REG - Central Asia Metals - 2017 Full Year Results
RNS Number : 6414KCentral Asia Metals PLC12 April 201812 April 2018
CENTRAL ASIA METALS PLC
('CAML' or the 'Company')
2017 Full Year Results
Central Asia Metals plc (AIM: CAML) today announces its full year results for the 12 months ended 31 December 2017.
Financial summary
· $402.5 million acquisition of Lynx Resources, 100% owner of Sasa zinc-lead mine, Macedonia
· 2017 dividend of 16.5 pence per share (2016: 15.5 pence), includes final proposed dividend of 10 pence
· Group gross revenue of $106.5 million (2016: $69.3 million)
· Kounrad 2017 C1 cash cost of $0.52 per pound (2016: $0.43 per pound)
· Sasa 2017 C1 zinc equivalent cash cost of $0.44 per pound
· Adjusted Group EBITDA of $66.4 million (2016: $39.9 million)
· Unadjusted EBITDA of $53.8 million (includes Lynx Resources acquisition cost of $12.6 million)
· Adjusted EBITDA margin of 62% (2016: 58%), unadjusted EBITDA margin of 51% (2016: 58%)
· Cash in the bank as at 31 December 2017 of $45.8 million (2016: $40.3 million)
· Group net debt as at 31 December 2017 of $138.9 million (2016: net cash of $40.3 million)
Operational summary
Kounrad
· Record copper production of 14,103 tonnes (2016: 14,020 tonnes)
· Record copper sales of 14,181 tonnes (2016: 13,938 tonnes)
· Western Dumps under leach with 40% of 2017 production from that area
Sasa
· Zinc in concentrate production of 21,585 tonnes (CAML attributable 3,625 tonnes)
· Lead in concentrate production of 29,881 tonnes (CAML attributable 4,951 tonnes)
2018 outlook
· Kounrad copper production guidance, between 13,000 and 14,000 tonnes
o Approximately 65% of 2018 copper production to be leached from Western Dumps
· Sasa production guidance
o Zinc, between 21,000 and 23,000 tonnes
o Lead, between 28,000 and 30,000 tonnes
· Shuak 2018 exploration programme, to commence in Q2
Nick Clarke, Chairman of CAML, commented:
"2017 was a truly transformational year for the Company with the $402.5 million acquisition of Lynx Resources, 100% owner of the Sasa zinc-lead mine in Macedonia. We can already see the benefits of our acquisition, as demonstrated by the 66% increase in Group adjusted EBITDA and 62% adjusted EBITDA margin. This result also reflects a much improved copper market, with the LME price increasing by 30% throughout the year.
"In a sector that is now starting to experience cost inflation, we were pleased to deliver a C1 cash cost at Kounrad of $0.52 per pound. While this cost reflects increased electricity usage as a result of commencing Western Dump leaching operations, we are proud to remain one of the lowest cost copper producers in the world. Costs at Sasa were also as expected and reflect a low cost zinc and lead operation by industry standards.
"Adding Sasa to our portfolio has developed CAML from a copper company to a diversified low cost base metals producer. Including our zinc and lead production from Sasa, CAML's annual copper equivalent production has now increased by approximately 150% to 35,000 tonnes, and copper equivalent recoverable resources have increased by almost 200%.
"We are delighted to propose a 10 pence final 2017 dividend, equating to a full year dividend of 16.5 pence. Once the final dividend for 2017 has been paid, the Company will have returned $129 million to its shareholders in six years of Kounrad operations. With production from both Kounrad and Sasa, we are confident that we can continue to offer attractive returns to shareholders in 2018 and beyond.
"2017 was a strong year for all of the base metals in CAML's portfolio, with the three metals averaging a price increase of 28%. Going forward into 2018, many industry commentators are expecting a challenging year for copper supply that could result in another positive 12 months for the copper price. In the zinc market, supply side challenges remain, while demand is expected to increase to over 15 million tonnes by 2019.
"The 2017 CAML share price closed at £3.06, which represents a 35% increase during the year, and reflected positive market sentiment following our Lynx Resources acquisition. We now move forward into 2018 as a larger and diversified base metals business, with low cost operations in two prospective jurisdictions.
"CAML has enjoyed an excellent 2017 and we look forward to continuing to build the Company's future in 2018. I am pleased to announce the appointments of Nigel Robinson as Chief Executive Officer and Gavin Ferrar as Chief Financial Officer, with effect from 16 April 2018. Both Nigel and Gavin, in their current roles of Chief Financial Officer and Business Development Director respectively, have been instrumental in the success and growth of our business and I believe that their new roles will position the Company for its next stage of development."
Analyst conference call
There will be an analyst conference call on Thursday 12 April 2018 at 09:30 (BST) at the offices of Peel Hunt. The call can be accessed by dialling 0808 109 0700 and quoting the confirmation code 'Central Asia Metals'. The presentation will be available on the Company's website and there will be a replay of the call available following the presentation at www.centralasiametals.com.
For further information contact:
Central Asia Metals
Tel: +44 (0) 20 7898 9001
Nick Clarke, Chairman
Nigel Robinson, CFO
Louise Wrathall, Investor Relations
louise.wrathall@centralasiametals.com
Peel Hunt (Nominated Advisor and Joint Broker)
Tel: +44 (0) 20 7418 8900
Ross Allister
James Bavister
Mirabaud Securities (Joint Broker)
Tel: +44 (0) 20 3167 7221
Peter Krens
Blytheweigh (PR Advisors)
Tel: +44 (0) 20 7138 3204
Tim Blythe
Camilla Horsfall
Megan Ray
Note to editors
Central Asia Metals, an AIM-listed UK company based in London, owns the Kounrad SX-EW copper project in central Kazakhstan and the Sasa zinc-lead mine in Macedonia. The Company also owns 80% of the Shuak copper exploration property in northern Kazakhstan. For further information, please visit www.centralasiametals.com.
CHAIRMAN'S STATEMENT
2017 was a transformational year for us as our business development activities came to fruition with the $402.5 million acquisition of Lynx Resources, owner of the Sasa zinc-lead mine in Macedonia. We were delighted that our hard work in this regard was rewarded as we won the Mid-Cap Deal of the Year Award in the prestigious November 2017 Mines and Money Outstanding Achievement Awards.
Key achievements
Following our $402.5 million acquisition by reverse takeover of Lynx Resources, we became sole owners of the Sasa zinc and lead mine in Macedonia on 6 November 2017.
We now move into the future as a diversified base metals producer in two prospective jurisdictions - Kazakhstan and Macedonia. The acquisition of Sasa now provides the Company with two low cost, long life, and cash generative base metal operations that should ensure the Company remains well positioned throughout the commodity cycle. Sasa has significant Inferred Mineral Resources and other brownfield exploration targets that offer potential for growth in terms of production levels and the life of the mine.
The addition of Sasa to our production portfolio has increased our copper equivalent annual production to approximately 35,000 copper equivalent tonnes, an increase of 150% from the standalone 14,103 tonnes of copper from Kounrad. Likewise, our mineral resources have increased by almost 200% from c.185,000 tonnes of recoverable copper at Kounrad to about 560,000 tonnes of copper equivalent recoverable resources. Importantly, both Kounrad and Sasa have cash costs that are low by industry standards meaning that, at the Group level, CAML has been able to report C1 copper equivalent production costs within the lowest quartile at $0.76 per pound.
In Kazakhstan, we have enjoyed another year of solid performance from Kounrad with above guidance copper output and continued support to the local communities in which we operate.
We are proposing a final dividend for 2017 of 10 pence per share and, once that has been distributed, we will have paid dividends of $129 million to our shareholders in less than six years.
CAML has enjoyed an excellent 2017 and I want to thank not only our Board of Directors for their commitment, but all of our employees for their hard work during the year. We welcome our 700 new employees at Sasa and believe that this team has significant talent. We look forward to working together to build the Company's future.
Kounrad
Our operations at Kounrad have continued to be reliable and we are pleased to have produced 14,103 tonnes of copper during 2017. In April 2017, we began leaching copper from the Western Dumps post our successful Stage 2 Expansion that was delivered on schedule and 30% below budget, due to a combination of cost savings associated with the weaker local currency and engineering efficiencies.
During the year, 40% of our copper production was from the Western Dumps, with the percentage contribution increasing throughout the year. Production from the Western Dumps has been in line with our expectations and we are pleased to note that copper leaches from these dumps as we anticipated. During Q4 2017, approximately 65% of the copper that we produced was from the Western Dumps.
While our C1 cash cost of production increased modestly to $0.52 per pound, our position remains in the lowest quartile of the cost curve and indeed we are proud to be one of the lowest cost copper producers in the world.
Sasa
We are delighted with Sasa's operational performance since we assumed ownership of the mine, and were able to report full year production for zinc of 21,585 tonnes and for lead of 29,881 tonnes, which were in line with the 2017 guidance that we gave at the time of the acquisition. Importantly, costs have remained low by industry standards and we believe that this should continue into 2018.
Our team has been busy integrating the Sasa mine into the Company during Q4 2017 and, while there is still work to be done, we have made significant progress in the short time that we have owned the mine.
Shuak
During the 2017 due diligence and preliminary exploration season, the Shuak team undertook over 22,000 metres of both core hydrotransport ('CHT') and diamond drilling within our 197km2 licence area. The findings have been encouraging, with additional oxide potential identified at the Kyzyl-Sor prospect and some interesting deeper intersections of sulphide mineralisation.
We will soon embark on another exploration season in 2018, which should enable us to better understand the potential at Shuak in terms of continuity and likely scale.
Copper Bay
After announcing the positive results from the Copper Bay definitive feasibility study in January 2017, CAML undertook some additional engineering studies with the intention of improving the economics of the Copper Bay project. Some capital expenditure savings were identified and there is the potential to optimise the project further in the future. However, in the context of our new Sasa mine, the Board decided that Copper Bay was no longer a material asset for us and so we have commenced a formal sales process.
Market performance
2017 was a much improved year for the commodity markets with the average copper and zinc LME prices 27% and 38% respectively higher than those achieved in 2016. This momentum commenced in Q4 2016 and we are pleased that it continued throughout 2017, with analyst consensus commodity price forecasts now moving higher. 2018 has also started positively, with the market dynamics underlying copper, zinc and lead being stronger than they have been for a considerable period of time.
That said, at Kounrad we have always focused on ensuring that our operations are as low cost as possible as this gives us comfort that we can continue to operate in depressed commodity price environments. We take the same philosophy to Sasa, which is also a low cost operation.
Outlook
2018 is an exciting year for us as we look forward to a full year of operations from both of our sites. We expect steady production from both Sasa and Kounrad. We have set our 2018 copper production target at between 13,000 and 14,000 tonnes. We expect to produce between 21,000 and 23,000 tonnes of zinc and between 28,000 and 30,000 tonnes of lead from Sasa during 2018.
At Kounrad, our proportion of copper production from the Western Dumps will increase to approximately 65% in 2018, and, by 2020, almost all of our production will be from those areas. At Sasa, our operational focus will be on completing construction of the new tailings storage facilities ('TSF 4'), that will ensure sufficient storage for operations until at least 2026.
Both Kounrad and Sasa are expected to be highly cash generative and should enable the Company to remain one of the leading dividend payers in the sector. From 2018, the CAML dividend policy is to return to shareholders a target range of between 30% and 50% of free cash flow, defined as net cash generated from operating activities less capital expenditure. While we have made changes to our dividend policy, we believe that this policy, coupled with the cash generative nature of our two operations, should ensure that our shareholders continue to receive attractive dividends from us.
We have built strong business and community relationships in Kazakhstan, having spent in excess of $1.5 million on local charitable worthy causes to enhance the lives of our employees, their families and their communities in Kounrad and Balkhash. I am particularly proud of the financial and practical support we provided in 2017 for the new recreational areas in central Balkhash, which comprise playgrounds and multi sports facilities.
We are pleased that the Sasa team shares the same ethos in terms of ensuring that all of our stakeholders benefit from our successes as this is particularly important when operating in emerging markets. I was proud that Sasa has supported The International Day for Disabled Persons in the local town, Makedonska Kamenica, and this will continue into the future.
I am proud of our achievements since listing in 2010. We are now positioning ourselves for the next stage of growth and I am therefore delighted to announce the following management changes.
Our Chief Financial Officer, Nigel Robinson, who has been instrumental in the success of our business since before our IPO, will take on the role of Chief Executive Officer. Gavin Ferrar will become Chief Financial Officer and will also retain responsibility for future business development activities. Gavin's in-depth banking industry experience is becoming increasingly important as we grow and continue to develop our business. These changes will come into effect on 16 April 2018 and will provide continuity amongst the current senior management team.
FINANCIAL REVIEW
Overview
CAML has reported a strong set of financial results with the Group generating 2017 EBITDA of $53.8 million (2016: $39.9 million), representing an increase of 35% from the prior year and an adjusted EBITDA of $66.4 million. Unadjusted EBITDA of $53.8 million excludes transaction costs of $12.6 million associated with the acquisition of Lynx Resources Limited (see definition of adjusted EBITDA in note 4 to the condensed financial information).
CAML completed the acquisition of Lynx Resources Limited on 6 November 2017 and has assumed control of this entity from this date. The results of the Lynx Resources Group have been fully consolidated in the CAML condensed financial information for two months in the 2017 financial year (from 1 November 2017). The acquired business contributed gross revenue of $20.0 million and EBITDA of $14.5 million to the Group during this period. The Group had the benefit of the Lynx Group's trading from 1 October 2017 to 6 November 2017 and this is reflected in the cash acquired of $8.5 million (see note 5 of the condensed financial information).
CAML achieved increased revenue and EBITDA at Kounrad compared to 2016 due to a combination of higher copper prices achieved and higher sales volumes. Sustained cost control has enabled the Kounrad project to continue producing copper at costs well within the lowest industry quartile.
Acquisition of Lynx Resources Limited
On 6 November 2017, CAML MK Limited, a wholly owned subsidiary of CAML, acquired 100% of the issued share capital of Lynx Resources Limited, a holding company for a group of companies that owns the Sasa mine. The acquisition expands and diversifies CAML's business with the addition of another cash generative asset with low production costs, a resource base supporting a long mine life and a proven operational track record.
Purchase consideration:
$'000
Cash paid
340,178
Consideration shares issued
48,883
Deferred consideration
12,000
Total purchase consideration
401,061
In March 2018, a final determination was reached with regards to the purchase price, pursuant to the share purchase agreement and an amount of $3.3 million was received from the sellers (Orion Co-Investments III and Fusion Capital) in April 2018 and has been deducted from the cash paid amount. This amount was recognised as a current receivable as at 31 December 2017.
The total fair value of the purchase consideration of $401.1 million accounted for in accordance with International Financial Reporting Standards ('IFRS'), as adopted by the EU, is lower than the headline transaction amount of $402.5 million previously announced to the market. $401.1 million includes the $3.3 million received from the sellers in April 2018 and includes $3.0 million interest paid from 1 October 2017 to completion (6 November 2017) at a rate of 9% of the equity value in accordance with the terms of the acquisition ('consideration interest'). In addition, the fair value of the 15,278,528 Ordinary Shares issued as part of the consideration paid ($48.9 million) was based on the published share price on 6 November 2017 of £2.44 per share translated at the USD/GBP spot exchange rate of 1.31124 compared to the contractual amount previously announced of $50.0 million.
$'000
Headline consideration
402,500
Amount received from the sellers in April 2018
(3,300)
Consideration interest
2,978
Fair value accounting for consideration shares
(1,117)
Total purchase consideration (IFRS)
401,061
The cash consideration was partially funded by the placing of 49,150,000 shares to institutional investors at £2.30 per share (approximately $150.0 million). The Company entered into a currency hedge arrangement in respect of the majority of the net proceeds of the placing in order to limit its total exposure to adverse currency movements. The gain on the hedge amounted to $3.0 million. In addition to the proceeds of the placing, the cash consideration was financed by $120.0 million in new debt facilities provided by metals trader, Traxys, and approximately $67.0 million of existing Lynx Resources Group debt.
The Company will pay the sellers $12.0 million of deferred consideration, payable in six equal monthly instalments commencing on the first anniversary of the acquisition.
Acquisition-related costs of $12.6 million that were not directly attributable to the issue of shares and borrowing proceeds are included in other expense in profit or loss and in operating cash flows in the statement of cash flows.
Income statement
Group profit after tax from continuing operations increased by 35% to $36.3 million (2016: $26.9 million), primarily as a result of higher revenue. Earnings per share from continuing operations increased to 29.02 cents (2016: 24.26 cents).
Revenue
The Group generated 2017 gross revenue of $106.5 million (2016: $69.3 million) consisting of Kounrad (full year) and Sasa (two months) gross revenue of $86.5 million (2016: $69.3 million) and $20.0 million respectively. Gross revenue is reported after deductions of treatment charges but before deductions of off-takers fees, silver purchases from silver stream and freight. Net revenue post these deductions was $83.9 million at Kounrad (2016: $66.7 million) and $18.7 million at Sasa.
Kounrad
A total of 14,001 tonnes (2016: 13,751 tonnes) of copper cathode were sold through the Company's off-take arrangements with Traxys and a further 180 tonnes (2016: 187 tonnes) were sold locally. Total sales at Kounrad were 14,181 tonnes (2016: 13,938 tonnes) representing a 2% increase in volumes.
While copper cathode sales volumes have increased when compared to 2016, Group revenue also benefitted from a 22% increase in the average copper price received, which was $6,107 per tonne in 2017 (2016: $4,994 per tonne). This generated gross revenues for the Group of $86.5 million (2016: $69.3 million).
CAML's off-take arrangement with Traxys has been fixed through to September 2022 and the commitment is for a minimum of 90% of the Kounrad copper cathode production. During 2017 the off-taker's fee was $2.6 million (2016: $2.6 million).
Sasa
A total of 2,906 tonnes of payable zinc in concentrate and 4,559 tonnes of payable lead in concentrate were sold during the period 1 November 2017 to 31 December 2017.
The average zinc price received during this period was $3,239 per tonne and the average lead price received during this period was $2,401 per tonne. After the deduction of treatment charges, this generated gross revenues for the Group of $20.0 million.
On 1 January 2018, the Lynx Resources Group entered into a zinc and lead concentrate off-take arrangement with Traxys, which has been fixed through to 31 December 2022. The commitment is for 100% of the Sasa output.
Cost of sales
The Group reported 2017 cost of sales of $31.4 million (2016: $18.4 million), consisting of $22.7 million of Kounrad related costs (2016: $18.4 million) and $8.7 million of Sasa related costs.
Kounrad
Cost of sales for the year was $22.7 million (2016: $18.4 million). The increase is due to higher sales volumes, higher depreciation charges following the completion of the Kounrad Stage 2 Expansion during early 2017 and higher mineral extraction tax ('MET') due to the increased copper price received. Production from the Western Dumps commenced in April 2017 and this resulted in slightly higher electricity consumption and additional labour costs. Over the coming years, the proportion of copper that Kounrad produces from the Eastern Dumps will fall as production from the Western Dumps gradually increases. This will result in a sustained increase in electricity consumption and additional labour to manage the Western Dumps operations.
Depreciation and amortisation charges recognised in cost of sales during the year were $6.6 million (2016: $5.0 million). MET for the year was $5.0 million (2016: $3.9 million) and is charged by the Kazakhstan authorities at the rate of 5.7% on the value of metal recovered during the year.
During the year, the Kazakhstan Tenge appreciated slightly against the US Dollar which also resulted in some increase in the cost base. The average exchange rate for the year was 326 KZT/USD (2016: 342 KZT/USD), resulting in the Kazakhstan Tenge being worth an average 5% more in US Dollar terms in 2017 compared to 2016. Approximately 60% of the total cost base in Kazakhstan is denominated in Tenge (70% of C1 cash costs).
Sasa
Cost of sales for the period 1 November 2017 to 31 December 2017 were $8.7 million. This includes depreciation and amortisation charges of $4.1 million, labour costs of $1.5 million and reagents and materials of $2.0 million.
C1 cash cost of production
C1 cash cost of production is a standard metric used in the mining industry to allow comparison across the sector. In line with the Wood Mackenzie approach, CAML calculates C1 cash cost by including all direct costs of production at Kounrad and Sasa (realisation charges such as freight and treatment charges, reagents, power, production labour and materials) as well as local administrative expenses. Royalties and depreciation and amortisation charges are excluded from C1 cash cost and reported within the fully inclusive unit cost of production.
Kounrad's 2017 C1 cash cost of copper production remains firmly in the lowest quartile of the industry cost curve for copper production at $0.52 per pound (2016: $0.43 per pound). Production from the Western Dumps commenced in April 2017 and this resulted in slightly higher electricity consumption and additional labour costs. The average C1 cash cost of production since production commenced in 2012 is $0.58 per pound.
Sasa's C1 cash cost of zinc equivalent production for the full year 2017 was $0.44 per pound (2016: $0.45 per pound) which was at the lower end of the second quartile of the zinc industry cost curve.
Following the acquisition of the Sasa mine, CAML reports its C1 cash cost on a copper equivalent basis incorporating the production costs at Sasa. CAML's full year 2017 C1 copper equivalent cash cost was $0.76 per pound. This number is calculated based on Sasa's 12 month 2017 zinc and lead production which equates to 21,161 copper equivalent tonnes (based upon 2017 average commodity price achieved) added to Kounrad's 2017 copper production of 14,103 tonnes.
The Group's fully inclusive copper equivalent unit cost for the year was $1.43 per pound (2016: $1.06 per pound excluding Sasa). This includes depreciation and amortisation charges, royalties, finance costs and corporate overheads associated with the Kounrad and Sasa projects.
Administrative expenses
During 2017, administrative expenses were $15.3 million (2016: $13.3 million). The Group recognised a share based payment charge of $2.8 million (2016: $3.0 million) in relation to the Company's share option schemes.
Balance sheet
The provisional net assets recognised as a result of the Lynx Resources acquisition were $312.5 million, in addition to provisional goodwill of $21.6 million (see note 5 of the condensed financial information).
During the year, there were additions to property, plant and equipment of $4.1 million (2016: $12.3 million). The additions were a combination of Sasa and Kounrad sustaining capital expenditure as well as costs incurred to finalise the commissioning of the Kounrad Stage 2 Expansion at the Western Dumps. Kounrad capital expenditure is significantly reduced from the prior year due to finalisation of the Stage 2 Expansion in early 2017. This expansion was completed approximately 30% below the original $19.5 million budget, due to a combination of cost savings associated with the weaker local currency and engineering efficiencies.
During the year, there were additions to intangible assets of $2.0 million (2016: $1.6 million) including $2.0 million (2016: $1.6 million) capitalised in relation to exploration and evaluation costs incurred on the Copper Bay project, which was subsequently classified as held for sale, and the Shuak exploration project.
As at 31 December 2017, current trade and other receivables were $13.7 million (31 December 2016: $0.9 million) and non-current trade and other receivables were $2.5 million (31 December 2016: $2.7 million). Current trade and other receivables as at 31 December 2017, includes trade receivables from customers of $6.3 million and $3.3 million received from the sellers of Lynx Resources Limited in April 2018 as explained above.
As explained in note 18 of the condensed financial information, as at 31 December 2017, a total of $2.7 million (2016: $2.9 million) of VAT receivable was still owed to the Group by the Kazakhstan authorities. In 2017, the Kazakhstan authorities refunded $0.8 million and a further amount of $0.2 million was refunded from the authorities in January 2018 and has been classified as current trade and other receivables as at 31 December 2017. The Group is working closely with its advisors to recover the remaining portion. The planned means of recovery will be through a combination of the local sales of cathode copper to offset VAT liabilities and by a continued dialogue with the authorities.
As at 31 December 2017, current trade and other payables were $22.4 million (31 December 2016: $6.0 million). During 2017, instalments of $12.3 million were paid towards the Group's 2017 corporate income tax liability and at 31 December 2017, approximately $6.0 million remained outstanding.
On 31 December 2017, the Group had cash of $45.8 million (31 December 2016: $40.4 million) including restricted cash of $2.8 million (31 December 2016: $0.1 million).
Debt financing
As at 31 December 2017, non-current and current borrowings were $141.8 million and $40.1 million respectively.
The cash consideration payable for the acquisition of Lynx Resources was partly financed by $120.0 million in new secured debt facilities provided by Traxys.
The debt financing agreement forms part of a pre-payment arrangement between the Group and Traxys under which Traxys is advancing funds in expectation of acquiring production from the Group's Kounrad operations.
The debt financing agreement has a term of five years, with monthly repayments of $2.0 million. Cash sweeps are required equal to 33% of Kounrad free cashflow less $1.0 million per quarter. Interest is payable at LIBOR plus 4.75%. Security is provided over the shares in CAML Kazakhstan BV, certain bank accounts and the Traxys Kounrad off-take agreement. The agreement contains typical covenants for this type of facility, including financial covenants related to financial performance of the Company's Kounrad operations.
Borrowings also represent the long-term loan of $75.0 million from Societe Generale and Investec (the Senior Facility) obtained in October 2016 with an interest rate of 3 month LIBOR plus 5%, maturing on 30 September 2023. In addition, the Group had short-term bank borrowings from Ohridska Banka and more details are included in the notes of the condensed financial information.
Discontinued operations
Copper Bay
The assets and liabilities of the Copper Bay entities have been presented as held for sale in the consolidated balance sheet following the decision of the CAML Board in August 2017 to sell the project. The financial results of the Copper Bay entities for the year ended 31 December 2017 and the comparative period ended 31 December 2016 are shown within discontinued operations in the consolidated income statement.
Mongolia
In December 2016, CAML Mongolia BV signed an agreement with a third party to sell its entire interest in Monresources LLC for a cash consideration of $100 with deferred consideration dependent on the outcome of future events. Confirmation of the transfer of shares to the third party was received in February 2017. Following unsuccessful attempts to dispose of the Ereen project, CAML has taken the decision to exit its position in Zuunmod UUL LLC and this process was completed in April 2018. The Group continues to hold for sale these assets in this financial year, although they were fully written off in prior years.
Cash flows
The continued strong operational performance of the Kounrad project and the associated low costs of production resulted in robust cash flows for the Group. Cash generated from operations increased to $60.4 million (2016: $44.7 million) and during the year $23.1 million was returned to shareholders as dividends (2016: $20.4 million).
The outflow of cash to acquire Lynx Resources Limited net of cash acquired was $268.0 million. During 2017, proceeds from the issue of shares net of transaction costs amounted to $142.9 million. Cash received from the drawdown of new debt financing was $120.0 million and during the year $8.4 million of Group debt was repaid.
$12.3 million of corporate income tax was paid during 2017 (2016: $9.2 million) towards the 2017 Kazakhstan corporate income tax liability.
Dividend
For the year ended 31 December 2017, the Company's dividend policy was to return a minimum of 20% of the attributable revenues generated from the Kounrad project to shareholders subject to maintaining three times cash cover. The final dividend for the year ended 31 December 2016 of 10 pence per Ordinary Share was paid to Shareholders on 7 June 2017. On 22 September 2017 the Company announced an interim dividend for the period from 1 January 2017 to 30 June 2017 of 6.5 pence per Ordinary Share and was paid to shareholders on 27 October 2017.
In conjunction with CAML's 2017 annual results, the Board proposes a final 2017 dividend of 10 pence per Ordinary Share, bringing total dividends declared for the year to 16.5 pence (2016: 15.5 pence). These dividends equate to approximately 39% of the Kounrad gross revenue for the year and will be payable on 25 May 2018 to shareholders registered on 27 April 2018.
This latest dividend will increase the amount returned to shareholders in dividends and share buy-backs since the 2010 IPO listing to $129 million.
Commencing on 1 January 2018, the Company's new dividend policy is to return to shareholders a target range of between 30% and 50% of free cash flow (defined as net cash generated from operating activities less capital expenditure). The dividends will only be paid provided there is sufficient cash remaining in the Group to meet the ongoing contractual debt repayments and that banking covenants are not breached.
Nigel Robinson
Chief Financial Officer
CONDENSED FINANCIAL INFORMATION
Consolidated Income Statement
for the year ended 31 December
Note
2017
$'000
2016
$'000
Continuing operations
Revenue
6
102,517
66,707
Presented as:
Gross revenue
6
106,479
69,269
Less:
Silver purchases from silver stream
6
(1,120)
-
Freight cost
6
(252)
-
Off-take buyers' fees
6
(2,590)
(2,562)
Revenue
102,517
66,707
Cost of sales
7
(31,363)
(18,388)
Gross profit
71,154
48,319
Distribution and selling costs
8
(394)
(215)
Administrative expenses
9
(15,294)
(13,266)
Other (expense)/income
10
(12,348)
192
Foreign exchange gain/(loss)
3,349
(1,385)
Operating profit
46,467
33,645
Finance income
11
5,597
67
Finance costs
12
(2,319)
(158)
Profit before income tax
49,745
33,554
Income tax
13
(13,468)
(6,661)
Profit for the year from continuing operations
36,277
26,893
Discontinued operations
Profit/(loss) for the year from discontinued operations
17
56
(796)
Profit for the year
36,333
26,097
Profit attributable to:
- Non-controlling interests
(36)
(173)
- Owners of the parent
36,369
26,270
36,333
26,097
Earnings/(loss) per share from continuing and discontinued operations attributable to owners of the parent during the year (expressed in cents per share)
$ cents
$ cents
Basic earnings/(loss) per share
From continuing operations
14
29.02
24.26
From discontinued operations
0.04
(0.72)
From profit for the year
29.06
23.54
Diluted earnings/(loss) per share
From continuing operations
14
28.31
23.71
From discontinued operations
0.04
(0.72)
From profit for the year
28.35
22.99
The results of the Copper Bay entities were reclassified as discontinued operations in the comparative year ended 31 December 2016 in accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations (note 17).
Consolidated Statement of Comprehensive Income
for the year ended 31 December
Note
2017
$'000
2016
$'000
Profit for the year
36,333
26,097
Other comprehensive income:
Items that may be subsequently reclassified to profit or loss:
Currency translation differences
21
7,989
1,034
Other comprehensive income for the year, net of tax
7,989
1,034
Total comprehensive income for the year
44,322
27,131
Attributable to:
- Non-controlling interests
(36)
(173)
- Owners of the parent
44,358
27,304
Total comprehensive income for the year
44,322
27,131
Total comprehensive income attributable to equity shareholders arises from:
- Continuing operations
44,266
27,261
- Discontinued operations
56
(130)
44,322
27,131
Consolidated Statement of Financial Position
as at 31 December
Note
2017
$'000
2016
$'000
Assets
Non-current assets
Property, plant and equipment
15
460,952
50,324
Intangible assets
16
70,321
40,759
Investments
-
-
Other non-current receivables
18
2,519
2,738
533,792
93,821
Current assets
Inventories
6,998
3,319
Trade and other receivables
18
13,738
919
Restricted cash
19
2,812
118
Cash and cash equivalents
19
43,022
40,258
66,570
44,614
Assets of disposal group classified as held for sale
17
4,516
45
71,086
44,659
Total assets
604,878
138,480
Equity attributable to owners of the parent
Ordinary shares
20
1,765
1,121
Share premium
20
191,184
-
Treasury shares
20
(7,780)
(7,780)
Currency translation reserve
21
(79,446)
(87,435)
Retained earnings:
At 1 January
215,479
209,120
Profit for the year attributable to the owners
36,369
26,270
Other changes in retained earnings
(20,553)
(19,911)
231,295
215,479
337,018
121,385
Non-controlling interests
55
91
Total equity
337,073
121,476
Liabilities
Non-current liabilities
Borrowings
24
141,839
-
Deferred revenue
23
17,621
-
Other non-current payables
22
8,000
-
Deferred income tax liability
29
30,361
8,541
Provisions for other liabilities and charges
25
5,319
2,087
203,140
10,628
Current liabilities
Borrowings
24
40,075
-
Deferred revenue
23
2,056
-
Trade and other payables
22
22,398
6,020
Provisions for other liabilities and charges
25
46
-
64,575
6,020
Liabilities of disposal group classified as held for sale
17
90
356
64,665
6,376
Total liabilities
267,805
17,004
Total equity and liabilities
604,878
138,480
Consolidated Statement of Changes in Equity
for the year ended 31 December
Attributable to owners of the parent
Note
Ordinary shares
$'000
Share
premium
$'000
Treasury
shares
$'000
Currency translation reserve
$'000
Retained earnings
$'000
Total
$'000
Non-controlling interests
$'000
Total
equity
$'000
Balance as at 1 January 2016
1,121
-
(7,810)
(88,469)
209,120
113,962
264
114,226
Profit/(loss) for the year
-
-
-
-
26,270
26,270
(173)
26,097
Other comprehensive expense - currency translation differences
21
-
-
-
1,034
-
1,034
-
1,034
Total comprehensive income/(expense)
-
-
-
1,034
26,270
27,304
(173)
27,131
Transactions with owners
Share based payments
9
-
-
-
-
2,959
2,959
-
2,959
Sale of EBT shares
20
-
-
30
-
-
30
-
30
Exercise of options
-
-
-
-
(2,466)
(2,466)
-
(2,466)
Dividends
27
-
-
-
-
(20,404)
(20,404)
-
(20,404)
Total transactions with owners, recognised directly in equity
-
-
30
-
(19,911)
(19,881)
-
(19,881)
Balance as at 31 December 2016
1,121
-
(7,780)
(87,435)
215,479
121,385
91
121,476
Profit/(loss) for the year
-
-
-
-
36,369
36,369
(36)
36,333
Other comprehensive expense - currency translation differences
21
-
-
-
7,989
-
7,989
-
7,989
Total comprehensive income/(expense)
-
-
-
7,989
36,369
44,358
(36)
44,322
Transactions with owners
Issue of shares
20
644
191,184
-
-
-
191,828
-
191,828
Share based payments
9
-
-
-
-
2,823
2,823
-
2,823
Disposal of subsidiaries
-
-
-
-
1,262
1,262
-
1,262
Exercise of options
-
-
-
-
(1,492)
(1,492)
-
(1,492)
Dividends
27
-
-
-
-
(23,146)
(23,146)
-
(23,146)
Total transactions with owners, recognised directly in equity
644
191,184
-
-
(20,553)
171,275
-
171,275
Balance as at 31 December 2017
1,765
191,184
(7,780)
(79,446)
231,295
337,018
55
337,073
Consolidated Statement of Cash Flows
for the year ended 31 December
Note
2017
$'000
2016
$'000
Cash flows from operating activities
Cash generated from operations
26
60,412
44,746
Interest paid
(2,127)
(4)
Corporate income tax paid
(12,294)
(9,208)
Net cash generated from operating activities
45,991
35,534
Cash flows from investing activities
Payment for acquisition of subsidiary, net of cash acquired
5
(268,008)
-
Purchase of property, plant and equipment
15
(4,082)
(12,331)
Purchase of intangible assets
16
(2,025)
(1,594)
Proceeds from sale of property, plant and equipment
-
147
Interest received
11
323
67
Restricted cash (increase)/decrease
19
(2,694)
376
Net cash used in investing activities
(276,486)
(13,335)
Cash flows from financing activities
Proceeds from issues of shares (net)
20
142,945
-
Gain on currency hedge
11
2,977
-
Proceeds from borrowings
24
120,000
-
Repayment of borrowings
24
(8,362)
-
Dividends paid to owners of the parent
27
(23,146)
(20,360)
Settlement on exercise of share options
(1,491)
(2,436)
Net cash used in financing activity
232,923
(22,796)
Effect of foreign exchange gain/(loss) on cash and cash equivalents
487
(669)
Net increase/(decrease) in cash and cash equivalents
2,915
(1,266)
Cash and cash equivalents at the beginning of the year
19
40,258
41,524
Cash and cash equivalents at the end of the year
19
43,173
40,258
Cash and cash equivalents at 31 December 2017 includes cash at bank and on hand included in assets held for sale of $151,000 (31 December 2016: nil) (note 19).
The notes below are an integral part of this condensed consolidated financial information.
Notes to the Condensed Financial Information
for the year ended 31 December 2017
1. General information
Central Asia Metals plc ('CAML' or the 'Company') and its subsidiaries (the 'Group') are a mining and exploration organisation with operations primarily in Kazakhstan and Macedonia and a parent holding company based in the United Kingdom ('UK').
CAML owns 100% of the Kounrad SX-EW copper project in Kazakhstan and 100% of the Sasa zinc-lead mine in Macedonia. The Company also owns 80% of the Shuak copper exploration property in northern Kazakhstan. During the year, the Group held for sale its 75% equity interest in Copper Bay Limited, which is a private company that has conducted a definitive feasibility study at its copper project in Chañaral Bay, Chile. The Group also held for sale two exploration projects in Mongolia and in February 2017 the Group disposed of its interest in one of the projects (note 17).
CAML is a public limited company, which is listed on the AIM market of the London Stock Exchange and incorporated and domiciled in England, UK. The address of its registered office is Masters House, 107 Hammersmith Road, London, W14 0QH. The Company's registered number is 5559627.
2. Summary of significant accounting policies
Basis of preparation of the Condensed Financial Information
The financial information set out herein does not constitute the Group's statutory financial statements for the year ended 31 December 2017, but is derived from the Group's audited full financial statements. The auditors have reported on the 2017 financial statements and their reports were unqualified and did not contain statements under s498(2) or (3) Companies Act 2006. The 2017 Annual Report was approved by the Board of Directors on 12 April 2018, and will be mailed to shareholders in April 2018. The financial information in this statement is audited but does not have the status of statutory accounts within the meaning of Section 434 of the Companies Act 2006.
The financial information is in accordance with the accounting policies set out in the 2017 financial statements and have been prepared on a going concern basis.
The Group's consolidated financial statements, which form part of the 2017 Annual Report, have been prepared in accordance with International Financial Reporting standards ('IFRS') and IFRS Interpretations Committee ('IFRSIC') interpretations as adopted by the European Union, and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention with the exception of assets held for sale which have been held at fair value. The Group financial information is presented in US Dollars ($) and rounded to the nearest thousand.
The preparation of condensed financial information in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the condensed financial information are explained in note 3.
Going concern
The Group meets its day to day working capital requirements through its profitable operations at Kounrad and Sasa. The Group manages liquidity risk by maintaining adequate committed borrowing facilities and the Group has substantial cash balances as at 31 December 2017. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence over a period of at least 12 months from the date of approval of the condensed financial information.
The Group sells and distributes its copper cathode product primarily through an off-take arrangement with a minimum of 90% of the SX-EW plant's forecasted output committed as sales for the period up until September 2022. During the year, 100% of Sasa's zinc and lead concentrate was sold to credit-worthy customers and on 1 January 2018, Lynx Mining Limited entered into a zinc and lead concentrate off-take arrangement with Traxys, which has been fixed through to 31 December 2022. The commitment is for 100% of the Sasa concentrate production.
The Group therefore continues to adopt the going concern basis in preparing its condensed financial information. Please refer to notes 6, 19 and 22 for information on the Group's revenues, cash balances and trade and other payables.
3. Critical accounting estimates and judgments
The Group has the following key areas where critical accounting estimates and judgements are required that could have a material impact on the condensed financial information:
Mineral reserves and resources
The major value associated with the Group is the value of its mineral reserves and resources. The value of the reserves and resources have an impact on the Group's accounting judgements in relation to depreciation and amortisation, impairment of assets and the assessment of going concern. These resources are the Group's best estimate of product that can be economically and legally extracted from the relevant mining property. The Group's estimates are supported by geological studies and drilling samples to determine the quantity and grade of each deposit.
Significant judgement is required to generate an estimate based on the geological data available. Ore resource estimates may vary from period to period. This judgement has a significant impact on impairment consideration and the period over which capitalised assets are depreciated within the condensed financial information.
The Kounrad resources were classified as JORC Compliant in 2013 and the Sasa JORC ore reserves and mineral resources were estimated in July 2017. As part of the 2016 Copper Bay Definitive Feasibility Study, Cube Consulting Pty Ltd, Australia, undertook a Mineral Resource estimate to JORC (2012) standards.
Impairment of non-current assets
Estimates are required periodically to assess assets for impairment. The critical accounting estimates are future commodity prices, ore reserves, discount rates and projected future costs of development and production. This includes an assessment of the carrying values of assets held for sale.
The carrying value of the goodwill generated by accounting for the business combination of the Group acquiring an additional 40% in the Kounrad project in May 2014 (the 'Kounrad Transaction') and the Lynx Resources Limited acquisition in November 2017 requires an annual impairment review. This review will determine whether the value of the goodwill can be justified by reference to the carrying value of the business assets and the future discounted cash flows of the business. The key assumptions used in the Group's impairment assessments are disclosed in note 16.
Functional currency
The functional currency of the Kazakhstan subsidiaries is Kazakhstan Tenge and the functional currency of the Macedonian subsidiaries is Macedonian Denar, which reflects the currency of the primary economic environment in which these entities operate. Determination of functional currency may involve certain judgments to determine the primary economic environment and this is re-evaluated for each new entity, or if conditions change.
Decommissioning and site rehabilitation estimates
Provision is made for the costs of decommissioning and site rehabilitation costs when the related environmental disturbance takes place. The discounted provision recognised represents management's best estimate of the costs that will be incurred, but significant judgement is required, as many of these costs will not crystallise until the end of the life of the mine. Estimates are reviewed annually and are based on current contractual and regulatory requirements and the estimated useful life of mines. Engineering and feasibility studies are undertaken periodically; however significant changes in the estimates of contamination, restoration standards and techniques will result in changes to provisions from period to period.
Business combinations
All business combinations in the Group are accounted for under IFRS 3 'Business Combinations' using the acquisition method. When the Group acquires a business, it assesses the fair value of assets and liabilities acquired for the purpose of purchase price allocation as at the acquisition date. When discounted cash flow calculations are undertaken, management estimates the expected future cash flows from the cash generating unit ('CGU') by considering the future metal price, expected ore reserve, grade, mine life, moisture content and discount rate in order to estimate the expected present value of cash flows from the mine. The inputs to these factors are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. During the year, the Group completed the acquisition of Lynx Resources Limited which has been accounted for under IFRS 3 'Business Combinations' using the acquisition method. The key assumptions used to determine the provisional fair value of assets acquired and liabilities assumed are disclosed in note 5.
VAT recoverability
As explained in note 18, as at 31 December 2017, a total of $2,703,000 (2016: $2,838,000) of VAT receivable was still owed to the Group by the Kazakhstan authorities. In 2017, the Kazakhstan authorities refunded $820,000 and a further amount of $223,000 was refunded from the authorities in January 2018 and has been classified as current trade and other receivables as at 31 December 2017. The Group is working closely with its advisors to recover the remaining portion. The planned means of recovery will be through a combination of the local sales of cathode copper to offset VAT liabilities and by a continued dialogue with the authorities.
4. Segmental information
The Board is the Group's chief operating decision maker. Management have determined the operating segments based on the information reviewed by the Board for the purposes of allocating resources and assessing performance. The Board considers the business from a project perspective.
The Group has three business segments consisting of the SX-EW copper plant at Kounrad in Kazakhstan, the Sasa zinc-lead mine in Macedonia and the Shuak exploration project in Kazakhstan. The Group operations are controlled from a head office in London, UK, but this does not represent a separate business segment. The Copper Bay project is reported within discounted operations (note 17).
The segmental results for the year ended 31 December 2017 are as follows:
Kounrad $'000
Sasa
$'000
Shuak
$'000
Unallocated
$'000
Total
$'000
Gross revenue
86,443
20,036
-
-
106,479
Silver purchases from silver stream
-
(1,120)
-
-
(1,120)
Freight cost
-
(252)
-
-
(252)
Off-take buyers' fees
(2,590)
-
-
-
(2,590)
Revenue
83,853
18,664
-
-
102,517
EBITDA
63,565
14,485
(130)
(24,127)
53,793
Lynx Resources acquisition costs
-
-
-
12,600
12,600
Adjusted EBITDA
63,565
14,485
(130)
(11,527)
66,393
Depreciation and amortisation
(6,695)
(4,176)
(1)
(55)
(10,927)
Foreign exchange (loss)/gain
(29)
2,683
(13)
708
3,349
Other income/(expense)
268
(16)
-
(12,600)
(12,348)
Finance income
8
2,296
-
3,293
5,597
Finance costs
(172)
(783)
(4)
(1,360)
(2,319)
Profit/(loss) before income tax
49,745
Income tax
(13,468)
Profit for the year after tax from continuing operations
36,277
Profit from discontinued operations
56
Profit for the year
36,333
CAML signed the framework agreement to acquire the Shuak copper-gold exploration project in November 2016 and the comparative segmental results for the year ended 31 December 2016 do not include the results of the Shuak project. The segmental results for the year ended 31 December 2016 are as follows:
Kounrad $'000
Unallocated
$'000
Total
$'000
Gross revenue
69,269
-
69,269
Off-take buyers' fees
(2,562)
-
(2,562)
Revenue
66,707
-
66,707
EBITDA
51,321
(11,400)
39,921
Depreciation and amortisation
(5,028)
(55)
(5,083)
Foreign exchange loss
(271)
(1,114)
(1,385)
Other income
192
-
192
Finance income
8
59
67
Finance costs
(158)
-
(158)
Profit/(loss) before income tax
46,064
(12,510)
33,554
Income tax
(6,661)
Profit for the year after tax from continuing operations
26,893
Loss from discontinued operations
(796)
Profit for the year
26,097
Adjusted EBITDA
Adjusted EBITDA is a non-IFRS financial measure and excludes subsidiary acquisitions costs which may have an impact on the quality of earnings. Adjusted EBITDA is intended to provide additional information to investors and analysts. It does not have any standardised meaning prescribed by IFRS and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. Adjusted EBITDA excludes the impact of cash costs of financing activities and taxes, and the effects of changes in operating working capital balances, and therefore is not necessarily indicative of operating profit or cash flow from operations as determined under IFRS. Other companies may calculate adjusted EBITDA differently.
EBITDA excludes the following items:
· Income tax expense;
· Finance income and expense;
· Other income/(expense);
· Foreign exchange;
· Depreciation and amortisation; and
· Discontinuing operations;
A reconciliation between profit for the year and adjusted EBITDA is presented below:
2017
2016
$'000
$'000
Profit for the year
36,333
26,097
Plus/(less):
Income tax expense
13,468
6,661
Depreciation and amortisation
10,927
5,083
Foreign exchange (gain)/loss
(3,349)
1,385
Other income
(252)
(192)
Finance income
(5,597)
(67)
Finance costs
2,319
158
(Profit)/loss from discontinued operations
(56)
796
Group continuing operations EBITDA
53,793
39,921
Lynx Resources Limited acquisition costs (note 5)
12,600
-
Group continuing operations adjusted EBITDA
66,393
39,921
Group segmental assets and liabilities for the year ended 31 December 2017 are as follows:
Segmental assets
Additions to non-current assets
Segmental liabilities
31 Dec 17
$'000
31 Dec 16
$'000
31 Dec 17
$'000
31 Dec 16
$'000
31 Dec 17
$'000
31 Dec 16
$'000
Kounrad
99,872
98,275
1,050
12,354
(13,953)
(13,700)
Sasa
477,657
-
3,043
-
(122,975)
-
Shuak
1,475
-
1,244
-
(71)
-
Copper Bay
-
4,766
-
2,002
-
(259)
Assets held for sale (note 17)
4,516
45
758
-
(90)
(356)
Unallocated including corporate
21,358
35,394
-
-
(130,716)
(2,689)
604,878
138,480
6,095
14,356
(267,805)
(17,004)
The assets and liabilities of the Copper Bay entities have been classified as assets held for sale during the year ended 31 December 2017 (note 17).
5. Business combination
a) Summary of acquisition
On 6 November 2017, CAML MK Limited, a wholly owned subsidiary of CAML, acquired 100% of the issued share capital of Lynx Resources Limited, a holding company for a group of companies that owns the SASA mine. The SASA mine located in north-eastern Macedonia, comprises an operating underground zinc and lead mine and a processing facility that produces both zinc and lead concentrate. The acquisition expands and diversifies CAML's business with the addition of another cash generative asset with low production costs, a resource base supporting a long mine life and a proven operational track record.
The acquisition has been accounted for under IFRS 3 'Business Combinations' using the acquisition method. The acquisition was classified as a reverse takeover under the AIM Rules for Companies.
Purchase consideration:
Provisional
fair value
$'000
Cash consideration
340,178
Ordinary shares issued
48,883
Deferred consideration
12,000
401,061
Less: net debt acquired
(67,000)
Total purchase consideration
334,061
In March 2018, a final determination was reached with regards to the purchase price, pursuant to the share purchase agreement and an amount of $3,300,000 was received from the sellers in April 2018 and is deducted from the cash paid amount. This amount was recognised as a current receivable as at 31 December 2017.
The fair value of the 15,278,528 shares issued as part of the consideration paid for Lynx Resources Limited ($48,883,000) was based on the published share price on 6 November 2017 of £2.44 per share translated at the USD/GBP spot exchange rate of 1.31124.
The Company will pay the sellers $12,000,000 of deferred consideration, payable in six equal monthly instalments commencing on the first anniversary of the acquisition (6 November 2018). The impact of discounting the deferred consideration is not material.
The provisional assets and liabilities recognised as a results of the acquisition are as follows:
Provisional
fair value
$'000
Intangible assets
10,841
Property, plant and equipment
402,567
Inventories
2,420
Trade and other receivables
13,128
Cash and cash equivalents
8,470
Borrowings
(70,276)
Deferred revenue
(19,981)
Provisions for other liabilities and charges
(3,493)
Trade and other payables
(9,615)
Deferred tax liability
(21,558)
Net assets acquired
312,503
Purchase consideration
334,061
Provisional goodwill
21,558
As permitted by IFRS 3 Business Combinations, the business combination is accounted for using provisional amounts. Any adjustments to the provisional amounts, will be made within the measurement period to reflect new information obtained about facts and circumstances that were in existence at the acquisition date. The measurement period cannot exceed one year from the acquisition date. Among other things, management are currently reviewing the fair value of the silver stream (note 23) which is reported as deferred revenue of $19,981,000 in the table above.
To determine the fair value of the mineral reserves within property, plant and equipment including mining reserves, management used a discounted cash flow model to estimate the expected future cash flows of the mine, based on the life-of-mine plan. Expected future cash flows were based on estimates of future production and commodity prices, operating costs, and forecast capital expenditures using the life-of-mine plan as at the acquisition date. The key economic assumptions used were a five year consensus forecast average price of $2,701 per tonne and a long-term price of $2,282 per tonne for zinc, $2,199 per tonne and $1,991 per tonne for lead, and $19.10 per ounce and $18.40 per ounce for silver. A post-tax discount rate of 12% has been applied to discount the future post tax cash flows. The fair value of the remaining property, plant and equipment was determined based on a replacement cost approach.
The goodwill arising on the completion of and transaction amounting to $21,558,000 is equal to the deferred tax liability which arises on the difference between the assigned fair value of the acquired assets and liabilities and their tax base.
The results of the Lynx Resources Group have been fully consolidated in the CAML condensed financial information for two months in the 2017 financial year (from 1 November 2017). The impact of six days between 1 November and 6 November 2017 is not material. The acquired business contributed gross revenue of $20,036,000 and EBITDA of $14,485,000 to the Group during this period. If the acquisition had occurred on 1 January 2017, consolidated pro-forma gross revenue and profit for the year ended 31 December 2017 would have been $119,740,000 and $56,320,000 respectively. These amounts have been calculated using the subsidiary's results and adjusting them for the additional depreciation and amortisation that would have been charged assuming the fair value adjustments to property, plant and equipment had applied from 1 January 2017, together with the consequential tax effects.
Acquisition-related costs of $12,600,000 that were not directly attributable to the issue of shares and borrowing proceeds are included in other expense in profit or loss and in operating cash flows in the statement of cash flows.
b) Purchase consideration - cash outflow
2017
$'000
Outflow of cash to acquire subsidiary, net of cash acquired:
Cash consideration less net debt acquired
276,478
Less: cash acquired
(8,470)
Net outflow of cash - investing activities
268,008
The cash consideration in the table above excludes the amount of $3,300,000 received from the sellers in April 2018.
6. Revenue
2017
$'000
2016
$'000
International customers (Europe) - copper cathode
85,342
68,442
International customers (Europe) - zinc and lead concentrate
19,373
-
Domestic customers (Kazakhstan) - copper cathode
1,100
827
Revenue of silver
664
-
Total gross revenue
106,479
69,269
Less:
Silver purchases from silver stream
(1,120)
-
Off-take buyers' fees
(2,590)
(2,562)
Freight
(252)
-
Revenue
102,517
66,707
Kounrad
The Group sells and distributes its copper cathode product primarily through an off-take arrangement with Traxys, which has been retained as CAML's off-take partner through to September 2022. The off-take arrangements are for a minimum of 90% of the SX-EW plant's output. The copper cathodes are delivered from the Kounrad site by rail under an FCA (Incoterms 2010) contractual basis and delivered to the end customers in Turkey.
The off-take agreement provides for the option of provisional pricing i.e. the selling price is subject to final adjustment at the end of the quotation period based on the average price for the month following delivery to the buyer. The Company may mitigate commodity price risk by fixing the price in advance for its copper cathode sales with the off-take partner.
The costs of delivery to the end customers have been effectively borne by the Group through means of an annually agreed buyer's fee which is offset from the selling price.
During 2017, the Group sold 14,001 tonnes (2016: 13,751 tonnes) of copper through the off-take arrangements. Some of the copper cathodes are also sold locally and during 2017, 180 tonnes (2016: 187 tonnes) were sold to local customers.
Lynx Resources Group
During the two month period ended 31 December 2017, the Lynx Resources Group sold its zinc and lead concentrate to two European smelters. The agreements with the smelters provides for provisional pricing i.e. the selling price is subject to final adjustment at the end of the quotation period based on the average price for the month following delivery to the buyer and subject to final adjustment for assaying results.
During the two month period ended 31 December 2017, the Group sold 2,906 tonnes of zinc concentrate and 4,559 tonnes of lead concentrate.
On 1 January 2018, the Lynx Resources Group entered into a zinc and lead concentrate off-take arrangement with Traxys, which has been fixed through to 31 December 2022. The commitment is for 100% of the Sasa concentrate production.
On 1 September 2016, the Lynx Group entered into a Silver Purchase Agreement with Lynx Metals Limited by netting of its existing loan payable with Lynx Metals. The prepayments for the purchase of silver are recognised as deferred revenue (note 23) and are related to production of silver during the life of the mine. Deferred revenue is recognised in the income statement as the silver is delivered based on the units of production.
7. Cost of sales
2017
$'000
2016
$'000
Reagents, electricity and materials
7,600
5,291
Depreciation and amortisation (note 15, 16)
10,736
4,975
Royalties
5,459
3,858
Employee benefit expense
5,079
2,670
Consulting and other services
1,995
1,138
Taxes and duties
494
456
31,363
18,388
8. Distribution and selling costs
2017
$'000
2016
$'000
Transportation costs
108
44
Employee benefit expense
72
61
Taxes and duties
32
20
Depreciation and amortisation
18
16
Materials and other expenses
164
74
394
215
The above distribution and selling costs are those incurred at Kounrad and Sasa in addition to the costs associated with the off-take arrangements. Note 6 refers to the costs associated with the off-take arrangements (off-take buyers' fee).
9. Administrative expenses
2017
$'000
2016
$'000
Employee benefit expense
8,063
6,056
Share based payments
2,823
2,959
Consulting and other services
3,324
2,830
Office-related costs
883
851
Taxes and duties
27
478
Depreciation and amortisation
174
92
Total from continuing operations
15,294
13,266
Total from discontinued operations (note 17)
442
947
15,736
14,213
10. Other (expense)/income
2017
$'000
2016
$'000
Lynx Resources Limited acquisition costs (note 5)
(12,600)
-
Other income
252
192
(12,348)
192
11. Finance income
2017
$'000
2016
$'000
Gain on currency hedge
2,977
-
Foreign exchange gain on intercompany borrowings
2,297
-
Bank interest received
323
67
5,597
67
The Company entered into a currency hedge arrangement in respect of the majority of the net proceeds of the share placing (note 20) in order to limit its total exposure to adverse currency movements.
12. Finance costs
2017
$'000
2016
$'000
Provisions: unwinding of discount (note 25)
192
153
Interest on borrowings (note 24)
2,106
-
Bank charges
21
5
2,319
158
13. Income tax
2017
$'000
2016
$'000
Current tax on profits for the year
13,984
9,580
Deferred tax credit (note 29)
(516)
(2,919)
Income tax expense
13,468
6,661
Taxation for each jurisdiction is calculated at the rates prevailing in the respective jurisdictions.
The tax on the Group's profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated entities as follows:
2017
$'000
2016
$'000
Profit before taxation including loss from discontinued operations
49,801
32,758
Tax calculated at domestic tax rates applicable to profits in the respective countries
9,037
6,553
Tax effects of:
Expenses not deductible for tax purposes
3,582
1,758
Profit/(loss) not subject to tax - Group operations in Bermuda
180
-
Movement on unrecognised deferred tax - tax losses
1,185
2,120
Movement on unrecognised deferred tax - other
-
(851)
Movement on recognised deferred tax (note 29)
(516)
(2,919)
Income tax expense
13,468
6,661
Corporate income tax is calculated at 19.25% (2016: 20%) of the assessable profit for the year for the UK parent company, 20% for the operating subsidiaries in Kazakhstan (2016: 20%) and 10% for the operating subsidiaries in Macedonia.
Expenses not deductible for tax purposes includes share based payment charges and transfer pricing adjustments in accordance with local tax legislation.
14. Earnings/(loss) per share
(a) Basic
Basic earnings/(loss) per share is calculated by dividing the profit/(loss) attributable to owners of the Company by the weighted average number of Ordinary Shares in issue during the year excluding Ordinary Shares purchased by the Company and held as treasury shares (note 20).
2017
$'000
2016
$'000
Profit from continuing operations attributable to owners of the parent
36,313
27,066
Profit/(loss) from discontinued operations attributable to owners of the parent
56
(796)
Profitable attributable to owners of the parent
36,369
26,270
Weighted average number of Ordinary Shares in issue
125,144,585
111,558,091
2017
$ cents
2016
$ cents
Earnings/(loss) per share from continuing and discontinued operations attributable to owners of the parent during the year (expressed in $ cents per share)
From continuing operations
29.02
24.26
From discontinued operations
0.04
(0.72)
From profit for the year
29.06
23.54
(b) Diluted
The diluted earnings/(loss) per share is calculated by adjusting the weighted average number of Ordinary Shares outstanding after assuming the conversion of all outstanding granted share options.
2017
$'000
2016
$'000
Profit from continuing operations attributable to owners of the parent
36,313
27,066
Loss from discontinued operations attributable to owners of the parent
56
(796)
Profitable attributable to owners of the parent
36,369
26,270
Weighted average number of Ordinary Shares in issue
125,144,585
111,558,091
Adjusted for
- Share options
3,115,417
2,670,098
Weighted average number of Ordinary Shares for diluted earnings per share
128,260,002
114,228,189
Diluted earnings/(loss) per share
2017
$ cents
2016
$ cents
From continuing operations
28.31
23.71
From discontinued operations
0.04
(0.72)
From profit for the year
28.35
22.99
15. Property, plant and equipment
Construction in
progress
$'000
Plant and
equipment
$'000
Mining
assets
$'000
Motor vehicles and office
equipment $'000
Land
$'000
Mineral
rights
$'000
Total
$'000
Cost
At 1 January 2016
2,003
49,408
1,601
1,301
-
-
54,313
Additions
11,572
557
-
202
-
-
12,331
Disposals
-
(246)
-
(3)
-
-
(249)
Change in estimate - asset retirement obligation (note 25)
-
(22)
-
-
-
-
(22)
Transfers
(10,443)
10,427
-
16
-
-
-
Exchange differences
67
985
30
26
-
-
1,108
At 31 December 2016
3,199
61,109
1,631
1,542
-
-
67,481
Acquisition of subsidiary (note 5)
8,722
48,216
-
-
643
344,986
402,567
Additions
3,903
26
-
132
21
-
4,082
Disposals
(28)
(396)
-
(46)
-
-
(470)
Change in estimate - asset retirement obligation (note 25)
-
(477)
-
-
-
-
(477)
Transfers
(5,129)
5,057
-
72
-
-
-
Exchange differences
371
1,648
5
3
-
11,654
13,681
At 31 December 2017
11,038
115,183
1,636
1,703
664
356,640
486,864
Accumulated depreciation
At 1 January 2016
-
12,953
62
498
-
-
13,513
Provided during the year
-
3,445
38
155
-
-
3,638
Disposals
-
(246)
-
(3)
-
-
(249)
Exchange differences
-
213
-
42
-
255
At 31 December 2016
-
16,365
100
692
-
-
17,157
Provided during the year
-
6,321
69
142
-
2,744
9,276
Disposals
-
(435)
-
(19)
-
-
(454)
Exchange differences
-
(40)
(1)
(26)
-
-
(67)
At 31 December 2017
-
22,211
168
789
-
2,744
25,912
Net book value
at 31 December 2016
3,199
44,744
1,531
850
-
-
50,324
Net book value
at 31 December 2017
11,038
92,972
1,468
914
664
353,896
460,952
The Lynx Group has pledged building and equipment with an estimated carrying value of $8,836,000 as of 31 December 2017 as a security for the borrowings (note 24).
The reduction in estimate in relation to the asset retirement obligation of $477,000 (2016: $22,000) is due to a combination of adjusting the provision recognised at the net present value of future expected costs using latest assumptions on inflation rates and discount rates as well as updating the provision for management's best estimate of the costs that will be incurred based on current contractual and regulatory requirements and the estimated useful life of mine (note 25).
16. Intangible assets
Goodwill
$'000
Exploration and
evaluation costs
$'000
Mining licences and permits
$'000
Computer
software and website
$'000
Total
$'000
Cost
At 1 January 2016
10,106
2,039
30,631
38
42,814
Additions
-
1,561
14
19
1,594
Exchange differences
187
-
306
1
494
At 31 December 2016
10,293
3,600
30,951
58
44,902
Acquisition of subsidiary (note 5)
21,558
-
10,412
430
32,400
Additions
-
2,002
-
23
2,025
Assets classified as held for sale (note 17)
-
(4,358)
-
-
(4,358)
Exchange differences
775
-
367
3
1,145
At 31 December 2017
32,626
1,244
41,730
514
76,114
Accumulated amortisation
At 1 January 2016
-
-
2,524
23
2,547
Provided during the year
-
-
1,554
9
1,563
Exchange differences
-
-
30
3
33
At 31 December 2016
-
-
4,108
35
4,143
Provided during the year
-
-
1,628
30
1,658
Exchange differences
-
-
(8)
-
(8)
At 31 December 2017
-
-
5,728
65
5,793
Net book value at 31 December 2016
10,293
3,600
26,843
23
40,759
Net book value at 31 December 2017
32,626
1,244
36,002
449
70,321
Impairment assessment
Kounrad project
The Kounrad project located in Kazakhstan has an associated goodwill balance. In accordance with IAS 36 'Impairment of assets' and IAS 38 'Intangible Assets', a review for impairment of goodwill is undertaken annually or at any time an indicator of impairment is considered to exist and in accordance with IAS 16 'Property, plant and equipment', a review for impairment of long-lived assets is undertaken at any time an indicator of impairment is considered to exist. The discount rate applied to calculate the present value is based upon the real weighted average cost of capital applicable to the cash generating unit ('CGU'). A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
The discount rate reflects equity risk premiums over the risk-free rate, the impact of the remaining economic life of the CGU and the risks associated with the relevant cash flows based on the country in which the CGU is located. These risk adjustments are based on observed equity risk premiums, historical country risk premiums and average credit default swap spreads for the period.
The key economic assumptions used in the review were a five year forecast average nominal copper price of $7,292 per tonne and a long-term price of $7,372 per tonne and a discount rate of 8%. Assumptions in relation to operational and capital expenditure are based on the latest budget approved by the Board. The carrying value of the net assets is not currently sensitive to any reasonable changes in key assumptions.
Sasa project
The Sasa project located in Macedonia has an associated goodwill balance. In accordance with IAS 36 'Impairment of assets' and IAS 38 'Intangible Assets', a review for impairment of goodwill is undertaken annually or at any time an indicator of impairment is considered to exist and in accordance with IAS 16 'Property, plant and equipment', a review for impairment of long-lived assets is undertaken at any time an indicator of impairment is considered to exist.
The discount rate reflects equity risk premiums over the risk-free rate, the impact of the remaining economic life of the CGU and the risks associated with the relevant cash flows based on the country in which the CGU is located. These risk adjustments are based on observed equity risk premiums, historical country risk premiums and average credit default swap spreads for the period.
The key economic assumptions used in the review were a five year consensus forecast average price of $2,701 per tonne and a long-term price of $2,282 per tonne for zinc, $2,199 per tonne and $1,991 per tonne for lead, and $19.10 per ounce and $18.40 per ounce for silver a discount rate of 12%. Assumptions in relation to operational and capital expenditure are based on the latest budget approved by the Board.
At 31 December 2017, the Group has reviewed the indicators for impairment, including forecasted commodity prices, discount rates, operating and capital expenditure, and the mineral reserves and resources' estimates and has not identified any impairment indicators.
Copper Bay project
The Group has reviewed the indicators for impairment under IFRS 6 Exploration and Evaluation of Mineral Resources and, although held for sale, has not identified any indicators of impairment. The carrying value of the net assets is not currently sensitive to any reasonable changes in key assumptions. The Company has commenced a formal sales process of the asset.
17. Assets held for sale
The assets and liabilities of the Copper Bay entities have been presented as held for sale in the statement of financial position following the decision of the CAML Board to sell the project in August 2017 and the Company has commenced a formal sales process. The results of the Copper Bay entities for the year ended 31 December 2017 and the comparative year ended 31 December 2016 are shown within discontinued operations in the consolidated income statement. The Group has reviewed the indicators for impairment under IFRS 6 Exploration and Evaluation of Mineral Resources and has not identified any indicators of impairment.
During 2017, the Group continued to hold for sale the assets it owns in Mongolia. The Group disposed of its interest in Monresources LLC in February 2017 and its interest in Zuunmod UUL LLC in April 2018. The Mongolian assets are fully written-down.
Assets of disposal group classified as held for sale:
31 Dec 17 $'000
31 Dec 16 $'000
Cash and cash equivalents
151
-
Property plant and equipment
-
45
Intangible assets
4,358
-
Trade and other receivables
7
-
4,516
45
Liabilities of disposal group classified as held for sale:
31 Dec 17 $'000
31 Dec 16 $'000
Provisions
-
336
Trade and other payables
90
20
90
356
Profit/(loss) from discontinued operations:
2017
$'000
2016
$'000
General and administrative expenses
(442)
(947)
Other income
100
-
Foreign exchange gain
398
151
Profit/(loss) from discontinued operations
56
(796)
Cash flows of disposal group classified as held for sale:
2017
$'000
2016
$'000
Operating cash flows
151
(22)
Total cash flows
151
(22)
18. Trade and other receivables
31 Dec 17 $'000
31 Dec 16 $'000
Trade receivables
6,254
-
Prepayments
2,367
347
VAT receivable
1,563
548
Other receivables
3,554
24
13,738
919
Non-current receivables
Prepayments
39
368
VAT receivable
2,480
2,370
2,519
2,738
The carrying value of all the above receivables is a reasonable approximation of fair value. There are no amounts past due at the end of the reporting period that have not been impaired apart from the VAT receivable balance as explained below. Management's policy is to assess all trade and other receivables for recoverability on a regular basis. A provision is made where doubt exists and amounts are fully written-off when information becomes known that the amounts due will not be recovered.
Other receivables includes $3,300,000 received from the Sellers of Lynx Resources Limited in April 2018 (note 5).
As at 31 December 2017, the total Group VAT receivable was $4,043,000 (2016: $2,918,000) which includes an amount of $2,703,000 (2016: $2,838,000) of VAT owed to the Group by the Kazakhstan authorities. In 2017, the Kazakhstan authorities refunded $820,000 and a further amount of $223,000 was refunded from the authorities in January 2018 and has been classified as current trade and other receivables as at 31 December 2017. The Group is working closely with its advisors to recover the remaining portion. The planned means of recovery will be through a combination of the local sales of cathode copper to offset VAT liabilities and by a continued dialogue with the authorities.
19. Cash and cash equivalents
31 Dec 17
$'000
31 Dec 16
$'000
Cash at bank and on hand
35,208
32,209
Short-term deposits
7,814
8,049
43,022
40,258
Cash at bank and on hand included in assets held for sale
151
-
Total cash and cash equivalent
43,173
40,258
Restricted cash
2,812
118
Total cash and cash equivalent including restricted cash
45,985
40,376
The restricted cash amount of $2,812,000 (2016: $118,000) is held at bank to cover debt compliance and Kounrad SUC licence requirements. Short-term deposits are held at call with banks.
20. Share capital and premium
Number of
shares
Ordinary
shares
$'000
Share
premium
$'000
Treasury
shares
$'000
At 1 January 2016
112,069,738
1,121
-
(7,810)
Sale of EBT shares
-
-
-
30
At 31 December 2016
112,069,738
1,121
-
(7,780)
Issue of shares
64,428,528
644
191,184
-
At 31 December 2017
176,498,266
1,765
191,184
(7,780)
The par value of Ordinary Shares is $0.01 per share and all shares are fully paid. The cash consideration for the Lynx Resources acquisition was partially funded by the placing of 49,150,000 shares to institutional investors at £2.30 per share (approximately $142,945,000 net of issue costs) allotted on 12 October 2017. In addition, the fair value of the 15,278,528 Ordinary Shares issued on 6 November 2017 as part of the consideration paid ($48,883,000) was based on the published share price on 6 November 2017 of £2.44 per share translated at the USD/GBP spot exchange rate of 1.31124.
21. Currency translation reserve
Currency translation differences arose primarily on the translation on consolidation of the Group's Kazakhstan-based and Macedonian-based subsidiaries whose functional currency is the Tenge and Macedonian Denar. In addition, currency translation differences arose on the goodwill and fair value uplift adjustments to the carrying amounts of assets and liabilities arising on the Kounrad Transaction and Lynx Resources acquisition which are denominated in Tenge and Denar. During 2017, a non-cash currency translation gain of $7,989,000 (2016: gain of $1,034,000) was recognised within equity.
22. Trade and other payables
31 Dec 17 $'000
31 Dec 16 $'000
Trade and other payables including accruals
10,626
3,762
Deferred consideration (note 5)
4,000
-
Corporation tax, social security and other taxes
7,772
2,258
22,398
6,020
Other non-current payables:
Deferred consideration (note 5)
8,000
-
8,000
-
The carrying value of all the above payables is equivalent to fair value.
The Group made a provision for the 2017 Kazakhstan corporate income tax liability of $1,331,000 (2016: $940,000) having paid an amount of $11,367,000 in advance during the year (2016: $8,675,000). $927,000 was also paid during the year in relation to 2016 corporate income tax. The Group made a provision for the 2017 Macedonian corporate income tax liability of $4,677,000.
All Group trade and other payables are payable within less than one year for both reporting periods.
23. Deferred revenue
The carrying amounts of the deferred revenue-received advances for silver delivery are as follows:
31 Dec 17 $'000
31 Dec 16
$'000
Current
2,056
-
Non-current
17,621
-
19,677
-
On 1 September 2016, the Lynx Group entered into a Silver Purchase Agreement with Lynx Metals Limited by netting off its existing loan payable with Lynx Metals (note 6). The prepayments for the purchase of silver are recognised as deferred revenue and are related to the production of silver during the life of the mine. Deferred revenue is recognised in the income statement as the silver is delivered based on the units of production. Management are currently reviewing the fair value of the silver stream (note 5).
24. Borrowings
31 Dec 17 $'000
31 Dec 16
$'000
Secured: Non-current
Bank loans
141,839
-
Secured: Current
Bank loans
40,075
-
181,914
-
The carrying value of loans approximates fair value:
Carrying amount
Fair value
31 Dec 17 $'000
31 Dec 16 $'000
31 Dec 17 $'000
31 Dec 16
$'000
Ohridska Banka AD Skopje
5,539
-
5,539
-
SG Facility
62,664
-
62,664
-
Traxys
113,711
-
113,711
-
181,914
-
181,914
-
Current and non-current borrowings includes the long-term loan that was issued for an amount of $75,000,000 from Societe Generale and Investec (the Senior Facility) obtained in October 2016 with an interest rate of 3 month LIBOR plus 5%, maturing on 30 September 2023.
Bank borrowings from Ohrdiska Bank represents a 4.5% interest rate rollover credit facility of up to MKD 307,500,000, which was partially drawn in four separate tranches:
- $2,43,000 (MKD 123,000,000) maturing on 30 June 2018;
- $600,000 (MKD 30,747,000) maturing on 5 September 2018;
- $1,199,000 (MKD 61,483,000) maturing on 30 November 2018;
- $1,260,000 (MKD 64,589,000) maturing on 24 February 2018.
The cash consideration payable for the acquisition of Lynx Resources was partly financed by $120,000,000 in new secured debt facilities provided by Traxys on 22 September 2017. The debt financing agreement forms part of a pre-payment arrangement between the Group and Traxys under which Traxys is advancing funds in expectation of acquiring production from the Group's Kounrad operations. The debt financing agreement has a term of five years, with monthly repayments of $2,000,000 per month. Additional quarterly repayments (cash sweeps) are required equal to 33% of Kounrad free cash-flow less $1,000,000 per quarter. Interest is payable at LIBOR plus 4.75%. Security is provided over the shares in CAML Kazakhstan BV, certain bank accounts and the Traxys Kounrad off-take agreement. The agreement contains typical covenants for this type of facility, including financial covenants related to financial performance of the Company's Kounrad operations including a gearing ratio of less than 100% and total debt to Group EBITDA of less than 250%. The following Group subsidiaries are guarantors: Sary Kazna LLP, Kounrad Copper Company LLP and CAML Kazakhstan BV. Kounrad Copper Company LLP is required to maintain a minimum cash balance of $2,500,000.
During the year, there were repayments of borrowings amounting to $8,362,000.
The fair value of borrowings has been calculated by discounting the expected future cash flows at contracted interest rates.
As at 31 December 2017, the Group measured the fair value using techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly (Level 2).
The different levels have been defined as follows:
• Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1).
• Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2).
• Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).
25. Provisions for other liabilities and charges
Asset
retirement obligation
$'000
Employee retirement
benefits
$'000
Other
employee
benefits
$'000
Legal claims
$'000
Total
$'000
At 1 January 2016
1,916
-
-
-
1,916
Change in estimate
(22)
-
-
-
(22)
Unwinding of discount
153
-
-
-
153
Exchange rate difference
40
-
-
-
40
At 31 December 2016
2,087
-
-
-
2,087
Acquisition of subsidiary (note 5)
2,746
123
184
440
3,493
Change in estimate
(477)
57
(30)
-
(450)
Unwinding of discount (note 12)
192
-
-
-
192
Exchange rate difference
28
-
-
15
43
At 31 December 2017
4,576
180
154
455
5,365
Non-current
4,576
171
149
423
5,319
Current
-
9
5
32
46
At 31 December 2017
4,576
180
154
455
5,365
a) Asset retirement obligation
The Group provides for the asset retirement obligation associated with the mining activities at Kounrad, estimated to be required in 2034. The provision is recognised at the net present value of future expected costs using a discount rate of 8.07% (2016: 8.07%) representing the risk-free rate (pre-tax) for Kazakhstan. The reduction in estimate in relation to the asset retirement obligation of $477,000 (2016: $22,000) is due to a combination of adjusting the provision recognised at the net present value of future expected costs using an inflation rate of 5.59% (2016: 6.02%) and discount rate of 8.07% (2016: 8.07%) representing the risk-free rate (pre-tax) for Kazakhstan as well as updating the provision for management's best estimate of the costs that will be incurred based on current contractual and regulatory requirements and the estimated useful life of mine to 2034.
Under current legislation entities operating mining and related activities in Macedonia are required to take remedial action for the land where such activities have occurred based on a plan approved by the Ministry of the Environment as well as in accordance with international best practices. After the ceasing of mining activities the Group is obliged to restore the mining area and to return it to its initial condition. The Group has engaged an independent expert to conduct an independent assessment on the environment of the mining activities of the Group and to prepare assessment of the restoration and the relevant costs connected with the mine, tailing site and the mining properties. The calculation was performed on a basis of this independent assessment performed by an environmental technical expert. The expected current cash flows were projected over the useful life of the mining sites and discounted to 2017 terms using a risk free discount rate of 7.98%. The cost of the related assets are depreciated over the useful life of the assets and are included in property, plant and equipment.
b) Employee retirement benefit
All employers in Macedonia are obliged to pay employees minimum severance pay on retirement equal to two months of the average monthly salary applicable in the country at the time of retirement. The retirement benefit obligation is stated at the present value of expected future payments to employees with respect to employment retirement pay. The present value of expected future payments to employees is determined by an independent authorised actuary in accordance with the prevailing rules of actuarial mathematics.
c) Other employee benefit
The Group is also obliged to pay jubilee anniversary awards at each ten years of continuous service of the employee. Provisions for termination and retirement obligations are recognised in accordance with actuary calculations. Basic 2017 actuary assumptions are used as follows:
Discount rate: 3.8%
Expected rate of salary increase: 2.5%
d) Legal claims
The Group is party to certain legal claims and the recognised provision reflects management's best estimate of the most likely outcome.
26. Cash generated from operations
Note
2017
$'000
2016
$'000
Profit before income tax including discontinued operations
49,801
32,758
Adjustments for:
Depreciation and amortisation
15,16
10,927
5,083
Amortisation of deferred revenue - received advances for silver delivery
(304)
-
Gain on disposal of property, plant and equipment
-
(64)
Foreign exchange (gain)/loss
(3,349)
1,234
Share based payments
2,823
2,959
Finance income
11
(5,597)
(67)
Finance costs
12
2,319
158
Changes in working capital:
Inventories
(1,259)
(288)
Trade and other receivables
18
3,868
3,241
Trade and other payables
22
1,113
(268)
Provisions for other liabilities and charges
25
70
-
Cash generated from operations
60,412
44,746
27. Dividend per share
In line with the Company dividend policy, the Company paid $23,146,000 in 2017 (2016: $20,360,000) which consisted of a 2017 interim dividend of 6.5 pence per share and a final dividend for 2016 of 10.0 pence per share (2016: interim dividend of 5.5 pence per share and a final dividend for 2015 of 8.0 pence per share).
The Directors will propose a final dividend in respect of the year ended 31 December 2017 of 10.0 pence per share at the forthcoming Annual General meeting (AGM).
28. Related party transactions
Key management remuneration
Key management remuneration comprises the Directors' remuneration, including Non-Executive Directors, disclosed in the 2017 Annual Report.
Non-Executive Directors
Mr Kenges Rakishev became a major shareholder of CAML on 23 May 2014 following completion of the Kounrad Transaction. He was appointed to the CAML Board on 9 December 2013 following the completion of the first part of the transaction. As part of the obligations on Kenges Rakishev for completing the Kounrad Transaction, he signed a relationship agreement with CAML setting out the terms of the relationship between himself and the Group.
In June 2017, Kenges Rakishev sold his 86.09% interest in JSC Kazkommertsbank ('KKB') to JSC Halyk Bank and resigned as Chairman of KKB in July 2017. The Group uses the facilities of KKB and JSC Halyk Bank within Kazakhstan for its normal day-to-day banking.
Kenges Rakishev has an interest in other finance and insurance entities in Kazakhstan. The Group has insurance relationships with such entities and has made an insurance claim under which a syndicate of insurers, including some related to Kenges Rakishev, have a potential liability.
In September 2017, Kenges Rakishev sold 10,605,875 ordinary CAML shares of $0.01 each at a price of 230 pence per share. In February 2018, he sold his remaining shareholding of 10,605,876 ordinary shares at a price of 275 pence per share.
During the year, the Group paid consultancy fees of $75,000 (2016: nil) to Nurlan Zhakupov, a Non-Executive Director of the Company, under a consultancy agreement in terms of which Mr Zhakupov provides services over and above his normal duties.
29. Deferred income tax liability
The movements in the Group's deferred tax assets and liabilities are as follows:
At 1 January
2017 $'000
Lynx Resources acquisition
$'000
Currency translation
differences $'000
(Debit)/credit to income
statement
$'000
At 31 December
2017 $'000
Other timing differences
(82)
-
(2)
(37)
(121)
Deferred tax liability on fair value adjustment on Kounrad Transaction
(8,459)
-
(31)
387
(8,103)
Deferred tax liability on fair value adjustment on Lynx acquisition (note 5)
-
(21,558)
(745)
166
(22,137)
Deferred tax liability, net
(8,541)
(21,558)
(778)
516
(30,361)
A taxable temporary difference arose as a result of the Kounrad Transaction and Lynx Resources Limited acquisition, where the carrying amount of the assets acquired were increased to fair value at the date of acquisition but the tax base remained at cost. The deferred tax liability arising from these taxable temporary differences has been reduced by $553,000 during the year (2016: $2,867,000) to reflect the tax consequences of depreciating and amortising the recognised fair values of the assets during the year.
At 1 January
2016 $'000
Currency translation
differences $'000
Credit to income
statement
$'000
At 31 December
2016 $'000
Other timing differences
(134)
-
52
(82)
Deferred tax liability on fair value adjustment on Kounrad Transaction
(10,106)
(1,220)
2,867
(8,459)
Deferred tax liability, net
(10,240)
(1,220)
2,919
(8,541)
At 31 December 2017
$'000
At 31 December 2016
$'000
Deferred tax liability due within 12 months
(1,597)
(352)
Deferred tax liability due within 12 months
(28,764)
(8,189)
Deferred tax liability, net
(30,361)
(8,451)
Where the realisation of deferred tax assets is dependent on future profits, the Group recognises losses carried forward and other deferred tax assets only to the extent that the realisation of the related tax benefit through future taxable profits is probable.
The Group did not recognise other potential deferred tax assets arising from losses of $8,758,000 (2016: $7,991,000) as there is insufficient evidence of future taxable profits within the entities concerned. Unrecognised losses can be carried forward indefinitely.
At 31 December 2017, the Group had other deferred tax assets of $2,195,000 (2016: $1,543,000) in respect of share based payments and other temporary differences which had not been recognised because of insufficient evidence of future taxable profits within the entities concerned.
There are no significant unrecognised temporary differences associated with undistributed profits of subsidiaries at 31 December 2017 and 2016, respectively.
30. Events after the reporting period
Kazakhstan VAT recoverability
As at 31 December 2017 a total of $2,703,000 (2016: $2,838,000) of VAT receivable was still owed to the Group by the Kazakhstan authorities. A portion of this amount totalling $233,000 was refunded from the authorities in January 2018 and has been classified as current trade and other receivables as at 31 December 2017.
Lynx Resources acquisition
In March 2018, a final determination was reached with regards to the purchase price, pursuant to the share purchase agreement. Consistent with the closing account mechanics of the agreement, the amount of $3,300,000 was received from the sellers in April 2018. This amount was recognised as a current receivable as at 31 December 2017.
This information is provided by RNSThe company news service from the London Stock ExchangeENDFR UAONRWOASAAR
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