financial assets and financial liabilities. Financial Assets Cash and cash equivalents Trade and other receivables Financial derivative assets Marketable securities Financial liabilities Trade and other payables Borrowings Gold offtake payment liability Share warrant liability Measurement Category(i) IAS 39 IFRS 9 Loans and receivables Loans and receivables FVTPL Available for sale assets Amortized costs Amortized costs n/a n/a Amortized costs Amortized costs FVTPL FVOCI Amortized costs Amortized costs FVTPL FVTPL (i) There were no adjustments to the carrying amounts of the financial instruments as a result of the change in classification from IAS 39 to IFRS 9. IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) The Company adopted IFRS 15 as at January 1, 2018 on a modified retrospective basis in accordance with the transitional provisions of IFRS 15. Results for reporting periods beginning after January 1, 2018 are presented under IFRS 15, while prior reporting period amounts have not been restated and continue to be reported under IAS 18 – Revenue. The Company has determined that the gold streaming arrangement with Franco-Nevada Corporation (“Franco-Nevada”) falls within the scope of IFRS 15 as it constitutes a contract with a customer to deliver an uncertain quantity of gold ounces in the future. The upfront payment constitutes a gold stream liability whereby the performance obligation is in the form of future deliveries of refined ounces under the streaming agreement. Under the Franco-Nevada gold streaming arrangement, the Company is required to deliver ounces of production annually commencing in 2014 from the Company’s existing properties in Senegal in exchange for an up-front deposit of $135 million. Under the arrangement, Franco-Nevada pays the Company cash at the prevailing spot price of gold at the date of delivery on 20 percent of the ounces delivered. For the remaining 80 percent of the ounces delivered to Franco- Nevada, the deferred revenue balance is drawn down based on the prevailing spot price for gold. Once the deferred revenue has been drawn down to $nil, the Company will record sales of 20 percent of spot price, equal to the cash payments, for 6 percent of ounces produced. As the total amount paid up-front by Franco-Nevada for the future deliveries (the promised consideration) differs from the stand-alone selling price of the product purchased (i.e. the expected forward price as applied to total anticipated future deliveries), the Company concluded that this arrangement provided the entity with a significant benefit of financing and therefore contains a significant financing component (“SFC”) as defined under IFRS 15. 70 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) The consideration transferred, in this case the gold stream liability, should be adjusted for the effects of a SFC, and its effects should be accounted for separately. In order to estimate the effect of the SFC, the Company has determined a discount rate of approximately 9 percent based on management’s best estimates of information available at the inception of the streaming arrangement related to the anticipated future deliveries, and the forward prices for gold (estimated at $1,250 per ounce). This discount rate is not subsequently changed for changes in timing, price or quantities of deliveries, and is applied to the gold stream liability to reflect the effects of financing in each period. Deliveries due in connection with the up-front deposit are recorded in revenue based on the forward prices originally established at the time of entering into the contract (i.e. $1,250 per ounce), being the estimated stand-alone selling price of the deliveries as determined at contract inception (after separating the SFC). The outstanding gold stream liability will accrue interest at the discount rate determined, reflecting the cost of financing. Changes in quantity and timing of future deliveries due under the arrangement affect the consideration transferred in exchange for each ounce delivered, and constitute the resolution of uncertain events and the remaining gold stream liability is remeasured using the revised production profile combined with the original estimated discount rate, and original estimated forward prices. A re-measurement of the remaining gold stream liability will result in a cumulative catch-up adjustment to revenue recorded on satisfied performance obligations and will be recorded as either revenue or a reversal of revenue in the period of the change in the remaining gold stream liability. The effect of initially applying IFRS 15 resulted in the following cumulative adjustment as at January 1, 2018: • Increase to gold stream liability of $56.1 million • Decrease to retained earnings of $56.1 million b. Future accounting policies not yet adopted IFRS 16, Leases (“IFRS 16”) In January 2016, the IASB issued IFRS 16 Leases which superseded IAS 17 Leases and related interpretations. The new standard provides a single-on-balance sheet model which eliminates the distinction between operating and finance leases, by requiring lessees to recognize assets and liabilities for all leases unless the underlying asset has a low value or the lease term is twelve months or less. At the commencement date of a lease, a lessee will recognize a liability to make lease payments and an asset representing the right to use the underlying asset during the lease term (i.e. the right- of-use asset). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset. Lessor accounting remains largely unchanged and the distinction between operating and finance leases is retained. The Company has adopted the standard on its effective date of January 1, 2019 based on a modified retrospective approach. The cumulative impact of adoption will be recognized as at January 1, 2019 and comparatives will not be restated. The Company will elect to use the exemptions proposed by the standard on lease contracts for which the lease terms ends within twelve months as of the date of initial application and lease contracts for which the underlying asset is of low-value. The Company has certain minor camp accommodation and storage leases that are considered as low- value. In 2018, the Company progressed in the implementation of IFRS 16. This work consisted of reviewing contracts, aggregating data to support the evaluation of the accounting impacts and performing preliminary calculations of the impact to the financial statements. At this stage, the Company expects the main impacts of IFRS 16 will relate to office leases and mobile fleet contracts. Based on the work completed to date, the Company estimates that it will record the following cumulative impact to the financial statements, effective January 1, 2019 (these results are preliminary and are subject to change): • • Increase to Property, Plant and Equipment (right-of-use assets) of $5.0 million - $6.0 million Increase to Lease Liabilities of $5.0 million - $6.0 million Upon implementation of IFRS 16, the main impacts are expected to be as follows: • • Assets and liabilities will increase as some leases currently classified as operating leases will be recognized on the balance sheet. There will be a reduction in mine operation or administration expenses and an increase in finance costs as operating lease costs are replaced with depreciation and lease interest expense. Annual Report 2018 71 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) • • The classification between cash flow from operating activities and cash flow from financing activities will change. Commonly used financial ratios and performance metrics for the Company, using existing definitions, will be impacted including net debt, EBITDA, and operating cash flows. The amounts recognized as assets and liabilities under IFRS 16 are subject to the following judgements, assumptions and estimates: • • • Judgement as to whether the contracts contain leases as defined under the new standard; Assumptions used to calculate the discount rate; and Estimation of the lease term. IFRIC 23, Uncertainty over Income Tax Treatments (“IFRIC 23”) In June 2017, the IASB issued the International Financial Reporting Interpretations Committee Interpretation 23 (“IFRIC 23”) which clarifies application of the recognition and measurement requirement in IAS 12 Income Taxes (“IAS 12”). IFRIC 23 explains how to recognize and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment. An uncertain tax treatment is any tax treatment applied by an entity where there is uncertainty over whether that treatment will be accepted by a tax authority. IFRIC 23 applies to all aspects of income tax accounting where there is an uncertainty regarding the treatment of an item, including taxable profit or loss, the tax bases of assets and liabilities, tax losses and credits and tax rates. IFRIC 23 is effective for annual reporting periods beginning on or after January 1, 2019. The Company is currently evaluating the impact of applying IFRIC 23 to the consolidated financial statements. The Company will apply IFRIC 23 from its effective date. 5. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The following are critical judgments and estimations that management has made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements and that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year: Ore reserves Management estimates its ore reserves based upon information compiled by qualified persons as defined in accordance with the Canadian Securities Administrators’ National Instrument 43-101 Standards for Disclosure for Mineral Projects requirements. The estimated quantities of economically recoverable reserves are based upon interpretations of geological models and require assumptions to be made regarding factors such as estimates of short and long-term exchange rates, estimates of short and long-term commodity prices, future capital requirements and future operating performance. Changes in reported reserve estimates can impact the carrying value of property, plant and equipment, mine development expenditures, provision for mine restoration and rehabilitation, the recognition of deferred tax assets, as well as the amount of depreciation and amortization charged to net profit within the consolidated statements of comprehensive income. Units-of-production Management estimates recoverable proven and probable mineral reserves in determining the depreciation and amortization of mining assets, including buildings and property improvements and certain plant and equipment. This results in a depreciation/amortization charge proportional to the recovery of the anticipated ounces of gold. The life of the asset is assessed annually and considers its physical life limitations and present assessments of economically recoverable reserves of the mine property at which the asset is located. The calculations require the use of estimates and assumptions, including the amount of recoverable proven and probable mineral reserves. The Company’s units-of- production calculations are based on contained ounces of gold milled. Mine restoration and rehabilitation provision Management assesses its mine restoration and rehabilitation provision each reporting period. Significant estimates and assumptions are made in determining the provision for mine rehabilitation as there are numerous factors that will affect the ultimate liability payable. These factors include estimates of the extent, the timing and the cost of rehabilitation activities, technological changes, regulatory change, cost increases, and changes in discount rates. Those uncertainties 72 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) may result in actual expenditures differing from the amounts currently provided. The provision at the reporting date represents management’s best estimate of the present value of the future rehabilitation costs required. Changes to estimated future costs are recognized in the statement of financial position by adjusting the rehabilitation asset and liability. Impairment of non-current assets Non-current assets are tested for impairment if there is an indicator of impairment. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made which is considered to be the higher of the fair value less costs to sell and value in use. These assessments require the use of estimates and assumptions such as long-term commodity prices, discount rates, future capital requirements, and operating performance. Fair value is determined as the amount that would be obtained from the sale of the asset in an arm’s-length transaction between knowledgeable and willing parties. Fair value for mineral assets is generally determined as the present value of estimated future cash flows arising from the continued use of the asset. Cash flows are discounted by an appropriate discount rate to determine the net present value. Management has assessed its CGUs as being all sources of mill feed through a central mill, which is the lowest level for which cash inflows are largely independent of other assets. Production start date Management assesses the stage of each mine development project to determine when a mine moves into the production stage. The criteria used to assess the start date of a mine are determined based on the unique nature of each mine development project. The Company considers various relevant criteria to assess when the mine is substantially complete, ready for its intended use and moves into the production phase. Some of the criteria include, but are not limited to, the following: • • • completion of a reasonable period of testing of the mine plant and equipment; ability to produce metal in saleable form; and ability to sustain ongoing production of metal. When a mine development project moves into the production stage, the capitalization of certain mine construction costs ceases and costs are either regarded as inventory or expensed, except for capitalizable costs related to mining asset additions or improvements or mineable reserve development. It is also at this point that depreciation/amortization commences. Stripping costs in the production phase of a surface mine Management assesses the costs associated with stripping activities in the production phase of surface mining. Deferred stripping is defined as the excess waste material moved above the average strip ratio to provide access to further quantities of ore that will be mined in future periods, which are estimated by management. Taxes Management is required to make estimations regarding the tax basis of assets and liabilities and related income tax assets and liabilities and the measurement of income tax expense and indirect taxes. This requires management to make estimates of future taxable profit or loss, and if actual results are significantly different than its estimates, the ability to realize any deferred tax assets or discharge deferred tax liabilities on the Company’s consolidated statement of financial position could be impacted. Contingencies Contingencies can be either possible assets or possible liabilities arising from past events which, by their nature, will only be resolved when one or more future events not wholly within the Company’s control occur or fail to occur. The assessment of such contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims, that may result in such proceedings or regulatory or government actions that may negatively impact the Company’s business or operations, the Company with assistance from its legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims or actions as well as the perceived merits of the nature and amount of relief sought or expected to be sought, when determining the amount, if any, to recognize as a contingent liability or assessing the impact on the carrying value of assets. Contingent assets are not recognized in the consolidated financial statements. Annual Report 2018 73 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) Determination of purchase price allocation Business combinations require the Company to determine the identifiable asset and liability in fair values and the allocation of the purchase consideration over the fair value of the assets and liabilities. This requires management to make judgements and estimates to determine the fair value, including the amount of mineral reserves and resources acquired, future metal prices, future operating costs, capital expenditure requirements and discount rates. 6. BUSINESS ACQUISITION a. Acquisition of Afema On March 22, 2018, the Company entered in to an agreement with Sodim Limited (“Sodim”), the owner of all of the issued and outstanding shares of Taurus Gold Afema Holdings Limited (“Afema”), and acquired 51 percent of Afema, which owns an interest in the Afema Gold project through the 90 percent controlled Afema Gold SA, for an initial cash consideration of $5.0 million, with an additional $2.5 million to be paid in 2019. Pursuant to the agreement, a further $2.5 million is payable upon the delivery of a confirmation study, feasibility study or updated feasibility study which shall include anticipated pre-production capital expenditures and the Company’s written confirmation of its decision to proceed with the development of any Afema Project. Upon this, the Company’s participating interest will increase to 70 percent and Sodim can elect to maintain its 30 percent equity interest on a fully participatory basis or convert it to a 5 percent equity interest on a free carrying basis or to a 3 percent net smelter royalty on the Afema project. Management has determined that the acquisition of Afema, along with its mining license and exploration permits, was a purchase of assets and assumption of liabilities and did not qualify as a business combination under IFRS 3, Business Combinations. The value assigned to the assets acquired and liabilities assumed were based upon the fair value of consideration given at the date of acquisition and transaction costs were capitalized as part of the purchase consideration. The Company has elected to measure the non-controlling interests as their proportionate share of the fair value of net identifiable assets acquired and liabilities assumed. Consideration for the acquisition was $7.8 million. b. Acquisition of Boss Gold and Boss Minerals On October 2, 2018, the Company completed its acquisition of the remaining 49 percent interest in the Golden Hill and and Gourma exploration projects, owned by Boss Minerals Sarl (“Boss Minerals”) and Boss Gold Sarl (“Boss Gold”) (together, the “Boss Entities”), respectively, from Boss Resources Limited (“Boss Resources”) for total consideration of AUD 10 million (US$7.2 million). Upon closing, Teranga owned 100 percent interest in each of the Golden Hill and Gourma exploration projects. Changes in the Company’s ownership in subsidiaries that do not result in a loss of control are recorded as equity transactions. As a result of the acquisition of the remaining 49 percent interest in the Boss Entities, a debit of $12.6 million was recognized directly in equity, which was the sum of the consideration paid of $7.2 million and a $5.4 million deficit representing Boss Resources’ 49 percent non-controlling interest which was derecognized on October 2, 2018. 7. REVENUE Gold sales - spot price (i) Silver sales Gold stream arrangement (ii) Revenue(iii) For the years ended December 31, 2018 289,794 334 22,500 312,628 2017 291,335 348 - 291,683 (i) (ii) The Company realized cash proceeds from the sale of gold to Franco-Nevada equivalent to 20 percent of the spot gold price. Refer to note 24 for further details. The Company realized revenues from the drawdown of the gold stream liability to Franco-Nevada equivalent to 80 percent of $1,250 per ounce of gold. Refer to Note 24 for further details. 74 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) (iii) If IFRS 15 had not been adopted for 2018, revenue for the year ended December 31, 2018 would have been $313.0 million. Refer to Notes 4 and 24 for further details. For the year ended December 31, 2018, 223,573 ounces of gold were sold at an average price of $1,271 per ounce, excluding 22,500 ounces delivered to Franco-Nevada (2017: 208,578 ounces of gold were sold at an average realized price of $1,261 per ounce, excluding 22,500 ounces delivered to Franco-Nevada). The Company made sales to customers in 2018 and in 2017 as follows: Customer 1 Customer 2 Customer 3 Customer 4 Total Revenue 8. MINE OPERATION EXPENSES Mine production costs Royalties(i) Regional administration costs Capitalized deferred stripping Inventory movements For the years ended December 31, 2018 2017 145,266 149,976 137,925 113,449 28,207 28,258 1,230 - 312,628 291,683 For the years ended December 31, 2018 2017 175,179 161,155 19,809 19,180 1,868 1,996 (45,978) (29,428) 13,471 15,786 Total Mine Operation Expenses 164,349 168,689 (i) Includes royalties to Axmin Inc. on account of their 1.5 percent net smelter royalty on the Gora deposit. During the year ended December 31, 2018, the Company incurred $1.5 million of Axmin royalties (2017: $1.6 million). 9. DEPRECIATION AND AMORTIZATION Depreciation and amortization - property, plant and equipment and mine development expenditures 43,264 39,152 Depreciation and amortization - deferred stripping assets 27,118 22,555 Inventory movements - depreciation (1,486) (6,306) Capitalized deferred stripping - depreciation (2,728) (1,977) Total Depreciation and Amortization 66,168 53,424 For the years ended December 31, 2018 2017 10. ADMINISTRATION EXPENSES Corporate office Legal and other Audit fees Depreciation For the years ended December 31, 2018 2017 11,090 8,855 1,865 1,428 467 301 196 118 Total Administration Expenses 13,618 10,702 Annual Report 2018 75 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) 11. FINANCE COSTS Accretion expense (i) Interest and deferred financing costs on borrowings Stocking fees Bank charges Other Total Finance Costs(i) For the years ended December 31, 2018 9,723 3,388 741 1,931 - 15,783 2017 865 1,594 761 620 67 3,907 (i) For the year ended December 31, 2018, the amount includes $9.0 million of accretion expense on the gold stream liability (2017: $nil). If IFRS 15 had not been adopted prospectively for 2018, total finance costs for year ended December 31, 2018 would have been $6.8 million. Refer to Notes 4 and 24 for further details. 12. OTHER (INCOME)/EXPENSES Unrealized gains on derivative instruments (i) Realized gains on derivative instruments (i) Change in fair value of share warrant liability (ii) Change in fair value of gold offtake payment liability (iii) Government of Senegal payments (iv ) Business and other taxes (v ) Option Agreement - Milestone Payment (v i) Gain on sale of marketable securities (v ii) Interest income and other expense Total Other Income For the years ended December 31, 2018 (2,553) (6,746) (1,136) (317) - 1,315 - - 979 (8,458) 2017 (1,832) - - - (569) 1,152 (1,150) (2,469) 372 (4,496) (i) (ii) (iii) (iv) (v) (vi) On September 11, 2017, the Company entered into forward gold sales contracts with Macquarie Bank Limited for a total of 131,000 ounces of gold at a price of $1,336 per ounce. During the fourth quarter 2017, the Company amended these contracts to defer quarterly settlements by a quarter, and as a result, the contracts extend through the first quarter of 2019. In 2018, an additional 56,500 ounces of forward contracts at a price of $1,350 per ounce were entered into and remained outstanding as at December 31, 2018. A total of 106,000 ounces of gold had been settled in 2018 under these contracts. Refer to Note 23 for further details. Refer to Note 22 for further details During 2017, a present value adjustment related to the social development fund was recorded to reflect a change in the expected payment date from 2029 to 2031. Senegalese business taxes which are calculated based on the gross value of fixed assets of the preceding year. During the second quarter 2017, the required milestones from an option agreement with Algold Resources Ltd (“Algold”) were met and the Company recorded income of C$1.5 million ($1.2 million) and received 7,349,339 Algold shares. (vii) Refer to Note 16 for further details. 13. INCOME TAX EXPENSE The Company records a current income tax expense on taxable income earned in Senegal at a rate of 25 percent. Current income tax is calculated using local tax rates on taxable income, which is estimated in accordance with local statutory requirements and is denominated in the Senegalese currency (CFA Franc). The tax basis of all assets and non-current intercompany loans are recorded using historical exchange rates and translated to the functional currency using the period end exchange rate, and as a result, the Company’s deferred tax balances will fluctuate due to changes in foreign exchange rates. Current income taxes are also affected by changes in foreign exchange rates as unrealized foreign exchange gains as well as losses, recorded in the local financial statements, are taxable / deductible for purposes of calculating income tax in Senegal. The Company also has a number of development and exploration projects in Burkina Faso and Côte d’lvoire, which currently do not generate any profit subject to income tax. 76 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) Effective January 1, 2018, Teranga’s West African entities in Senegal, Burkina Faso and Côte d’Ivoire converted to new accounting standards under the Organization for the Harmonization of Business Law in Africa (“SYSCOHADA”). The new SYSCOHADA standards bring West African accounting standards and principles in greater alignment to IFRS. As a result, certain of transitional changes impacted current and deferred income taxes for the year ended December 31, 2018. For the year ended December 31, 2018, the Company recorded income tax expense of $23.3 million, comprised of current income tax expense of $13.0 million and a deferred income tax expense of $10.3 million (2017: $2.4 million expense, comprised of current income tax expense of $6.9 million and a deferred income tax recovery of $4.5 million). For the years ended December 31 2018 2017 Current tax expense 13,017 6,962 Deferred tax expense / (recovery) 10,295 (4,526) 23,312 2,436 The Company's provision for income taxes differs from the amount computed by applying the combined Canadian federal and provincial income tax rates to income before income taxes as a result of the following: Income before income taxes Statutory tax rates 36,761 36,966 26.5% 26.5% Income tax expense computed at statutory tax rates 9,742 9,796 For the years ended December 31 2018 2017 Impact of foreign tax rates Non-deductible items Adjustment for prior years Tax credits Change in foreign exchange rates Unrecognized deferred tax assets Provision for income taxes 14. TRADE AND OTHER RECEIVABLES Current Value added tax ("VAT") recoverable (i) Other receivables (ii) Total Trade and Other Receivables 2,478 808 3,153 888 (102) (667) (64) (64) 4,251 (13,745) 3,854 5,420 23,312 2,436 As at December 31, 2018 As at December 31, 2017 5,874 4,378 3,205 1,106 9,079 5,484 (i) (ii) VAT is levied at a rate of 18 percent on supply of goods and services and is recoverable on the majority of purchases in Senegal and Burkina Faso. Non-recoverable VAT is expensed to net profit. In February 2016, the Company received an exemption for the payment and collection of refundable VAT from government of Senegal. This exemption is governed by an amendment to our mining convention and expires on May 2, 2022. The balance at the end of December 31, 2018 primarily relates to VAT amounts paid prior to May 2017 in Senegal, and VAT amounts paid within 24 months prior to commencement of operations at Wahgnion in Burkina Faso. On December 20, 2017, the Company received exoneration from VAT directly related to mining services during the construction phase from the Burkinabe government for the Wahgnion Gold Project. Other receivables primarily include: $1.8 million receivables from suppliers for services, materials and utilities used at the Sabodala Gold Mine and Wahgnion Gold Operations, a $0.1 million receivable related to the sale of exploration rights (2017: $0.1 million), $0.8 million of sales tax refunds as at December 31, 2018 (2017: $0.1 million) and a receivable from Sodim of $0.5 million (2017: $nil). Annual Report 2018 77 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) 15. INVENTORIES Current Gold bullion Gold in circuit Ore stockpile Total gold inventories Diesel fuel Materials and supplies Goods in transit Total other inventories Total current inventories Non-current Ore stockpile Total Inventories As at Decem ber 31, 2018 (i) As at Decem ber 31, 2017 2,704 3,885 26,801 33,390 2,014 29,526 678 32,218 65,608 86,105 151,713 2,929 5,451 16,356 24,736 1,891 28,581 1,816 32,288 57,024 103,638 160,662 (i) 2018 balances includes the following related to the Wahgnion Gold Project: $2.4 million of current ore stockpile, $0.3 million of other inventory and $0.7 million of non-current ore stockpile. 16. MARKETABLE SECURITIES Balance at January 1, 2017 Marketable securities acquired Change in fair value of marketable securities during the year Marketable securities disposed Foreign exchange gain Balance at December 31, 2017 Marketable securities acquired Change in fair value of marketable securities during the year Foreign exchange loss Balance as at December 31, 2018 Amount 1,171 1,583 2,178 (4,245) 277 964 77 (662) (55) 324 The Company holds publicly traded equity securities that are classified as marketable securities and are revalued to prevailing market prices at each period end. Unrealized gains and losses from changes in fair value are accounted for in other comprehensive income. During the first quarter of 2018, the Company purchased 1,000,000 Sarama Resources Ltd. shares. During the third quarter of 2017, the Company received 7,349,339 Algold shares pursuant to an option agreement. During the fourth quarter of 2017, the Company disposed of all 13,505,000 shares it held in Tawana Resources NL for net cash proceeds of $4.0 million. In 2017, a gain of $2.5 million was recorded within Other (Income)/Expense upon disposition. 78 Annual Report 2018 17. OTHER ASSETS Current Prepayments (i) Advanced royalty (ii) Derivative assets (iii) VAT certificates held (iv ) Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) As at December 31, 2018 As at December 31, 2017 5,043 4,086 1,184 2,857 4,385 1,659 333 1,084 Total Other Current Assets 10,945 9,686 Non-current Advanced royalty (ii) 2,378 3,451 Prepayments for non-current assets 1,226 - Intangible assets Derivative assets (iii) 947 816 - 173 Total Other Non-Current Assets 4,551 4,440 Total Other Assets 15,496 14,126 (i) (ii) (iii) (iv) As at December 31, 2018, prepayments include advances to vendors and contractors in Senegal of $2.7 million and $1.4 million in Burkina Faso (2017: $2.9 million Senegal) and $0.9 million for insurance (2017: $1.2 million). As at December 31, 2018, there is $1.2 million in other current assets and $2.4 million in other non-current assets as advanced royalty payments to the Government of Senegal. In total, the Company had recorded $10.0 million related to the Oromin Joint Venture Group (“OJVG”) in 2014 and $4.2 million related to the Gora deposit in the first quarter of 2015. The advanced royalties are expensed to net profit based on actual production from the former OJVG and Gora deposits. During the year ended December 31, 2018, the Company expensed $2.7 million, as amortization of the OJVG and Gora advanced royalties (2017: $3.0 million). The advanced royalty recorded within other current assets is based on the expected production from the OJVG and Gora deposits over the next year and the remaining balance is recorded within other non-current assets. Refer to Note 12(i) for further details. VAT certificates are highly liquid and convertible into cash at local banks or may be issued directly to the Company’s suppliers to reduce future VAT collections or other taxes payable by the Company. 18. PROPERTY, PLANT AND EQUIPMENT Land, building, plant and equipment Sabodala and Corporate Wahgnion Wahgnion Construction in Progress Mine development costs subject to depreciation Mine development costs not yet subject to depreciation(i)(iii)(iv) Total Cost Balance as at January 1, 2017 447,953 957 - 451,693 52,595 953,198 Additions Disposals 12,343 2,215 7,271 45,723 18,916 86,468 (814) (123) - - - (937) Balance as at December 31, 2017 459,482 3,049 7,271 497,416 71,511 1,038,729 Additions Disposals 9,854 14,146 128,249 60,052 39,421 251,722 (57) - - - - (57) Balance as at December 31, 2018 469,279 17,195 135,520 557,468 110,932 1,290,394 Accumulated depreciation Balance as at January 1, 2017 263,399 112 - 192,612 - 456,123 Depreciation expense Disposals 22,379 786 - 39,492 - 62,657 (814) (71) - - - (885) Balance as at December 31, 2017 284,964 827 - 232,104 - 517,895 Depreciation expense Disposals 25,876 1,599 - 44,605 - 72,080 (45) - - - - (45) Balance as at December 31, 2018 310,795 2,426 - 276,709 - 589,930 Net book value Balance as at December 31, 2017(ii) Balance as at December 31, 2018(ii) 174,518 2,222 7,271 265,312 71,511 520,834 158,484 14,769 135,520 280,759 110,932 700,464 Annual Report 2018 79 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) (i) (ii) (iii) (iv) Mine development costs not yet subject to depreciation includes mine licenses and costs associated with the Afema acquisition in the first quarter of 2018. Balance as at December 31, 2018 includes $150.3 million (2017: $9.5 million) of construction and $96.5 million (2017: $71.5 million) of mine development costs associated with Wahgnion, $438.1 million (2017: $438.3 million) of costs associated with Sabodala, $14.4 million (2017: $nil) of costs associated with Afema and $1.1 million (2017: $1.5 million) of cost associated with other projects. Total borrowing costs capitalized as a component of mine development as at December 31, 2018 was $3.1 million (2017 – $nil). As the Wahgnion Gold project is currently under construction, development expenditures are not currently subject to depreciation. Year ended December 31, 2018 Year ended December 31, 2017 Capitalized mine development additions Deferred stripping costs Capitalized mine development - Golouma South Capitalized mine development - Golouma West Capitalized mine development - Niakafiri Capitalized reserve development - Sustaining (Sabodala) Capitalized mine development - Growth (Wahgnion) (i) Capitalized mining license - Afema Other Total Capitalized Mine Development Additions 48,824 - - 8,817 647 25,060 14,361 1,764 99,473 31,405 130 7,408 332 5,799 18,916 - 649 64,639 (i) Capitalized development costs include reserve development, feasibility studies, construction readiness and early works expenditures related to the Wahgnion Gold Project. Depreciation of property, plant and equipment for the year ended December 31, 2018 was $27.5 million (2017: $23.2 million). Depreciation of capitalized mine development for the year ended December 31, 2018 was $44.6 million and was expensed as cost of sales (2017: $39.5 million). 19. DEFERRED INCOME TAX ASSETS/(LIABILITIES) The deferred income tax assets (liabilities) balance reported on the balance sheet and relating to Sabodala Gold Operations is comprised of the following: Deferred tax assets Unrealized foreign exchange Mining and property, plant, and equipment Other Net deferred tax assets 2018 9,049 4,417 286 13,752 2017 9,742 12,984 230 22,956 The deferred income tax assets (liabilities) balance reported on the balance sheet and relating to Wahgnion Gold Project is comprised of the following: Deferred tax assets Unrealized foreign exchange Mining and property, plant, and equipment Deferred tax assets Unrecognized Deferred Tax Assets 2018 237 2,207 2,444 2017 154 3,381 3,535 Deferred income tax assets such as tax loss carry-forwards, property, plant and equipment, share issuance costs and transaction costs are recognized as assets to the extent that the realization of the related tax benefit through future taxable profits is probable. 80 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) For the years ended December 31 2018 2017 Deferred income tax assets not recognized Share issuance and transaction costs 286 464 Loss carry forwards 21,738 21,474 Property, plant and equipment 1,051 892 Other 2,206 1,889 Deferred income tax assets not recognized 25,280 24,719 Deferred income tax liabilities have not been recognized for the withholding tax and other taxes on the unremitted earnings of certain subsidiaries as these amounts will not be distributed in the foreseeable future. Unremitted earnings totaled $499,305 at December 31, 2018. As at December 31, 2018, the tax losses not recognized by the Company and their associated expiry dates are as follows: Tax losses - gross Canada Mauritius Côte d’lvoire Australia 20. TRADE AND OTHER PAYABLES Current Trade payables (i) Sundry creditors and accrued expenses Government royalties (ii) Amounts payable to the Republic of Senegal (iii) (iv ) Contingent consideration (v i) Expiry Date 2018 2017 For the years ended December 31 2030 - 2038 81,606 76,112 2019 - 2023 220 337 2022 - 1 Indefinite 225 4,152 82,051 80,602 As at December 31, 2018 As at December 31, 2017 26,427 20,623 34,317 17,152 3,930 4,462 9,886 11,294 534 634 Total Current Trade and Other Payables 75,094 54,165 Non-Current Amounts payable to the Republic of Senegal (v ) Contingent consideration (v i) Total Other Non-Current Liabilities Total Trade and Other Payables 8,150 7,762 2,297 2,297 10,447 10,059 85,541 64,224 (i) (ii) (iii) (iv) Trade payables are comprised of obligations by the Company to suppliers of goods and services. Terms are generally 30 to 60 days. Government royalties are accrued based on the mine head value of the gold and related substances produced at a rate of 5 percent of sales, which was 2,256 million XOF (2017: 2,443 million XOF). For the year ended December 31, 2018, royalty payments totalling $16.0 million relating to the fourth quarter 2017 and the first nine months of 2018 were made to the Republic of Senegal (2017: $13.4 million paid relating to fourth quarter 2016 and the first nine months of 2017). A reserve payment is payable to the Republic of Senegal based on $6.50 for each ounce of new reserves until December 31, 2012. As at December 31, 2018, $2.1 million remains accrued as a current liability. The Company has agreed to advance accrued dividends to the Republic of Senegal in relation to its interest in Sabodala Gold Operations. For the year ended December 31, 2018, $7.8 million has been accrued based on net sales revenue for each of the twelve months ended December 31, 2013 and December 31, 2014. No additional amounts are owing beyond 2014. (v) The Company agreed to establish a social development fund which involves making a payment of $15.0 million to the Annual Report 2018 81 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) Republic of Senegal at the end of the operational life. It is recorded at its net present value of $8.2 million. The change in the period is solely due to the accretion of the liability. (vi) The Company acquired Badr Investment Ltd’s (“Badr”) 13 percent carried interest in the OJVG for cash consideration of $7.5 million and further contingent consideration which will be based on realized gold prices and increases to the former OJVG’s mining reserves through 2020, of which $3.8 million was accrued upon finalization of the purchase price allocation in 2014. In June 2018, the Company made an advance payment of $0.1 million to Badr. As at December 31, 2018, $0.5 million has been recorded as a current liability and $2.3 million has been recorded as a non-current liability and is recorded at its net present value (2017: $0.6 million in current liabilities and $2.3 million in non-current liabilities). 21. BORROWINGS Principal outstanding Deferred financing costs Total Revolver Credit Facility Secured development finance facility Principal outstanding Deferred financing costs Total Secured Development Finance Facility Total Borrowings Deferred financing costs detail: Financing costs Fair value of gold offtake payment liability - Note 22 Share warrants issued - Note 23 Accumulated amortization of deferred financing costs a. Revolver Credit Facility As at December 31, 2018 As at December 31, 2017 - - - 112,200 (25,103) 87,097 87,097 15,000 (693) 14,307 - - - 14,307 As at December 31, 2018 As at December 31, 2017 12,278 14,015 3,105 (4,295) 25,103 2,321 - - (1,628) 693 In June 2016, the Company completed an extension of its $30.0 million revolver facility with Société Générale S.A. (“Revolver Facility”). The Revolver Facility was expected to mature on September 30, 2019, with the available amount decreasing to $15.0 million on June 30, 2018. The Revolver Facility carried an interest rate of LIBOR plus 4.65 percent with any unused facility amounts subject to a commitment fee of 1.6 percent. In May 2018, the Revolver Facility was repaid in full and terminated. Unamortized deferred financing cost of $0.5 million were written off upon extinguishment of the Revolver Facility. b. Secured Development Finance Facility On April 16, 2018, the Company entered into a secured development finance facility (“Facility”) with Taurus Funds. The Facility consists of two tranches to fund the development and advancement of the Company’s projects in Burkina Faso. The first tranche consists of $165 million to be used to fund the development of the Wahgnion Gold Project (“Wahgnion Tranche”) and to repay all of the Company’s outstanding debt drawn on the Revolver Facility. The second tranche consists of $25 million to be used towards the advancement of a feasibility study for the Golden Hill Project (“Golden Hill Tranche”). The Golden Hill Tranche was increased by an additional $10 million to $35 million in October 2018 (see Note 6b). All subsequent drawdowns on the Golden Hill Tranche are subject to meeting conditions precedent. Both tranches bear an interest rate of 8.75 percent per annum on the drawn amount, paid quarterly in arrears. Early repayment is permitted at any time without penalty. Principal repayments on the Wahgnion Tranche are due quarterly commencing on March 31, 2020 with the balance due on December 31, 2022. The principal repayment of the Golden Hill Tranche is due on December 31, 2022. A commitment fee of 2.5 percent on undrawn balances is due quarterly in arrears. As part of the Facility, the Company granted 2 million share warrants to Taurus Funds on April 16, 2018. Each warrant allows the holder to acquire common shares of the Company at an exercise price of C$5.22. The fair value of these warrants on the date of grant was $3.1 million and was recognized as a deferred financing cost (Note 23). 82 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) As at December 31, 2018, $102.2 million was drawn on the Wahgnion Tranche and $10 million was drawn on the Golden Hill Tranche. 22. GOLD OFFTAKE PAYMENT LIABILITY In conjunction with the Facility, the Company entered into a gold offtake payment agreement with Taurus Funds (“Gold Offtake Agreement”) on May 31, 2018. Under the terms of the Gold Offtake Agreement, Taurus Funds is entitled to an amount equal to the difference between the actual spot sales price per ounce and the lowest a.m. and p.m. London Bullion Market Association gold price per ounce during the eight business days preceding the sale date for gold ounces produced and sold from the Wahgnion Gold Project, up to 1,075,000 ounces. Sales proceeds received by Teranga will be reduced by any amounts owed to Taurus Funds under the Gold Offtake Agreement. Taurus Funds does not take physical delivery of gold ounces. The Company has the option to terminate the agreement by paying Taurus Funds the net present value (applying an 8.75 percent annual discount rate, and assuming gold deliveries on a straight line basis for the first 9.5 years of mine life commences from the date of first production) of $20 per ounce multiplied by the number of outstanding gold ounces remaining under the Gold Offtake Agreement. The Gold Offtake Agreement was classified as a derivative financial liability as the amount due to Taurus Funds is variable and determined based on the price spread between the spot price of gold on the date of sale and the lowest spot price of gold over periods of time in the future. As a result, the gold offtake payment liability is recorded at fair value at the end of each reporting period. The Company has estimated the fair value of the gold offtake payment liability using a discounted cash flow model based on the Wahgnion Gold Project’s life-of-mine production. Key inputs used in the discounted cash flow model at each period were: Number of gold ounces outstanding Maximum per ounce price spread betw een spot gold price and low est price of the 8 preceding days Discount rate As at Decem ber 31, 2018 On inception date 1,075,000 1,075,000 20.0 20.0 9.0% 9.2% As at May 31, 2018, the estimated fair value of the gold offtake payment liability was $14.0 million and was recognized as a deferred financing cost (Note 21). As at December 31, 2018, the estimated fair value was $13.7 million. 23. SHARE WARRANT LIABILITY The Company granted 2 million share warrants to Taurus Funds on April 16, 2018. Each warrant allows the holder to acquire one common share of the Company at an exercise price of C$5.22, with an expiry date of April 15, 2022. The currency of the exercise price of the warrants is different from the Company’s functional currency and as a result the share warrants have been classified as a derivative financial liability. Changes in fair value of the financial liability are recognized as other income (expense) at the end of each reporting period. Upon exercise, the warrant liability will be reclassified to share capital. Should the warrants expire unexercised, the associated warrant liability will be recorded as other income in the consolidated statements of comprehensive income. There is no circumstance under which the Company would be required to pay any cash upon exercise or expiry of the warrants. A reconciliation of the change in the fair values of the share warrant liability is presented below: Balance as at December 31, 2017 Granted during the year Number of warrants Share warrant liability - - 2,000,000 3,105 Change in fair value of share warrant liability - (1,136) Balance as at December 31, 2018 2,000,000 1,969 Annual Report 2018 83 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) Fair value of warrants were calculated using the Black-Scholes option pricing model with the following assumptions: Valuation date share price Weighted average fair value of share warrants Exercise price Risk-free interest rate Expected share market volatility (i) Expected life of warrants (years) Dividend yield Number of warrants exercisable As at December 31, 2018 As at grant date C$4.03 C$1.34 C$5.22 1.85% 57% 3.3 0% C$4.49 C$1.95 C$5.22 1.90% 61% 4.0 0% 2,000,000 2,000,000 (i) Volatility was determined using historical volatility, based on the expected life of the warrants, of the Company’s share price. 24. GOLD STREAM LIABILITY On January 15, 2014, the Company completed a streaming transaction with Franco-Nevada. The Company is required to deliver 22,500 ounces of gold annually over the first six years followed by 6 percent of production from the Company’s existing properties in Senegal, thereafter, in exchange for a deposit of $135 million. For accounting purposes, the agreement is considered a contract for the future delivery of gold ounces at the contracted price. The up-front payment of $135 million payment is accounted for as a prepayment of undelivered ounces under the contract and is recorded as a gold stream liability. For ounces of gold delivered to Franco-Nevada under the streaming transaction, Franco-Nevada pays the Company cash at the prevailing spot price of gold at the date of delivery on 20 percent of the ounces delivered. For the remaining 80 percent of the ounces delivered to Franco-Nevada, the gold stream liability balance is drawn down based on the contracted price under IFRS 15. The gold stream liability is revalued based on estimates of expected deliveries from priced at $1,250 per ounce of gold. Any future changes in timing, quantities and gold price assumptions will result in an update to the liability balance. During the year ended December 31, 2018, the Company delivered 22,500 ounces of gold to Franco-Nevada (2017: 22,500 ounces) and recorded revenue of $28.2 million, consisting of $5.7 million received in cash proceeds and $22.5 million recorded as a reduction of gold stream liability (2017: revenue of $28.3 million, consisting of $5.7 million received in cash proceeds and $22.6 million recorded as a reduction of gold stream liability). As part of the gold streaming transaction with Franco-Nevada, the Company is required to maintain a minimum consolidated cash balance of $15.0 million. Amount 68,815 (22,606) 46,209 56,096 8,957 (22,500) 88,762 Balance as at January 1, 2017 Amortization of gold stream liability Balance as at December 31, 2017 Cumulative adjustment due to IFRS 15(ii) Accretion of gold stream liability Amortization of gold stream liability Balance as at December 31, 2018(i) 84 Annual Report 2018 Current Non-Current Total Gold stream liability(i) Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) As at Decem ber 31, 2018 As at Decem ber 31, 2017 14,860 24,206 73,902 22,003 88,762 46,209 (i) (ii) If IFRS 15 had not been adopted, the current gold stream liability and the total gold stream liability as at December 31, 2018 would both have been $23.4 million. Refer to Note 4a for further details. Refer to Note 4a. 25. PROVISIONS Current Mine restoration and rehabilitation (i) Employee benefits (ii) Cash settled share-based compensation (iii) As at December 31, 2018 As at December 31, 2017 370 - 2,815 2,289 4,055 2,630 Total Current Provisions 7,240 4,919 Non-Current Mine restoration and rehabilitation (i) Employee benefits (ii) Cash settled share-based compensation (iii) Total Non-Current Provisions Total Provisions 33,735 27,510 798 872 795 1,002 35,328 29,384 42,568 34,303 (i) (ii) (iii) The rehabilitation provision represents the present value of rehabilitation costs relating to the Sabodala Gold Mine which are expected to be incurred up to 2031 and the Wahgnion Gold Project which are expected to be incurred up to 2033. The non- current provision includes $27.5 million for Sabodala Gold Mine and $6.2 million for the Wahgnion Gold Project (2017: $27.5 million Sabodala Gold Mine). The provision has been recorded based on estimates and assumptions which management believe are a reasonable basis to estimate the future liability. The estimates are reviewed regularly to take into account any material changes to the rehabilitation work required. Actual rehabilitation costs will ultimately depend upon future market prices for the necessary rehabilitation work required that will reflect market conditions at the relevant time. The current provisions for employee benefits include $1.1 million accrued vacation and $1.7 million long service leave entitlements for the period ended December 31, 2018 (2017: $1.1 million and $1.2 million). The non-current provisions for employee benefits include $0.8 million of accrued vacation (2017: $0.9 million). The provision for cash settled share-based compensation represents the amortization of the fair value of the fixed bonus plan units and the amortization of the fair value of the RSUs and DSUs. Refer to Note 34 for further details. 26. ISSUED CAPITAL Balance as at January 1, 2017 107,342,775 496,326 Cancellation of fractional shares as a result of share consolidation (1,636) - Number of shares Amount Stock options exercised Balance as at December 31, 2017 Stock options exercised Balance as at December 31, 2018 2,763 7 107,343,902 496,333 242,867 924 107,586,769 497,257 The Company is authorized to issue an unlimited number of common shares with no par value. Holders of common shares are entitled to one vote for each common share on all matters to be voted on by shareholders at meetings of the Company’s shareholders. All dividends which the Board of Directors may declare shall be declared and paid in equal amounts per share on all common shares at the time outstanding. There are no pre-emptive, redemption or conversion rights attached to the common shares. All common shares, when issued, are and will be issued as fully paid and non- assessable shares without liability for further calls or to assessment. Annual Report 2018 85 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) Capital Risk Management The Company manages its capital with the following objectives: • Ensure sufficient financial flexibility to achieve both short and long-term business objectives including funding of future growth and development and exploration opportunities. • Maintain an optimal capital structure to maximize shareholder return through maximising long-term free cash flows. • Safeguarding the Company’s ability to continue as a going concern. Through the ongoing management of its capital, the Company will make adjustments to the structure of its capital based on changing economic, industry, and business conditions in the jurisdictions in which it operates in an effort to meet its objectives. In doing so, the Company may issue new shares or debt, buy back issued shares, or pay off any outstanding debt. The capital structure is reviewed by management and the Board of Directors on an ongoing basis. The Company considers its capital to be equity, comprising share capital, stock options, contributed surplus and accumulated earnings, which at December 31, 2018 totalled $607,127 (2017: $649,555) 27. EARNINGS PER SHARE (EPS) Basic EPS Diluted EPS Net profit used in the calculation of basic EPS Weighted average number of common shares for the purposes of basic EPS (‘000) Effect of dilutive share options ('000) Weighted average number of common shares outstanding for the purpose of diluted EPS (‘000) For years ended December 31, 2018 0.11 0.11 11,794 107,425 234 107,659 2017 0.30 0.30 31,932 107,345 78 107,423 The determination of weighted average number of common shares for the purpose of diluted EPS excludes 3.0 million and 3.1 million shares relating to share options that were anti-dilutive for the years ended December 31, 2018 and December 31, 2017, respectively. 86 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) 28. COMMITMENTS FOR EXPENDITURES As at December 31, 2018, the Company had the following payments due on contractual obligations and commitments: Paym ents Due By Period (US$ m illions) Total < 1 year 1-3 years 4-5 years >5 years Debt (i) 112.2 - 112.2 - - Franco-Nevada gold stream (ii) 137.9 22.5 38.1 18.6 58.7 Purchase obligations for supplies and services (iii) 2.4 2.4 - - - Sustaining capital commitments (iv) Grow th capital commitments (v) Afema Investment (vi) 5.0 3.1 1.9 - - 69.5 69.5 - - - 11.2 5.2 6.0 - - Operating lease commitments 7.6 2.5 2.5 0.9 1.7 Total (i) (ii) (iii) (iv) (v) (vi) 345.8 105.2 160.7 19.5 60.4 On April 16, 2018, the Company entered into the Taurus Facility. As at December 31, 2018, $102.2 million was drawn on the Wahgnion Tranche and $10 million was drawn on the Golden Hill Tranche. On January 15, 2014, the Company completed a gold stream transaction with Franco-Nevada Corporation. The Company is required to deliver 22,500 ounces annually over the first six years followed by 6 percent of production from the Company’s existing properties in Senegal, thereafter, in exchange for a deposit of $135.0 million. The commitment estimate assumes a gold price of $1,250 per ounce. Purchase obligations for supplies and services - includes commitments related to maintenance and explosives services contracts. Sustaining capital commitments - purchase obligations for capital expenditures at Sabodala, which include only those items where binding commitments have been entered into. Growth capital commitments - purchase obligations for capital expenditures at the Wahgnion Gold Project, which include only those items where binding commitments have been entered into. On December 7, 2017, the Company entered into a memorandum of understanding with Sodim for the exploration and development of the Afema land package in Côte d'Ivoire, for total cash consideration of $10.0 million, payable over four instalments. During 2018, two payments totalling $5.0 million was paid. The third instalment of $2.5 million will be paid in 2019. A fourth payment of $2.5 million will be payable upon delivery of a confirmation study or updated feasibility study with Teranga’s confirmation of its decision to proceed with the Afema project. Under the terms of the memorandum of understanding, the Company maintains its 51 percent interest in the Afema mine license and Afema permits through the completion of a three-year $11.0 million exploration and community relations work program, increasing its interest to 70 percent on the Afema mine license through the delivery of a positive economic evaluation of potential mining on the Afema land package and Teranga's commitment to fund its 70 percent interest in the project through construction. Pursuant to the Company’s existing joint venture agreement with Miminvest SA, a 3 percent royalty is payable to Miminvest in connection with Teranga’s share of production or product emanating from the Afema mining lease as the land package was considered an exploration property. SABODALA GOLD OPERATIONS (“SGO”), SABODALA MINING COMPANY (“SMC”), WAHGNION GOLD OPERATIONS SA (“WGO”) AND THE OROMIN JOINT VENTURE GROUP LTD. (“OJVG”) OPERATING COMMITMENTS The Company has the following operating commitments in respect of the SGO, SMC, WGO and the OJVG: • • Pursuant to the Company’s Senegal Mining Concession, a royalty of 5 percent is payable to the Republic of Senegal based on the value of gold shipments, evaluated at the spot price on the shipment date for SGO. Pursuant to the completion of the acquisition of the OJVG, the Company is required to make initial payments totaling $10.0 million related to the waiver of the right for the Republic of Senegal to acquire an additional equity interest in the exploration licenses converted to mine licenses when the ore is processed through the Sabodala mill. The initial payment is to be used to finance social projects in the mine site region, which are determined by the Republic of Senegal and will be paid either directly to suppliers for the completion of specific projects or to specified ministries of the Republic of Senegal. An additional payment will become payable when the actual cumulative production from the OJVG, net of mining royalties, multiplied by the Company’s weighted average gold prices, multiplied by 1 percent, exceeds the initial payments. Annual Report 2018 87 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) • • • • • • • Pursuant to the Company’s Senegal Mining Concession, $1.2 million is payable annually for community projects and infrastructure to support local communities surrounding the Company’s operations and social development of local authorities in the surrounding Kedougou region. In addition to the Company’s corporate social responsibility spending, Teranga has agreed to establish a social development fund which includes making a payment of $15.0 million to the Republic of Senegal at the end of the mine operational life. As at December 31, 2018, $8.1 million was accrued which is the discounted value of the $15.0 million future payment. $0.4 million is payable annually for training of Senegalese Directorate of Mines and Geology officers and Mines Ministry and $30 thousand is payable annually for logistical support of the territorial administration of the region for SGO. On May 1, 2016, SGO entered into a commitment with local communities around its Gora deposit to provide annual social assistance funding. An amount of $0.2 million is payable for each year of operations. Any amounts not paid is carried forward to future years. $0.3 million is payable annually, until 2019, to the Ministry of Environment pursuant to a forestry protocol with the Government of Senegal. Pursuant to the Company’s Burkina Faso Mining Concession, a sliding net smelter royalty of 3 to 5 percent of gold sales, based on the daily spot price of gold, is payable to the government of Burkina Faso. In addition, pursuant to the 2015 Burkina Faso Mining Code, 1 percent of monthly turnover (before tax) is to be contributed to the mining fund for local development. Offtake obligation • Under the Offtake Agreement, Taurus Funds is entitled to an amount, in cash, equal to the difference between the actual spot sales price per ounce and the lowest a.m. and p.m. London Bullion Market Association gold price per ounce during the eight business days preceding the sale date for all Wahgnion gold ounces produced and sold, up to 1,075,000 ounces. 29. CONTINGENT LIABILITIES Outstanding tax assessments In April 2016, the Company received a withdrawal of the 2011 tax assessment for all but $1.0 million, which remains in dispute. No amounts were accrued relating to this matter. The Company operates in various countries in West Africa and may be subject to assessments by the regulatory authorities in each of those countries, which can be complex and subject to interpretation. Assessments may relate to matters such as income and other taxes, duties and other matters. The Company exercises informed judgment to interpret the provisions of applicable laws and regulations as well as their application and administration by regulatory authorities to reasonably determine and pay the amounts due. From time to time, the Company may undergo a review by the regulatory authorities and in connection with such reviews, disputes may arise with respect to the Company’s interpretations about the amounts due and paid. As at December 31, 2018, the Company did not have any material provisions for tax assessments. The Company believes the ultimate resolution of any assessments will not have a material adverse effect on the financial position of the Company. Reserve payment A reserve payment is payable to the Republic of Senegal, calculated on the basis of $6.50 for each ounce of new reserves until December 31, 2012 and 1 percent of the trailing twelve-month gold price for each ounce of new reserve beyond December 31, 2012 on the Sabodala mine license. As at December 31, 2018, $1.9 million was accrued as a current liability. 88 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) 30. EXPLORATION LICENSES AND JOINTLY CONTROLLED OPERATIONS AND ASSETS The Company has exploration licenses or is a joint venturer in the following jointly controlled operations and assets: Name of venture Principal activity Sabodala Mining Company Sarl Bransan(i) Sounkounkou(i)(ii) Boss Gold Sarl (iii) Boutouanou (iv ) Diabatou (iv ) Foutouri Kankandi Tyara Tyabo Boss Minerals Sarl (iii) Baniri Intiedougou Mougue Gryphon Minerals Burkina Faso Sarl (v) Dierisso II Nianka II Nogbele II Zeguedougou II Nogbele Sud Teranga Exploration (Ivory Coast) Sarl (vi) Dianra Guitry Mahapleu Tiassalé Sangaredougou Taurus Gold CI Sarl (vii)(viii) Aboisso Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration Gold Exploration - Jointly Controlled Gold Exploration - Jointly Controlled Gold Exploration - Jointly Controlled Interest 2018 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 51 51 51 Ayame Mafere (i) (ii) (iii) (iv) The decrees evidencing issuance of these exploration permits were delivered to Sabodala Mining Company Sarl from Senegal’s Ministry of Mines and Geology on April 20, 2018. The joint venture partner of the exploration permit has elected a 1.5 percent net smelter royalty on all currently identified targets within the original Sounkounkou permit and including the Gora project in exchange for its fully participatory 20 percent interest. The joint venture partner retains a 20 percent participatory right for any new exploration targets identified or to elect the royalty. On October 2, 2018, the Company concluded a transaction to acquire the outstanding interest in both the Golden Hill and Gourma properties, resulting in Teranga’s 100 percent ownership in these properties (see Note 6b). As at December 31, 2018, 4 out of the 6 exploration permits held by Boss Gold Sarl were current. An application to the Burkina Faso Minister of Mines for an exceptional renewal of the expired permits was filed by Boss Gold Sarl on April 30, 2018. (v) Sanembaore Sarl holds a 1 percent net smelter royalty on Banfora production. Annual Report 2018 89 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) (vi) (vii) A 3 percent net smelter royalty is owing to Miminvest SA (“Miminvest”) pursuant to the terms of a joint venture agreement. A 1 percent net smelter royalty is owing to an Ivorian State controlled entity, SODEMI, pursuant to a mining development agreement. An additional net smelter royalty of 3 percent is applicable only with respect to Teranga's equity ownership interest in the Taurus Gold CI Sarl permits under the terms of the agreement with Miminvest. Pursuant to its agreement with Sodim Limited dated March 22, 2018, Teranga also retains a right to acquire a 70 percent interest in all of the aforementioned permits upon delivery of a technical study confirming Teranga's commitment to move forward with the development of a mine on any of these permits. (viii) Interest in Taurus Gold CI Sarl was inherited as part of the acquisition of Taurus Gold Afema Holdings Ltd. on January 8, 2018. 31. CONTROLLED ENTITIES The significant mining and exploration entities of Teranga that have non-controlling interests are listed below. Sabodala Gold Operations SA Wahgnion Gold Operations SA Afema Gold SA Taurus Gold CI Sarl 32. CASH FLOW INFORMATION Changes in working capital excluding inventory Increase in trade and other receivables Decrease in other assets Decrease in trade payables and other Increase/(Decrease) in provisions Increase/(Decrease) in current income taxes payable Net Change in Working Capital Excluding Inventory 33. FINANCIAL INSTRUMENTS Country of Incorporation Effective Percentage Ownership Owned 2018 Senegal Burkina Faso Côte d’lvoire Côte d’lvoire 90.0 89.8 51.0 51.0 For the years ended December 31, 2018 (5,367) 741 (7,372) 106 7,303 (4,589) 2017 (1,769) 2,978 (5,128) (88) (7,224) (11,231) The Company’s risk exposures and the impact on the Company’s financial instruments are summarized below: a. Categories of Financial Instruments As at December 31, 2018 and 2017, the Company’s financial instruments consisted of cash and cash equivalents, trade and other receivables, marketable securities, derivative financial instruments, trade and other payables, borrowings and share warrants. 90 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) The following table illustrates the classification of the Company’s financial instruments, as at December 31, 2018 and 2017: As at December 31, 2018 As at December 31, 2017 Financial assets: Cash and cash equivalents Measured at amortized cost Trade and other receivables Measured at fair value through profit or loss Financial derivative assets Measured at fair value through other comprehensive income Marketable securities Financial liabilities: Measured at amortized cost Trade and other payables Current income tax liabilities Borrowings Measured at fair value through profit or loss Gold offtake payment liability Share warrant liability 46,615 9,079 4,385 324 90,391 13,124 87,097 13,699 1,969 87,671 5,484 1,832 964 67,856 7,634 14,307 - - Sabodala’s and Teranga’s financial assets, excluding those related to the Wahgnion and Afema related entities, have been pledged as collateral for the gold stream arrangement with Franco-Nevada. The Company’s Wahgnion related entities’ assets have been pledged as collateral for the finance Facility with Taurus Funds. b. Commodity Market Risk Market risk represents the potential loss that can be caused by a change in the market value of financial instruments. The Company’s exposure to market risk is determined by a number of factors, including foreign exchange rates and commodity prices. The Company may, at its discretion, use forward or derivative contracts to manage its exposure to changes in commodity prices. c. Foreign Currency Risk Management The Company has certain financial instruments denominated in CFA Franc, EUR, CAD, AUD and other currencies. Consequently, the Company is exposed to the risk that the exchange rate of the USD relative to the CFA Franc, EUR, CAD, AUD and other currencies may change in a manner which has a material effect on the reported values of the Company’s assets and liabilities which are denominated in the CFA Franc, EUR, CAD, AUD and other currencies. To mitigate foreign exchange risk, the Company may consider options to manage its exposures in the future. No foreign exchange contracts were entered into in 2018. The carrying amounts of the Company’s foreign currency denominated monetary assets and liabilities are as follows: CFA Franc (XOF) EUR CAD AUD Other Financial Assets Financial Liabilities December 31, 2018 December 31, 2017 December 31, 2018 December 31, 2017 25,352 378 1,123 60 1 19,894 562 4,391 431 - 44,873 2,726 10,119 107 596 56,222 967 6,198 990 41 Annual Report 2018 91 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) Foreign currency sensitivity analysis The Company is mainly exposed to CFA Franc, EUR, CAD and AUD. Based on the Company’s currency exposures relating to foreign currency denominated monetary items, a 10 percent appreciation of the US dollar against the applicable foreign currencies would have resulted in the following gains/(losses) at December 31, 2018: Financial Assets Financial Liabilities As at December 31, 2018 As at December 31, 2017 As at December 31, 2018 As at December 31, 2017 10% Strengthening of functional currency CFA Franc (XOF) Impact Gain or (loss) EUR Impact Gain or (loss) CAD Impact Gain or (loss) AUD Impact Gain or (loss) (2,535) (1,989) 4,487 5,622 (38) (56) 273 (112) (439) 1,012 (6) (43) 11 97 620 99 d. Interest Rate Risk Management Interest rate risk is the risk that the value of a financial instrument will fluctuate because of changes in the market interest rates. The Company has exposure to interest rate risk relating to its bank balances and external borrowings. The Company ensures that there is sufficient available capital to meet its short-term business requirements, taking into account its anticipated cash flows from operations and its holdings of cash and cash equivalents. The following table illustrates the classification of the Company’s financial instruments which are exposed to interest rate risk as at December 31, 2018 and 2017: Financial assets Cash and cash equivalents Financial liabilities Borrow ings As at of Decem ber 31, 2018 As at of Decem ber 31, 2017 46,615 87,671 87,097 14,307 The Company’s interest rate on its borrowing is calculated at 8.75 percent margin on the Facility with Taurus Funds. Interest rate sensitivity analysis If interest rates had been higher or lower by 50 basis points and all other variables were held constant, the profit and net assets would increase or decrease by: Financial Assets Financial Liabilities As at December 31, 2018 As at December 31, 2017 As at December 31, 2018 As at December 31, 2017 Profit or (loss) 391 419 (374) (75) 92 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) e. Credit Risk Management The Company’s credit risk is primarily attributable to cash, cash equivalents and derivative financial instruments. The Company does not have any significant credit risk exposure as cash and cash equivalents are held in low risk jurisdictions. The Company does not have significant credit risk exposure on accounts receivable as gold sales are executed with either AAA rated banking institutions or established gold metal merchants, including government entities, with access to significant credit lines. Gold production is sold into the spot market. The Company is exposed to the credit risk of Senegalese and French banks that disburse cash on behalf of its Senegal subsidiaries. The Company manages its Senegalese and French bank credit risk by centralizing custody, control and management of its surplus cash resources at the corporate office and only transferring money to its subsidiary based on immediate cash requirements, thereby mitigating exposure to Senegalese banks. The Company’s current balances held in Burkina Faso and Côte d'Ivoire are not currently significant. f. Liquidity Risk Management Liquidity risk is the risk that the Company will not be able to meet its obligations as they fall due. The Company monitors its risk of a shortage using projected cash flows and by monitoring the maturity of both its financial assets and liabilities. Cash flow forecasting is performed in the operating entity of the group and combined by the Company’s finance group. The Company’s finance group monitors the liquidity requirements to ensure it has sufficient cash to meet operational needs while maintaining sufficient headroom in its accounts so that the Company does not breach any of its covenants. Liquidity tables The following tables detail the Company’s remaining contractual maturity for its financial liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Company will be required to pay. The table includes both interest and principal cash flows. Weighted average effective interest rate % Due on demand Due one to three months Due between three months to one year Due one to five years Due over five years Financial Liabilities December 31, 2018 Non-interest bearing Fixed interest rate instruments Fixed interest rate instruments Fixed interest rate instruments Total December 31, 2017 Non-interest bearing Variable interest rate instruments Fixed interest rate instruments Fixed interest rate instruments Fixed interest rate instruments Total - 8.75% 3.08% 7.50% - 5.92% 3.08% 7.50% 5.00% 60,745 3,930 12,649 7,793 - - - - 112,200 - 2,093 - - - - - - 534 2,298 - 62,838 3,930 13,183 122,291 - 39,182 - 12,096 7,793 - - - - 15,000 - 2,093 - - - - - 634 - 2,508 - - - - - 15,000 41,275 634 12,096 25,301 15,000 Management considers that the Company has adequate current assets and forecasted cash flow from operations to manage liquidity risk arising from settlement of current and non-current liabilities. g. Fair Value of Financial Instruments The Company’s trade and other receivables, and trade and other payables are carried at amortized cost, which approximates fair value. Cash and cash equivalents and marketable securities are measured at fair value. Borrowings are based on discounted future cash flows using discount rates that reflect current market conditions for this financial instrument with similar terms and risks. Such fair value estimates are not necessarily indicative of the amounts the Company might pay or receive in actual market transactions. Potential transaction costs have also not been considered in estimating fair value. 93 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) Financial instruments carried at amortized cost on the consolidated statement of financial position are as follows: Financial assets Trade and other receivables Financial liabilities Trade and other payables Borrowings As at December 31, 2018 As at December 31, 2017 Carrying amount Fair value Carrying amount Fair value 9,079 9,079 5,484 5,484 90,391 90,391 67,856 67,856 104,217 138,067 14,307 13,732 Fair value is the price that would be received to sell an asset or paid to transfer a liability in an ordinary transaction between market participants at the measurement date. The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value. The Company values financial instruments carried at fair value using quoted market prices, where available. Quoted market prices (unadjusted) in active markets represent a Level 1 valuation. When quoted market prices in active markets are not available, the Company maximizes the use of observable inputs within valuation models. When all significant inputs are observable, the valuation is classified as Level 2. Valuations that require the significant use of unobservable inputs are considered Level 3. The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. The following table outlines financial assets and liabilities measured at fair value in the consolidated statement of financial position and the level of the inputs used to determine those fair values in the context of the hierarchy as defined above: Financial Assets Cash and cash equivalents Marketable securities Financial derivative assets Total Financial Liabilities Gold offtake payment liability Share warrant liability As at December 31, 2018 As at December 31, 2017 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 46,615 - - 87,671 - - 324 - - 964 - - - 4,385 - - 1,832 - 46,939 4,385 - 88,635 1,832 - - 13,699 - - - - - 1,969 - - - - Cash settled share-based compensation 4,725 - 125 3,511 - 121 Total 4,725 15,668 125 3,511 - 121 34. SHARE BASED COMPENSATION The share-based compensation expense for the year ended December 31, 2018 totaled $4.9 million (2017: $2.6 million). a. Incentive Stock Option Plan The Incentive Stock Option Plan (the “Plan”) authorizes the Directors to grant options to purchase shares of the Company to directors, officers, employees and consultants of the Company and its subsidiaries. The vesting of options is determined by the Board of Directors at the date of grant. The term of options granted under the Plan is at the discretion of the board of directors, provided that such term cannot exceed ten years from the date the option is granted. Each employee share option is convertible into one common share of Teranga on exercise. No amounts are paid or payable by the recipient upon receipt of the option. The options carry neither rights to dividends nor voting rights. Options may be exercised at any time from the date of vesting to the date of their expiry subject to the terms of the Plan. 94 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) The following reconciles the share options outstanding at the beginning and end of the year: Balance as at January 1, 2017 Granted during the period Forfeited during the period Exercised during the period(i) Balance as at December 31, 2017 Granted during the period Forfeited during the period Exercised during the period(ii) Balance as at December 31, 2018 Number of options exercisable - December 31, 2017 Number of options exercisable - December 31, 2018 Number of options 3,789,106 891,488 (223,340) (2,763) 4,454,491 1,321,000 (324,738) (242,867) 5,207,886 3,488,194 3,704,864 Weighted average exercise price C$10.48 C$4.16 C$10.91 C$3.33 C$9.20 C$4.22 C$6.34 C$3.25 C$8.39 (i) (ii) The weighted average share price at the time of the option exercises was C$4.50. The weighted average share price at the time of the options exercised was C$5.19. The following stock options were outstanding as at December 31, 2018: Option series Number Grant date Expiry date Exercise price (C$) Granted on November 26, 2010 Granted on December 3, 2010 Granted on February 9, 2011 Granted on April 27, 2011 Granted on August 13, 2011 Granted on December 20, 2011 Granted on February 24, 2012 Granted on February 24, 2012 Granted on June 5, 2012 Granted on September 27, 2012 Granted on October 9, 2012 Granted on October 31, 2012 Granted on December 3, 2012 Granted on June 3, 2013 Granted on March 31, 2015 Granted on March 31, 2015 Granted on March 31, 2016 Granted on August 2, 2016 Granted on March 7, 2017 Granted on March 29, 2017 Granted on July 17, 2017 Granted on March 29, 2018 Granted on April 26, 2018 Granted on May 7, 2018 Granted on May 17, 2018 Granted on June 21, 2018 Granted of September 4, 2018 Granted of September 17, 2018 Granted of November 1, 2018 1,064,000 240,000 85,000 5,000 72,000 209,000 64,000 45,000 10,000 120,000 120,000 16,000 40,000 24,000 390,000 125,223 586,164 18,225 441,665 339,609 5,000 1,127,000 20,000 6,000 10,000 10,000 8,000 3,000 4,000 26-Nov-10 03-Dec-10 09-Feb-11 27-Apr-11 13-Aug-11 20-Dec-11 24-Feb-12 24-Feb-12 05-Jun-12 27-Sep-12 09-Oct-12 31-Oct-12 03-Dec-12 03-Jun-13 31-Mar-15 31-Mar-15 31-Mar-16 02-Aug-16 07-Mar-17 29-Mar-17 17-Jul-17 29-Mar-18 26-Apr-18 07-May-18 17-May-18 21-Jun-18 04-Sep-18 17-Sep-18 01-Nov-18 26-Nov-20 03-Dec-20 09-Feb-21 27-Apr-21 13-Aug-21 20-Dec-21 24-Feb-22 24-Feb-22 05-Jun-22 27-Sep-22 06-Oct-22 31-Oct-22 03-Dec-22 03-Jun-23 31-Mar-20 31-Mar-20 31-Mar-21 11-Aug-21 07-Mar-22 29-Mar-22 17-Jul-22 29-Mar-24 26-Apr-24 07-May-24 17-May-24 21-Jun-24 04-Sep-24 17-Sep-24 01-Nov-24 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 15.00 3.20 3.20 3.33 5.34 4.20 4.15 3.43 4.19 4.78 5.01 5.26 5.33 3.88 3.90 3.61 FV at grant date (C$) 5.95 5.95 4.95 4.00 4.10 3.05 1.83 6.32 0.85 4.65 5.05 2.60 3.05 0.20 1.75 1.50 1.75 3.20 1.50-1.90 1.75-2.10 1.46-1.69 1.86-2.37 2.12-2.73 2.24-2.80 2.34-2.94 2.20-2.84 1.47-1.81 1.48-1.82 1.71-1.97 Annual Report 2018 95 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) As at December 31, 2018, approximately 6.1 million (2017: 6.3 million) options were available for issuance under the Plan. The estimated fair value of share options is amortized over the period in which the options vest which was three years, except for the options granted on March 29, 2018 and future grants, which vest over four years. For those options which vest on single or multiple dates, either on issuance or on meeting milestones (the “measurement date”), the entire fair value of the vesting options is recognized immediately on the measurement date. Of the 5,207,886 common share stock options issued and outstanding as at December 31, 2018, 3,704,864 are vested and 315,022 vest over a three-year period, and 1,188,000 vest over a four-year period. As at December 31, 2018, the weighted average remaining contractual term of outstanding stock options exercisable was 2.3 years. As at December 31, 2018, 2,114,000, 1,905,886 and 1,188,000 share options had a contractual life of ten, five and six years at issuance, respectively. Fair value of stock options granted The grant date fair value of options granted during the nine months ended December 31, 2018 was calculated using the Black-Scholes option pricing model with the following assumptions: For the years ended December 31, Grant date share price Weighted average fair value of awards Exercise price(i) Range of risk-free interest rates Expected share market price volatility(ii) Expected life of options (years) Dividend yield Forfeiture rate 2018 C$3.64- C$5.37 C$2.25 C$3.61- C$5.33 1.88%-2.40% 56%-65% 3.3-5.0 0% 3%-14% 2017 C$3.12-C$4.15 C$1.81 C$3.12-C$4.20 0.82%-1.61% 64%-69% 2.8-3.8 0% 3%-14% (i) (ii) Represents the 5-day volume-weighted average price of the Company's shares on the Toronto Stock Exchange for the period ending on the grant date. Volatility was determined using the 3-year average historical volatility of the Company’s share price for the historical grants up to December 31, 2017 and 4-year average historical volatility of the Company’s share price for the options granted on March 29, 2018 and future grants. b. Fixed Bonus Plan The Fixed Bonus Plan authorizes the directors to grant Fixed Bonus Plan Units (“FBUs”) to officers and employees of the Company and its subsidiaries in lieu of participating in the Stock Option Plan. Each FBU entitles the holder upon exercise to receive a cash payment equal to the closing price of a common share of Teranga on the TSX on the business day prior to the date of exercise, less the exercise price. FBUs may be exercised at any time from the date of vesting to the date of their expiry subject to the terms of the plan. FBUs are not transferable or assignable. The exercise price of each FBU is determined by the board of directors at the date of grant but in no event shall be less than the five-day weighted average closing price of the common shares as reported on the TSX for the period ended on the business day immediately preceding the day on which the FBU was granted. The vesting of the FBUs is determined by the board of directors at the date of grant. The term of FBUs granted under the plan is at the discretion of the board of directors, provided that such term cannot exceed ten years from the date that the FBUs are granted. As at December 31, 2018, there were 323,500 FBUs outstanding that were granted on August 8, 2012, March 31, 2015, and March 31, 2016 with expiry dates ranging from March 31, 2020 through to February 24, 2022. Of the 323,500 FBUs outstanding as at December 31, 2018, 236,000 FBUs have an exercise price of C$15.00, 60,000 FBUs have an exercise price of C$3.20 and 27,500 FBUs have an exercise price of C$3.33. The total outstanding FBUs 96 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) have fair values of C$0.53 per FBU at December 31, 2018. The total fair value of the FBUs at December 31, 2018 was $0.1 million (December 31, 2017: $0.1 million). The estimated fair values of the FBUs are amortized over the period in which the FBUs vest. Of the 323,500 FBUs outstanding, 322,732 FBUs were vested at December 31, 2018 with the remaining FBUs to be fully vested by March 31, 2019. Fair value of FBUs granted The FBUs were revalued using Black-Scholes option pricing model with the following assumptions: Share price at the end of the period Weighted average fair value of vested awards Exercise price(i) Range of risk-free interest rates Expected share market price volatility(ii) Expected life of FBUs (years) Dividend yield Forfeiture rate For the years ended December 31, 2018 C$4.03 C$0.53 C$3.20-C$15.00 1.86% 62% 1.2-3.2 0% 5%-50% 2017 C$2.99 C$0.44 C$3.20-C$15.00 1.51%-1.79% 64% 2.0-4.0 0% 5%-50% (i) (ii) Represents the 5-day volume-weighted average price of the Company's shares on the Toronto Stock Exchange for the period ending on the grant date. Volatility was determined using the 3-year average historical volatility of the Company’s share price. c. Restricted Stock Units The Company introduced a RSU plan for employees in 2014. RSUs are not convertible into Company stock and simply represent a right to receive an amount of cash (subject to withholdings), on vesting, equal to the product of i) the number of RSUs held, and ii) the volume weighted average trading price of the Company’s shares for the five trading days prior to such date. RSUs will generally vest as to 50 percent in thirds over a three-year period and as to the other 50 percent, in thirds upon satisfaction of annual production and cost targets, except for the RSUs granted on March 29, 2018 and future grants, which vest as to 25 percent in thirds over a three-year period, 50 percent in thirds upon satisfaction of annual production and costs targets and 25 percent in thirds upon satisfaction of matching the average performance of the VanEck Vectors Junior Gold Miners ETF (“GDXJ”). During the twelve months of 2018, 821,000 RSUs were granted at a price of C$4.19 per unit and 211,866 RSUs were forfeited (2017: 856,460 RSUs granted, 102,293 forfeited). As of December 31, 2018, a total of 1,467,014 RSU’s were outstanding of which 969,665 units were vested. As at December 31, 2018, $2.0 million of current RSU liability and $0.7 million of non-current RSU liability have been recorded in the consolidated financial statement of financial position (2017: $1.4 million and $0.9 million in current and non-current RSU liability respectively). d. Deferred Stock Units The Company introduced a DSU Plan for non-executive directors in 2014. DSUs represent a right for a non-executive director to receive an amount of cash (subject to withholdings), on ceasing to be a director of the Company, equal to the product of (i) the number of DSUs held, and (ii) the volume weighted average trading price of the Company’s shares for the five trading days prior to such date. The Company granted 193,000 DSUs during the year ended December 31, 2018 at a price of C$4.19 per unit. Of the 756,998 DSUs outstanding at December 31, 2018, 676,581 DSUs were vested and no units were cancelled. As at December 31, 2018, $2.1 million of current DSU liability has been recorded in the consolidated financial statement of financial position (2017: $1.2 million). Annual Report 2018 97 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) 35. SEGMENT INFORMATION Teranga’s Chief Operating Decision Maker (“CODM”), reviews the operating results, assesses the performance and makes capital allocation decisions at the following levels: Sabodala gold mine in Senegal; Corporate entities; Wahgnion Gold Project in Burkina Faso; and exploration projects in Senegal, Burkina Faso, and Côte d'Ivoire (including Afema). The following table provides the Company’s operating results and summary asset information by segment. The Company’s operating revenues are solely attributable to the Sabodala Gold operations in Senegal. Revenue Mine operation expenses Depreciation and amortization Cost of sales Gross profit Year ended December 31, 2018 Sabodala Corporate Wahgnion Exploration Total 312,628 - - - 312,628 (164,349) - - - (164,349) (66,168) - - - (66,168) (230,517) - - - (230,517) 82,111 - - - 82,111 Exploration and evaluation expenditures - - - (13,160) (13,160) Administration expenses - (13,618) - - (13,618) Corporate social responsibility expenses (3,386) (314) - - (3,700) Share-based compensation Finance costs - (4,851) - - (4,851) (3,648) (9,680) (2,224) (231) (15,783) Net foreign exchange (losses)/gains (2,205) (301) (427) 253 (2,680) Other (expenses)/income Operating expenses (2,083) 9,917 624 - 8,458 (11,322) (18,847) (2,027) (13,138) (45,334) Profit/(losses) before income tax 70,789 (18,847) (2,027) (13,138) 36,777 Income tax expense Net profit /(loss) (22,222) - (1,090) - (23,312) 48,567 (18,847) (3,117) (13,138) 13,465 Revenue Mine operation expenses Depreciation and amortization Cost of sales Gross profit Year ended December 31, 2017 Sabodala Corporate Wahgnion Exploration Total 291,683 - - - 291,683 (168,689) - - - (168,689) (53,424) - - - (53,424) (222,113) - - - (222,113) 69,570 - - - 69,570 Exploration and evaluation expenditures - - - (12,373) (12,373) Administration expenses - (10,702) - - (10,702) Corporate social responsibility expenses (2,564) (342) - - (2,906) Share-based compensation Finance costs - (2,580) - - (2,580) (3,352) (554) (1) - (3,907) Net foreign exchange (losses)/gains (4,473) (243) (147) 231 (4,632) Other income 64 3,631 801 - 4,496 Operating (expenses)/income (10,325) (10,790) 653 (12,142) (32,604) Profit/(loss) before income tax Income tax (expense)/recovery Net profit/(loss) 59,245 (10,790) 653 (12,142) 36,966 (4,074) - 1,638 - (2,436) 55,171 (10,790) 2,291 (12,142) 34,530 98 Annual Report 2018 Consolidated Financial Statements of Teranga Gold Corporation December 31, 2018 (in $000’s of United States dollars, except per share amounts) Selected non-current asset balances are detailed below: Property, plant and equipment Mine development expenditure Total non-current assets Property, plant and equipment Mine development expenditure Total non-current assets As at December 31, 2018 Sabodala Corporate Wahgnion Exploration 157,063 278,390 537,526 349 150,018 - 98,833 612 254,097 1,343 14,432 15,784 Total 308,773 391,691 807,316 As at December 31, 2017 Sabodala Corporate Wahgnion Exploration 171,358 260,132 562,231 3,125 5,116 8,501 8,869 71,511 83,914 659 64 757 Total 184,011 336,823 655,403 36. KEY MANAGEMENT PERSONNEL COMPENSATION The Company considers key members of management to include the President and CEO and officers. The remuneration of the key members of management includes 6 members during the years ended December 31, 2018 and 2017. The remuneration during the years ended December 31, 2018 and 2017 is as follows: Salary and Fees Short term benefits Non-Cash Benefits Cash Bonus (i) Cash settled share based payments - value vested during the period Equity settled share based payments - value vested during the period RSUs Options Total 1,777 13 1,030 825 348 3,993 1,852 14 768 1,028 502 4,164 For the year ended December 31, 2018 Compensation For the year ended December 31, 2017 Compensation (i) These amounts are based on cash payments made during the year and relate to the prior year. 37. RELATED PARTY TRANSACTIONS a. Transactions with Key Management Personnel During the year ended December 31, 2018, there were transactions totaling $50 thousand between the Company and an entity controlled by Alan R. Hill, the Company’s Chairman, for consulting services. b. Exploration Agreement with Miminvest The Company has an exploration agreement with Miminvest, a related party, to identify and acquire gold exploration stage mining opportunities in Côte d'Ivoire. Miminvest is a company established to invest in gold and natural resources in West Africa and is controlled by the Mimran family and Mr. David Mimran, a director and the largest shareholder of Teranga. Miminvest holds five existing exploration permits, representing 1,838 km2 in Côte d'Ivoire. Under the terms of the exploration agreement, a separate entity was created and is owned and funded by Teranga. Miminvest transferred its permits into the entity and in exchange retains a net smelter royalty interest of 3 percent and will provide ongoing in-country strategic advice. Furthermore, the entity will pursue additional exploration projects in Côte d'Ivoire outside of the existing Miminvest permits. Annual Report 2018 99 CORPORATE DIRECTORY Board of Directors Alan R. Hill Richard Young William Biggar Jendayi Frazer Edward Goldenberg Christopher R. Lattanzi David Mimran Alan R. Thomas Frank D. Wheatley Senior Management Richard Young Paul Chawrun Navin Dyal David Savarie David Mallo Leily Omoumi Trish Moran Registered Office Chairman President and CEO Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director President and CEO Chief Operating Officer Chief Financial Officer Vice President, General Counsel & Corporate Secretary Vice President, Exploration Vice President, Corporate Development* Head of Investor Relations 77 King Street West, TD North Tower Suite 2110, P.O. Box 128 Toronto, Ontario, Canada M5K 1H1 T: +1 416-594-0000 F: +1 416-594-0088 E: investor@terangagold.com www.terangagold.com Senegal Office 2K Plaza Suite B4, 1er Etage Sis Route du Méridien Président, Almadies BP 38385 Dakar Yoff T: +221 338 642 525 F: +224 338 642 526 Ouagadougou Office Avenue Gérard Kango Ouedraogo Ouaga 2000 01 BP 1334 Ouagadougou, Burkina Faso T: +226 2537 5199 Auditor Ernst & Young LLP Chartered Accountants Toronto, Ontario, Canada Legal Counsel Stikeman Elliot LLP Toronto, Ontario, Canada Share Registry Computershare Trust Company of Canada T: +1 800 564 6253 Stock Exchange Listing Toronto Stock Exchange: TGZ OTC Markets Group “OTCQX” Market: TGCDF 100 Annual Report 2018 *Effective March 2019 8151_Teranga_Gold_2018_AR_Cover_Wrap.indd 4 2019-03-27 6:19 PM BUILDING a multi-asset mid-tier gold producer in West Africa Annual Report 2018 1 www.terangagold.com 

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