African Minerals Annual Report 2012 by Trevor Battye

2008

2009

2010

2011

Annual Report 2012

Discover Delineate Design Develop

Deliver 2013

2014

De-risk Duplicate

www.african-minerals.com

Discover

After review of the geophysical data that had been acquired by AML, the first discovery hole at Tonkolili was drilled into the magnetite deposit in March 2008.

Delineate

Over the remainder of 2008 and the whole of 2009 and beyond, AML drilled 200,000m and took the deposit from discovery to 12.8Bnt in 2010.

Design

With the help of numerous international consultants, and with the granting of the 99 year Exclusive Infrastructure Lease (2009) and the Mining Licence (2010), AML developed the design of Tonkolili from an initial two-phase plan starting with a 5Mtpa road transport DSO operation, to a 12Mtpa rail transport operation.

Develop

With successful debt and equity fundraisings in late 2010 and early 2011, AML developed the project in earnest in 2011, getting first ore on ship in November 2011, from a small mobile processing plant, after building a new 125km railway to the upgraded Pepel port and completely reconstructing 76km of existing rail.

Deliver

During 2012, AML attracted $1.5bn of Chinese investment, upgraded the scope of the mine to 20Mtpa, completed the construction of the major Wet Processing Plant, and began its ramp up to 20Mtpa in earnest, processing over 5Mt in the year.

De-risk

The focus is to be on stabilising the current operation to achieve a sustainable production rate of 20Mtpa, with cash costs in the range of $30/t. AML will continue to upgrade operational management and complete the planning and design for the next growth step to 35Mtpa.

Duplicate

2014 will see the commencement of the Pepel35 Project with the goal of almost doubling production from Tonkolili, with a higher grade concentrate, carrying a higher operating margin, leveraging off the significant infrastructure assets that AML has already put in place.

African Minerals Limited Annual Report 2012

Mission To reward our shareholders through the responsible exploration, development and mining of mineral resources Vision To be the developer and operator of choice for all of our stakeholders Values Respect Integrity Transparency Caring Teamwork

Contents Business review 02 Highlights 03 Competitive advantage 04 Tonkolili project 06 Port 08 Rail 11 Mining and processing 12 Sustainability 14 Executive Chairman’s statement 16 Chief Executive Officer’s review 20 Sierra Leone 22 Financial review 26 Operational review 29 History 30 Sustainability review 34 Macro environment/strategy and markets 36 Key Performance Indicators 38 Principal risks and uncertainties Corporate governance 40 Board of Directors 42 Directors’ report 44 Corporate governance statement 47 Directors’ remuneration report Financial statements 50 Independent auditor’s report 51 Consolidated statement of comprehensive income 52 Consolidated statement of financial position 53 Consolidated statement of cash flow 54 Consolidated statement of changes in equity 55 Notes to the financial statements 83 Advisors and Company information

Business review

Highlights From entrepreneurial explorer and developer to producer in under 3 years Operational Lost Time Injury Frequency Rate 1.72 (2011: 1.55);

All Incident Frequency Rate 0.74 (2011: not recorded).

Wet Process Plant commissioned and began

production build up in Q4 2012, supporting production capacity of 20Mtpa at the mine.

Production of 5.1Mt in 2012, with 4.3Mt shipped. Strengthened both the operating team and the senior

management team, including new CEO and four further new executive committee appointments, providing leadership capability.

All production tonnage to end of 2016 contracted under long term contracts.

Financial

Outlook Since Year End Following the commissioning of the high capacity car

dumper No 2 at Pepel in May 2013, the rail and port facilities started to ramp up towards target and from 18 May 2013 successfully despatched 10 Cape Size Vessels carrying 1.7 million tonnes of product during the subsequent 30 days. The average annualised run rate at the port for the period from 18 May to 16 June 2013 was 20.7Mtpa.

Since 1 May 2013, the processing plants were

consistently operating above the 20Mtpa run rate target. The average annualised production rate at the mine for the period from 18 May to 16 June 2013 was 20.7Mtpa.

Each of the elements of the integrated mine and

infrastructure have successfully operated at above target capacity during the period from 18 May to 16 June 2013, thus demonstrating that the Project can operate at an export run rate of 20Mtpa.

Production, predominantly All In 32 (“AI32”), generated

Expect to be cashflow positive on a sustainable basis

Completion of $400m convertible bond.

Plant conversion and product mix strategy are in place

net sales proceeds of $286.6m during 2012 (capitalised during pre production).

Completion of landmark $1.5bn equity investment by Shandong Iron and Steel Group (“SISG”).

Repayment of $418m Secured Loan Facility. Estimated construction cost at completion of $2.1bn

for Phase I with low capital intensity of around $105/t.

Establishment of corporate level $100m facility and

project level $250m facility post year end to provide flexibility during final ramp up.

Operating loss of $27.9m before non-recurring items ($225.6m post).

Profit before tax of $4.3m (after $288.4m fair value gain on SISG put option).

Profit after tax of $32.1m. Total comprehensive income of $6.4m.

during H2 2013, with cash costs expected to reduce to circa $30/t by year end. to overcome impact of the rainy season on shipping in 2013.

African Minerals Limited Annual Report 2012

Competitive advantage Why invest? World class iron ore resource

Strong project economics

The Tonkolili Iron Ore Deposit is one of the largest magnetite deposits in the world with a resource of over 12 billion tonnes, the mine is expected to last well over 60 years. AML’s involvement began with the grass roots exploration of the deposit, continued to resource delineation, mine planning and finally development of a large scale 20Mtpa capacity mine, rail and port.

AML’s Tonkolili operation is a low cost operation. The proximity to port and the nature of the deposit means very little processing for Phase 1 product. This allows AML to bring its product to market at circa $30/t. With current iron ore prices AML is able to enjoy strong positive cash flows.

Financial strength

Strategic partnerships

AML’s balance sheet allows the Company to invest in capital expansion projects at low costs. With circa $600m cash at the end of 2012, offtake contracts that guarantee customers for all product in 2013 and 2014, and strong relationships with a banking group, AML is able to leverage its resources to ensure the lowest cost of capital for its projects.

In March 2012, AML completed a landmark equity $1.5bn investment transaction with SISG, one of the world’s largest iron and steel groups.

Quality management team To complement AML’s management team several appointments have been made, including Global Head of Human Resources and Sustainability, Global Head of Health, Safety, Environment and Security, Global Head of Sales and Marketing, and, most recently, Chief Operating Officer.

Business review

Tonkolili project Africa’s fastest major mine development Port Loko

Lungi Airport

Pepel

Port Loko airstrip

Infrastructure lease boundary

Lunsar

FREETOWN

Pepel – Lunsar – Tonkolili rail, phase I 0

20 kilometres

Waterloo

Guinea

Tonkolili

Europe Sierra Leone

FREETOWN

Sierra Leone Liberia

The Tonkolili project is based in Sierra Leone, West Africa Sierra Leone has competitive seabourne export routes to European and Chinese steel markets

China

Marampa Mine

African Minerals Limited Annual Report 2012

Mine operation camp

Mine construction camp

Pit fly rock zone Bumbuna Numbara Pit

Hematite process plant

Marampon Pit

Simbili Pit

Makeni

AML Mine lease area Raw water dams Tailings storage facility cell 1 Tailings storage facility cell 2

Farangbaia Forest Reserve

Saprolite process plant Tailings storage facility option 2

Magnetite process plant

Project investigation area

The Tonkolili Iron Ore Deposit is circa 20km in length – scale in comparison with greater London area

Scale comparison with the city of London

Business review

Unlocking value

Por t “ AML is now successfully exporting iron ore to key global markets, thus setting a precedent in West Africa as it becomes a region of focus and growth in future iron ore production.”

1Mt

stockyard capacity

4.3Mt sold in 2012

Raymond Chirwa General Manager Port

During 2012 Pepel Port’s capacity was expanded with the commissioning of a larger second stockyard, including a stacker and a stacker/reclaimer, bringing the total laydown capacity to in excess of 1Mt stockyard capacity. A second shiploader belt was installed on the existing jetty – doubling loading capacity and allowing both stockyards to operate concurrently – and a third trans‑shipping vessel, the MV Nelvana, was added to the fleet in December, increasing loading capacity to in excess of the required 20Mtpa rate. AML hopes to consistently achieve 20Mtpa of exports from the end of 2013.

African Minerals Limited Annual Report 2012

Business review

Unlocking value

Rail “ Tonkolili’s proximity to the coast allows AML to transport the iron ore a relatively short distance, generating significant cost efficiencies compared to other iron ore producers. AML aims for rail operations to be timely, reliable and consistent.”

Francios Le Mieux General Manager Rail

4.6Mt

transported by rail during the year

72.5t average tonnage per wagon

Over the last 12 months AML has completed the upgrade of the rail. The rolling stock complement was increased from 20 locomotives and 456 wagons, to 34 locomotives and 1,056 wagons. The narrow-gauge rail was upgraded from 45 kg/m to 60 kg/m to allow wagonloads to be increased with higher rail speeds, with current rail speed averaging in excess of 50 km/h. Safe operation and management of the rolling stock and railway infrastructure continues with daily inspection and maintenance. At full production a fleet of 8 trains with 4 locomotives and 100 wagons each is expected.

African Minerals Limited Annual report Report2012 2012

Business review

African Minerals Limited Annual Report 2012

Unlocking value

Mining and processing “ The Tonkolili Mine is a world class mining operation that focuses on sustainable mining and development of the iron ore deposit. A team of professionals from various disciplines ensures that industry best standards are upheld in the running of the mine.”

5.3Mt product mined in 2012

processing facilities capable of producing >20Mtpa

In 2012 construction work focused on the completion of the large Wet Process Plant and the associated tailings and raw water dam facilities. Three processing facilities, all producing screened, washed lump and fine product, will be capable of producing at a sustainable rate of over 20Mtpa of saleable product. Alex Mayrick Mine Manager

Business review

Unlocking value

Sustainability “ Through responsible mining practices and sustainable local partnerships, AML’s vision is to be a positive force of economic and social change in Sierra Leone.”

Graham Foyle-Twining Global Head of HR and Sustainable Development

84%

of people working on the project as at 31 December 2012 were Sierra Leone nationals

We are at an exciting stage of our sustainability journey. AML now has the knowledge, team and vision to put in place a robust and transparent sustainability programme. We are now setting our strategic directions and execution programme for our environmental, social and governance activities in accordance with globally recognised standards of good sustainability practice. We are expanding and consolidating our growing range of partnership-based projects and initiatives to address our key social and community challenges and opportunities.

African Minerals Limited Annual report 2012

Business review

Executive Chairman’s statement “ 2012 has been transformational for AML. We have seen production capacity expanded towards the 20Mtpa target rate, an upgrade in leadership across the organisation, a normalising of finances with high cost debt replaced by commercial loans and a bond, and the welcome appointment of our new CEO, Keith Calder.”

Frank Timis Executive Chairman

$1.5bn

landmark deal with Shandong Iron and Steel Group completed

African Minerals Limited Annual Report 2012

African Minerals continues to progress towards its ambition of becoming the leading diversified miner in Africa. From the discovery of Tonkolili in 2008, the deposit was explored and delineated in 2009, designs were drawn up for construction in 2010, rapid development followed with first ore on ship in 2011, and the advancement of construction in 2012. 2013 will see Tonkolili further de-risked as production stabilises at 20Mtpa, making it the largest producer of iron ore in West Africa. Tonkolili Project 2012 has been transformational for AML. We have seen production capacity expanded towards the 20Mtpa target rate, an upgrade in leadership across the organisation, normalising of finances with high cost debt replaced by commercial loans and a bond, and the welcome appointment of our new CEO, Keith Calder, into the organisation. Importantly, 2012 also saw us deliver the anticipated landmark equity $1.5bn investment from our partners SISG, guaranteeing demand for our product and the future growth of the project into its next stage of development to 35Mtpa. This revised Pepel35 project promises a lower risk, lower capital development strategy. We look forward confidently to this year establishing Tonkolili as a new, low cost, high volume, scalable and extremely long lived producer. Competitive landscape and market The end of 2012 saw the beginning of the once in a decade handover of power at the helm of the Communist Party of China. Reassuringly for iron ore suppliers, China continues to focus on urbanisation as its main driver of future economic growth and this is expected to drive additional iron ore demand in the near to medium term. Iron ore pricing at the start of 2013 has been particularly strong. Weather disruptions across China, Australia and Brazil, together with the policy-induced export declines from India and permit delays in Brazil have assisted the significant tightening of seaborne supplydemand balances this year. We are optimistic that pricing will remain relatively buoyant across the year.

Our long life resource and increasing production capacity in combination with our attractive low silica product are establishing the Company as a long term and stable supplier of choice, particularly in the Chinese market. Sierra Leone We wish to congratulate the Government and people of Sierra Leone on the recent peaceful election, which provides a continued stable operating environment for our flagship project, and ushers in another five-year period of growth. Our strong in-country presence, headed by AML (SL) Executive Chairman and co-founder Gibril Bangura, provides us with a unique insight into Sierra Leone in particular and West Africa in general and further reinforces our position as a true Sierra Leonean company with deep roots in the region.

Thanks The history of African Minerals to date is one of strong and rapid project execution, balanced risk management and managerial focus and is a testament to the current and past project and operating teams that have made our Company what it is today. We have a strong team going forward and, combined with the vision and support of our shareholders and stakeholders, we stand well positioned to realise our current goals and to define an exciting pathway to future growth. We also have a unique opportunity, and an obligation, to achieve our growth and aspirations through close cooperation with the Government and people of Sierra Leone and to ensure that the outcomes are balanced and sustainable for all. Frank Timis Executive Chairman

Corporate governance As part of the ongoing process to enhance corporate governance within the Company we intend to increase the number of independent Non-Executive Directors on the Board, with the aim of having a majority being independent Non-Executive Directors. With the CEO position now filled, the full executive committee established, and a stable financial position, that search has recommenced, and we expect to be able to announce additions to the Board in due course. Several high level management appointments have already been made and we will continue to enhance management capability across the project, operating and corporate entities as part of the evolution of the Company. With an aim of providing more frequent market guidance, the Company will institute Interim Management Statement (“IMS”) quarterly reporting commencing with a Q2 IMS. With these important accomplishments behind us, and the ongoing support of all of our stakeholders, including the Government of Sierra Leone and our partners Shandong Iron and Steel Group, we are well positioned to continue our rapid growth.

Business review

Chief Executive Officer’s review “ At the time of our interims, we said that the safe ramp up of Phase I, the definition of our next phase of development and the establishment of a world class team would remain our area of immediate focus, and we have stuck to those priorities.”

Keith Calder Chief Executive Officer

20Mtpa

capacity built in to Mine, Rail and Port

2012 has been a year focused on the delivery of Phase I of the Tonkolili Iron Ore project. While first ore on ship was achieved in November 2011, from our first semi mobile process plant, 2012 saw us upgrade our rail, significantly improve throughput at the port, and complete the construction of two additional processing facilities. The commissioning of the No. 2 dumper at the port and the debottlenecking of the processing plants was completed in April 2013 and in the period from 18 May to 16 June 2013 we achieved our goal of a 20Mtpa run rate at each part of the integrated mine, rail and port facilities. Safety I am saddened to report that one of the Company’s contractors suffered a fatality on 30 October 2012. Mr. Alhaji Sannoh was fatally injured in an accident involving heavy mobile equipment at Rofaneye quarry. Our thoughts and continuing support go out to his family. The Lost Time Injury Frequency Rate (“LTIFR”) rose from 1.55 per million man hours in 2011 to 1.72 in FY 2012. We believe that this increase is principally the result of implementing a more rigorous process of capturing and categorising incidents and the man hours worked. This is an important step in establishing the baseline from which we intend to improve going forward. The Company has adopted the international standard for reporting, against an All Injury Frequency Rate per 200,000 man hours, from 1 January 2013. On a comparative basis, but not including minor first aid incidents, the equivalent rate for 2012 was 0.74. The health of all of our employees is a priority for our organisation and the reduction in malaria cases at our industrial sites, camps and in our neighbouring communities is a key focus for us in 2013. We have embarked on a major Group-wide initiative with the objectives of eliminating mosquito breeding habitats, improving preventative measures against contagion and a broader education and support programme.

African Minerals Limited Annual Report 2012

ncial Discipline Fina

ify nt

Inv t es

Ide

Business model

Sound Governance

rk et

Strategic partner In March 2012 we completed our strategic transaction with Shandong Iron and Steel Group (“SISG”) whereby SISG invested $1.5bn in return for a 25% stake in the underlying assets of the Tonkolili project and a discounted offtake agreement (“DOTA”) for the life of the mine. The DOTA covers 4.8Mtpa of sales in Phase I, and rises to 10Mtpa once the 35Mtpa production rate is achieved, with a sliding scale of discounts from zero to 15%, depending on the FOB received price. In the current price environment, SISG receives a discount on the 4.8Mtpa it is entitled to under this DOTA in Phase I. Under the shareholders’ agreement, SISG also has the right to elect to take its equity entitlement, on an annual basis and at market pricing, an additional 25% of production, equivalent to a further 5Mtpa in Phase I, which it has exercised for 2013. This landmark equity investment thus provides for offtake by SISG of around 50% of our product in Phase I, funding for further expansion, and procurement support amongst many other benefits.

AML is focused on Identifying commercial opportunities from the exploration, development and operation of viable ore bodies. There is a disciplined execution of Investment capital, ensuring rapid development within strict budgetary controls. Mining activities generate significant value, through the optimisation of processes, production increases and mine life extension. Our investment decisions are aligned with Market trends and the requirements of our partners. Sound Governance and Financial Discipline along with sustainable development are long term value drivers for the organisation.

$ 865m

of equity funds raised since the Tonkolili discovery in March 2008

20Mtpa

Phase I run rate

The Company has also recently revised and extended current credit facilities to include an additional $20m of liquidity at the Group level with the establishment of a $100m facility, and has established a $250m facility to provide additional working capital flexibility at the operating company level. Standard Bank has also provided two tranches of equipment finance facilities, which are currently drawn to $171m.

The remainder of the funds received from SISG, the various debt facilities, and anticipated internally generated cashflow provide a solid financial resource to Funding commence our next expansion at the Since the discovery of Tonkolili in March 2008, Tonkolili project to 35Mtpa. African Minerals has raised approximately $865m in equity funding, and has attracted an Team aggregate of $1,064m in various forms of debt Along with the world class Tonkolili deposit finance, to fully fund our Phase I development. and associated infrastructure, the key assets At the start of the year the Company also of the Company are its people. issued $400m of 8.5% convertible bonds, due in 2017. Since mid-2012, the Group has been able to attract considerable experience to our The $1.5bn subscription funds received in executive team including a Chief Operating the SISG transaction at the end of March Officer, a Head of Human Resources and 2012 were used to retire in full the $418m Sustainability, a Head of Health, Safety, Secured Loan Facility that was put in place in Environment and Security and a Head of February 2011 (and subsequently refinanced Business Development. While squarely by Standard Bank of South Africa Limited focused on our core activity in Sierra Leone, (“Standard Bank”) in February 2012), and the this enhanced leadership team will help to balance of the subscription funds are being ensure timely and effective decision making used to complete Phase I to the 20Mtpa across the entire organisation. run rate, achieved during Q2 2013, and to commence the Pepel35 expansion project. While the completion of the wet processing plant, second wagon dumper, and other

matters provide the physical capacity for achieving our goals, it is this leadership team that will provide the capability to deliver on an ongoing basis. Phase I In our last annual review, management at that time did expect to be able to complete the construction and commissioning of the various process plants to achieve the 20Mtpa run rate by 2012 year end, and produce 10Mt during the calendar year. While significant progress was made in 2012, delays in construction and commissioning of the wet process plant, and the prolonged and severe 2012 wet season, impacted operations, resulting in the exporting of 4.3Mt of material, below our revised 5Mt target. However, finalisation of construction and debottlenecking has been completed in line with the revised schedule set out in H2 2012. After successfully completing our rail upgrade, rolling stock expansion, commissioning of the second port stockyard, receipt of our third trans-shipper, and ramping up of our mine processing facilities, the last key element was the completion of our high capacity No 2 car dumping facility at Pepel. This was commissioned in May 2013 and the rail and port facilities started to ramp up towards target. From the 18 May to 16 June 2013 we successfully despatched 10 Cape Size Vessels carrying 1.7 million tonnes of product, achieving an average annualised run rate at the port of 20.7Mtpa. In addition since 1 May 2013, the processing plants were consistently operating above the 20Mtpa run rate target. The average annualised production rate at the mine for the period from 18 May to 16 June 2013 was 20.7Mtpa and the peak daily production for mining was 75,852 tonnes and processing plants was 72,526 tonnes or an annualised rate of 27.7Mtpa and 26.5 Mtpa respectively. We are extremely pleased to have achieved the 20Mtpa run rate as promised and we expect cash costs to fall subsequently to circa $30/t by year end. After successfully completing our rail upgrade, rolling stock expansion, commissioning of the second port stockyard, receipt of our third trans-shipper, and ramping up of our mine

Business review

Chief Executive Officer’s review continued

processing facilities, the last key element is the completion of our second wagon dumping facility at Pepel. I am pleased to report that it is now in the final stages of construction and that commissioning is continuing, with the dumper now in production. During the current ongoing ramp up, we have run our processing facilities at close to 18Mtpa on a short-term basis, and successfully loaded an Ocean Going Vessel in three days, which demonstrates the 20Mtpa port capability. With the step change in production that we expect once we have removed the wagon dumper bottleneck, and after the modifications made in recent planned shutdowns, we expect that these individual performances will be repeatable on an ongoing basis, capable of achieving our sustainable 20Mtpa run rate during Q2 2013. As we enter our first full production wet season, we have put in place a strategy of campaigning fines in the dry season, and lumps and blend in the wet season. This strategy requires establishment of stockpiles, and we are now expecting to mine and process 15–18Mt this year, and export 13–15Mt. With the flexibility afforded by three plants, a short haul rail, and significant stockpile capacity at both mine and port, we are confident that we will be able to consistently achieve 20Mt of exports annually in 2014 and beyond. With all major elements of the final infrastructure in place, we are confident that the cost at completion of the Phase I project will remain around $2.1bn, for a capital intensity of around $105/t. With this stage of development virtually complete – from a standing start on a greenfield exploration project to a major producer in just five years – we will have created a platform at Tonkolili that, as well as being capable of significantly leveraging our future organic expansion from 20Mtpa to 35Mtpa, should create significant competitive advantage as we review future growth opportunities across West Africa and beyond.

Pepel35 The completion of the landmark transaction with SISG gave us significant funding to continue our growth plans, to both complete the expanded scope of Phase I and to embark upon Pepel35. The strong anticipated cashflow from Phase I, together with the funds earmarked for Pepel35, gives us the confidence to move forward with our next expansion, set to generate higher tonnage, with higher revenue per tonne and a higher EBITDA margin. At the time of the interims we expected to be in a position to provide more definition on the various elements of the Pepel35 expansion by the end of the year, which was announced to the market in the middle of December. Our original strategy for expansion to 35Mtpa had been the construction of saprolite capacity at the mine in a number of smaller concentrator units, enhance the existing railway for most of its route, and to build a new rail spur to a new purpose-built large deepwater port at Tagrin Point, in a project that we anticipated would cost circa $3bn. Following a value engineering exercise during the second half of 2012, which focused on optimisation of our existing assets and the de-risking of our future expansion plans at Tonkolili, we announced our decision to opt for a brownfield expansion of our Pepel Port as opposed to a major greenfield project at Tagrin. We determined that the expansion could be achieved with an enhanced value proposition, a lower capital intensity and substantially reduced schedule risk if we leveraged off of our existing facilities rather than further expand our industrial footprint. Management estimates suggest that full project execution would cost circa $2bn (+/–25%) between 2013 and 2019, saving an estimated $1bn, with the first saprolite unit entering production in 2016 with a gradual increase to a 35Mtpa capacity over a four-year period. This strategy provides a lower risk path to establishing the full 35Mtpa capacity, thus cementing our transition to a mid-tier company. These management estimates will be firmed up during 2013. Early works of engineering, metallurgical, geotechnical studies etc are being undertaken during H1 2013 such that

physical works can begin in the dry season of Q4 2013, initially using the circa $485m of funds retained from the SISG subscription at the project level. Community As the largest private employer and the largest contributor to GDP in a country with extremely high unemployment, one of our main concerns is the management of expectations within the communities of Sierra Leone in which we operate. African Minerals recognises that we have a significant economic footprint in Sierra Leone, and we are committed to leveraging our position in-country, to be a force of long‑term, positive economic and social change within our operating sphere of influence. Our business sustainability depends on strong and enduring relationships with host communities, and government authorities at all levels. Active partnerships with communities is a key aspect of our Sustainability Strategy and alignment with prevailing international standards is central to the execution of our Communities Engagement Programmes. In April 2012, a protest in a neighbouring village to our operations, Bumbuna, by temporary workers recently laid off by our contractors, quickly became inflamed as a platform for general dissent regarding nationally high levels of unemployment. That protest deteriorated into a civil disturbance in Bumbuna to which the police responded, unfortunately resulting in the death of Miss Musa Conteh. We offer our sincere condolences to her family. African Minerals has engaged ERM, a global corporate social responsibility and sustainable development consultant, to assist us in conducting a baseline study and support us in developing policies and procedures to help guide our activities in the areas affected by our operations. African Minerals also carried out all-party discussion forums with labour leaders, paramount chiefs, the police and the government. As a result of those talks African Minerals negotiated a package of employment benefits that included a wage adjustment, index-linked annual pay revisions, union recognition, and the establishment of centres for excellence in teaching technical skills to

African Minerals Limited Annual Report 2012

employees. We are pleased to report that we are making significant strides in attracting and developing skilled Sierra Leoneans across the organisation. At the community level, in the immediate term, African Minerals is currently carrying out several community investment projects along the operational footprint of the business. The Company remains committed to aligning our operations and strategies towards the ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption as set out in the UN Global Compact. The potential of the minerals sector to increase economic development and reduce poverty in Sierra Leone, by attracting investment and providing job opportunities, is well known. As a complementary part of the initiative to ensure that current legislated fiscal and other obligations are met, Sierra Leone has established the National Minerals Agency (“NMA”), whose role is predominantly to oversee the implementation of existing agreements; especially those regarding social, community, environment and training, plus the oversight of the significant proceeds of mining revenues. This industry regulator will play a critical role in promoting transparency, accountability and good governance in Sierra Leone’s minerals sector. As one of the largest contributors to the country’s economy, African Minerals is committed to ensuring that all Sierra Leoneans benefit from the country’s mineral wealth. By virtue of the taxation we will pay – income tax, withholding tax, direct royalty, royalty regarding social and environmental projects and payroll taxes, together with income generated to the Government by virtue of the economic interest they retain in the rail and port infrastructure – African Minerals is poised to become one of the largest contributors to Sierra Leone’s economy. As such, we welcome any initiative, including the creation of the NMA, which further improves the transparency and regulation of the country’s mining industry. Keith Calder Chief Executive Officer

Strategy AML has developed a framework for its Mission, Vision and Values to help achieve its strategy to become the premier independent mining company, providing superior returns to shareholders.

Volume growth AML owns one of the largest iron ore deposits in the world. With over 12 billion tonnes, the Company anticipates a mine life of 60+ years. AML is currently the largest exporter of iron ore in West Africa.

Cost efficiency The Tonkolili ore body is located approximately 200km from the coast. This proximity to the coast allows AML to transport the iron ore, which occurs at surface and requires no stripping, the relatively short distance, thus generating significant cost efficiencies compared to other iron ore producers. In addition, the presence of a significant amount of hematite in the Tonkolili ore body allows AML to sell this direct shipping ore with little beneficiation.

Revenue enhancement As AML develops the Tonkolili ore body, there will be a natural revenue enhancement as more valuable product becomes accessible. The Tonkolili ore body is a very large magnetite ore (top-quality product) overlain with saprolite ore and topped with a hematite cap. Therefore, as mining and processing increases and reaches newer depths, the quality of AML’s product increases, resulting in a natural revenue enhancement over time. While operating costs will also remain broadly constant throughout the life of the mine, AML will be able to achieve economies of scale and synergies that will lead to increased margins.

Sustainability AML seeks to engage and enhance meaningful relationships with parties in Sierra Leone to create the next generation of good practice for sustainability in mining in Sierra Leone. Over the next three to five years AML will build a sustainability programme in accordance with globally recognised standards of good sustainability practice.

Business review

Sierra Leone

Gibril Bangura Executive Chairman and Founder AML Sierra Leone

“ Sierra Leone is a country where we are proud to operate. With our near-term expansion to 20Mtpa, we will shortly become the largest fully integrated exporter of iron ore in West Africa.” Gibril Bangura is a founding shareholder of African Minerals Ltd

African Minerals Limited Annual Report 2012

African Minerals’ ambition The Company’s successful transition from developer to producer has been a great example of doing business in Sierra Leone. Exporting the first iron ore in 30 years and promoting the country as a significant source of natural resources has attracted further foreign direct investment. Our ambition is to make a lasting and sustainable contribution to the social, environmental and economic wellbeing of our local communities, as well as supporting the wider development of the country in which we operate. Over time, the partnerships, projects and initiatives we put in place, in collaboration with the Government of Sierra Leone, will help to provide the capacity to enable our local stakeholders to thrive long beyond the Company’s 60+ year lifetime of the Tonkolili Project. Unique opportunity Business conditions in Sierra Leone remain challenging; the country is building on a low economic base, with high unemployment and a lack of skilled people. However, with one of the largest iron ore deposits in the world, we believe the Tonkolili Project will continue to generate significant returns and be a key driver to economic growth. At our targeted 20Mtpa in this current DSO Phase, we expect to produce significant revenues, increasing the GDP of the country, and provide a significant, strong tax base for the economy. African Minerals is also the largest employer in the country and we are uniquely positioned to contribute to capacity development at local, regional and national levels. We need a skilled, motivated and local workforce and in order to achieve this, we recruit and train talented Sierra Leonean individuals, as well as help develop resilient local communities through mutually supportive communitybased partnerships.

Government relations African Minerals understands that there is an increased emphasis from government organisations to better understand how to maximise the contribution of the mining and minerals sector to achieve sustainable development and meet broader UN objectives, such as the Millennium Development Goals, at the national, regional and local levels in developing economies. African Minerals believes it has a significant role to play in working collaboratively with the Government of Sierra Leone, to leverage its natural resource endowment to create a better future for the nation beyond direct revenue and royalty payments from private sector corporations. In 2012 African Minerals formed a partnership with the Government of Sierra Leone in the form of a Steering Committee that addresses the ever growing needs of the country to develop educational standards that will assist in achieving just this. The committee is made up of the Minister of Education and colleagues within the ministry, the Minister of Mines and representatives from African Minerals’ sustainability team. The role of the committee is to explore the educational needs of the nation and to empower them to take advantage of the increasing private sector investment and presence in the country. The committee will seek the assistance from various out-of-country institutes that can offer both in-country and online training. Currently, the committee is assessing the rebuilding of the Magburaka Technical Institute and the upgrading of the facility to meet national requirements and international standards.

Community relations For African Minerals our local communities are extremely important. Without thriving and supportive local communities we simply would not be able to achieve our business goals. We aim to have a policy of active relationships and transparent engagement with all communities that neighbour our sites and a desire to build relationships based on trust and partnership. Local communities provide us with a talented workforce and their support is fundamental to our social licence to operate. African Minerals has undertaken many local community projects including the rebuilding of the Makari and Makinkiba Schools and the redevelopment of the Binkolo Health Clinic and Marketplace. The reconstruction of water wells and reservoirs has been approved and numerous other projects, such as the building of the Health Clinics at Pepel and Bambuna, have commenced. Wide reaching effects African Minerals’ operations have involved international contractors, Chinese state owned enterprises, and improved commercial banking relationships. We expect these foundations to support further growth in these areas, increasing the amount of foreign direct investment, and reducing the country’s reliance on aid from donor countries. Such a high profile project will attract scrutiny on a global scale and we believe governance and transparency are essential to all our operations. Through our concerted efforts in our sustainability measures and working with leading consultants we aim to implement the necessary changes and embrace the appropriate principles.

Business review

Financial review

Miguel Perry Chief Financial Officer

$ 286.6m net sales of AI32 in 2012

“ 2012 has been another transformational year for AML. With the ramping up of production and closing of the SISG investment we are well positioned financially.”

Financial result FY 2012 In 2012, iron ore sales and operating costs have continued to be capitalised to assets under construction, since the Group’s infrastructure and mining assets were still undergoing commissioning at year end. We expect to start recognising revenue, operating costs and depreciation through the income statement during H1 2013. However, we note that the IFRS treatment of the SISG investment, as well as a number of non-recurring items, has a material impact on the Group Income Statement which has no bearing on operational performance. Operating Loss of $225.6m (2011: $41.5m) The Group incurred a loss from its ongoing operations of $27.9m, and an additional loss of $197.7m from non-recurring events, resulting in a Group operating loss for the year of $225.6m. The principal non-recurring events comprise: SISG associated costs of $133.3m (including penalty for SISG warranty breaches ($51.1m), transaction costs and other professional fees ($32.2m) and onerous offtake contracts ($50.0m); ■■ impairment relating to impairment of rail ($41.5m); and ■■ fuel misappropriation ($18.0m). ■■

The remainder of the operating loss from continuing operations of $27.9m includes employee costs ($12.2m) and other operating costs including travel, communications and security. Further detail on these individual elements is provided below: ■■

The transaction agreement with SISG stipulates that the Group produces and sells at least 10Mt in 2012 and delivers a minimum 2Mt offtake contract to SISG. Penalties for SISG warranty breaches ($51.1m) include a $47.4m charge for production in 2012 being 5.7Mt less than 10Mtpa committed to SISG and a $3.7m charge for non-fulfilment of 2Mt SISG offtake contract guarantee resulting from delivery of 1.2Mt to SISG in 2012.

African Minerals Limited Annual Report 2012

Prior to the completion of the SISG transaction, the Group put in place several offtake contracts to maintain optionality in the event that SISG did not close. The successful completion of the SISG transaction, and associated offtakes, has meant that certain contracts have had to be cancelled to accommodate the tonnages to SISG; as a result there is a payable amount of $50.0m. ■■ Rail refurbishment expenditure of $41.5m was derecognised as a result of increased project scoping. Initial refurbishment work of the 45kg/m existing rail was recognised in H1 2012, but the costs associated with the refurbishment were reversed when the decision was taken to completely replace the refurbished section with new 60kg/m rail, which was completed in 2012. ■■ $18m fuel misappropriation represents management’s best estimate for fuel theft which was previously capitalised within assets under construction. Management is continuing with efforts to recover losses incurred and to identify more accurately the exact amount of fuel theft. Management has also strengthened controls around the delivery and issue of fuel supplies to prevent the recurrence of fuel loss. ■■

Profit Before Taxation $4.3m (2011: $40.4m Loss) The Group’s profit before taxation for the year of $4.3m principally results from a fair value gain on SISG put option ($288.4m), offset by operating expenses referred to above, other finance costs ($39.5m) and loss on derecognition of borrowings ($21.1m). ■■

The fair value gain on financial instruments of $288.4m recognised by the Group is the movement recorded through the Income Statement on revaluation of the SISG non-controlling interest put option.

A put option exists in the SISG agreement whereby SISG can sell back its 25% interest in the project companies at fair value, in the unlikely event Frank Timis (Executive Chairman) voluntarily chooses to resign from the Board. Under IFRS the shares held by SISG are not recognised as non-controlling interest within equity and instead the put option is accounted for as a financial liability.

■■

The Group recognised a finance cost of $39.5m, being the imputed interest charge associated with unwinding of the discount from the SISG discounted offtake agreement for the purchase of iron ore, recorded as deferred income.

The amount initially recognised represents the net present value of the iron ore offtake discount that SISG will receive under the agreement. Volume and iron ore prices are based on management’s best estimate. This amount will be released to the Statement of Comprehensive Income as SISG takes delivery of its offtake volumes. In 2012, the $7.8m revenue discount was capitalised to assets under construction. ■■

In addition, the Group has recorded a loss on derecognition of borrowings ($21.1m) due to early repayment of the secured loan facility when refinanced on 9 February 2012.

Profit After Taxation $32.1m (2011: $13.3m loss) The Group’s profit after tax for the year was $32.1m compared to a loss of $13.3m in 2011. Iron ore sales of $286.6m have been credited and commissioning-associated costs of $416.8m have been capitalised to assets under construction since the Group’s infrastructure and mining assets were still undergoing commissioning at the year end. A taxation credit of $27.8m was generated relating to recognition of deferred tax assets on qualifying capital expenditure in Sierra Leone that is in excess of deferred tax liabilities. Other Comprehensive Expense $25.7m (2011: $6.8m) Other comprehensive expense of $25.7m resulted from fair value reductions in the Group’s listed investments, the main components of which were in respect of Cape Lambert Resources ($22.9m) and Obtala Resources Plc ($3.6m), offset by a $0.8m deferred tax credit. Total comprehensive income for the year amounted to $6.4m.

$34.1m

paid in direct taxes, indirect taxes, and royalties to Government of Sierra Leone 2011: $10.0m

$400m completion of convertible bond

Balance sheet Assets under construction and property, plant and equipment increased by $884.4m since December 2011 to $2,390.8m, resulting from expenditure on the project. The increase in 2012 was made up of $685.4m of capital equipment, and a net amount of $199.0m of production costs and financing costs, offset by sales proceeds in the period. At the end of 2012, the capitalised assets under construction comprised $1,946.2m of capital equipment, with the balance represented by accrued working capital deficits, interest, pre-production and exploration costs, offset by sales. As at 31 December 2012 the Group had total cash and cash equivalents of $601.9m, of which $560.9m is earmarked for the Pepel35 expansion. $1,500m was received from SISG on 2 April 2012. From these funds the $417.7m Secured Loan Facility was repaid. The remainder of these funds was used to fund expansion capital costs, resulting in $560.9m project cash available at 31 December 2012. $25m of the remaining cash relates to funds under dispute with lenders regarding a fee for the early repayment of the Secured Loan Facility, and are currently restricted.

Business review

Financial review continued

Borrowings are held at amortised cost on the Balance Sheet of $581.2m. The borrowings $20.4m increase in the year is principally due to the convertible bond issue ($358.7m) and project‑level asset financing ($83.1m) offset by the repayment of the Secured Loan Facility ($417.7m), derecognition ($21.1m) and $100m standby facility repayment ($20m). The amortised cost of the $400m bond at the Balance Sheet date has been recorded as: liability $358.7m, equity $52.9m. A summary of the Group’s cash, and nominal value of loan facilities, is set out below: As at 31 December 2012 (US$m)

Cash

Group cash Convertible bond Credit facility Equipment finance

602

Debt

Net Debt

(400) (80) (155)

Consolidated net debt at 31 December 2012

(33)

Total equity increased by $69.4m during the year to $1,051.5m. This movement comprises an increase of non-controlling interest ($135.8m), a reduction of accumulated deficit ($36.0m), an increase in equity reserves ($54.1m), and decreases in share premium ($130.8m) and fair value reserves ($25.7m). As at 31 December 2012, the Group recognised a non-controlling equity interest for $135.8m in the Balance Sheet. This interest relates to the 10% holding that the Government of Sierra Leone has in the subsidiary African Rail and Port Services (SL) Limited (“ARPS”). This amount is based on the net assets of ARPS as at the balance sheet date. Equity reserves increased by $54.1m, principally due to $52.9m from the convertible bond issue as detailed above, $10.2m from warrants issued for the secured facility refinancing, offset by $7.8m decrease from a share-based payment equity transfer to share premium. Share premium decreased by $130.8m due to reclassification of $139.6m for non-controlling interest as detailed above and transaction allotments costs of $2.5m, offset by $7.8m share‑based payment and warrants transfer from equity reserves and $3.5m allotments. The fair value reserves decreased due to the increase in comprehensive expense of listed investments, as previously noted. The non-controlling interest put option liability of $706.1m recognised, as detailed above, is management’s best estimate of the amount of the fair value that would be payable to SISG in the unlikely event Frank Timis voluntarily leaves the Board and SISG exercises its option to sell back its interest. A summary of the key accounting treatment for SISG is set out below: Deferred income

SISG noncontrolling interest

Total

30 March 2012 liability balance Release of deferred income (capitalised) Unwinding of time value of money (P&L) Gain on revaluation of put option

505.6 (7.8) 39.4 –

994.4 – – (288.3)

1,500.0 (7.8) 39.4 (288.3)

31 December 2012 liability balance

537.2

706.1

1,243.3

African Minerals Limited Annual Report 2012

The deferred income of $537.2m recognised as at 31 December 2012, as outlined above, is the present value of the iron ore offtake discount that SISG will receive under the agreement. As at 30 June 2012 the offtake was initially recognised as $505.6m. The increase of $31.6m relates to the adjustment to present value of the discount of $39.4m, offset by sales discount of $7.8m as detailed above. Trade and other payables have risen by $187.4m since December 2011 to $344.4m, predominantly as a result of project-related ramp up and due to increased operating expenses including non-recurring items referred to above. Also included in this balance is $30m compensation payable for an inability to fulfil offtake contracts and $22.5m SISG transaction costs as discussed above. Provisions of $63.8m principally comprise SISG warranty breach penalties as discussed above ($51.1m).

Post balance sheet events $250m borrowings and $100m refinancing of standby The Company has also recently revised and extended current credit facilities to include an additional $20m of liquidity at the Group level with the establishment of a $100m facility, and has established a $250m facility to provide additional working capital flexibility at the operating company level. Standard Bank has also provided two tranches of equipment finance facilities, which are currently drawn to $171m. Standby and Asset Financing facility covenant waivers. As at 31 December 2012, the Standby and Asset Financing facilities were in breach of financial covenants. Subsequent to year end, waivers of these have been received. Miguel Perry Chief Financial Officer

Taxes paid to Government $34.1m (2011: $10.0m) In February 2012, the Group volunteered to prepay $20m (2011: $10m) of Sierra Leone employee withholding tax which will be offset against future tax liabilities, in order to support infrastructure development in the country. In 2012 the Group paid $25.7m (2011: $6.9m) in employee taxes to the Government. In 2012 the Group paid $8.4m (2011: $0.6m) in royalties to the Government of Sierra Leone, based on 3% of sales.

Business review

Operational review

75tonnes Average tonnage per wagon

Focus on safety Safety is of paramount importance to us, and is one of the core fundamentals of our growth strategy. AML has always believed in ensuring industry best standards and procedures for all our areas of impact,Â regardless of the size or the nature of the operations there.

6hours

Average train cycle time in each direction

AML currently uses a range of safety key performance indicators (KPIs) to monitor and measure its operational safety performance. We continuously review our safety processes and are working with our contractors and healthcare team on the ground to ensure that risks are avoided in order to achieve zero harm. Adequate

health and safety training is given to all employees and contractors and senior managers aim to instil a positive and proactive safety culture at every level. We continually seek new safety improvement opportunities to enable us to fulfil our ambitious safety policy. We aim to establish a sustainable system integrating all Company operations to achieve these mutual goals.

African Minerals Limited Annual Report 2012

“ The operational team has overcome a number of challenges in 2012. Following upgrades at the port and rail we have the capacity to achieve our run-rate target of 20Mtpa in 2013, as we demonstrated in June 2013.”

Overview The production of our screened, unwashed All In 32 (AI32) product generated significant early revenue for the Company in the first half of 2012, with production rates rising in line with expectations to around 8Mtpa in May 2012. However, the onset of the wet season saw a steady degradation in production capability, as the clay-rich AI32 material started to cause materials handling problems both in the process facility and the port, with the moisture level in the material approaching the shipping transportable moisture limit (TML). The later than expected completion of the wet process plant meant that no other product was available and in August 2012 shipping of AI32 was temporarily suspended, until sufficient lump material became available from the new wet process plant to allow exports to recommence. From October 2012 production levels have continued to grow and for the period from 18 May to 16 June 2013,10 Cape Size Vessels carrying 1.7 million tonnes of product were successfully dispatched, demonstrating that the Project can operate at our target – an export run rate of 20Mtpa. Mine During 2012, construction work focused on the completion of the wet process plant and the associated tailings and raw water dam facilities. Commissioning was completed at the end of September, and in May 2013 has ramped up towards its nameplate capacity. The wet process plant is supplemented by a mobile crushing, washing and screening plant and a semi-mobile crushing plant. The semi-mobile plant, which produced the AI32 material, is in the final stages of being converted so that it too can have its feed diverted through an additional washing and screening section to produce a washed lump and fines product. The smaller mobile crushing and screening plant was also converted during 2012 to produce a washed and screened lumps and fines material. Together, these three facilities are capable of a rate of 20Mtpa of saleable product as demonstrated during the period from

18 May to 16 June 2016. The average annualised production rate for this period was 20.7Mtpa. To support the feed for these plants, our contract mining fleet has also been increased with the addition of a further 300t excavator and 10 additional Caterpillar 777 100t trucks, which were all commissioned into production in Q1 2013. Lump material constitutes approximately 45% of our production, with Fines of 55%. The International Maritime Shipping of Bulk Cargoes guidelines classify three classes of bulk cargoes as: Group A – capable of liquefaction; Group B – constituting a chemical hazard; and Group C – incapable of liquefaction. Our Lump product and a blend of Lump with AI32 (Lump Blend) are both categorised as Group C materials, and do not have any materials handling restrictions in wet weather, while our Fines are classified as Group A. Thus, in order to address any potential wet season disruption, it is now planned to focus on shipping of Group C cargoes in the wet season, with the Fines material campaigned preferentially through the dry season, maintaining planned export rates. Rail A total of 4.6Mt were transported by rail from the mine to the port in 2012. The further upgrade of the reconstructed narrow gauge rail from 45 to 60kg per metre to allow wagon loads to be increased with higher rail speeds has been completed. The original complement of 20 locos and 456 wagons has been expanded to 34 locomotives and 1,056 wagons. By the end of 2012, 30 of the 34 locomotives were delivered and all the 1,056 wagons were delivered, including 20 flatbed wagons for the container traffic and 10 tank wagons for the diesel traffic. The balance was received by the end of March 2013. Training of nationals to eventually become train drivers continued during the first quarter of 2013 and the eventual transition to a fleet operated by Sierra Leoneans is a key objective of the rail team.

Stephan Weber Chief Operating Officer

Rail speed is averaging 36kph, including the waiting time of the empty trains in passing loops. Average tonnage per wagon is currently 75t and train cycle time in each direction has improved from 9 hours to under 6 hours on average. The current rail operations comprise of 7 trains, each of 4 locomotives and 112 wagons, with rolling stock capacity to add an additional train consist if required. Port During 2012 the port continued to expand its capacity, with the construction of a second, larger stockyard facility, including a stacker and a stacker/reclaimer, bringing the total laydown capacity to approximately 1Mt of saleable product. Various modifications to the transfer towers and chute configurations were made during 2012 and 2013 to mitigate the material handling difficulties that had been encountered with our products, which are now all flowing well. A second shiploading conveyor was installed on the existing jetty, doubling loading capacity, and allowing both stockyards to operate concurrently, or each stockyard to operate independently with direct loading from the wagon dumpers. A third trans-shipping vessel, the MV Nelvana, was added to the fleet in December 2012, considerably increasing outloading capacity to achieve the required 20Mtpa rate. The Pepel channel is only navigable by one vessel at a time, and current practice has been to anchor the waiting trans-shipping vessels near Freetown, bringing them to the Pepel jetty once the outgoing transshipper has exited the channel. In order to reduce this waiting time, African Minerals has constructed a combined layby/fuel jetty, adjacent to the exiting shiploading jetty, reducing cycle times by around three hours. Capacity and capability for 20Mtpa – achieved in Q2 2013 As scheduled, the operations were shut down for maintenance on 26 February for ten days in order to complete the final steps of construction and modification at the mine, rail and port, which – together with the completion of the second dumper installation – provided the final step change required to achieve 20Mtpa capacity.

Business review

Operational review continued

6hours average train cycle time in each direction

36kph average rail speed

Infrastructure Infrastructure is one of the most important aspects in mining in West Africa and the development of such infrastructure is essential to the economic growth of Sierra Leone. The Tonkolili Mine and associated infrastructure has been one of the fastest developed projects in Africa, progressing from initial construction to a 20Mtpa capacity within 30 months. 2012 was a pivotal year in witnessing the transition from the construction phase to the operational phase. Mining infrastructure is an extremely broad and multidisciplined competency, which draws on a large cross-section of the teams’ capabilities from roads, rail, buildings, power supply and project management amongst others. AML has strengthened the operating team, with the appointments of a new CEO and COO, and HSE and Business Development professionals. Corporate and social responsibility has been central throughout these operations.

At the large wet process plant, the drive motor on the apron feeder was replaced with a higher power, higher torque motor, which has considerably increased input feed rates; the cyclones were modified from a bottom size of 150 microns to 75 microns and the screen decks were changed from 2mm to 0.8mm, which has the potential to increase recovery and saleable product yield; and the scrubber was relined as part of standard maintenance. On the railway, work included the installation of five turnouts and various track modifications ahead of tying in Car Dumper 2 and rail loop at Pepel, as well as connecting the north side of the locomotive workshop. At the port, various modifications were made to transfer tower and chute configurations to further increase throughput and reduce blockages. However, subsequent to this shutdown, we experienced a belt tear in our major overland conveyor at the wet processing plant at the mine, which prevented the plant from operating for the remainder of March and early April 2013. Exports, though, continued satisfactorily from our significant port and mine stockpiles. The No. 2 car dumper at Pepel was successfully commissioned, with first ore being offloaded on 29 April 2013. From 18 May to 16 June 2013 we successfully despatched 10 Cape Size Vessels carrying 1.7 million tonnes of product and we demonstrated the average annualised run rate of 20Mtpa. With all final modifications now complete, we were able to achieve the target 20Mtpa run rate across the entire operating system in unison during the period from 18 May to 16 June 2013. Of equal importance is the fact that these operating accomplishments were achieved during the start of the rainy season in Sierra Leone with 355mm of rain falling at the port facilities since the beginning of May, an early demonstration of the success of our wet season shipping strategy in FY13. Our focus now is to continue to successfully manage our production and infrastructure through the wet season, and we remain on track to meet our previous guidance of exporting 13–15Mt in 2013, and to bring the cost of production down to circa $30/t by year end. Stephan Weber Chief Operating Officer

African Minerals Limited Annual Report 2012

History The Tonkolili Iron Ore Deposit was discovered by Katharine S Fowler in 1931. In 1930 she was hired by Major NR Junner (Director, Geological Survey of Sierra Leone) to map the Seli Iron Ores that were discovered by the Geological Survey (Junner himself) in 1928. Fowler proposed renaming the deposits to “the Tonkolili Iron Ore Deposits” in 1931 in her report to Junner, when she wrote to confirm the discovery of hematite ore at the site. Katharine continued her work in Sierra Leone until 1935. She later investigated deposits of chrome, gold, platinum and molybdenum and wrote a book called “The Gold Missus”.

AML active in Sierra Leone since 1996

2008

12.8Bnt

AML revisited its vast geophysical database and identified the Tonkolili target. A 200,000m drill programme followed and eventually defined a SRK approved, JORC‑compliant 12.8Bnt of iron ore.

2010–11

$1.1bn

Equity and debt raised to fully fund Phase I development, which entered into production in Q4 2011.

2012

$1.5bn

In March 2012 AML completed a landmark $1.5bn transaction with SISG in return for a 25% shareholding in the Tonkolili project companies and a discounted offtake.

Sustainability

Sustainability review

“ AML is focused on building a business which has sustainability at the core of how it operates. We aim to do this in partnership with our key stakeholders, including our employees and local communities.”

Graham Foyle-Twining Global Head of HR and Sustainable Development

2,796

AML employees at 31 December 2012

What is sustainability? Sustainable development is development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs. Sustainability is based on economic, environmental, social and governance performance. Establishing a sustainability reporting process helps AML to set goals, measure performance, and manage change. A sustainability report is the key platform for communicating positive and negative sustainability impacts. Our sustainable development framework will include: ■■ ■■ ■■ ■■ ■■ ■■ ■■ ■■

targets and goals indicators and metrics monitoring and reporting management systems leadership and accountability strategies and standards policies and commitments a code of conduct

African Minerals Limited Annual Report 2012

Progress In 2012, African Minerals transitioned from an extremely challenging, yet rewarding, construction phase to operational delivery. During this transition, African Minerals has focused on improving and developing our sustainability approach. Mining activities have the potential to leave long-lasting socio‑economic consequences (both positive and negative) on communities and the environment in which they operate. We have taken a meaningful step forward in our strategic corporate management of sustainable development, putting in place the people and systems that will enable us to effectively manage these issues over the longer term. There is a great deal of importance for transparency, responsibility and accountability in all our operations. Our mining operations at Tonkolili have an anticipated multi-generational lifespan. African Minerals is aware of the contribution such a project can have on the local community, Sierra Leone and the West African region. As a mining company our social licence to operate is dependent on responsible and sustainable activities. It is essential that we develop and maintain excellent standards in addressing the

social, community and environmental issues and opportunities that our mine, railroad and port operations will face, not just now but over the whole lifecycle of the mine. Our ambition is to make a lasting and sustainable contribution to the social, environmental and economic wellbeing of our local communities, as well as supporting the wider development of Sierra Leone. Over time, the partnerships, projects and initiatives we put in place will help to provide the capacity to enable our local communities to thrive. Period of review In 2012 our management team critically reviewed where we have been executing effectively and where we could improve our sustainability performance. In December 2012, we engaged ERM, a leading global sustainable development consultant, to assist us in conducting a baseline study from which an impactful Sustainability Policy Framework is being developed in accordance with globally recognised standards of sustainability best practice. This process will ensure that we engage with our stakeholders to understand their key concerns and expectations of our business and practices.

Proactive and regular engagement enables us to identify opportunities and mitigate risks by understanding and responding to issues rather than reacting to them. ■■

Planning the creation of a Centre of Excellence to drive sustainable development across the business – including contractors and subcontractors.

The constant evolution of a Sustainability Policy Framework is an important dynamic that encourages progressive companies to adapt their practices and adhere to and promote industry best practice as the global landscape continues to evolve. Four major achievements in our sustainability policy include: The completion of a comprehensive social baseline diagnostic as the foundation for charting our Sustainability Policy Framework. Working with our consultants, ERM, we completed a review of all aspects of our footprint in-country, including social and community conditions within our operational sphere of influence. ■■ The recruitment of a strong team of experienced professionals to develop and manage our sustainability programme. ■■ Creation of a Centre of Excellence to drive sustainable development across the business – including contractors and subcontractors. ■■ Commencement of the development of a Sustainable Development Strategic, Policy and Corporate Governance Structure to drive internationally endorsed sustainable development principles throughout the business. ■■

Business review

Sustainability review continued

Phased Approach to the Sustainability Framework 2012 Diagnostic Review (complete) Established a baseline through a review of AML’s operations, in-country management approach and sustainability risks, challenges and opportunities. ■■ Reviewed existing governance structures, policies, processes, (risk) management systems, standards, info/data management and reporting, training and assurance programmes. ■■ Identified key stakeholders and assessed the extent of stakeholder engagement regarding sustainability issues. ■■ Reviewed shareholder perception of sustainability risks as reported in the public domain. ■■ Developed an overview of key “red flag” risks relative to international standards and stakeholder expectations. ■■

2013 Sustainability Strategy/Policy Development Develop an overall Sustainability Strategy and policy structure in collaboration with senior management representatives. ■■ Develop improvement plans to address key risks and impacts that require short and longer term prevention, management and mitigation. ■■ Map out and agree the governance and internal control improvements required to support implementation of AML’s Sustainability Framework. ■■ Develop a structured and proactive approach to stakeholder engagement, community consultation and grievance management. ■■

2013 onwards Implementation Support the implementation of a fit-for-purpose Sustainability Framework aligned with legal requirements, international standards, Industry Good Practice (IGP) and business objectives. ■■ Develop governance structures, processes and systems while refining or developing procedures guidance and training materials. ■■ Recruit, train and/or mobilise individuals and resources. ■■ Continue pro-active and constructive stakeholder engagement and community relations. ■■ Develop sustainability performance reporting, transparency and assurance mechanisms (e.g. data management and reporting systems). ■■

African Minerals Limited Annual Report 2012

Looking ahead We are aware that these are initial steps in formulating our Sustainable Development Policy Standards and our ambitions will take three to five years to come to fruition. During 2013 therefore, our emphasis will shift into delivering on these measures. Looking ahead, our key areas of focus are: 1. Resettlement 2. Health and Safety 3. Environmental Performance 4. Community and Social Performance 5. Governance, Assurance and Reporting 6. Communications, Grievance and Community Outreach Within each of these Policy Standards will be sub-sets of operational performance criteria, which, once in place, will be measured and accountable. For example, in our Community and Social Performance Development Policy Standard lies our Community Partnerships approach, which will focus on five key areas: Agriculture: there should be no net loss of agricultural land in the communities we work with. We will help maximise the productivity of the land by sponsoring and supporting community agricultural champions; ■■ Skills & Training: we are helping to build the wider teaching infrastructure necessary to produce talented individuals with the basic skills required in our recruits. These young men and women will become the core of our workforce in Sierra Leone, as well as having the transferable skills needed in the wider community. We are providing two training centres of excellence at Magburoka and Pepel to train up Sierra Leoneans to fill our senior technical and management positions in the future; ■■ Small to medium sized enterprise development within Sierra Leone will be a key aspect of our sustainability strategy, capitalising on Sierra Leone’s existing entrepreneurship to build additional business capacity; and ■■

■■

Health and Infrastructure Community Partnerships: we are supporting the provision of clinics, starting in Pepel, to provide the facilities and education necessary to promote health and wellbeing in our workforce and communities.

African Minerals is changing from being responsive to challenges to becoming a resilient and forward-looking company. We are developing and integrating our sustainability approach and have a long-term plan to create a robust business. We aim to report on our progress regularly in a transparent and consistent manner. Accountability to our stakeholders requires that we document both our successes and those areas where our

Integrate and streamline approach to maximise benefits Leverage existing work in Sierra Leone

performance has not been of the standard we expect of ourselves. Our approach, with its emphasis on creating and sharing value with the people and communities around our operations, is central to our business strategy. Our focus on sustainable development is a conscious decision that we believe provides us with a competitive advantage. Benefits include helping us to manage risks effectively, reduce environmental impacts, engage with our communities, decrease operating costs, provide local businesses with additional opportunities, attract high calibre employees and ensure their health and safety, and ultimately ensure our Company’s long‑term success.

Internal and external engagement/ endorsement

Critical Success Factors

Well understood responsibilities and accountabilities

Transparency and performance reporting

Awareness of sustainable business value

Business review

Macro environment/ strategy and markets Global economic environment and demand in 2012 African Minerals’ first full year of sales occurred against a backdrop of very high volatility in the iron ore market. Weak global macro-economic conditions in 2012 led to slower demand growth for crude steel. According to the World Steel Association, global steel output rose by just 1.4% year‑on-year to 1.51 billion tonnes for the year. However, Tonkolili has already become a highly accepted and desirable source of iron ore into China for reasons of security of supply and low silica content. As has become the norm over the past decade, China proved to once again be the world’s growth engine, cementing its position as the world’s leading steel producer, by lifting market share from 45% to 47% year-on-year. This was driven by an output expansion of 3.6% year-on-year to almost 684 million tonnes. Although far slower than in the previous two years, when growth averaged above 9%, China still outperformed most other seaborne ore consuming regions. European output contracted by 4.5%, with Turkey the most notable exception, growing 5.2% year-on-year, while in Asia, Japanese output fell by 0.3%. Despite China’s relative global strength in 2012 in steel and iron ore consumption, the country’s steel industry dynamics underperformed initial growth expectations of 6% – 8% for the year. This led to a less constrained seaborne iron ore supply-demand balance throughout the year than the previous year, when Fe 62% ore prices had averaged $168/t. The country’s downstream manufacturing base began 2012 holding very high stock levels, a hangover from Beijing’s 2009 $600bn stimulus package, invested to offset the 2008 global financial crisis. With interest rate and required reserve ratio cuts by the People’s Bank of China feeding into the economy at the end of 2011 and first half of 2012, most economists expected the economy to begin to improve into the second half of the year. Industries continued to hold high stocks in anticipation of the pick-up. Instead, a liquidity crunch at the end of June saw interbank cash rates jump abruptly upwards by 35%. This set in train a massive “cash crunch”, which caused

widespread panicked destocking across the manufacturing landscape. Since steel remains China’s key urbanisation/industrialisation building input, mills took the brunt of the impact, forced to raise cash by selling down both their steel and iron ore holdings. This led to dramatic iron ore price falls of $50/t in just 70 days, from $137 down to $87/t. Highlighting the year’s extreme news flow and pricing volatility, within a month, the industry’s fortunes had turned 180 degrees again. China’s economic indicators began to show an improvement in underlying economic activity, with steel purchasing manager indices moving into expansion in October, the first sustainable evidence of increasing demand conditions since the previous year. Meanwhile on the ore supply side, India’s Supreme Court issued a ban on the 50Mtpa exported from the West Coast region of Goa, until investigations into illegal mining and tax avoidance had been fully completed. India had been the seaborne market’s third largest supplier of iron ore, peaking in 2009 at 120 million tonnes. Goa was India’s largest exporting region, together with Karnataka (previously 30Mtpa), whose exports had been banned since 2H 2010 and Odisha (40Mtpa), whose exports had largely been rendered uncompetitive by the impost of 30% export taxes on fines products since the beginning of 2012. As a result, India’s ore supplies slipped to just 40Mt in 2012, and look set to fall further in 2013, unless the export bans are lifted and export taxes are reduced. These two key events, China’s cyclical recovery and seaborne ore tonnages losses from India, helped to improve supply-demand balances heading into the conclusion of 2012, causing prices to spike on Chinese mill ore re-stocking efforts as the year came to a close. This lead to a rally in Fe 62% iron ore prices all the way back to $145/t on 31 December 2012. As a result, the year had seen Fe 62% prices begin at $139/t, reach highs of $149/t, track to lows of $87/t and conclude at $145/t, only $6/t higher than the beginning of the year and yet providing a 2012 volatility reading of 33%.

Although unusually volatile, it should be noted that the pattern of seasonality is not uncommon. This is due to coincidental weather-related disruptions often associated with Chinese winter, Australian cyclones and Brazilian rains during the first quarter of every year. The wet season of West Africa is counter cyclical to these events as it occurs during the third quarter. Going forward, this fact will enable African Minerals to be especially well positioned as a reliable supplier even during the time of year when other supply regions typically struggle and prices increase accordingly. Competitive landscape The seaborne iron ore market in 2012 amounted to around 1.1 billion tonnes, while Chinese domestic supplies amounted to roughly 350–360 million tonnes, we estimate. In 2012, >10 million tonnes per annum brownfield supply expansions were successfully brought into the market by BHP Billiton and FMG in Australia. Other projects, including our own, saw smaller tonnage expansions, including from Atlas, Rio Tinto, Labrador Iron, Dannemora, Kumba, and Assmang. Arcelor Mittal Liberia and Gindalbie Karara began their lives as “new” brownfield projects during the year, tapping into certain existing port, road and rail infrastructure. Meanwhile, Russian and Ukrainian materials continued to increase their share, as did a number of smaller country suppliers. Offsetting these growth projects, India continued to lose tonnes to export taxes and mining bans. Meanwhile, projects in Brazil continued to struggle from mine depletion and grade declines. As a result, China’s four major suppliers, Australia, Brazil, India and South Africa, have actually seen their market share eroded over the past two years from circa 90% down to 80%. African Minerals’ efforts in 2012 focused squarely on building the foundation of its operations on Direct Shipping Ore (DSO). With that foundation now intact, work is accelerating on the step-up to a 35Mtpa+ operation which is a true brownfields project utilising the existing port site at Pepel. This expansion, underpinned by an enormous resource, will also benefit from the general slow down and deferral of mining capital

African Minerals Limited Annual Report 2012

“ Tonkolili’s low silica iron ore has been very well received in the market. In 2012 AML has established itself as a supplier of choice to multiple end-users.” Jim Griffin Global Head of Business Development

expenditure plans by others producers, as there will be less demand from competitors for engineering, equipment, plant facilities and manpower. African Minerals products African Minerals product continues to be well received by the Chinese market. Its distinct low silica level offers end-users significant blending advantages, enabling them to source cheaper supply from higher silica producers, e.g. >8% from Brazil and Mauritania, and thereby reduce their average raw material costs. Blending is also essential as operators seek to maintain acid-base balances in their blast furnaces. African Minerals product also has a lower level of impurities than production from countries such as India, Brazil and China. This means that during sintering African Minerals product generates lower emissions, delivers more iron units and increases energy efficiency. African Minerals’ low silica and low impurity product, in combination with good physical properties e.g. abrasion performance and decrepitation, are establishing the company as a “supplier of choice” with Chinese steel plants. African Minerals’ large scale resource and expanding capability go further in addressing security and sustainability of supply issues, which would typically concern end-users. In fact, African Minerals has already positioned itself as an important alternative source beyond the “Big 3” regions of Western Australia, India and Brazil. West Africa is considered by most industry observers to be the fastest growing iron ore supplier over the next 20 years – growing market share from negligible to roughly 20%. African Minerals has already established itself as the regional leader. New products will be introduced as African Minerals develops and expands the Tonkolili mine, transitioning first from DSO to saprolite and then to magnetite. This progression is being matched by a general shift in the market, as lump production reduces and is replaced by more fines; a migration from hematite DSO to magnetite concentrates and pelletised products.

The future step to magnetite brings on stream a product that already has established “green” credentials by virtue of its beneficial chemistry (high Fe, low Al, low P), physical properties (requires minimal grinding) and exothermic properties (lowering energy consumption and reduced carbon footprint). 2013 and beyond The end of 2012 saw the beginning of the once in a decade handover of power at the helm of the Communist Party of China. The Central Economic Work Conference held in December 2012 gave the new administration its first opportunity to present its vision for economic policy in 2013 and the longer term. Reassuringly for iron ore suppliers, China continues to focus on urbanisation as its main driver of future economic growth, maintaining the scope to increase infrastructure investment through pro-active fiscal policy, whilst avoiding the kind of “big stimulus” initiatives now blamed for over-stimulating the economy after the global financial crisis of 2008. China’s attention is now on quality, stable and efficient growth. The language being used is of targeted and effective economic policies that will underpin China’s longer-term growth, progressing towards market-based interest and exchange rates, and addressing socio‑economic issues to narrow the rich-poor divide. China is firmly focused on avoiding the “middle-income trap” that it has seen affect other countries, whereby growth has stagnated and a widening wealth gap has generated social unrest. In 2013, macro-economic conditions remain uncertain, with a number of regions continuing to predict falling growth rates or even further contraction. China, the primary engine for seaborne iron ore consumption, is expected to experience improving commodity demand growth averaging in the range of 4% – 6%, as the economy recovers from 2012’s cyclical declines. This will necessitate additional iron ore consumption of over 50Mt from China alone, in our view. The outlook remains more benign for other key demand regions, with other Asian countries likely to see flat demand and Europe experiencing falling consumption rates again.

Iron ore pricing has nonetheless begun 2013 particularly strongly. Weather disruptions across China, Australia and Brazil, together with the policy-induced export declines from India and Brazilian permitting delays, have assisted the significant tightening of seaborne supply-demand balances this year. As a result, ore stocks in China have been left weakened, as the market gears up for a strong start to the Asian construction season. We would expect pricing to remain relatively buoyant across the year, providing there are no changes to India’s policy position. 2014’s pricing environment may prove slightly more challenging, given the increase of ore supply which is finally expected to arrive from top Brazilian and Australian producers next year. African Minerals’ advantages of location, scale, long life, product acceptance and cost structure will continue to separate Tonkolili from other iron ore producers.

Megatonnes 1,800

Annual Crude Steel Production

1,350

900

450

2005

2006

2007

2008

2009

2010

2011

2012

2011

2012

 World  China  Rest of World

’000 1,200

Annual Seaborne Iron Ore Demand

900

600

300

2005

2006

2007

2008

2009

2010

 World  China  Rest of World

Business review

Key Performance Indicators Indicator

Description

2012

Total shareholder return (TSR)

Total shareholder return, calculated from the growth in share price together with any dividend income from the shares, with dividend income assumed to be reinvested.

TSR decreased during 2012 by 27.7%. 1 January 2012: £4.40 31 December 2012: £3.18

Cost per tonne

Direct cost per tonne shipped, including mining costs, processing costs, rail costs to port, port costs, and site administration.

The Company was in a commissioning and ramp up phase, and does not report this measure for the current period.

Net cash

Cash and cash equivalents less borrowings.

We had cash and cash equivalents of $601.9m at 31 December 2012. Borrowings of $581.2m at year end 2012.

Fatalities

Fatal accidents recorded over the Tonkolili project, including subcontractors.

The Company recorded one fatality in 2012.

AIFR

All Injury Frequency Rate.

0.74

Employee diversity (Localisation)/turnover

Diversity of workforce – percentage of workforce who are Sierra Leonean nationals (including contractors).

At end December 2012, 84% of the Company’s workforce (including contractors) were Sierra Leoneans.

Corporate social investment

Total investment in the community per annum.

$6.6m invested in 2012.

Financial

Non-financial

Change

African Minerals Limited Annual Report 2012

2011

Target

Comment

We achieved a TSR of 4.5% during 2011. 1 Jan 2011: £4.21 31 Dec 2011: £4.40

We do not have a formal TSR target. However, we are committed to creating long-term shareholder value and aim to outperform our peer group.

As we ramp up Phase I to full capacity and benefit from the associated cash flows and improved definition of Phase II, we expect a significant improvement in TSR in 2013.

The Company was in a commissioning and ramp up phase, and does not report this measure for the period.

We expect the cash cost to fall to a sustainable rate of circa $30/t shipped by the end of 2013.

The production rate increased to the targeted 20Mtpa, and cash costs are expected to fall to within the target range.

We had cash and cash equivalents of $16m at 31 December 2011.

We do not have a formal target for net cash; however, we manage our finances conservatively.

Borrowings of $589m at year end 2011. The Company recorded five fatalities in 2011.

We aim to achieve zero fatalities.

Unfortunately, one contractor working on the Tonkolili project lost their life in 2012.

Not reported

We continuously review our safety processes and are working with our contractors and healthcare team on the ground to ensure that such incidents are avoided entirely with the aim of zero harm.

During 2012 the Company adopted AIFR as our measure for safety as we believe it is a more inclusive ratio to monitor.

At end December 2011, 81% of the Company’s workforce (including contractors) were Sierra Leoneans.

We do not have a formal target for the proportion of workforce who are Sierra Leonean; however, we are committed to increasing it over time.

We aim to increase levels of employment and training of Sierra Leoneans over time to ensure maximum benefits from our operations are passed to local communities.

$3.2m invested in 2011.

We have established two funds to support community development and to fund environmental and social protection and impact mitigation. Each fund will receive a sum equivalent to 0.1% of AML’s gross annual sales per annum.

AML is committed to supporting local communities around the Tonkolili project and we have already invested significant sums in areas such as the provision of clean water supplies project and supporting the provision of education. We expect these sums to increase significantly as we develop our operations.

key Increase No change Decrease  Positive  Negative  No change

Business review

Principal risks and uncertainities Risk

Impact

Mitigation

Change Further information

Operational and market risks Fluctuations in iron ore prices

As currently a single commodity producer, changes in the iron ore price and market could have a material positive or negative impact upon the Group and the development of its projects.

We manage the risk of fluctuations in the iron price by ensuring that our operations are constructed as low-cost, efficient operations.

See pages 16 to 19.

Estimates of resources

There are inherent uncertainties in the estimation of iron ore resources and in projecting future rates of iron ore production. Fluctuations in these variables may have a material impact on the long-term financial condition and prospects of the Group.

The Group adheres to the best practice standards set out in the Australasian Code for Reporting of Mineral Resources and Ore Reserves and uses independent, external consultants to review all exploration work undertaken and to produce resource and reserve estimates.

–

Project development

The development of mining projects can be affected by a multitude of factors, many of which are outside the Group’s control (such as weather). A failure to effectively manage these factors could result in delays in construction, increases in capital costs, or reduction in planned exports.

The Group has appointed an extremely experienced management team who have significant experience of developing similar projects.

See Corporate Governance Statement on pages 44 to 46 and Operational Review on pages 26 to 29.

Going concern risk

The delivery of the Group’s strategy requires ramp up of production to a sustainable level of 20Mtpa. In the event that the Group does not sustain ramp up as planned, it may have to seek additional sources of financing.

The Directors have reviewed the cash flow forecast for the period ending 31 December 2014 and are confident that the Group will continue to have adequate resources to continue in operation for the foreseeable future.

Refer to Note 2 to the financial statements.

Costs

There are inherent uncertainties in the estimated development and operating costs of the mine, including the costs of skilled labour, power, water and fuel. Fuel and labour costs are a major component of the total cost of the operation and any increase in the price of fuel may have a material adverse effect on the Group’s performance.

We ensure that our operations are constructed as low-cost, efficient operations. Our Phase I production has a relatively low power requirement.

–

Financial risks

key Increase No change Decrease

African Minerals Limited Annual Report 2012

The Group’s ability to successfully deliver its strategy is subject to a number of material risks and the effective management of these is critical to creating value for shareholders. The determination of these principal risks and uncertainties is conducted on an ongoing basis by the Board.

Risk

Impact

Mitigation

Change Further information

Employees

Completion of the Group’s current projects is dependent upon the successful recruitment and retention of key engineering, financial and technical personnel.

The Group’s remuneration policy is to pay a competitive salary that attracts and retains personnel of the highest quality, having regard to their experience and the nature, complexity and location of their work. Levels of pay for African Minerals are significantly higher than the national average for Sierra Leone. The Group has approved a 16% consumer price inflation linked wage increase, applied retrospectively from January 2012, for all national employees and remains committed to transferring skills to the local Sierra Leone workforce. Individual remuneration for executives and senior management is linked to the Group’s long-term performance through the award of share options.

See Directors’ Remuneration Report on pages 47 to 49.

Health and safety

The development and operation of large-scale, complex operations such as the Tonkolili project is inherently risky. Safety regulations in Sierra Leone are developing and adopting global best practice standards will be challenging.

The Group is implementing world class health and safety policies and procedures which exceed local legal standards.

See page 16.

Environment

The Group is subject to environmental regulations. Non-compliance could result in significant impacts to the development and future operation of the Group’s projects. Environmental impacts also have the potential to significantly impact community relations.

AML is committed to sustainable development and has undertaken an extensive Environmental, Social and Health, Impact Assessment of Phase I. AML will strive to develop our operation in line with internationally accepted practices.

See pages 30 to 33.

Political, legal and regulatory

There is potential for the Group’s operations to be affected by instability and changes to legal, regulatory or fiscal frameworks in Sierra Leone. This could include, amongst other things, political unrest, changes to royalty or tax rates and the withdrawal or variation of permits.

The Group works closely with the local communities where it operates in order to maintain its social licence to operate. The Group also maintains a regular, transparent and open engagement with the Government and regulatory agencies of Sierra Leone.

–

Community relations

The development of the Group’s projects could negatively impact communities near its operations due to resettlements or the ongoing development of the Tonkolili Mine and its associated infrastructure.

AML is committed to building strong relationships with national and local governments and organisations. Consultation Committees have been established in seven chiefdoms to manage community needs for Phase I project activities.

See Corporate responsibility plan and update on page 21.

Corporate governance

The Group’s ability to implement its business strategy is dependent on the availability of directors with engineering, mining and financial expertise. Loss or diminution in the services of non‑executive directors could have an adverse effect on the Group’s business, financial condition, results of operations and prospects.

The Group has appointed a number of additional Independent Non-Executive Directors and intends to appoint additional Directors to obtain a majority of Independent Directors.

See Corporate Governance statement on page 44 to 46.

Non-financial risks

Corporate governance

Board of Directors

African Minerals Limited Annual Report 2012

Executive Directors 01 Vasile (Frank) Timis Executive Chairman Frank Timis, aged 49, has been the Executive Chairman of AML since 19 December 2006. He was the founder and was former Executive Chairman, President and Chief Executive Officer of European Goldfields Ltd. He was also founder and former Executive Chairman of both Regal Petroleum Plc, which is listed on AIM, and of Gabriel Resources Ltd., a company listed on the Toronto Stock Exchange. 02 Gibril Bangura Executive Chairman, AML Sierra Leone Gibril Bangura, aged 54, a founding shareholder, has been a Director of the Company since 30 January 1998 and Executive Chairman of the Company’s Sierra Leone subsidiaries since 1996. He is also a Non-Executive Director of African Petroleum Corporation Ltd. 03 Keith Calder Chief Executive Officer Keith Calder, aged 50, joined African Minerals as Chief Executive Officer on 4 July 2012 and was appointed to the Board on 3 August 2012. Most recently, Keith held the position of CEO at Western Coal since December 2009, prior to its $3.4bn takeover by Walter Energy in April 2011. Until December 2009 he was Managing Director of global copper projects at Rio Tinto, having spent 16 years at Rio Tinto in a number of senior executive and operational positions in emerging mining jurisdictions around the world. 04 Miguel Perry Chief Financial Officer Miguel, aged 42, joined the Board on 18 October 2010 and was most recently the Chief Financial Officer and a member of the Board of Directors of Eurasian Natural Resources Corporation plc (“ENRC”), a leading diversified metals and mining group and a member of the FTSE 100. During his time with ENRC, Miguel managed a successful IPO, raising $3bn in December 2007 and obtaining a listing on the main board of the LSE. He has significant experience of capital markets, M&A, Investor Relations and Risk Management. Prior to joining ENRC Miguel was a partner at PricewaterhouseCoopers.

Non‑Executive Directors 05 William Murray John Mr. John, aged 54, joined AML on 19 August 2009 and is the President and Chief Executive Officer of Dundee Resources Limited, a subsidiary of Dundee Corp. Mr. John also holds senior positions at several other publicly traded companies, including Corona Gold Corporation, Dundee Precious Metals Inc., Breakwater Resources Ltd. and Iberian Minerals Corp. Prior to joining the Dundee group of companies, Mr. John graduated from the Camborne School of Mines in 1980, received a Master of Business Administration degree from the University of Toronto in 1992 and had extensive experience working as a mining engineer. 06 Mr. Jurong Cui Mr. Jurong Cui, aged 51, was appointed to the Board in April 2012, following the completion of Shandong Iron and Steel Group’s (“SISG”) investment into the Tonkolili Project. Mr. Cui serves as a Vice President of SISG and is on the boards of various SISG subsidiaries. Mr. Cui brings to the Board of African Minerals 30 years of experience in the steel industry, serving in a variety of leadership roles in steel and iron plants in the Gansu Province. He previously served as Deputy Director General of the Gansu Province Geological Mineral Exploration Development Authority, and as the Deputy Mayor of a city in the Gansu Province. Mr. Cui has a Master of Metallurgical Engineering degree from the Xi’an University of Architecture and Technology. 07 Li Zhimin Mr Li, aged 49, joined AML on 3 August 2012 and is currently Vice President of China Railway Materials Company Limited (“CRM”), a large‑scale state owned enterprise, where is he is in charge of CRM’s International, Mineral and Energy divisions. CRM is one of China’s largest integrated service providers in the railway industry and the largest steel trader in China. CRM is a significant shareholder in AML, owning approximately 12.3% of the Company. Mr Li joined CRM in 2010, from Sinosteel, where he served in a variety of management positions most recently as the Vice President in charge of International Business. Mr Li has a PhD in Management Science and Engineering from the University of Science and Technology.

Independent Non‑Executive Directors 08 Dermot Coughlan Dermot Coughlan, aged 77, joined the Board in May 2010. Mr. Coughlan is currently Chairman and Chief Executive Officer of Derland Holdings Inc, a private investment holding company. Mr. Coughlan, a Chartered Certified Accountant, has held positions with Rio Tinto Zinc Corporation PLC and also with Alcan Industries and Indal Limited. From 1984 to 2000, Mr Coughlan was the founder, Chairman and Chief Executive Officer of Derlan Industries Ltd, a Public Company with multiple operations in Aerospace, Engineering and industrial markets in North America and Europe. Mr. Coughlan has also served as Chair of Audit and Human Resources Committees and also served on the Governance Committees of several public companies. 09 Bernard Prior Bernard Prior, aged 55, was appointed as an Independent Non-Executive Director taking effect from 12 July 2011. Bernard was until recently Chief Executive of Q Resources plc. Between 2006 and 2010 he held senior executive positions within Anglo American PLC as Head of Business Development, and CEO of Anglo Ferrous Brazil Inc. From 2000 to 2006 he was Director and Chief Operating Officer of Adastra Minerals Inc., developing the Kolwezi tailings deposit in the DRC. Prior to that, Mr Prior held several global minerals consulting positions. 10 Nina Shapiro Nina Shapiro was appointed as an Independent Non-Executive Director on 12 April 2011. Ms. Shapiro, aged 64, recently retired from her last role as VP, Finance and Treasury and member of the Management Group, for the International Finance Corporation of the World Bank Group. She has had a distinguished career serving for more than 30 years in the World Bank, well respected for innovative work in the emerging and developed capital markets, as well as in project and structured finance. 11 Roger Liddell Senior Independent Director Roger Liddell, aged 56, joined the Board on 15 November 2010. He recently retired as the Chief Executive of the London Clearing House, the world’s largest clearing house, clearing numerous equity markets, futures and options, commodity markets and over‑the‑counter derivatives. Prior to joining the London Clearing House in 2006, he worked for Goldman Sachs for approximately 13 years, becoming Managing Director and Head of Global Operations. His career prior to joining Goldman Sachs included a number of years at Citibank and with British Coal, where he held various management positions.

Corporate governance

Directors’ report The Directors present their Annual Report on the affairs of African Minerals Limited (the “Company”) and its subsidiaries (together the “Group”), together with the financial statements and auditor’s report, for the year ended 31 December 2012. Principal Activities The principal activities of the Group are the development, design, construction and operation of the world class iron ore deposit at Tonkolili, Sierra Leone, and its related rail and port infrastructure, and the marketing and sale of the iron ore produced from this project. The Company is incorporated in Bermuda, and the Group’s head office is in London. Business Review A review of the business during the year and to date, including comments on future developments, is contained on pages 2 to 39. Results and Dividends The results of the Group are in the financial statements and the Financial Review section of the report. The Directors do not recommend the payment of a dividend and will not make such recommendation until they consider it prudent to do so, having regard to the need to retain sufficient funds to finance the development of the Group’s activities. Subsequent Events Events that have occurred since the 31 December 2012 accounts date are disclosed in Note 26. Financial Instruments The Group’s financial instruments primarily comprise cash, cash equivalents, and other instruments such as trade receivables, available‑for‑sale investments, payables, non‑controlling put option, and borrowings, which arise directly from its operations. Note 25 to the accounts gives details of the Group’s risks and policies regarding financial instruments. Purchase of Own Shares The Group has not purchased or sold any shares in the Company during the year. Directors and Directors’ Interests The Directors in office during 2012 and up to the date of this report, and (for those in office at 31 December 2012) their beneficial interests in the ordinary share capital of the Company, are shown below: Date of the report and 31 December 2012 No. of shares

(Vasile) Frank Timis Keith Calder (appointed in August 2012) Miguel Perry Gibril Bangura Dermot Coughlan Roger Liddell Nina Shapiro Bernard Pryor Murray John Li Zhimin (appointed in August 2012) Cui Jurong (appointed in April 2012) Liu Guoping (resigned in July 2012) Alan Watling (resigned in May 2012) *

31 December 2011 No. of shares

42,296,960 40,810,002 – – 15,176 * 15,176* 7,792,624 7,792,624 50,000 115,000 37,140 84,560 30,268 29,561 5,811 174,747 – – – – – – – – –

In addition to these shares, Miguel Perry holds 12,500 warrants which are convertible into an equivalent number of shares at a conversion price of £4.25 per share. These rights arise from his participation as a lender in the debt financing raised by the Company in February 2011.

Directors’ Share Based Remuneration Details of the Directors’ share based remuneration are provided in the Directors’ Remuneration Report. Directors’ Liability Insurance and Indemnity The Group maintains liability insurance for its Directors and officers. The Company’s bye-laws, and the bye-laws or articles of some of its subsidiaries, include an indemnity for their respective Directors and officers. Supplier Payment Policy The Group’s policy is to agree terms of payment with its suppliers for each transaction, and to abide by the terms of payment.

African Minerals Limited Annual Report 2012

Substantial Shareholdings As at 31 December 2012, shareholdings of 3% or more of the issued share capital notified to the Company were: Name

Timis Diamond Corporation* China Railway Materials Commercial Corporation M&G Investment Management BlackRock Investment Management Capital Group Coâ&#x20AC;&#x2122;s Inc Deutsche Bank AG *

Number

% Holding

42,296,960 41,807,428 36,541,401 36,432,946 15,502,380 10,692,583

12.77% 12.62% 11.03% 11.00% 4.68% 3.23%

Frank Timis is a beneficiary of Timis Diamond Corporation .

Auditors Ernst & Young LLP has indicated its willingness to remain in office and a resolution to reappoint them as auditors will be proposed at the 2013 Annual General Meeting. By order of the Board Frank Timis Executive Chairman 26 June 2013

Corporate governance

Corporate governance statement The Company’s shares are listed on AIM (the Alternative Investment Market of the London Stock Exchange), and the Company is subject to and takes all appropriate steps to comply with the AIM Rules. The Board recognises the importance and value for the Company and its shareholders of good corporate governance. The Board has taken action to improve the Company’s credentials in this area during 2012, and aspires to comply with the UK Corporate Governance Code (the “Code”). Board Overview The Board is responsible for establishing the Company’s strategy and goals, and for developing and approving plans to achieve these goals. Authority for the execution of the approved strategies and objectives, and daily running of the business, is delegated to the Executive Directors and senior management team. The Board maintains full and effective control of the Company by regularly monitoring financial and operational progress and risks, and retaining decision making on major issues and high value contracts. Composition of the Board and Board Committees At the date of this report the Company had eleven Directors, consisting of four executive and seven Non-Executive Directors, of whom four are considered by the Board to be independent. In August 2012 the Company appointed Keith Calder as Director and Chief Executive Officer. Alan Watling was a Director during 2012 and resigned on 1 May 2012. In August 2012, Liu Guoping resigned as a Non-Executive Director of the Company, and was replaced by Li Zhimin as the nominated representative of China Railway Materials Commercial Corporation (“CRM”) on the Company’s Board in accordance with CRM’s rights under an April 2010 Subscription Agreement. The Board has reserved certain matters for its direct stewardship and decision making in conjunction with the committees appointed by the Board, and the Board is seeking to add further independent Non-Executive Directors to achieve compliance with the Code. In line with the Code a schedule of Matters Reserved for the Board was adopted in December 2012, which is available on our website. There are a number of formally constituted Committees of the Board including: the Audit Committee, the Remuneration Committee, the Risk and HSE Committee and the Disclosure Committee. Board Balance Page 41 contains further information about each Director. The current Board membership provides a balance of industry and financial expertise which is well suited to the Company’s activities. This will be monitored and adjusted to meet the Company’s needs, particularly as it progresses into full operations. Information and Professional Development Induction and professional development of Directors, and evaluation of the Board’s performance, are currently performed on an informal basis; however as the Company progresses the Board will adopt more formal procedures. All Directors have access to the advice and services of the Company Secretary who is responsible for ensuring that Board procedures and applicable rules and regulations are observed. The Board has a procedure allowing Directors to seek independent professional advice in furtherance of their duties, at the Company’s expense. Formal agendas and reports are provided before each meeting and the Executive Chairman ensures that all Directors are properly briefed on issues to be discussed. Re-election of Directors The Company’s bye-laws require one third of the Directors to retire by rotation at each Annual General Meeting, and they can stand for re‑election at that meeting. Directors appointed by the Board to fill a casual vacancy hold office until the next Annual General Meeting, and they can stand for re-election at that meeting. Board and Committee Meetings The Board held twelve full meetings for regular business during 2012. The Audit Committee held three meetings, the Remuneration Committee held two meetings, the Risk and HSE committee held two meetings, and there were three meetings of committees established to approve specific transactions. Attendance at the Board and Audit, Remuneration and Risk and HSE Committee meetings is shown in the table below:

(Vasile) Frank Timis Keith Calder (appointed in 2012) Miguel Perry Gibril Bangura Dermot Coughlan Roger Liddell Nina Shapiro Bernard Pryor Murray John Li Zhimin (appointed in 2012) Cui Jurong (appointed in 2012) Liu Guoping (resigned in 2012) Alan Watling (resigned in 2012)

Board

Audit Committee

Remuneration Committee

Risk and HSE Committee

10/10 5/6 10/10 8/10 9/10 10/10 9/10 8/10 9/10 4/7 4/7 2/4 3/3

– – – – 3/3 3/3 – – 2/3 – – 1/1 –

– – – – 2/2 2/2 – – 1/2 – – – –

– 1/1 – 1/2 – – 2/2 2/2 – – – – –

African Minerals Limited Annual Report 2012

Audit Committee The Audit Committee consists only of Non-Executive Directors: Roger Liddell (Chair and independent Non-Executive Director); Dermot Coughlan (independent Non-Executive Director); and Murray John (Non-Executive Director). The Chief Financial Officer and other Executive Directors as required, attend the meetings by invitation, as necessary, to facilitate its business. The external auditors are invited to attend meetings on a regular basis. Main responsibilities: The Audit Committee has formal terms of reference, which include: ■■ ■■ ■■ ■■ ■■ ■■ ■■ ■■ ■■

monitoring the integrity of the financial statements of the Company; reviewing significant financial reporting issues and judgements which they contain; reviewing the adequacy and effectiveness of the Company’s internal financial controls and internal control and risk management systems; reviewing the adequacy and security of the Company’s arrangements for its employees and contractors to raise concerns, in confidence, about possible wrongdoing in financial reporting or other matters; monitoring and reviewing the effectiveness of the Company’s internal audit function; considering and making recommendations in relation to the appointment, re-appointment and removal of the Company’s external auditor; assessing the independence of the external auditor, taking account of any non-audit services; reviewing and approving the annual audit plan; reviewing the findings of the annual audit with the external auditor.

Activities undertaken during 2012: The Audit Committee met three times in 2012. It reviewed the financial statements and auditors report for 2011 and half year results for 2012, and approved the half year and full year audit scope for 2012 (the latter being approved in January 2013), and further development of anti-bribery procedures. The Committee reviewed the independence of the external auditor during the year, and no concerns were identified. There were fees of £45,000 paid to the external auditor for non‑audit work in 2012. The non‑audit work was not prohibited by regulatory or other professional requirements. Remuneration Committee The Remuneration Committee consists only of Non-Executive Directors: Dermot Coughlan (Chair and independent Non-Executive Director); Roger Liddell (independent Non-Executive Director); and Murray John (Non-Executive Director). The Committee has formal terms of reference. It is responsible for determining the remuneration and other benefits, including bonuses and share based payments, of the Executive Directors, and for reviewing and making recommendations on the Company’s framework of executive remuneration. Further details about the Committee and its operation are set out in the Directors’ remuneration report on pages 47 to 49. Risk and Health Safety and Environment (HSE) Committee The Risk and HSE Committee was formed, and its terms of reference adopted, in December 2011. Its members are Bernard Pryor (Chair, independent Non-Executive Director), Nina Shapiro (independent Non-Executive Director), Keith Calder (Chief Executive Officer) and Gibril Bangura (Executive Director). Two meetings were held in 2012. The Committee has formal terms of reference and its responsibilities include: implementing procedures to assess and monitor the Group’s approach to: strategic risks, including political, market, reputational and competition issues; operational risks, including health and safety and environmental issues; compliance risks, including local and international laws and regulations; financial risks, to the extent these do not fall within the scope of the Audit Committee; ■■ advising on the Group’s approach to identifying and assessing key business risks, allocating ownership of the risks to senior management and promoting mitigation actions; ■■ monitoring the implementation by executive management of action plans to manage the identified key risks; and ■■ reviewing the adequacy and effectiveness of the Company’s internal control and risk management systems. ■■

■■ ■■ ■■ ■■

The Company manages health and safety requirements through its health and safety policy and procedures which include regular and timely reporting to executive management of events, risks and risk management strategies. Disclosure Committee The Disclosure Committee was formed in March 2012 and consists of three Executive Directors and two independent Non-Executive Directors. Its remit is to ensure compliance with applicable disclosure requirements (including under the AIM Rules) in relation to any change in the Company’s financial condition, its sphere of activity and the performance of its business which, if made public, would be likely to lead to a substantial movement in the price of the Company’s shares. Relations with Shareholders The Annual Report and Accounts contain information on the activities of the Company for the preceding year. It is sent to each shareholder on the share register, and published on the Company’s website. The Company uses its website to provide information to shareholders and other interested parties, and in accordance with regulatory requirements issues news releases through the London Stock Exchange Regulatory News Service. The Executive Chairman and/or Chief Executive Officer and/or Chief Financial Officer hold regular meetings with institutional investors to keep them informed of developments and to respond to any questions. Shareholders have the opportunity to raise questions at the Annual General Meeting.

Corporate governance

Corporate governance statement continued Major Shareholder Agreements China Railway Materials Commercial Corporation (“CRM”), as a condition of its subscription for shares in 2010, had the right to acquire shares in the Company to maintain its shareholding in the Company at 12.5%, and to subscribe for any new issue shares proportionately to its shareholding. It also has the right to nominate one person to be appointed as a Director of the Company. It was restricted from holding shares and options together being more than 12.5% of the Company’s issued capital without the Board’s consent, with some limited exceptions to this restriction. In December 2012, the Company agreed to a request from CRM to raise its restriction on share ownership from 12.5% to 15.0%. The Company has maintained the limit on CRM’s voting shares at 12.5%, with any additional shares purchased by CRM in the market to be voted at shareholder meetings by an independent Non-Executive Director of the Company. Shandong Iron and Steel Group Co. Ltd, as a condition of its subscription for a 25% equity investment in the Company’s Tonkolili project subsidiaries completed on 30 March 2012, is restricted from holding shares and options together being more than 12.49% of the Company’s issued capital. It also has the right to nominate one person to be appointed as a Director of the Company. Statement of Directors’ Responsibilities Bermudan Company law requires the Directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Group and the profit or loss for that year. The Directors are required to prepare the financial statements of the Group on the going concern basis unless it is inappropriate to presume the Group will continue in business. The Directors confirm that suitable accounting policies have been used and applied consistently. They also confirm that reasonable and prudent judgements and estimates have been made in preparing the financial statements for the year ended 31 December 2012 and that applicable accounting standards have been followed. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group and for ensuring that the financial statements comply with International Financial Reporting Standards. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. By order of the Board Francis O’Neill Company Secretary 26 June 2013

African Minerals Limited Annual Report 2012

Directors’ remuneration report Introduction This report has been approved by the Board and the Remuneration Committee. The Company is committed to compliance with remuneration best practice, including the guidance under the UK Corporate Governance Code. This report exceeds the Directors’ remuneration disclosure requirements that apply to the Company under AIM Rule 19, in that it also substantially complies with the disclosure requirements of Schedule 5 to the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008. Remuneration Committee The Remuneration Committee comprises Dermot Coughlan (Chair and independent Non-Executive Director), Roger Liddell (independent Non‑Executive Director), and Murray John (Non-Executive Director). Its responsibilities, as set out in its terms of reference, include determining and reviewing compensation arrangements for all executive Directors, and such other senior managers as it is designated to consider. The Committee met two times in 2012. During 2012 the Committee approved the remuneration package for Keith Calder as Chief Executive Officer, and changed the remuneration and incentive arrangements for Miguel Perry, Chief Financial Officer, and Gibril Bangura, Executive Director. Remuneration Policy for Directors The Group’s remuneration policy for Executive Directors is to: pay a competitive salary that attracts and retains high quality management, having regard to their experience and the nature and complexity of their work; ■■ link individual remuneration packages to the Group’s long term performance using share based awards and bonuses; and ■■ provide appropriate employment related benefits, including housing allowances for Directors working permanently away from their countries of normal residence. ■■

There are four main elements of the remuneration package for Executive Directors and senior management: ■■ ■■ ■■ ■■

basic annual salary; performance-related bonuses; share based awards; and benefits.

Remuneration Policy for Directors In the first quarter of 2013 the Remuneration Committee reviewed and approved a new pay for performance compensation structure for the Company. For the Executive Directors and the Senior Management this includes a short term annual cash bonus award of 80% – 100% of salary for the achievement of all Company and personal objectives approved by the Remuneration Committee. In addition a long term share based incentive plan provides annual awards that are aligned to business performance, with a vesting period spread over three years. The Non-Executive Directors receive fees for their services, which are agreed by the Board as a whole, in accordance with the bye-laws and on recommendation of the Executive Directors. The Non-Executive Directors do not participate in any of the Group’s benefits or incentive schemes, apart from Dermot Coughlan and Murray John who hold share options issued in June 2010. No Director plays a part in any decision about his/her own remuneration. Directors’ Contracts The Group’s policy is for Executive Directors to have service contracts which can be terminated by the Company on no more than twelve months’ notice. Li Zhimin is nominated as a Non-Executive Director by China Railway Materials Commercial Corporation, a shareholder in the Company, and is appointed as a Director in accordance with and subject to the subscription agreement. Cui Jurong is nominated as a Non-Executive Director by Shandong Iron and Steel Group Co. Ltd, which holds a 25% equity investment in the Company’s Tonkolili project subsidiaries, and is appointed as a Director in accordance with and subject to the subscription agreement. The other Non-Executive Directors have letters of appointment, which can be terminated by the Director giving at least one month’s notice, and by the Company in accordance with the bye-laws.

Corporate governance

Directors’ remuneration report continued Directors’ Remuneration Remuneration (cash, bonus and benefits) for the Directors during the year was as follows: Basic salary/fees

US$ 000’s

Executive Directors (Vasile) Frank Timis Keith Calder* Miguel Perry Gibril Bangura Alan Watling** Non-Executive Directors Dermot Coughlan Roger Liddell Bernard Pryor Nina Shapiro Murray John Liu Guoping** Li Zhimin* Cui Jurong* Former Directors Mark Ashurst

Benefits

Total 2012

Total 2011

792 594 871 723 898

– – – – –

72 32 5 89 2

864 626 876 812 900

922 – 1,610 604 1,219

158 253 238 159 40 – – –

– – – – – – – –

158 253 238 159 40 – – –

414 148 78 182 47 – – –

–

1,500

–

1,500

–

4,726

1,500

200

6,426

5,246

2012 bonus pool Total

Bonus***

* Appointed during the year ** Resigned during the year *** This bonus is an accrual only and has not been individually approved or paid. The Remuneration Committee has not determined the allocation of this bonus.

The Company did not make any pension contributions for any of the Directors. Share options The following table shows the Directors’ interests in share options, changes to those interests during the year and the charge to the Company’s 2012 statement of comprehensive income in respect of those share options:

Grant date

V Timis 19.02.09 K Calder 03.07.12 A Watling 19.02.09 M Perry 15.11.10 G Bangura 22.11.04 D Coughlan 22.06.10 M John 22.06.10 Former Directors C Duffy 19.02.09 M Ashurst 19.02.09

No. of options

5,000,000 1,500,000 1,345,455 *2,250,000 1,000,000 500,000 500,000 400,000 400,000

Option Outstanding Total price/ and vested at outstanding at share 31 Dec 2011 31 Dec 2011

Exercised during year

Lapsed during year

Outstanding Vested and vested at during year 31 Dec 2012

50p 3,333,333 5,000,000 – – 1,666,667 5,000,000 313p – – – – – – 50p 896,970 896,970 896,970 – – – 423p 416,666 1,250,000 – – 416,667 833,333 50p 1,000,000 1,000,000 – **1,000,000 – – 349p 166,666 500,000 – – 166,667 333,333 315p 166,666 500,000 – – 166,667 333,333 50p 50p

– 400,000

133,334 133,334 400,000 –

– –

– 400,000

2012 2011 Charge Charge Total to income to income outstanding at statement statement 31 Dec 2012 US$ 000’s US$ 000’s

5,000,000 1,500,000 – *1,250,000 – 500,000 500,000

15 697 4 1,405 3,983 369 377

129 – 35 3,101 3,416 847 865

– 400,000

– –

6 31

* In 2011 Miguel Perry waived rights over 1,000,000 options, to be replaced by an award under a long term incentive plan, details of which have not been finalised. ** Since 31 December 2012 the Remuneration Committee has approved an extension to 21 November 2014 of Gibril Bangura’s right to exercise these share options.

Subject to the rules of the Option Plan these options vest in three equal tranches upon the first, second and third anniversaries of the date of grant provided that the option holder remains a Director of the Company. They must be exercised within five years of grant, or if earlier within ninety days of ceasing to be a Director.

African Minerals Limited Annual Report 2012

Performance Share Awards In July 2012, the Remuneration Committee approved an amendment to the performance criteria for vesting of Miguel Perry’s conditional share award. These awards are divided into various tranches, and are conditional on achieving specific targets. The following table shows the Director’s interests in performance share awards, changes to those interests during the year and the charge to the Company’s 2012 statement of comprehensive income in respect of those awards:

Alan Watling Miguel Perry

Vested in prior years

Outstanding at 1 Jan 2011

Vested during year

Lapsed during year

Outstanding at 31 Dec 2012

500,000 –

1,500,000 500,000

– –

1,500,000 –

– 500,000

Charge to income statement US$ 000’s

(9,782) 562

Alan Watling resigned as a Director on 1 May 2012, and his outstanding performance shares therefore lapsed on that date. On behalf of the Board Dermot Coughlan Chairman of the Remuneration Committee 26 June 2013

Financial statements

Independent auditor’s report to the shareholders of African Minerals Limited

We have audited the Group financial statements (the financial statements) of African Minerals Limited for the year ended 31 December 2012 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Cash Flow, the Consolidated Statement of Changes in Equity and the related notes 1 to 29. The financial reporting framework that has been applied in their preparation is International Financial Reporting Standards (IFRSs) as adopted by the European Union. This report is made solely to the Company’s members, as a body, in accordance with our engagement letter dated 26 November 2010. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 46, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with Bermudian Law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: ■■ ■■

give a true and fair view of the state of the Group’s affairs as at 31 December 2012 and of its profit for the year then ended; and have been properly prepared in accordance with IFRSs as adopted by the European Union.

Emphasis of matter In forming our opinion, which is not qualified, we have also considered the adequacy of the disclosures made in note 2 to the financial statements concerning the Group’s ability to continue as a going concern. The conditions described in note 2 indicate the existence of a material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern. Ernst & Young LLP London 26 June 2013

African Minerals Limited Annual Report 2012

Consolidated statement of comprehensive income For the year ended 31 December 2012

Notes

Net operating expenses Continuing operations Non-recurring items Operating loss Continuing operations Interest income Imputed cost of deferred income Gain on non-controlling interest put option Loss on derecognition of borrowings

3 3

22 22 19

2012 US$ 000’s

(27,886) (197,720)

(35,575) (5,894)

(225,606)

(41,469)

2,198 (39,497) 288,355 (21,133)

1,061 – – –

229,923 Profit/(loss) before taxation for the year Taxation Profit/(loss) after taxation for the year Attributable to: Equity holders of the parent Non-controlling interest Other comprehensive income/(expense) Fair value movement on available for sale investments Deferred taxation on available for sale investments

10 14

Other comprehensive expense for the year Total comprehensive income/(expense) for the year Attributable to: Equity holders of the parent Non-controlling interest Basic earnings/(loss) per share – cents Diluted earnings/(loss) per share – cents

6 6

2011 US$ 000’s

1,061

4,317 27,834

(40,408) 27,098

32,151

(13,310)

36,008 (3,857)

(13,310) –

32,151

(13,310)

(26,504) 771

(8,100) 1,261

(25,733)

(6,839)

6,418

(20,149)

10,275 (3,857)

(20,149) –

6,418

(20,149)

10.90 10.09

(4.06) (4.06)

Financial statements

Consolidated statement of financial position At 31 December 2012

Non-current assets Exploration and evaluation assets Intangible assets Assets under construction and property, plant and equipment Available for sale investments Inventories Deferred tax assets Deposits

Notes

31 December 2012 US$ 000’s

31 December 2011 US$ 000’s

7 8 9 10 11 14 15

7,559 2,788 2,390,785 41,492 27,263 65,196 3,000

7,475 2,048 1,506,388 67,996 – 36,591 3,910

2,538,083

1,624,408

56,825 90,414 601,925

51,035 16,456 16,465

Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents

11 12 13

Total current assets Total assets Equity Share capital Share premium account Equity reserves Fair value reserve Accumulated deficit

16 16 16 16

Equity attributable to owners of the parent Non-controlling interest

749,164

83,956

3,287,247

1,708,364

3,312 3,290 902,307 1,033,065 137,972 83,877 (11,180) 14,553 (116,666) (152,675) 915,745 135,769

982,110 –

1,051,514

982,110

327,651 506,356 1,465

144,208 – 1,898

835,472

146,106

253,553 344,416 3,022 30,881 706,093 62,296

416,609 157,034 6,505 – – –

Total current liabilities

1,400,261

580,148

Total liabilities

2,235,733

726,254

Total equity and liabilities

3,287,247

1,708,364

Total equity Non-current liabilities Interest-bearing loans and borrowings Deferred income Provisions

19 22 23

Total non-current liabilities Current liabilities Interest-bearing loans and borrowings Trade and other payables Tax payable Deferred income Non-controlling interest put option Provisions

19 20 21 22 22 23

The financial statements were approved by the Board on 26 June 2013 and were signed on its behalf by: KEITH CALDER Director and Chief Executive Officer

MIGUEL PERRY Director and Chief Financial Officer

African Minerals Limited Annual Report 2012

Consolidated statement of cash flow For the year ended 31 December 2012

Notes

Cash flows from operating activities Profit/(loss) before taxation from operations Adjustments to add/(deduct) non-cash items: Depreciation of property, plant and equipment Amortisation of intangible assets Derecognition of assets under construction Fuel misappropriation Loss on disposal of property, plant and equipment Unrealised foreign exchange loss Increase in provisions Imputed cost of deferred income Fair value gain on financial instruments Share-based payments Interest income Operating loss before working capital changes Proceeds from SISG offtake agreement Increase in other current inventories Increase in prepayments and other receivables (Decrease)/increase in other non-current provisions Increase in trade, taxation and other payables

4,317 9 8 9 3 3 23 22 22 18

22 11 12 23

Net cash flow from operating activities Cash flows from investing activities Interest received Payments to fund assets under construction and property, plant and equipment Proceeds received from ore sales Payments to acquire software

2012 US$ 000’s

2011 US$ 000’s

(40,408)

808 588 41,490 18,000 – 315 62,296 39,497 (288,355) 5,077 (2,198)

714 135 – – 66 309 – – – 25,683 (1,061)

(118,165)

(14,562)

505,552 (4,419) (25,864) (433) 51,730

– (1,071) (4,505) 1,162 3,525

408,401

(15,451)

247

222

(1,029,679) 242,265 (1,328)

(935,044) 18,400 (2,183)

(788,495)

(918,605)

– 3,610 994,448 400,000 83,105 (446,460) (68,834)

46,345 2,348 – – 589,181 – (59,408)

Net cash inflow from financing activities

965,869

578,466

Net increase/(decrease) in cash and cash equivalents Net foreign exchange difference Cash and cash equivalents at beginning of period

585,775 (315) 16,465

(355,590) (309) 372,364

Cash and cash equivalents at end of period

601,925

16,465

Net cash outflow from investing activities Cash flows from financing activities Proceeds of ordinary share issue Proceeds of exercise of options and warrants Proceeds from SISG investment Proceeds from convertible bond issue Proceeds from borrowings Repayment of borrowings Interest paid and costs of financing

16 19

Financial statements

Consolidated statement of changes in equity For the year ended 31 December 2012

Attributable to equity holders of the parent

As at 1 January 2011 Loss for the year Fair value movements on available for sale investments Deferred taxation on available for sale investments Total comprehensive income Allotments during the year Transaction cost – equity issues Share-based payments Reserves transfer – options Reserves transfer – warrants Initial recognition of noncontrolling interest

Share capital US$ 000’s

Share premium account US$ 000’s

Equity reserves US$ 000’s

Fair value reserves US$ 000’s

3,176 –

966,931 –

20,269 –

21,392 –

–

(8,100)

–

1,261

– 114 – – – –

– 65,686 – – 378 70

– 38,373 – 25,683 (378) (70)

(6,839) – – – – –

Accumulated deficit US$ 000’s

Total attributable to owners Non-controlling of the parent interest US$ 000’s US$ 000’s

Total US$ 000’s

872,403 (13,310)

– –

872,403 (13,310)

–

(8,100)

–

(8,100)

–

1,261

–

1,261

(139,365) (13,310)

(13,310) – – – – –

(20,149) 104,173 – 25,683 – –

– – – – –

(20,149) 104,173 – 25,683 – –

–

As at 31 December 2011

3,290

1,033,065

83,877

14,553

(152,675)

982,110

–

982,110

As at 1 January 2012 Profit/(loss) for the year Fair value movements on available for sale investments Deferred taxation on available for sale investments

3,290 –

1,033,065 –

83,877 –

14,553 –

(152,675) 36,008

982,110 36,008

–

Total comprehensive income Allotments during the year Transaction cost – equity issues Share-based payments Reserves transfer – options Reserves transfer – warrants Initial recognition of non‑controlling interest As at 31 December 2012

– 22 – – – –

– 3,588 (2,538) – 6,854 965

–

(139,627)

3,312

902,307

– 63,097 – (1,183) (6,854) (965) – 137,972

(26,504) 771 (25,733) – – – – – – (11,180)

–

– –

(26,504) 771

– (3,857) – –

982,110 32,151 (26,504) 771

36,008 – – – – –

10,275 66,707 (2,538) (1,183) – –

–

(139,627)

139,627

–

915,744

135,770

1,051,514

(116,667)

(3,857) – – – – –

6,418 66,707 (2,538) (1,183) – –

African Minerals Limited Annual Report 2012

Notes to the financial statements For the year ended 31 December 2012

1. Accounting policies 1.1 Corporate information The consolidated financial statements of African Minerals Limited for the year ended 31 December 2012 were authorised for issue in accordance with a resolution of the Directors on 26 June 2013. The registered office of African Minerals Limited, the ultimate parent of the Group, is Victoria Place, 31 Victoria Street, Hamilton HM10, Bermuda. The principal activities of the Group are the production and sale of iron ore and development of mining and infrastructure assets in Sierra Leone. 1.2 Basis of preparation The consolidated financial statements of African Minerals Limited and all its subsidiaries (the “Group”) have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and adopted by the European Union (EU) as they apply to the financial statements of the Group for the year ended 31 December 2012. The consolidated financial statements have been prepared on a historical cost basis, except for certain financial instruments that have been measured at fair value. The consolidated financial statements are presented in US dollars and all values are rounded to the nearest thousand except when otherwise indicated. 1.3 Basis of consolidation The consolidated financial statements comprise the financial statements of the Group as at 31 December 2012. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date when such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. All intra-group balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends are eliminated in full. Total comprehensive income within a subsidiary is attributed to the non-controlling interest even if it results in a deficit balance. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. 1.4 Significant accounting judgements, estimates and assumptions The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations of future events, that are believed to be reasonable under the circumstances. However, actual outcomes would differ from these estimates if different assumptions were used and different conditions existed. In particular, the Group has identified the following areas where significant judgements, estimates and assumptions are required, and where actual results were to differ, may materially affect the financial position or financial results reported in future periods. Further information on each of these and how they impact the various accounting policies is located in the relevant notes to the consolidated financial statements. 1.4.1 Key judgements In the process of applying the Group’s accounting policies, management has made the following judgements, which have the most significant effect on the amounts recognised in the consolidated financial statements: Going concern Management has prepared these consolidated financial statements on the assumption that the Group is able to continue as a going concern. Refer to Note 2. Commissioning of assets and production start date Management assesses the stage of each asset under construction to determine when it moves into the production stage, this being when the asset is substantially complete and ready for its intended use. Management considers various relevant criteria to assess when the production phase is considered to commence. Some of the criteria used to identify the production start date will include, but are not limited to: ■■ ■■ ■■ ■■

level of capital expenditure incurred compared to the original construction cost estimates; completion of a reasonable period of testing of the asset; ability to produce saleable iron ore; and ability to sustain ongoing production.

When a mine development/construction project moves into the production stage, the capitalisation of certain mine development/construction costs ceases and costs are either regarded as forming part of the cost of inventory or expensed, except for costs that qualify for capitalisation relating to asset additions or improvements, mine development or mineable reserve development. It is also at this point that depreciation/ amortisation commences. Please refer to Note 9 for further details.

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

1. Accounting policies continued By the end of 2012, the Group’s iron ore infrastructure and mining assets in Sierra Leone were still undergoing commissioning. The mine was processing iron ore, and sales have occurred during this commissioning period. The ore stockpile was held as inventory at the end of the year. Commissioning costs are capitalised into assets under construction after deducting the net proceeds from selling iron ore and will be depreciated when the infrastructure and mine assets are fully operational. Trade receivables have been recognised for amounts receivable at the end of the year for iron ore sales. Mine rehabilitation provision The Group is required to decommission and rehabilitate the mine site at the end of its producing life to a condition acceptable to the Environment Protection Agency (EPA) of the Government of Sierra Leone (GoSL). This is consistent with the environmental policies outlined in the 2009 Mining Licence agreement with the GoSL. As at 31 December 2012 the Group has not provided for rehabilitation as no legal or constructive obligation exists at year end. Management is currently engaging environmental experts to assess the estimated valuation of the mine rehabilitation provision and, in accordance with the mining licence, will recognise a rehabilitation provision when Phase 2 commences. The Group works and closely cooperates with the GoSL regarding all environmental matters, which is evidenced by the Group’s annual renewal of Environmental Impact Assessment from the EPA in August 2012. Put option over non-controlling interest The Group has entered into a put option over a non-controlling interest (please refer to Note 22 for further details). Under IFRS, equity is defined as where the Group has the unconditional right to avoid cash payments, regardless of probability of the condition. Management assessed the terms of the put option and determined that IAS 32 takes precedence over IAS 27: on this basis, the shares held by the non-controlling party are not recognised as a non-controlling interest within equity. The put option is initially measured at the present value of the redemption amount and subsequently accounted for as a financial liability under IAS 39. As a result, the put option is subsequently re-measured at each reporting period. This valuation requires the Group to estimate the fair value of the amount that would be payable to Shandong Iron and Steel Group (“SISG”) in the unlikely event that Frank Timis voluntarily resigns from the Board, and SISG exercises its option to sell back its interest, and therefore, is subject to uncertainty. (Refer to Note 1.6 for further details). Deferred income The Group has entered into a discounted offtake agreement (please refer to Note 22 for further details). The amount initially recognised represents the present value of the iron ore offtake discount that SISG will receive under the agreement: the estimate required determination of the most appropriate inputs including volume, iron ore prices and discount rate. The assumptions and models used for estimating the present value of the offtake discount are disclosed in Note 22. The nominal amount (i.e. the undiscounted estimate) is treated as a revenue deduction; the difference between the present value and the nominal amount of the consideration is treated as interest expense. Fuel misappropriation As disclosed in Note 3, management’s best estimate for misappropriated fuel of $18m has been recorded in the statement of comprehensive income. This estimate has been based on extrapolation procedures and has therefore involved significant judgement. Management has taken a number of measures to mitigate the risk of further such losses occurring, such as employing a specialised in-house fuel consumption control team. The investigation into the misappropriation is ongoing. Management anticipate that the offenders will be identified and are also in contact with suppliers in relation to potential compensation for the misappropriation. Recovery of deferred income tax assets Judgement is also required in determining whether deferred income tax assets are recognised in the statement of financial position. Deferred income tax assets, including those arising from un-utilised tax losses, require management to assess the likelihood that the Group will generate sufficient taxable earnings in future periods, in order to utilise recognised deferred income tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. These estimates of future taxable income are based on forecast cash flows from operations (which are impacted by production and sales volumes, commodity prices, reserves, operating costs, closure and rehabilitation costs, capital expenditure, dividends and other capital management transactions) and judgement about the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Group to realise the net deferred income tax assets recorded at the reporting date could be impacted. In addition, future changes in tax laws in the jurisdictions in which the Group operates could limit the ability of the Group to obtain tax deductions in future periods. (Please refer to Note 14 for further details). Accruals Management have used judgement and prudence when estimating certain accruals for contractor claims. The accruals recognised are based on work performed but are before settlement. As Phase 1 approaches completion through Q2 2013, these claims will be settled, resulting in a likely revision to the accruals balance. Contingencies By their nature, contingencies will only be resolved when one or more uncertain future events occur or fail to occur. The assessment of the existence, and potential quantum, of contingencies inherently involves the exercise of significant judgement and the use of estimates regarding the outcome of future events. Please refer to Note 24 for further details.

African Minerals Limited Annual Report 2012

1. Accounting policies continued Impairment of assets The Group assesses each asset or cash generating unit (CGU) every reporting period to determine whether any indication of impairment exists. Where an indicator of impairment exists, a formal estimate of the recoverable amount is made, which is considered to be the higher of the fair value less costs to sell and value in use. These assessments require the use of estimates and assumptions such as long-term commodity prices (considering current and historical prices, price trends and related factors), discount rates, operating costs, future capital requirements, closure and rehabilitation costs, exploration potential, reserves (see “Ore resource estimates” below) and operating performance (which includes production and sales volumes). These estimates and assumptions are subject to risk and uncertainty. Therefore, there is a possibility that changes in circumstances will impact these projections, which may impact the recoverable amount of assets and/or CGUs. (Please refer to Note 9 for further details). 1.4.2 Key estimates and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur. Ore resource estimates Ore resource estimates relate to the amount of ore that can be economically and legally extracted from the Group’s mining assets. The Group estimates its ore resource based on information compiled by appropriately qualified persons relating to the geological data on the size, depth and shape of the ore body, and requires complex geological judgements to interpret the data. The estimation of recoverable resource is based upon factors such as estimates of foreign exchange rates, commodity prices, future capital requirements, and production costs along with geological assumptions and judgements made in estimating the size and grade of the ore body. Changes in the resource estimates may impact upon the carrying value of exploration and evaluation assets, mine assets, property, plant and equipment, recognition of deferred tax assets, and depreciation and amortisation charges. Exploration and evaluation expenditure The application of the Group’s accounting policy for exploration and evaluation expenditure requires judgement in determining whether future economic benefits will arise either from future exploitation or sale or where activities have not reached a stage which permits a reasonable assessment of the existence of reserves. The determination of a Joint Ore Reserves Committee (JORC) resource is itself an estimation process that requires varying degrees of estimation depending on sub-classification and these estimates directly impact the point of deferral of exploration and evaluation expenditure. The deferral policy requires management to make certain estimates and assumptions about future events or circumstances, in particular whether an economically viable extraction operation can be established. Estimates and assumptions made may change if new information becomes available. If, after expenditure is capitalised, information becomes available suggesting that the recovery of expenditure is unlikely, the amount capitalised is written off in the consolidated statement of comprehensive income in the period when the new information becomes available. Exploration and evaluation assets are carried at historical cost less any impairment losses recognised. (Please refer to Note 7 for further details). Share-based payments The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 18. 1.5 New and amended standards and standards issued but not effective New and amended standards and interpretations The accounting policies adopted are consistent with those of the previous financial year. The following new and amended IFRS and interpretations effective as of 1 January 2012 have been adopted, but did not have a financial impact on the Group: IAS 12 Income Taxes (Amendment) – Deferred Taxes: Recovery of Underlying Assets IFRS 1 First-Time Adoption of International Financial Reporting Standards (Amendment) – Severe Hyperinflation and Removal of Fixed Dates for First-Time Adopters ■■ IFRS 7 Financial Instruments: Disclosures (Amendments) ■■ IFRS 7 Financial Instruments: Disclosures – Enhanced Derecognition Disclosure Requirements ■■ ■■

Standards issued but not yet effective Standards issued but not yet effective up to the date of issuance of the Group’s financial statements are listed below. The Group intends to adopt these standards when they become effective, however these are not expected to have any significant impact on disclosures, financial position or performance when applied at a future date, except for IFRIC 20 as below. ■■ ■■ ■■ ■■ ■■ ■■ ■■

IAS 1 Presentation of Items of Other Comprehensive Income – Amendments to IAS 1 (effective 1/7/2012) IAS 19 Employee Benefits (Revised) (effective 1/1/2013) IAS 28 Investments in Associates and Joint Ventures (as revised in 2011) (effective 1/1/2014) IAS 32 Offsetting Financial Assets and Financial Liabilities – Amendments to IAS 32 (effective 1/1/2014) IFRS 1 Government Loans – Amendments to IFRS 1 (effective 1/3/2012) IFRS 7 Disclosures – Offsetting Financial Assets and Financial Liabilities – Amendments to IFRS 7 (effective 1/1/2013) IFRS 9 Financial Instruments: Classification and Measurement (effective 1/1/2015)

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

1. Accounting policies continued IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities (effective 1/1/2014) ■■ IFRS 13 Fair Value Measurement (effective 1/1/2013) ■■ IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (effective 1/1/2014) ■■

The interpretation only applies to stripping costs incurred during the production phase of a surface mine (production stripping costs). Costs incurred in undertaking stripping activities are considered to create two possible benefits – the production of inventory in the current period and/or improved access to ore to be mined in a future period. Production stripping costs are to be capitalised as part of an asset, if an entity can demonstrate that it is probable future economic benefits will be realised, the costs can be reliably measured and the entity can identify the component of an ore body for which access has been improved. This asset is to be called the “stripping activity asset”. Where costs cannot be specifically allocated between the inventory produced during the period and the stripping activity asset, the interpretation requires an entity to use an allocation basis that is based on a relevant production measure. Annual Improvements May 2012: these improvements are effective for annual periods beginning on or after 1 January 2013, but will not have any significant impact on the Group: ■■ ■■ ■■ ■■ ■■

IFRS 1 First-time Adoption of International Financial Reporting Standards IAS 1 Presentation of Financial Statements IAS 16 Property, Plant and Equipment IAS 32 Financial Instruments, Presentation IAS 34 Interim Financial Reporting

1.6 Summary of significant accounting policies Exploration and evaluation assets Exploration costs are capitalised as exploration and evaluation assets until a decision is made to proceed to development. Related costs are then transferred to assets under construction. Before reclassification, exploration costs are assessed for impairment and any impairment loss recognised in the statement of comprehensive income. Subsequent development costs are capitalised under assets under construction, together with any amounts transferred from exploration and evaluation assets. Software Software is shown at historical cost less accumulated amortisation and impairment losses. The initial cost of an asset comprises its purchase price and any consultancy costs directly attributable to bringing the asset into operation together with any incidental cost of purchase. Software amortisation is charged to the statement of comprehensive income on a 20% straight-line basis. Assets under construction and property, plant and equipment Plant and equipment are shown at cost less accumulated depreciation and impairment losses. The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, any incidental cost of purchase and borrowing costs. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Directly attributable costs include employee benefits, professional fees and costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling iron ore produced while bringing the asset to the condition intended by management. Capitalised borrowing costs include those that are directly attributable to the construction of mining and infrastructure assets. Property, plant and equipment relate to land, buildings, plant, machinery, fixtures and fittings and are shown at historical cost less accumulated depreciation and impairment losses. Assets under construction relate to mining and infrastructure assets and are not depreciated. After production starts, all assets included in “Assets under construction” are transferred to “Property, plant and equipment” or “Mine assets”: this is signified by the formal commissioning of the mine for production. Mining assets will be amortised over the estimated life of the commercial mineral reserves on a unit of production basis. Infrastructure assets and any other assets are depreciated on a straight-line basis over the expected useful lives of the assets concerned. The depreciation rates are as follows: Plant and machinery Fixtures and fittings Buildings Freehold land

20–33% 20–33% 2–5% 0%

Subsequent expenditure is capitalised when it is probable that future economic benefits from the use of the asset will be increased. All other subsequent expenditure is recognised as an expense in the period in which it is incurred. Assets that are replaced and have no future economic benefit are derecognised and expensed through profit or loss. Repairs and maintenance which neither materially add to the value of assets nor appreciably prolong their useful lives are charged against income. Gains/(losses) on the disposal of fixed assets are credited/(charged) to income. The gain or loss is the difference between the net disposal proceeds and the carrying amount of the asset. The asset’s residual values, useful lives and methods of depreciation are reviewed at each reporting period, and adjusted prospectively if appropriate.

African Minerals Limited Annual Report 2012

1. Accounting policies continued Financial instruments: initial recognition and measurement a) Financial assets The Group’s financial assets include available for sale investments, trade and other receivables, and cash and cash equivalents. Available for sale investments Available for sale financial assets include investments in listed equities, that are neither classified as held for trading nor designated at fair value through profit or loss, and are initially measured at fair value. Changes in fair values of investments available for sale are recorded through fair value reserves, whilst dividend income is recorded in the statement of comprehensive income for the period. When the fair value declines, management makes assumptions about the decline in value to determine whether it is an impairment that should be recognised in profit or loss. Management assesses impairment based on significant or prolonged fair value declines in comparison to the original cost, where management considers significant to be a fair value decline of approximately 30% and prolonged to be a sustained decline of greater than one year. During 2012, no impairment losses have been recognised on available for sale assets (2011: $nil). Trade and other receivables Trade and other receivables are stated at amortised cost less provision for doubtful debts. Trade and other receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Cash and cash equivalents Cash and cash equivalents are measured at fair value, based on the relevant exchange rates at balance sheet date. Cash and cash equivalents comprise cash, cash at hand and short-term deposit amounts with original maturity of less than three months. For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Impairment The Group assesses at each reporting date whether there is any objective evidence that a financial asset is impaired. A financial asset is deemed to be impaired if there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (a loss event) and that loss event has an impact on the estimated future cash flows of the financial asset that can be reliably estimated. b) Financial liabilities The Group’s financial liabilities include trade and other payables, a put option over non-controlling interest-bearing loans and borrowings. All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, less directly attributable transaction costs. Trade and other payables Trade and other payables are non-derivative financial liabilities that are not quoted in an active market. Put option over non-controlling interest The put option is initially measured at the present value of the redemption amount and subsequently measured at fair value. The put option has been valued using an enterprise value model, which reflects management’s interpretation of the shareholders’ agreements with SISG. This valuation requires the Group to make assumptions related to the amount that would be payable to SISG in the unlikely event that Frank Timis voluntarily resigns from the Board, and SISG exercises its option to sell back its interest. The fair value calculation has key assumptions that include the utilisation of the quoted African Minerals Limited share price in estimating the market capitalisation of the mine, rail and port and power subsidiaries and an estimated significant influence premium component to reflect SISG’s 25% shareholding in the mine, rail and port and power subsidiaries. As a result there is estimation uncertainty related to subsequent re-measurements. Any movement is recorded through the statement of comprehensive income. Refer to Note 22 for further details. Interest-bearing loans and borrowings Interest-bearing loans and borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost using the effective interest (EIR) method. The fair value implies the rate of return on the debt component of the facility. This rate of return reflects the significant risks attaching to the facility from the lenders’ perspective. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in profit or loss. Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds e.g. arrangement fees. Convertible bonds are calculated in two components: a liability, which is valued at the present value of future interest payments and principal using the effective interest rate; and an equity component, which is the residual amount of funds received. The Group capitalises borrowing costs for all eligible assets. Where funds are borrowed specifically to finance the project, the amount capitalised represents the actual borrowing costs incurred. Early repayment of borrowings, specifically for reasons of refinancing do not qualify for capitalising as borrowing costs under IAS 23 and are recognised as a loss on derecognition in the statement of comprehensive income.

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

1. Accounting policies continued c) Fair value of financial instruments The following methods and assumptions are used to estimate the fair values: ■■ ■■ ■■ ■■ ■■

Cash and short-term deposits, trade and other receivables, trade and other payables and other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments. Fair value of available-for-sale investments is derived from quoted market prices in active markets. Initial fair value of interest-bearing borrowings is normally the transaction price, i.e. the fair value of the consideration received. When part of the consideration is for something other than the loan, the fair value is estimated using a valuation technique, as described in Note 19. Methods and assumptions used to estimate the fair value of the put option over non-controlling interests are disclosed in Note 1.4 and Note 1.6b. For disclosure purpose only, fair value of convertible bonds is based on price quotations at the reporting date. The fair value of unquoted instruments, such as loans and other financial liabilities, is estimated by discounting future cash flows using rates currently available for debt on similar terms, credit risk and remaining maturities.

Deferred income Deferred income relates to the discounted offtake agreement with SISG, which was executed on 30 March 2012, as described in Note 22. The Group measures deferred income at its present value when the time value of money is significant. Therefore the following two components are treated separately: the initial estimate of the nominal amount is released to profit or loss for deliveries that qualify for discounts up to 15%, depending on the benchmark FOB iron ore price in accordance with the offtake agreement; and the difference between the nominal amount and present value is unwound to the statement of comprehensive income as an interest expense. The valuation of the deferred income requires the Group to make estimates about the expected future benchmark FOB iron ore price and future deliveries, which may differ from actual quantities and discounts given in any particular year. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation. Impairment of non-financial assets The carrying amounts of the Group’s assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. An asset’s carrying value is written down to its estimated recoverable amount, being the higher of its fair value less costs to sell and value in use, if that is less than the asset’s carrying amount. Impairment reviews for exploration and evaluation costs are carried out on a project-by-project basis, as each project has the potential to be an economically viable cash generating unit. An impairment review is undertaken when indicators of impairment arise but normally when one of the following conditions apply: ■■ ■■ ■■ ■■ ■■

unexpected geological occurrences render a deposit uneconomic; title to an asset is compromised; variations in commodity prices render the project uneconomic; variations in the currency of operation; and variations to the fiscal and tax legislation in the country of operation.

Operating leases The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date. Operating lease payments are recognised as an operating expense in the income statement on a straight-line basis over the lease term. Finance income Interest income is made up of interest received on cash and cash equivalents. Deferred taxation Deferred income tax is provided using the balance sheet method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences. Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses, can be utilised, except: ■■

In respect of deductible temporary differences associated with investments in subsidiaries, deferred income tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

African Minerals Limited Annual Report 2012

1. Accounting policies continued The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at the end of each reporting period and are recognised to the extent that it has become probable that future taxable profit will be available to allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority. Foreign currencies The consolidated financial statements are presented in US dollars, which is the parent company’s functional currency and the Group’s presentation currency. Transactions in foreign currencies are initially recorded in the functional currency at the respective functional currency rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the spot rate of exchange ruling at the reporting date. All differences are taken to the profit or loss, should specific criteria be met. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Inventories Inventories are valued at the lower of cost of production and net realisable value. Work in progress stockpiles represent ore that has been extracted and is available for further processing. The cost of producing iron ore is accounted for on a weighted average basis and includes labour costs, materials and contractor expenses which are directly attributable to the extraction and processing of ore, and production overheads. Quantities of ore stockpiles are assessed through surveys and assays. Other inventories are made up of fuel and spare parts for maintenance equipment. Share-based payments Options The Group awards equity-settled share-based payments to certain Directors, officers, employees and suppliers. The grant date fair value of the share plans is recognised as an expense over the expected vesting period with a corresponding entry to retained earnings. The estimate of the number of awards likely to vest is reviewed at each statement of financial position date up to the vesting date, at which point the estimate is adjusted to reflect the actual awards issued. No adjustment is made after the vesting date even if the awards are forfeited or not exercised. Fair value of the options is measured by use of the Black-Scholes pricing model. The estimated life of the instrument used in the model is adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. Performance shares The Group issues performance shares on the completion of certain conditions being met. The Company has also entered into agreements to award senior executives with shares in the Company based on certain performance conditions being met. Conditions include the completion of certain feasibility studies and the achievement of various iron ore production targets. The grant-date fair value of performance shares is charged to the statement of comprehensive income over the period between the date of grant and the date the performance conditions are expected to be met. Warrants Non-market based vesting conditions are taken into account in estimating the number of awards likely to vest. Fully paid shares are valued at market value at the date of issue. The grant-date fair value of warrants granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees become unconditionally entitled to the warrants. The amount recognised as an expense is adjusted to reflect the actual number of warrants for which the related service and non-market vesting conditions are met. To calculate the fair value of the warrants, the Black-Scholes pricing model has been used. Segment reporting The Group is managed as a single operating segment which is developing a mine and related infrastructure. In accordance with IFRS 8 Operating Segments, the Group presents its results in a single segment which are disclosed in the statement of comprehensive income for the Group. The Group does not have any significant non-current assets that are located in the country of domicile of the Group. The vast majority of the non‑current assets are located in Sierra Leone.

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

2. Going concern The Group has prepared a detailed cash flow forecast through to December 2014 that supports the conclusion of the Directors that it will be able to operate as a going concern. Whilst the Group has a significant cash balance on hand as at 31 December 2012, a large portion of those funds are earmarked for project expansion from 20 to 35mtpa (Pepel 35) expenditure. On 5 April 2013, the Group extended the pre-existing $80m Standby Facility from Standard Bank and completed a new $250m project-level Working Capital Facility (refer to Note 26). These facilities, of which $75m and $200m have been drawn respectively, together with revenue from sales have been used to fund the completion of Phase 1 development and the ramp up of operations. The Group recently announced its successful ramp up to a run-rate of 20mtpa for a 30 day period. Until such time as the Group has established a proven operating history there can be no certainty that the Group’s budget can be met. In the event the Group is unable to sustain the higher levels of production achieved recently and sales were to fall materially below budgeted levels the Group may have to seek waivers for any breaches in covenants from existing lenders or seek additional funds for working capital purposes. The Directors have concluded that the matter discussed above represents a material uncertainty that may cast significant doubt over the Group’s ability to continue as a going concern. Nevertheless, the Directors after making enquiries and considering the material uncertainty are confident that they have several options by which this can be addressed and therefore the Group will continue to have adequate resources to continue in operation for the foreseeable future. For this reason, the consolidated financial statements of the Group have been prepared on a going concern basis. Accordingly, these consolidated financial statements do not include any adjustments to the carrying amount or classification of assets and liabilities that would result if the Group was unable to continue as a going concern. 3. Net operating expenses Notes

From continuing operations Depreciation of property, plant and equipment Amortisation of intangible assets Loss on disposal of property, plant and equipment Employee costs Foreign exchange differences Travel Advertising and public relations Insurance Security IT and communications Other operating charges From non-recurring items Onerous offtake contracts and contractor claims Transaction costs and other professional fees Fuel misappropriation Derecognition of assets under construction Penalties for SISG warranty breach Total net operating expenses

9 8 5

9 23

2012 US$ 000’s

2011 US$ 000’s

808 588 – 12,187 470 3,347 545 528 2,628 1,835 4,950

714 135 66 23,657 (1,793) 4,796 1,022 1,759 999 2,478 1,742

27,886

35,575

55,000 32,174 18,000 41,490 51,056

– 5,894 – – –

197,720

5,894

225,606

41,469

Onerous offtake contracts and contractor claims include compensation charges for an inability to fulfil several offtake contracts and contractor claims relating to final settlement of construction contracts. Transaction costs and other professional fees include amounts in relation to the Shandong Iron and Steel Group investment. The misappropriated fuel amount of $18,000,000, which is management’s best estimate, recorded in the period was previously capitalised within assets under construction and property, plant and equipment. A certain portion of this amount relates to prior periods but it is impractical to apply retrospective restatement. This estimate has been based on extrapolation of the results of tests performed and has therefore involved significant judgement. Management has taken a number of measures to mitigate the risk of further such losses occurring, such as employing a specialised in-fuel management team. The investigation into the misappropriation is ongoing. Management are continuing with efforts to identify the exact causes and, where possible, to recover losses incurred. Rail refurbishment expenditure of $41,490,000 was derecognised as a result of increased project scoping. Initial refurbishment work of the 45kg/m existing 1930s rail was derecognised when replacement upgrade work to 60kg/m was completed in 2012 to support project capacity of 20Mtpa.

African Minerals Limited Annual Report 2012

3. Net operating expenses continued Net operating expenses include: Auditors’ remuneration: Audit of the annual financial statements Review of interim financial statements Other non-audit services

4. Key management personnel Directors’ emoluments (Forfeitures)/charges for performance share awards Share options Social security

2012 US$ 000’s

2011 US$ 000’s

530 152 43

400 96 –

725

496

2012 US$ 000’s

2011 US$ 000’s

6,426 (9,220) 6,850 321

5,246 10,504 8,403 336

4,377

24,489

Key management personnel comprise the Directors. Detailed disclosures of the Directors’ remuneration and interests in shares and options over the Company’s shares are shown in the report of the Remuneration Committee. No Director has retirement benefits accruing to them as a result of their services to the Group. 5. Employee costs

2012 US$ 000’s

2011 US$ 000’s

Wages and salaries Social security costs

100,466 1,551

39,932 1,682

Less: capitalised salaries and wages

102,017 (94,907)

41,614 (27,369)

7,110 (1,183) 6,260

14,245 25,683 (16,271)

5,077

9,412

12,187

23,657

Notes

Total share based payments Deductions for/(capitalised) share based payments Share based payments expense Employee costs included within net operating expenses

The number of employees at the various mining and exploration operations (excluding the Non-Executive Directors of the Group) at the end of the year was 2,796 (2011: 1,707). $94,907,000 (2011: $27,369,000) wages and salaries costs were capitalised in the year. $6,260,000 (2011: $16,271,000 capitalised) is the net deduction for share based payment credited to assets under construction. This comprises $5,778,000 (2011: $16,540,000) capitalised share based payment expense less a credit of $12,038,000 (2011: $269,000) for project-related share based payment forfeitures and lapses. Refer to Note 18 for details. 6. Earnings per share

2012 US$ 000’s

36,008

Profit/(loss) for the year attributable to owners of the parent

2011 US$ 000’s

(13,310)

Basic profit/(loss) per share is calculated by dividing the profit/(loss) attributable to owners of the parent by the weighted average number of ordinary shares in issue during the year.

Basic weighted average number of common shares in issue Basic profit/(loss) per share – cents

2012 Shares

2011 Shares

330,342,162

327,395,866

10.90

(4.06)

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

6. Earnings per share continued Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. For share options, a calculation is performed to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options. Terms and conditions of share options are disclosed in Notes 16 and 18. 2012 Shares

2011 Shares

Basic weighted average number of common shares in issue Adjustment for convertible bond Adjustment for share options and warrants

330,342,162 – 26,236,975

327,395,866 – 1,887,997

Diluted profit/(loss) per share – cents

356,579,137 10.09

329,283,863 (4.06)

Where there is a basic loss per share, the dilution effect is ignored. 7. Exploration and evaluation assets Exploration expenditure US$ 000’s

Cost At 1 January 2011 Additions Transfer to assets under construction

235,334 – (189,720)

Mineral exploration licences US$ 000’s

920 – (920)

Total US$ 000’s

236,254 – (190,640)

As at 31 December 2011

45,614

–

45,614

At 1 January 2012 Additions Transfer to assets under construction

45,614 84 –

– – –

45,614 84 –

As at 31 December 2012

45,698

–

45,698

Provision for amortisation and impairment At 1 January 2011 Amortisation charge for the year

38,139 –

– –

38,139 –

As at 31 December 2011

38,139

–

38,139

At 1 January 2012 Amortisation charge for the year

38,139 –

– –

38,139 –

As at 31 December 2012

38,139

–

38,139

Net book value At 1 January 2011

197,195

920

198,115

At 31 December 2011

7,475

–

7,475

At 31 December 2012

7,559

–

7,559

Exploration and evaluation assets comprise the cost of purchasing mineral exploration licences and certain exploration and evaluation expenditure on the Group’s mineral licences. The transfer to assets under construction relates to the Group’s flagship project in Tonkolili, Sierra Leone. The remaining balance relates to a gold exploration project in Sierra Leone. The Board of Directors regularly assesses the potential of each mineral licence and writes off any deferred exploration expenditure that it believes to be unrecoverable. The Board of Directors undertook an impairment review of the Group’s exploration and evaluation assets as at 31 December 2012 and the impairment charge for the year was $nil (2011: $nil).

African Minerals Limited Annual Report 2012

8. Intangible assets

Software US$ 000’s

Cost At 1 January 2011 Additions

595 2,183

As at 31 December 2011

2,778

At 1 January 2012 Additions

2,778 1,328

As at 31 December 2012

4,106

Provision for amortisation and impairment At 1 January 2011 Amortisation charge for year

595 135

As at 31 December 2011

730

At 1 January 2012 Amortisation charge for year

730 588

As at 31 December 2012

1,318

Net book value At 1 January 2011

–

At 31 December 2011

2,048

At 31 December 2012

2,788

There was no software impairment during 2012 (2011: $nil). 9. Assets under construction and property, plant and equipment Assets under construction US$ 000’s

Plant and machinery US$ 000’s

Land and buildings US$ 000’s

Fixtures and fittings US$ 000’s

Total US$ 000’s

Cost At 1 January 2011 Additions Disposals Derecognition of assets under construction Transfer from exploration and evaluation assets

253,996 1,035,759 – – 190,640

15,262 11,156 (214) – –

4,584 4,235 – – –

607 274,449 1,569 1,052,719 (224) (438) – – – 190,640

As at 31 December 2011

1,480,395

26,204

8,819

1,952

1,517,370

At 1 January 2012 Additions Disposals Derecognition of assets under construction Transfer from assets under construction Transfer from exploration and evaluation assets

1,480,395 941,506 (7,380) (41,490) (11,408) –

26,204 – – – 7,035 –

8,819 – – – 742 –

1,952 – – – 3,631 –

1,517,370 941,506 (7,380) (41,490) – –

As at 31 December 2012

2,361,623

33,239

9,561

5,583

2,410,006

Depreciation At 1 January 2011 Charge for the year Disposals

– – –

3,898 5,121 (214)

As at 31 December 2011

–

8,805

1,592

585

10,982

At 1 January 2012 Charge for the year Disposals

– – –

8,805 6,286 –

1,592 985 –

585 968 –

10,982 8,239 –

As at 31 December 2012

–

15,091

2,577

1,553

19,221

253,996

11,364

3,768

269,133

Net book value At 1 January 2011

816 776 –

602 207 (224)

5,316 6,104 (438)

At 31 December 2011

1,480,395

17,399

7,227

1,367

1,506,388

At 31 December 2012

2,361,623

18,148

6,984

4,030

2,390,785

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

9. Assets under construction and property, plant and equipment continued Depreciation Less: Capitalised costs

2012 US$ 000’s

2011 US$ 000’s

8,239

6,104

(7,431)

(5,390)

808

Depreciation charge

714

Rail refurbishment expenditure of $41,490,000 was derecognised as a result of increased project scoping. Initial refurbishment work of the 45kg/km existing rail was derecognised when a decision was taken to accelerate the replacement upgrade work to 60kg/km, which was completed in 2012 to support an expansion of the project capacity to 20Mtpa. Subsequently management has derecognised the initial refurbishment for $nil scrap value. Capitalised borrowing costs There were borrowing costs capitalised during the year of $68,834,000 (2011: $86,363,000). Borrowing costs comprise placement fees and interest expense. The effective interest rates of the specific borrowing are used to determine the amount of borrowing costs eligible for capitalisation. These are detailed in Note 19. 10. Available for sale investments 2011 US$ 000’s

Listed securities: Equity securities – Australia Equity securities – UK

Exchange movement US$ 000’s

Total fair value movement US$ 000’s

2012 US$ 000’s

58,349 9,647

(23,013) (3,926)

98 337

(22,915) (3,589)

35,434 6,058

67,996

(26,939)

435

(26,504)

41,492

2010 US$ 000’s

Listed securities: Equity securities – Australia Equity securities – UK

Share price movement US$ 000’s

Exchange movement US$ 000’s

Total fair value movement US$ 000’s

2011 US$ 000’s

62,668 13,428

(4,382) (3,770)

63 (11)

(4,319) (3,781)

58,349 9,647

76,096

(8,152)

(8,100)

67,996

Australia Australian equity securities are shares in Cape Lambert Resources Limited. As at 31 December 2012 the percentage holding of Cape Lambert Resources Limited was 17.71% (2011: 17.73%). United Kingdom Securities in the United Kingdom include Stellar Diamonds plc (formerly West African Diamonds plc) and Obtala Resources plc. As at 31 December 2012 the percentage holding of Stellar Diamonds plc was 0.59% (2011: 0.80%) and the percentage holding of Obtala Resources plc was 8.46% (2011: 8.97%). 11. Inventories Non-current Saprolite stockpiles

2012 US$ 000’s

2011 US$ 000’s

27,263

–

27,263

–

Current Work in progress stockpiles Finished goods stockpiles Other inventories

4,319 45,739 6,767

20,408 28,279 2,348

56,825

51,035

Total

84,088

51,035

Direct Shipping Ore (DSO) is mined together with saprolite which is stockpiled for future processing as part of the Pepel35 expansion project. Saprolite stockpiled at the end of the year will not be processed before the commencement of the Pepel35 expansion project and is therefore classified as non-current.

African Minerals Limited Annual Report 2012

11. Inventories continued There were no inventory write-downs in the year. Other inventories relate to fuel and spare parts used at the mine and rail and port. Movements in inventories of stockpiles have been credited to assets under construction, since the project was in a phase of commissioning as at 31 December 2011 and 31 December 2012. 12. Trade and other receivables Current Trade receivables Prepayments Other receivables

2012 US$ 000’s

2011 US$ 000’s

58,784 21,388 10,242

10,690 3,046 2,720

90,414

16,456

Trade receivables relate to amounts receivable as at 31 December 2012 for the sales of iron ore. Sales have been credited to assets under construction, since the project was in a phase of commissioning as at 31 December 2011 and 31 December 2012. Other receivables includes $2,974,000 due from related parties for rental and related expenses. Refer to Note 27. Prepayments have increased principally due to increased supplier contract down payments. 13. Cash and cash equivalents

2012 US$ 000’s

2011 US$ 000’s

Restricted cash Unrestricted cash

585,853 16,072

– 16,465

Total

601,925

16,465

$560,853,000 of the restricted cash relates to funds received from the Shandong Iron and Steel Group transaction and are earmarked for the funding of the 20Mtpa to 35Mtpa Pepel35 expansion. This restriction is based on management’s agreement with Shandong Iron and Steel Group which requires their approval for drawdown of funds. The remaining $25,000,000 restricted cash relates to funds under dispute with lenders regarding an early repayment fee on the syndicated loan facility at the year end. 14. Taxation Analysis of credit for the year:

2012 US$ 000’s

2011 US$ 000’s

Deferred tax Current year Tax adjustments in respect of prior years Effect of changes in tax rates

30,810 (1,844) (1,132)

15,126 12,896 (924)

Deferred tax credit

27,834

27,098

The effective corporate income tax for the year is lower than the statutory rate of corporation tax in the UK of 24.5% (2011: 26.5%). A reconciliation between the tax credit reflected in the statement of comprehensive income and the expected tax credit based on the statutory rate of corporation tax for the year is shown below: 2012 US$ 000’s

Profit/(loss) on ordinary activities before tax

4,317

2011 US$ 000’s

(40,408)

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

14. Taxation continued The Group’s domestic tax rate is as follows: 2012 US$ 000’s

Profit/(loss) before tax multiplied by the standard rate of UK corporation tax 24.5% (2011: 26.5%) Effects of: Net income not taxable Effect of changes in tax rates Recognition of previously unrecognised deferred tax assets Tax adjustments in respect of prior years Losses not recognised Effect of overseas tax rates Total taxation credit

2011 US$ 000’s

(1,050)

10,708

48,849 (1,132) – (1,845) (11,428) (5,560)

10,150 (924) 14,689 – (7,610) 85

27,834

27,098

Deferred income tax asset With the Tonkolili mine in a commissioning phase and with the Group entering production phase in 2013, the Group has increased confidence of its ability to generate taxable profits against which brought forward tax losses may be utilised. This has resulted in an increase to the recognised net deferred tax asset during 2012. The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows: Property, plant and equipment US$ 000’s

Deferred income tax assets At 1 January 2011 (Charged)/credited to the statement of comprehensive income Amounts previously unrecognised Effects of changes in tax rates As at 31 December 2011

5,123 (5,037) – –

Tax losses US$ 000’s

Other temporary differences US$ 000’s

Total US$ 000’s

76,123 135,009 – –

213 9,416 – –

81,459 139,388 – –

211,132

9,629

220,847

At 1 January 2012 Credited/(charged) to the statement of comprehensive income Amounts previously unrecognised Effects of changes in tax rates

86 104 – –

211,132 184,245 – –

9,629 (3,274) – –

220,847 181,075 – –

As at 31 December 2012

190

395,377

6,355

401,922

Property, plant and equipment US$ 000’s

Investment US$ 000’s

Other US$ 000’s

Total US$ 000’s

Deferred income tax liabilities At 1 January 2011 Charged/(credited) to the statement of comprehensive income (Credited) to other comprehensive income

67,506 115,979 –

As at 31 December 2011

183,485

771

–

184,256

At 1 January 2012 Charged/(credited) to the statement of comprehensive income (Credited) to other comprehensive income

183,485 153,241 –

771 – (771)

– – –

184,256 153,241 (771)

As at 31 December 2012

336,726

–

336,726

2,032 – (1,261)

–

3,689 (3,689) –

73,227 112,290 (1,261)

Net deferred tax asset As at 1 January 2012

36,591

Tax credit recognised in statement of comprehensive income Tax credit recognised in other comprehensive income

27,834 771

Total taxation credit

28,605

As at 31 December 2012

65,196

African Minerals Limited Annual Report 2012

14. Taxation continued Unrecognised tax losses Where the realisation of deferred tax assets is dependent on future taxable profits, losses carried forward are recognised only to the extent that business forecasts predict that such profits will be available to the companies in which the losses arose. The Group has tax losses of approximately $73,700,000 (2011: $28,100,000) upon which deferred tax assets are not recognised. These losses are available indefinitely for offset against future taxable profits. Change in corporation tax rate United Kingdom Provisions to reduce the rate of corporation tax to 23% with effect from 1 April 2013 were substantively enacted on 3 July 2012 following Royal Assent of Finance Act 2012. The government has announced that it intends to reduce further the rate of corporation tax to 21% from 1 April 2014 and to 20% with effect from 1 April 2015. This will reduce the valuation of the Group’s deferred tax asset on UK companies going forward. As legislation for the subsequent reductions was not substantively enacted by 31 December 2012, the impact of the anticipated rate change is not reflected in these consolidated financial statements. Given that the majority of the Group’s deferred tax asset is recognised in Sierra Leone, the effect of this change going forward is not likely to be significant. Sierra Leone The rate of corporation tax is 25% as provided for in the Company’s Mining Lease Agreement (Note 24) and has not changed in the year. 15. Deposits Non-current Deposits

2012 US$ 000’s

2011 US$ 000’s

3,000

3,910

$3,000,000 in 2011 and 2012 relates to deposits paid to the Government of Sierra Leone in relation to the rail and port licences. These amounts are recoverable and will be netted against future Sierra Leone tax payables at a future point in time to be agreed with the Government of Sierra Leone. 16. Share capital and reserves

2012 Number of shares

2012 US$ 000’s

2011 Number of shares

2011 US$ 000’s

Authorised Common shares of US$ 0.01 each

500,000,000

5,000

500,000,000

5,000

Preference shares of US$ 0.001 each

100,000,000

100

100,000,000

100

Issued and fully paid – common shares of US$ 0.01 each At 1 January Allotments during the period

328,945,556 2,280,306

3,290 22

317,575,943 11,369,613

3,176 114

At 31 December

331,225,862

3,312

328,945,556

3,290

Preference shares are authorised but not issued. Share premium At 1 January 2011 Share allotments during the year Reserves transfer – options Reserves transfer – warrants Non-controlling interest At 31 December 2011 Share allotments during the year Reserves transfer – options Reserves transfer – warrants Transaction cost – equity issues Non-controlling interest At 31 December 2012

US$ 000’s

966,931 65,686 378 70 – 1,033,065 3,588 6,854 965 (2,538) (139,627) 902,307

Allotments during the period were as follows: New shares No new common shares were issued other than for share options and warrants in 2012 (2011: 9,348,282 for consideration of $63,452,000, with nil expenses paid). There were modifications to existing performance share awards (Note 18).

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

16. Share capital and reserves continued Share options 2,030,306 (2011: 1,887,997) new common shares were issued on exercise of options for consideration of $1,397,708 (2011: $2,184,336) on the exercise of share options. Warrants 500,000 (2011: 133,334) new common shares were issued for consideration of $2,211,968 (2011: $163,693) on the exercise of share warrants. Share scheme No new common shares were issued in 2012 on the achievement of corporate objectives under the Employee Share Scheme (2011: nil). There were performance share condition modifications in the year (refer to Note 18). Total 2,530,306 (2011: 11,369,613) shares were issued for consideration of $3,609,676 (2011: $65,800,000). In 2011, consideration for the shares issued as a commitment fee of the Secured Financing Facility $17,107,000 is included within the proceeds from borrowings of $417,700,000 as per the statement of cash flows, resulting in net consideration of ordinary shares issued of $48,693,000. Equity reserves The balance held in equity reserves relates to share-based payments, options and warrants. Notes

As at 1 January 2011 Issue of warrants Share-based payments Reserves transfer – options Reserves transfer – warrants

As at 31 December 2011 Convertible bond issue Issue of warrants Share-based payments Reserves transfer – options Reserves transfer – warrants

US$ 000’s

20,269 38,373 25,683 (378) (70) 83,877

19 18, 19 18

As at 31 December 2012

52,885 10,212 (1,183) (6,854) (965) 137,972

Fair value reserves Balances held in fair value reserves relate to fair value movements in the year on available for sale investments. Notes

As at 1 January 2011 Fair value movement on available for sale investments Deferred taxation on available for sale investments 2011 fair value movement

10 14

As at 31 December 2011 Fair value movement on available for sale investments Deferred taxation on available for sale investments 2012 fair value movement As at 31 December 2012 17. Non-controlling equity interest 10% holding of African Railway and Port Services (SL) Limited by the Government of Sierra Leone

US$ 000’s

21,392 (8,100) 1,261 (6,839) 14,553

10 14

(26,504) 771 (25,733) (11,180)

2012 US$ 000’s

135,770

As at 31 December 2012 the Group recognised a non-controlling equity interest for $135,770,000 in the consolidated statement of financial position. This interest relates to the 10% holding that the Government of Sierra Leone has in the subsidiary African Railway and Port Services (SL) Limited (ARPS). This amount is based on the net assets of ARPS as at the balance sheet date.

African Minerals Limited Annual Report 2012

17. Non-controlling equity interest continued At December 2011 ARPS was in net liability position and therefore no non-controlling interest was recognised. Since incorporation the principal operations of ARPS have been the construction of the infrastructure for the project. At this date a significant proportion of expenditure had been capitalised and remaining costs contributed to the closing accumulated deficit. As at 31 March 2012 the intercompany loans with other Group companies were capitalised and transferred to equity as part of the SISG transaction. The Company therefore held a net asset position as a result of the loan capitalisation and the Government’s non-controlling interest was recognised in the Group’s equity. The loss attributable to non-controlling interest for the year is $3,857,000. Following successful ramp up in 2013, management forecasts that the Company’s provision of infrastructure services to the mine will generate future profits (refer to Note 14) to offset brought forward losses. 18. Share based payments Equity-settled transactions The cost of equity-settled transactions is recognised, together with a corresponding increase in equity reserves, over the period in which the performance and/or service conditions are fulfilled. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The statement of comprehensive income expense or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period and is recognised in employee benefits expense (see Notes 4 and 5). No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied. Where the terms of an equity-settled transaction award are modified, the minimum expense recognised is the expense as if the terms had not been modified, if the original terms of the award are met. An additional expense is recognised for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification. Where an equity-settled award is cancelled, no further expense is recognised for that award. This includes any award where non-vesting conditions within the control of either the entity or the employee are not met. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph. $1,183,000 (2011: $25,683,000 expense) is the net share based income for the year. This comprises $13,000,000 (2011: $29,546,000) share based payment expense, which is offset by a forfeiture of $10,416,000 (2011: $3,863,000) and a lapse of $3,767,000 (2011: $nil). A transfer of $6,854,000 (2011: $378,000) was made from the equity reserve to the share premium account during the year. a) Options The Group has issued equity-settled share options under a share option scheme adopted by the Group on 5 November 2004. Movements in share options over US$ 0.01 common shares in the Company were as follows: 2012

Number of options

2011

Weighted average exercise price

Number of options

Weighted average exercise price

As at 1 January Options granted in the year Options exercised in the year Options lapsed in the year Options forfeited in the year

18,640,313 5,433,334 (2,030,306) (1,600,000) (1,703,336)

225.8p 20,274,973 307.1p 6,875,000 83.3p (1,887,997) 123.0p (1,238,327) 422.5p (5,383,336)

203.4p 478.5p 51.7p 468.5p 422.4p

As at 31 December

18,740,005

255.2p 18,640,313

225.8p

11,114,396 (2011: 10,628,343) options were exercisable at year end. Volatility was determined using the historic fluctuations in the Company’s share price. The fair value of options granted during the year was estimated using the Black-Scholes pricing model with the following significant assumptions: Expected life (years) Risk-free interest rate Volatility Weighted average fair value per option Weighted average exercise price Weighted average share price at grant date

2012

2011

0.25–4.50 0.30%–0.09% 40% $3.12 $4.85 $4.75

0.25–4.50 0.57–1.96% 40% $2.48 $7.78 $6.13

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

18. Share based payments continued Key statistics regarding all options held during the year were as follows: Weighted average share price at exercise date during the year Weighted average remaining life (days) at end of period Range of exercise price at end of period

2012

2011

$4.66 668 $0.81–$9.34

$7.41 978 $0.80–$8.67

Subject to the rules of the Share Option Plan and the requirements noted below, each of the outstanding options is exercisable based on various targets in relation to performance of the Group including: ■■ ■■ ■■ ■■

10% share price growth by one year’s vest, if failed 20% growth by two years’ vest, if failed 30% growth by three years’ vest; one-third of the shares under option following the first anniversary of the date of grant; a further one-third of the shares under option following the second anniversary of the date of grant; and the final one-third of the shares under option following the third anniversary of the date of grant;

provided that the option holder remains a Director or employee of the Group, or if the option holder’s employment is terminated, within 90 days of the termination. Subject to the rules of the Share Option Plan each of the outstanding options is exercisable when the Company’s share price has traded at or above the exercise price for 14 consecutive trading days. b) Warrants Movements in equity-settled warrants over US$ 0.01 common shares in the Company in the year were as follows: Number of options

2012

2011

As at 1 January Warrants granted in the year Warrants lapsed in the year Warrants exercised in the year

11,730,000 133,334 1,985,000 11,730,000 – – (500,000) (133,334)

As at 31 December

13,215,000 11,730,000

1,985,000 warrants were granted in the year as part of the commitment fees of the 2012 Secured Loan Facility refinancing package; refer to Note 19. All warrants granted and outstanding at year end (2011: 11,730,000) relate to those granted in relation to the Secured Loan Facility. Refer to Note 19 for details and key statistics regarding these warrants. Warrants are valued using the Black-Scholes pricing model. During the year there were no lapses of warrants in 2012 (2011: nil) and therefore no transfer out of equity reserves for warrants. c) Performance shares Movements in performance equity-settled shares in the Company in the year were as follows:

Number of shares

As at 1 January Shares granted in the year Shares forfeited in the year Shares lapsed in the year Shares cancelled in the year As at 31 December

2012

3,250,000 – (2,000,000) (500,000) – 750,000

Weighted Average Price

2011

376.0p 3,250,000 – 1,650,000 440.6p (1,000,000) 5.5p (150,000) – (500,000) 437.5p

Weighted Average Price

226.2p 523.6p 285.5p 521.0p 26.0p

3,250,000

These performance shares represent $nil exercise cost options. There were no issues or exercises in 2012 (2011: nil). In 2011 the Group entered into agreements to award senior executives with shares in the Company based on certain performance conditions being met. These conditions, including modifications, include the following: ■■ ■■

completion of Pepel35 expansion project funding (as modified); and the achievement of various iron ore production targets.

–

African Minerals Limited Annual Report 2012

19. Interest-bearing loans and borrowings Non-current interest-bearing loans and borrowings Convertible bond $417.7m Secured Loan Facility $100m Standby Facility $96.5m Asset financing facility $92m Asset financing facility Other Asset financing Current interest-bearing loans and borrowings Convertible bond $417.7m Secured Loan Facility $100m Standby Facility $96.5m Asset financing facility $92m Asset financing facility Other Asset financing

Effective interest rate %

Maturity

12.62% 28.18% LIBOR + 8.5% LIBOR + 5.59% LIBOR + 6.0% 21.38%

9 February 2017 31 January 2013 30 September 2013 31 March 2017 30 June 2018 31 October 2015

12.62% 28.18% LIBOR + 8.5% LIBOR + 5.59% LIBOR + 6.0% 21.38%

9 August 2013 31 January 2013 30 September 2013 31 March 2017 30 June 2018 31 October 2015

Total interest-bearing loans and borrowings

2012 US$ 000’s

2011 US$ 000’s

327,589 – – – – 62

– 32,171 53,795 57,927 – 315

327,651

144,208

31,084 – 79,376 85,731 57,007 355

– 360,343 44,583 11,491 – 192

253,553

416,609

581,204

560,817

Maturities have been reclassified as current due to breaches of certain debt covenants at the year end (refer to each facility below). Waivers have been received post year end; refer to Note 26. Convertible bond On 31 January 2012 the Group announced the pricing of US$350 million of convertible bonds, subsequently upsized to $400m by China Railway Materials Commercial Corporation (CRM) subscribing to $50m. The $350m bonds were issued on 9 February 2012. If not converted or previously redeemed, the bonds will be redeemed at par at maturity five years from the closing date (9 February 2017). The Group has the option to call the bonds at 110% of par at three years after the closing date (9 February 2015). In addition, the Group has the right to redeem the bonds if at any time the aggregate principal amount of the bonds outstanding is equal to or less than 15% of the aggregate principal amount of the bonds initially issued. The principal terms of the facility are as follows: ■■ ■■ ■■ ■■ ■■

Five-year term. A coupon rate of 8.5% and rate of effective interest rate of 12.62% including issue fees. Coupon payable semi annually in arrears. Can be converted into fully paid ordinary shares of the Group. Conversion price GBP £7.00 equivalent to USD $10.98 converted into US$ at the GBP:USD exchange rate as of 30 January 2012.

The Group offered CRM the right to subscribe to ordinary shares in accordance with their right to preserve their 12.5% shareholding. The Board of CRM confirmed acceptance of this offer and an additional $50m worth of bonds were subscribed on 16 May 2012 with the same conditions as the existing $350m. Based on the issue of US$400m, the ordinary shares to be issued upon conversion of the bonds would represent 36,476,138 ordinary shares and at the time of pricing this corresponded to 11.1% of the current total number of issued and outstanding ordinary shares of the Group. The fair value of the equity component of this issue was recorded as $52.9m on settlement on 9 February 2012. Secured loan facility repayment and refinancing In 2011 the Group closed a secured $417.7m non-revolving credit facility “$417.7m Secured Loan Facility”. On 31 January 2012 the Group announced that The Standard Bank of South Africa Limited (Standard Bank) approved a refinancing package for $518m in order to redeem the existing $417.7m Secured Loan Facility prior to its anniversary date and continue the existing $100m Standard Bank Standby Facility. The refinancing was concluded on improved and less restrictive terms than the facilities that it replaced. On 9 February 2012 the Group announced that it had repaid the $417.7m Secured Loan Facility prior to the anniversary date, with the new financing package provided by Standard Bank. Only borrowing costs that are directly attributable to the construction of a qualifying asset can be capitalised, and therefore, a $21,133,000 loss on derecognition of borrowings has been recognised in the statement of comprehensive income. The $417.7m available under the new facility agreement has been completely drawn down to redeem the previous secured loan facility in full, at par.

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

19. Interest-bearing loans and borrowings continued Principal terms of the agreement were as follows: ■■ ■■ ■■

Nine-month term (full repayment at end of term). An interest rate of LIBOR plus 7.5% per annum and a commitment fee. Secured over the principal assets of the Group.

Under the agreement, commitment fees are payable in warrants convertible into new common shares in the Company; 1,985,000 warrants were issued. Key assumptions and variables used in the valuation included: the spot share price used was £5.62, being the last available closing price prior to the valuation date (11 April 2012); the strike share price used was £5.15; the risk free rate used was a yield of a three-year UK Government Bond as at the valuation date over the life of the warrants; a nil% dividend yield; volatility of 40% (sensitivity analysis performed on volatilities of 40%, 45% and 50%, independent valuers’ conclusion deemed volatility of 40% appropriate); ■■ American type option; options can be exercised at any point up until expiry; and ■■ warrants are freely transferable (with the exception of to “Restricted Purchasers”) prior to the exercise of the subscription rights. ■■ ■■ ■■ ■■ ■■

The fair value of the warrants issued in relation to the refinancing of the Secured Loan Facility were valued at $10,212,000. On 2 April 2012 this facility was repaid following the investment of $1.5 billion from Shandong Iron and Steel Group (SISG). In 2011, 11,730,000 warrants were issued in relation to commitment fees for the Secured Loan Facility discussed above. The warrants are convertible into new common shares in the Company at 425 pence per share at the discretion of the warrant holder over a life of five years. The fair value of the common shares was based on the agreed price of 450 pence and the warrants were valued at 227 pence using a Black‑Scholes pricing model. Key assumptions and variables used in the valuation included: the spot share price used was £5.13, being the last available closing price prior to the valuation date (4 February 2011); the strike share price used was £4.24; the risk free rate used was a yield of a five-year UK Government Bond as at the valuation date over the life of the warrants; a nil% dividend yield; volatility of 40% (sensitivity analysis performed on volatilities of 40%, 45% and 50%, independent valuers’ conclusion deemed volatility of 40% appropriate); ■■ American type option; options can be exercised at any point up until expiry; and ■■ warrants are freely transferable (with the exception of to “Restricted Purchasers”) prior to the exercise of the subscription rights. ■■ ■■ ■■ ■■ ■■

The fair value of the warrants issued in relation to the Secured Loan Facility were valued at $38,373,000. Standby facility This facility was arranged in 2011 and refinanced on 9 February 2012 (see refinancing section above). As at 31 December 2012, the facility is fully drawndown after repayment of $20m. Borrowing costs of $2,295,000 (2011: $5,278,000) have been capitalised and transferred to assets under construction based on an effective interest rate of 10.7% (incorporating transaction fees). As at 31 December 2012, the standby facility was in breach of its gearing ratio and minimum production financial covenants. Subsequent to year end, this waiver has been received (Note 26). On 5 April 2013, the Group extended the pre-existing $100m Standby Facility ($80m drawn) from Standard Bank and completed a new $250m project-level working capital facility (Note 26). $96.5m Asset financing facility This facility was arranged in 2011 and was increased to $96.5m in March 2012 from $92.5m, when is it was originally signed in September 2011. A total of $95m was drawdown from this facility. As at 31 December 2012 the facility was fully drawndown and repayments of $8,370,000 have been made. During the period borrowing costs of $4,434,000 have been capitalised and transferred to assets under construction (2011: $3,861,000) based on an effective interest rate of 7% (incorporating transaction fees). As at 31 December 2012 the Group was in breach of the gearing ratio financial covenant and, as such, the loan is disclosed as current. Subsequent to year end, the Group has negotiated waivers for the covenant breach from Standard Bank (Note 26). $92m Asset financing facility This facility was arranged in November 2012. A total of $58.8m has been drawdown from this facility by the end of 2012.

African Minerals Limited Annual Report 2012

19. Interest-bearing loans and borrowings continued During the period borrowing costs of $329,000 (2011: $nil) have been capitalised and are based on an effective interest rate of 7.34% (incorporating transaction fees). As at 31 December 2012 the Group was in breach of the gearing ratio financial covenant and, as such, the loan is disclosed as current. Subsequent to year end, the Group has negotiated waivers for the covenant breach from Standard Bank (Note 26). 20. Trade and other payables Trade payables Accruals Other payables

2012 US$ 000’s

2011 US$ 000’s

96,553 187,523 60,340

79,161 74,233 3,640

344,416

157,034

Trade payables are non-interest bearing and are normally settled on 60-day terms. A significant portion of the accruals balance is construction-related. Accruals recognised are based on work performed but are before final settlement and invoicing. Other payables includes a balance due to Global Iron Ore Corporation for $30,000,000 and $7,840,000 to China Railway Materials Commercial Corporation (both being related parties and included in Note 27). 21. Tax payable Penalties Other taxes and social security

2012 US$ 000’s

2011 US$ 000’s

– 3,022

2,790 3,715

3,022

6,505

Penalties have been capitalised and incurred for under-provision of withholding tax on payments made prior to the Mining Lease Agreement being approved. Other taxes include employee tax and withholding tax payable. 22. Non-controlling interest put option and deferred income Deferred income

30 March 2012 liability balance Release of deferred income Unwinding of time value of money Gain on revaluation of put option 31 December 2012 liability balance Non-current Current

505,552 (7,812) 39,497 –

SISG non‑controlling interest

Total

994,448 1,500,000 – (7,812) – 39,497 (288,355) (288,355)

537,237

706,093

1,243,330

506,356 30,881

– 706,093

506,356 736,974

537,237

706,093

1,243,330

On 30 March 2012, following receipt of all Peoples’ Republic of China approvals, SISG completed its $1.5bn acquisition of a 25% shareholding in the mine, rail and port and power subsidiaries comprising the Tonkolili iron ore project, for a cash consideration of $1.5bn. The proceeds of $1.5bn were allocated to deferred income of $505.6m and the non-controlling interest put option of $994.4m based on the fair values as determined as of 30 March 2012. The key assumptions in fair valuing the deferred income and the non-controlling interest put option are described below. Deferred income Under the agreement completed on 30 March 2012 with SISG a discounted offtake agreement exists for the purchase of iron ore, specifically: volumes of 2Mtpa of Phase I production, increasing to 10Mtpa following completion of Phase II, with discounts ranging from 0% to 15%, depending on the benchmark FOB iron ore price. The amount recognised at the balance sheet date represents the present value of the iron ore offtake discount that SISG will receive under the agreement. The discount rate used in valuation is 12.5%, based on the Company’s cost of capital. Volume and iron ore prices are based on management’s best estimate. This amount is released to the statement of comprehensive income as SISG takes delivery of its offtake volumes and revenue is recognised by the Group.

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

22. Non-controlling interest put option and deferred income continued In 2012 $7,812,000 deferred income has been credited to assets under construction. $39,497,000 has been treated as an interest expense being the unwinding of the discount of the provision. The interest expense reflects the passage of time recognised as a borrowing cost at the Group’s cost of capital (12.5%) and failure to deliver. The net of these two variables comprises the movement on deferred income ($31,687,000). The offtake contract was initially based on 2Mt in 2012. The Group delivered 1.2Mt to SISG in 2012, hence resulting in non‑fulfilment of 0.8Mt (Note 23) in 2012. If the Group had delivered 2Mt, the sales discount would have increased, which would have reduced the impact of the borrowing cost to deferred income movement in the year. The current portion of $30.9m reflects management’s best estimate of the discount attributable to the benchmark FOB iron ore price and deliveries to SISG in 2013 of 3.23Mt. Non-controlling interest put option A put option exists in the agreement whereby SISG can sell back their 25% interest in the project companies (as mentioned above) at fair value, in the unlikely event that Frank Timis (Executive Chairman) voluntarily resigns from the Board. The liability recognised is management’s best estimate of the amount of the fair value that would be payable to SISG in the unlikely event Frank Timis leaves the Group and SISG exercises its option to sell back its interest. The put option was valued at inception and is revalued at each reporting period to fair value using an enterprise value model. The fair value calculation has key assumptions that include the utilisation of the quoted African Minerals share price in estimating the market capitalisation of the mine, rail and port and power subsidiaries of an estimated significant influence premium component to reflect SISG’s 25% shareholding in the mine, rail and power subsidiaries. As at 31 December 2012, the put option valuation utilises an African Minerals Limited share price of $4.46 and an estimated significant influence component of $64,190,000. Any movement is recorded through the statement of comprehensive income. Fair value gain on financial instruments The put option was initially recognised on inception (30 March 2012) at $994,448,000 and as at 31 December 2012 at $706,093,000. The fair value gain on the put option from 30 March 2012 to 31 December 2012 is $288,355,000 and has been recognised through the statement of comprehensive income. 23. Provisions

At 1 January 2012

SISG warranty provisions US$ 000’s

Other provisions US$ 000’s

Total US$ 000’s

–

1,898

Arising during the year Utilised Reversal of unused amounts

51,056 – –

11,240 – (433)

62,296 – (433)

At 31 December 2012

51,056

12,705

63,761

Comprising: Current 2012 Non-current 2012

51,056 –

11,240 1,465

62,296 1,465

51,056

12,705

63,761

– –

– 1,898

–

1,898

Current 2011 Non-current 2011

SISG warranty provisions A warranty exists within the agreement with SISG (SISG agreement is referred to in Note 22) which stipulates that the Group guarantees to produce and sell at least 10Mt in 2012. The Group delivered sales of 4.3Mt in 2012, which has resulted in a breach of the warranty. The Directors are in commercial settlement negotiations with SISG and the warranty provision of $47.4m represents management’s best current estimate of the 5.7Mt shortfall of the 10Mt warranty for 2012. Assumptions used to calculate the provision were based on forecast sales and associated charges for the shortfall in delivery. The remaining $3.7m provision relates to non-fulfilment of 2Mt of deliveries to SISG as specified in the SISG offtake contract guarantee. The Group delivered 1.2Mt, hence resulting in a breach for 0.8Mt. Assumptions and approach for the offtake contract guarantee were in line with the 10Mt warranty. The Directors are also in commercial settlement negotiations with SISG and the offtake contract guarantee is management’s best current estimate. Other provisions Other provisions as at 31 December 2012 include $6,240,000 for legal disputes, $5,000,000 for contractor claims and $1,465,000 for Sierra Leone end of service benefit provision. Legal disputes are in respect of litigations and claims against the Group arising from contractual interpretation disputes. Provision estimations are based on valuations from expert legal advice.

African Minerals Limited Annual Report 2012

24. Commitments and contingencies Contingent liabilities There were contingent liabilities at 31 December 2012 in respect of litigations and claims against the Group arising from contractual interpretation disputes. The estimated financial effect of contingent liabilities at 31 December 2012 has not been disclosed as it is not presently practicable to arrive at a reliable estimate, however management believes that the impact of any legal proceedings related to these matters on the Group’s results of operations, liquidity or financial position will not be material. The Group has conducted its operations in the ordinary course of business in accordance with its understanding of applicable tax legislation in the countries where the Group has operations. Sierra Leone tax legislation and custom regulations continue to evolve. Legislation and regulations are not always clearly written and are subject to varying interpretations and inconsistent enforcement by the tax authorities and other Governmental bodies. Instances of inconsistent interpretations are not unusual. The uncertainty of application of UK and Sierra Leone transfer pricing legislation and the continued evolution of Sierra Leone’s tax laws, including those affecting cross-border transactions, create a risk of additional tax payments having to be made by the Group, which could have a material effect on the Group’s financial position and results of operations. Operating leases The Group has entered into two mining licences with the Sierra Leone Government and a lease for the port and rail operations. The lives of the mining licences are 25 years, with renewal options after 15 years, and the port and rail licence is 99 years. The Group may, at least one year prior to the expiration of the mining lease, apply to the Government of Sierra Leone for a renewal for a further period of 15 years effective from the date of expiration of the previous lease. The Group also has a five-year operating lease contract for a locomotive fleet for the port and rail operations. A call option exists for the Group to obtain ownership of the assets at fair value of the assets throughout the lease term. Where the Group does not exercise the call option, the lessor has a put option over a maximum of 16 of the cars, which can be exercised six months prior to the expiration of the lease. Future minimum payments under the operating leases as at 31 December are as follows: Within one year After one year but not more than five years More than five years

2012 US$ 000’s

2011 US$ 000’s

16,617 48,482 39,500

10,332 38,708 40,750

104,599

89,790

Capital commitments At 31 December 2012, the Group had commitments of $46,140,000 (2011: $48,700,000) including $43,670,000 (2011: 25,650,000) infrastructure and $2,740,000 (2011: $23,050,000) in relation to the mine. 25. Financial instruments Set out below is a comparison by class of the fair value of the Group’s financial instruments that are carried in the financial statements.

Financial assets Loans and receivables Trade and other receivables Deposit Available for sale financial assets Available for sale investments Cash and cash equivalents (refer below)

Notes

Carrying value 2012 US$ 000’s

Carrying value 2011 US$ 000’s

Fair value 2012 US$ 000’s

Fair value 2011 US$ 000’s

12 15

69,026 3,000

13,410 3,910

69,026 3,000

13,410 3,910

72,026

17,320

72,026

17,320

41,492 601,925

67,996 16,465

41,492 601,925

67,996 16,465

715,443

101,781

715,443

101,781

222,531 358,673

560,817 –

222,531 411,548

560,817 –

581,204 344,416

560,817 157,034

634,079 344,416

560,817 157,034

925,620

717,851

978,495

717,851

706,093

–

706,093

–

1,631,713

717,851

1,684,588

717,851

Financial liabilities Amortised cost Interest-bearing borrowings – unquoted Interest-bearing borrowings – quoted Trade and other payables Financial liabilities at fair value through profit or loss Non-controlling interest put option

19 20

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

25. Financial instruments continued Fair value hierarchy The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities. Level 2: other techniques for which all inputs that have a significant effect on the recorded fair value are observable, either directly or indirectly. Level 3: techniques that use inputs that have a significant effect on the recorded fair value that are not based on observable market data. As at 31 December 2012, the Group held the following financial instruments carried at fair value in the statement of financial position:

Assets measured at fair value Available for sale financial assets: Equity shares Liabilities measured at fair value Non-controlling interest put option

31 December 2012 US$ 000’s

Level 1 US$ 000’s

Level 2 US$ 000’s

Level 3 US$ 000’s

41,492

–

706,093

–

706,093

As at 31 December 2011, the Group held the following financial instruments carried at fair value in the statement of financial position:

Assets measured at fair value Available for sale financial assets: Equity shares Liabilities measured at fair value Non-controlling interest put option Interest-bearing borrowings – quoted

31 December 2011 US$ 000’s

Level 1 US$ 000’s

Level 2 US$ 000’s

Level 3 US$ 000’s

67,996

–

– –

The Group’s principal financial liabilities comprise the non-controlling interest put option, interest-bearing borrowings and trade and other payables. The Group has a financial liability recognised at fair value. The put option existing in the SISG agreement, as outlined in Note 22, which is management’s best estimate of the amount payable to SISG in the unlikely event Frank Timis leaves the Group and SISG exercises its option to sell back this interest. Any movement in the put option financial liability is recorded in profit or loss. The main purpose of the interest-bearing borrowings is to raise finance for the Group’s capital expenditure programme. Trade and other payables are used to manage short term cash flow and working capital requirements. The Group has various financial assets such as available for sale investments, as well as trade and other receivables and cash and cash equivalents. In respect of monetary assets and liabilities held in currencies other than US dollars, the Group ensures that net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates where necessary to address short term imbalances. Foreign exchange differences on retranslation of such assets and liabilities are recorded in the profit or loss. Cash and cash equivalents consist of short-term deposits in US dollars and sterling which earn market interest rates. The fair value of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Refer to Note 1.6 for further details. 26. Subsequent events 1. $75m restricted funds drawdown On 3 January 2013 $75m of restricted cash earmarked for Pepel35 expansion was drawndown for Phase 1 construction expenditure. 2. $250m borrowings and $100m refinancing of standby On 5 April 2013, the Group extended the pre-existing $100m Standby Facility ($80m drawn) from Standard Bank and completed a new $250m project-level working capital facility. 3. Covenant waivers As at 31 December 2012, the Group was in breach of a number of loan covenants. Whilst waivers and/or extensions of relevant facilities have been obtained post year end, the facilities have all been classified as current liabilities as at 31 December 2012, irrespective of their maturity dates. Following receipt of the relevant waivers and/or extensions, $118,278,000 of the asset financing facilities classified as current at 31 December 2012 are now subsequently classified as non-current.

African Minerals Limited Annual Report 2012

27. Related party transactions

Non-controlling interest Non-controlling Accounts deferred interest put payable income option US$ 000’s US$ 000’s US$ 000’s

Sales US$ 000’s

Accounts receivable US$ 000’s

Purchases/ interest expense US$ 000’s

African Petroleum Corporation Limited 2012 2011

654 475

– 475

1,061 326

– –

157 233

– –

International Petroleum Limited 2012 2011

387 130

517 130

– –

1,539 668

2,207 668

– –

50,457 –

869 –

81,982 66,688

– –

4,351 5,065

– –

50,000 –

Dundee Corporation 2012 2011

– –

525 2,728

– –

– 26,000

Dundee Resources Limited 2012 2011

– –

3,309 8

– –

3,309 –

– –

30,000 –

Dundee Securities Limited 2012 2011

– –

2,100 –

– –

Corona Gold Corporation 2012 2011

– –

128 525

– –

– 5,000

Global Iron Ore Corporation 2012 2011

37,483 2,254

497 –

– –

62,414 168

30,000 –

– –

Shandong Iron and Steel Group 2012 2011

74,755 –

47,032 –

– –

537,237 –

706,093 –

– –

Pan African Minerals Limited 2012 2011 China Railway Materials Commercial Corporation 2012 2011

Commissions US$ 000’s

Borrowings US$ 000’s

African Petroleum Corporation Limited is a company of which Frank Timis is a Director and has an ownership interest of 39.5%. Transactions relate to provision of jet services by African Petroleum Corporation Limited to AML and recharges by AML to African Petroleum for shared London office rental and related expenses. International Petroleum Limited is a company of which Frank Timis is a Director and in which he has an ownership interest of 37.75%. Transactions relate to recharges by AML to International Petroleum Limited for shared London office rental and related expenses. Pan African Minerals Limited is a company of which Frank Timis is a majority shareholder with an ownership interest of 65%. Transactions relate to recharges by AML to Pan African Minerals Limited for the provision of certain AML staff on Pan African Minerals Limited projects and for shared office rental and related expenses. China Railway Materials Commercial Corporation is a Group shareholder. Transactions relate to iron ore sales and materials purchased for railways and ore cars. Purchases also include interest payable accrued on the borrowings related to the subscription of convertible bonds (see Note 19) for $3,880,000. Dundee Corporation is a corporation of which Murray John is a named Executive Officer. Murray John is also a Director of African Minerals Limited. Borrowings in 2011 relate to debt raised as part of the secured loan facility. Purchases include interest payable paid on the secured loan facility.

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

27. Related party transactions continued Dundee Resources Limited is a wholly owned subsidiary of Dundee Corporation, of which Murray John is a named Executive Officer. Borrowings in 2012 relate to the subscription of convertible bonds. Purchases in 2011 relate to fees incurred under the secured loan facility, which was provided by Dundee Resources Limited. Purchases and accounts payable in 2012 include interest payable accrued on the borrowings related to the subscription of convertible bonds (see Note 19). Dundee Securities Limited is a wholly owned subsidiary of Dundee Corporation, of which Murray John is a named Executive Officer. Transactions in 2012 relate to Placing Agent commissions for the issue of convertible bonds (see Note 19). Corona Gold Corporation is a firm of which Murray John is a Director and Chief Executive Officer. Borrowings in 2011 relate to debt raised as part of the secured loan facility. Purchases include interest payable paid on the secured loan facility. Global Iron Ore Corporation is a company in which Dermot Coughlan’s son holds a senior management position. Dermot Coughlan is a Director of African Minerals Limited. Sales transactions relate to iron ore sales. Commissions relate to agency commission fees associated with iron ore sales contracts, and the cancellation thereof, and together with the provision of logistics services. Following its $1.5bn acquisition of a 25% shareholding in the mine, rail and port and power subsidiaries comprising the Tonkolili iron ore project, for a cash consideration of $1.5bn, Shandong Iron and Steel Group became a related party. Transactions relate to the sale of iron ore through off take contracts, offtake discount deferred income and put option. Refer to Note 22 for details. All the above transactions have been approved by the Board and have been carried out on an arm’s length basis. Miguel Perry provided $500,000 as part of the 2011 $417.7m Secured Loan Facility, on which $5,000 interest was paid in 2012 (2011: $55,000). He also received 12,500 warrants and 2,811 shares. Miguel Perry is the Chief Financial Officer and Director of African Minerals Limited. 28. Reporting jurisdictions The Company is a reporting issuer in certain Canadian jurisdictions. However, the Company is a “designated foreign issuer” as defined in Canadian National Instrument 71–102 and is subject to foreign regulatory requirements, including those of the AIM market of the London Stock Exchange. As such, the Company is exempt from certain requirements otherwise imposed on reporting issuers in Canada. In particular, financial statements of the Company may be prepared under International Financial Reporting Standards or accounting principles that meet the non‑Canadian disclosure requirements to which the Company is subject. 29. Financial risk management objectives and policies The Group’s activities expose it to a variety of financial risks. The Group’s Board provides certain specific guidance in managing such risks, particularly as relates to credit and liquidity risk. Any form of borrowings requires approval from the Board and the Group does not currently use any derivative financial instruments to manage its financial risks. The key financial risks and the Group’s major exposures are as follows: Credit risk The maximum exposure to credit risk is represented by the carrying amount of the financial assets. In relation to cash and cash equivalents, the Group limits its credit risk with regards to bank deposits by only dealing with reputable banks. In relation to sales receivables, the Group’s credit risk is managed by credit checks for credit customers and approval of letters of credit by the Group’s advising bank for offtake customers. Foreign currency risk Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The table below indicates the currencies to which the Group had significant exposure at 31 December 2012 on its monetary assets and liabilities. The analysis calculates the effect of a reasonably possible movement of the currency rate against the US dollar, with all other variables held constant on the statement of comprehensive income (due to the fair value of currency sensitive non-trading monetary assets and liabilities). A positive amount in the table reflects a potential net increase in the consolidated statement of comprehensive income.

African Minerals Limited Annual Report 2012

29. Financial risk management objectives and policies continued Non-trading currency cash and cash equivalents:

British Pounds Canadian Dollars Chinese Renminbi Euros South African Rand Sierra Leone Leones

2012 US$ 000’s

Change in currency rate in %

Effect on statement of comprehensive income

2011 US$ 000’s

Change in currency rate in %

Effect on statement of comprehensive income

5,025 – 13 – – 207

+10 +10 +10 +10 +10 +10

503 – 1 – – 21

3,934 131 98 – – 709

+10 +10 +10 +10 +10 +10

393 13 10 – – 71

525

4,872

5,245 Available for sale investments:

487

2012 US$ 000’s

Change in currency rate in %

Equity movement US$ 000’s

2011 US$ 000’s

Change in currency rate in %

Equity movement US$ 000’s

Listed securities: Equity securities – Australia Equity securities – UK

35,434 6,058

+10 +10

3,543 606

58,349 9,647

+10 +10

5,835 965

Total

41,492

4,149

67,996

6,800

Equity price risk Equity price risk is the risk that the fair values of equities decrease as the result of changes in the levels of equity indices and the value of individual stocks. Management of the Group monitors equity securities in its investment portfolio and used in the valuation of the non-controlling interest put option based on market indices. The effect on equity (as a result of a change in the fair value of quoted equity shares held at 31 December 2012) due to a reasonably possible change in equity indices, with all other variables held constant, is as follows: 2012

Quoted investments Non-controlling interest put option

2011

Change in equity price %

Effect on equity US$ 000’s

Effect on profit or loss US$ 000’s

Change in equity price %

Effect on equity US$ 000’s

+15 +15

6,224 –

– 105,914

+15 +15

10,199 –

Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Numbers in the table below represent the gross, contractual, undiscounted amount payable in relation to the financial liabilities. The Group monitors its risk to a shortage of funds using a combination of cash flow forecasts, budgeting and monitoring of operational performance. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of various interest-bearing loans and borrowings (refer to Note 19), operating leases (refer to Note 24) and share issues. During the period, the Group issued a convertible bond and a refinancing package for key borrowings was agreed (refer to Note 19).

Financial statements

Notes to the financial statements continued For the year ended 31 December 2012

29. Financial risk management objectives and policies continued

As at 31 December 2012: Accruals Trade and other payables Provisions Interest-bearing loans and borrowings Non-controlling interest put option As at 31 December 2011: Accruals Trade and other payables Provisions Interest-bearing loans and borrowings

On demand US$ 000’s

Less than three months US$ 000’s

Three to twelve months US$ 000’s

One to five years US$ 000’s

Total months US$ 000’s

– 156,893 – – 706,093

129,431 – – 37,748 –

58,092 – 62,296 126,962 –

– – 1,465 681,249 –

187,523 156,893 63,761 845,959 706,093

862,986

167,179

247,350

682,714

1,960,229

64,806 74,794 1,898 4,311

9,427 8,007 – 25,085

– – – 452,322

– – – 198,572

74,223 82,801 1,898 680,290

145,809

42,519

452,322

198,572

839,222

The Group continuously monitors the liquidity risk related to the non-controlling interest put option. The Group considers the event that Frank Timis voluntarily leaves the Board unlikely. Capital management Capital includes equity attributable to the equity holders of the parent. Refer to the statement of changes in equity for quantitative information regarding equity. The Group’s primary objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders. Capital managed by the Group as at 31 December 2012 consisted of: Cash and cash equivalents Interest-bearing loans and borrowings (Note 19) Non-controlling interest put option Equity attributable to equity holders of the parent

2012 US$ 000’s

2011 US$ 000’s

601,925 581,204 706,093 915,744

16,465 560,817 – 982,110

The capital structure is reviewed by management through regular forecasting and monthly reporting. The Group is not subject to any externally imposed capital requirements. Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. A sensitivity analysis is not presented, as all borrowing costs have been capitalised as at 31 December 2012; therefore profit or loss and equity would have not been affected by changes in the interest rate. Commodity price risk As the Group is currently a single commodity producer, fluctuations in iron ore prices as well as in demand could have a material positive or negative impact upon the financial result of the Group and the development of its projects. Management manages the risk of fluctuations in price by ensuring that operations are constructed as low-cost, efficient operations. The Group has an established customer base and manages demand by signing of offtake contracts, fully committing sales for future periods.

African Minerals Limited Annual Report 2012

Advisors and Company information Auditors Ernst & Young LLP 1 More London Place London SE1 2AF United Kingdom

Company Secretary Marlies Smith M Q Services Ltd. Victoria Place, 31 Victoria Street, Hamilton HM 10 Bermuda

Nominated Advisor Jefferies Hoare Govett Vintners Place 68 Upper Thames Street London EC4V 3BJ United Kingdom

Registered Office Victoria Place, 31 Victoria Street, Hamilton HM 10 Bermuda

PR Advisor FTI Consulting Holborn Gate 26 Southampton Buildings London WC2A 1PB United Kingdom

Company Number 34816

UK Solicitors Cleary Gottlieb Steen & Hamilton LLP City Place House, 55 Basinghall Street London EC2V 5EH United Kingdom Canadian Solicitors Blake Cassels and Graydon LLP 199 Bay Street Suite 2800, Commerce Court West Toronto ON M5L 1A9 Canada Registrars Computershare Trust Company of Canada 600, 530 â&#x20AC;&#x201C; 8th Ave SW Calgary, AB T2P 3S8 Canada

Financial statements

Notes

African Minerals Limited London Office Stratton House 5 Stratton Street London W1J 8LA Tel: +44 (0)203 435 7600 Registered Office Victoria Place 31 Victoria Street Hamilton HM10 Bermuda www.african-minerals.com