T I TA N I U M R E SO U R C E S
A nn
ua L
REPORT
2008
TRG will release the value of the mineral reserves from its deposits in Sierra Leone
and enhance expansion opportunities for the benefit of shareholders. Our commitment to identifying and managing risk and maintaining an efficient operating system aligns the needs of our shareholders, employees and local communities to the mutual long term benefit of all.
2 C H A I R M A N ’ S STAT E M E N T 5 C H I E F E X EC U T I V E ’ S R E V I E W 9 BUSINESS REVIEW 11 SO C I A L R E S P O N S I B I L I T Y 14 P R I N C I PA L R I S K S 18 B OA R D O F D I R EC TO R S 20 A DV I S E R S 21 D I R EC TO R S ’ R E P O RT 26 A U D I TO R S ’ R E P O RT 27 F I N A N C I A L STAT E M E N T S 31 N OT E S TO F I N A N C I A L STAT E M E N T S
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 2
2008 Highlights
I I I I I I I I
Sales of US$49.4 million in the year (2007: US$67.8 million) Disposal of SML bauxite mine for US$40.5 million in cash Appointment of John Sisay as Chief Executive Officer and Lindberg Charles as Chief Financial Officer New low cost power plant commissioned improving efficiency by 25% Successful settlement reached with Company’s second largest insurer in relation to D2 Rutile production of 78,908 tonnes (2007: 82,530 tonnes) and Q1 2009: 18,000 Ilmenite production of 17,528 tonnes (2007: 15,750 tonnes) and Q1 2009: 5,028 Loss before interest, tax, depreciation, amortisation and exceptional items of US$22.8 million (2007: loss of US$0.3 million) Exceptional loss of US$7.7 million, relating to D2 impairment charge of US$34.3 million, offset profit on disposal of Sierra Minerals bauxite mine of US$26.6million
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I I I
Two year moratorium of interest payments on EU loan negotiated with the Government of Sierra Leone Cash balance of US$7 million as at 3 March 2009 No significant re-financing requirements during 2009
Sierra Leone
Africa
Freetown Nitti Port Sherbro Island Sierra Rutile mining area
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 1
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Chairman’s Statement
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Dear shareholders 2008 proved to be a very busy and challenging year for the Company and I would like to take this opportunity, on behalf of the Board, to thank all of TRG’s employees for their exceptional efforts over the last 12 months. The dedication shown by our employees in a difficult environment has contributed significantly to our achievements in the year and their continued efforts will be vital to the Company’s long-term success. A challenging year In July 2008, we disposed of the Sierra Minerals bauxite mine to Vimetco NV for US$40.5 million in cash. This well timed disposal was made following a thorough review by the Board, which enabled us to exit a sub scale business at an attractive cash premium.
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ma ns STATEMENT
Following the capsize of Dredge D2 (“D2”), the Board took a number of proactive steps to realign the Company’s operations to the changed operating environment, for example by moving Dredge D1 (“D1”) into a higher grade mining area and by streamlining operations at SRL. These initiatives are now starting to deliver improved performance and, together with efficiency improvements following the full commissioning of the HFO power plant, we expect to achieve operating profitability in 2009. Shareholders After the end of the year, Jean Raymond Boulle purchased Ospraie Management’s 49% holding in the Company. I see this as a very positive development for the Company. Mr Boulle has significant experience of operating in Sierra Leone and his decision to increase his stake in the Company has demonstrated his continuing faith in the quality of our underlying business. The Board remains committed to keeping TRG as a publicly listed company.
2 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
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In April 2009, we concluded a Settlement Agreement with Zurich, one of our largest reinsurers, in relation to the Company’s insurance claims and associated business interruption, following the capsize of Dredge D2. The decision by Zurich to settle their portion of the claim, apparently based upon the same information and external legal advice that the remainder of the reinsurance syndicate has received, gives us confidence that further progress can be made in successfully concluding our claims. Strategy Since the year end, we have been encouraged by the continued strength in demand for SRL’s high quality rutile, with orders for 2009 exceeding our current production capacity. We are therefore concentrating sales efforts on customers in higher margin sectors, such as in titanium sponge markets, and examining the potential for increasing production through the completion of Dredge D3, or initiating dry mining, or even a combination of the two. The timeframe for the completion of these growth initiatives, which could deliver an additional production capacity of more than 50,000 tonnes per annum, is dependent upon the Company obtaining further expansionary capital. We have so far received encouraging responses from a number of potential industry partners in relation to securing the necessary investment and will update shareholders on progress as appropriate. New Board members During the year, we took a number of steps to realign and reinvigorate the Board to better reflect the needs of the Company going forward. In October 2008, Wayne Malouf, Baroness Valerie Amos and Sir Sam Jonah all stood down from the Board. In February, after the end of the year, Len Comerford resigned as Chief Executive of TRG, whilst Raju Jaddoo became a Non Executive Director in April 2009 having been Chief Financial Officer since 2005. I would like to thank all of the Directors for their hard work. As CEO and CFO, Len and Raju made significant contributions to the development of TRG over the last several years. We now have a new executive team led by John Sisay as Chief Executive and ably supported by Lindberg Charles as Chief Financial Officer. Both John and Lindberg have experience of living and working in Sierra Leone and, given their significant relevant expertise, have made progress in addressing the significant challenges facing the Company. We also appointed François Colette as a Non Executive Director in May and have recently begun a process for the recruitment of a Chief Operating Officer and Senior Geologist to further strengthen the Board and executive team.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 3
Chairman’s Statement
Health, Safety, Environment and Community Whilst the level of recordable injuries fell in 2008, our overall performance fell below the targets we have set for ourselves. In addition to the two employees who unfortunately lost their lives when D2 capsized, a contractor was also killed whilst working on the expansion of SRL’s dry plant. Our goal remains to record zero injuries. In 2009 we will be working to achieve this through continued health and safety training initiatives. We have continued with our HIV/AIDS prevention and Darwin programmes in 2009 and are hopeful that these will deliver real benefits to local communities. We also continue to investigate the best methods for rehabilitating old mine areas in order to enhance community welfare. To that end, TRG has set aside in excess of US$1 million in the year for the rehabilitation of areas impacted by our operations. In addition to these programmes, the Company, in partnership with a former shareholder, has completed the construction of the Sierra Rutile Technical and Vocational Institute. We are now working to establish an operating budget for the school and will assess options for funding the school in partnership with the Government of Sierra Leone, NGOs and others. Sierra Leone Whilst Sierra Leone remains a challenging operating environment, I am encouraged by the continuing political stability in the country. We recognise our responsibilities to Sierra Leone as one of the country’s largest private sector employers and a significant tax payer and are committed to building on the partnerships we have already developed with Government.
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Walter Kansteiner Non-Executive Chairman
4 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
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x Utives
REVIEW
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Chief Execu tive’s Review
Overview 2008 was a challenging year for the Company, with the capsize of Dredge D2 in July having a significant impact on available production capacity. In spite of these difficulties, the Company has produced a robust performance and achieved 50% of its production targets for the year.
Dredge D1 has operated consistently throughout 2008 while the rutile grade at the Lanti South deposit where D1 is operating has improved considerably over the year. The Company produced 78,908 tonnes of rutile in the year, slightly down on 2007 but ilmenite production rose 11% year on year to 17,528 tonnes. In light of the difficult circumstances in which the Company is operating and the capsizing of D2 in July 2008, this is a creditable operating performance. Since the end of the year, D1 has performed ahead of target production rates. This performance underlines the world class potential of the Sierra Rutile mine. The progress made on the outstanding insurance claims relating to D2 gives us confidence that further progress can be made in pursuing the remaining outstanding claims. However, the project to rehabilitate D2, which is expected to take at least two years from commencement, will not be commenced until the Company has secured sufficient funding for the entire cost of rehabilitation. During the year the Company has successfully implemented significant cost cutting measures and the new low cost heavy fuel oil power plant has increased efficiency. Workforce reductions and the suspension of all exploration activities by the Company have also resulted in a considerable reduction in costs. In addition, the Company has successfully negotiated a moratorium of interest payments to the Government of Sierra Leone in relation to the US$45 million loan from the EU, significantly improving TRG’s short term cash flows.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 5
Chief Executive’s Review
In July 2008, prior to the current weakness in aluminium markets, we successfully sold the non-core Sierra Mineral bauxite mine for US$40.5 million, out of which US$11.1 million was used to repay an intercompany loan and US$500,000 remains receivable as a deferred consideration. Production Total rutile production fell by only 5% in 2008, despite the halving of production capacity following the capsize of D2 in July. This performance was a result of consistent production by D1, which has been carried forward into the first quarter of 2009 with production reaching 18,000 tonnes of rutile compared to a target of 17,522 tonnes for the period. D1 has completed its transition from Lanti North to the higher rutile grade Lanti South deposit, a process which we initiated immediately following the capsize of D2. This transition, in addition to the increase in operational performance, allowed the Company to meet 50% of its annual production targets for 2008. In 2008, the Company produced 17,528 tonnes of ilmenite, compared to 15,750 tonnes in the previous year. This positive trend has continued with 5,028 tonnes of ilmenite produced in the first quarter of 2009 compared to a target of 2,594 tonnes due to higher than expected grades in the tailings re-treatment programme. Financials The Company generated total sales of US$49.4 million in the year, a decline of 27% from 2007 as a result of the loss of contribution from the Sierra Minerals bauxite mine following its disposal and reduced production from Sierra Rutile, resulting in a loss before taxation of US$40.4 million (2007: US$17 million). However, rutile and ilmenite sales from Sierra Rutile in 2008 of US$39.4 million were robust compared with US$40.8 million in 2007. The exceptional loss of US$7.7 million relates to an impairment charge in relation to D2 of US$34.3 million, offset against the profit realised on disposal of the Sierra Minerals mine of US$26.6 million. The Company has a strong balance sheet with no significant re-financing requirements during 2009. The Company’s gearing ratio is still low despite writing off a US$86 million deferred tax asset. The Company expects to maintain a current assets to current liabilities ratio of 2:1 over the 12 months ahead. Cost reduction We have successfully completed significant cost cutting measures in the year and the completion of the heavy fuel oil power plant increased efficiency by around 25%. Fuel costs have fallen in line with market prices and increased efficiency. These savings have
6 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
increased in the first months of 2009, now that the power plant is fully commissioned on heavy fuel oil. HFO is approximately 60% of the cost of diesel. The cost mitigation measures are working as planned and we are confident that this trend will continue through the remainder of 2009, provided input prices remain at current levels. As stated previously, the Company has reduced its workforce by some 25% and all capital programmes have been either suspended or substantially reduced to minimise working capital requirements and improve cash flow. Contractors working on the dry plant at the mine site have also been stood down as the dry plant upgrade will not be required until tonnage has increased. Additionally, the Company has also suspended all exploration activities including those at the Sierra Rutile mine and Turners’ Peninsular. Dredge D2 Following further detailed work to assess the damage to Dredge D2, we have now revised our previous estimates for the cost of restoring D2 to full production upwards to US$35 million. Also, whilst we still expect that the repair and recommissioning of D2 will take approximately 14 months, the sourcing and transportation of all the necessary replacement parts to the mine site is likely to require an additional 10 month period. When the Dredge has been recommissioned it will continue to mine the Gangama deposit as initially anticipated by the Company. As stated above, the decision by Zurich to settle their portion of the property damage and business interruption claim following the capsize of D2 is positive and gives us confidence that further progress can be made in pursuing the remaining outstanding claims. Marketing In response to the cessation of D2’s mining operations, the Company declared force majeure on all its rutile and ilmenite contracts, with all customers being placed on an equitable allocation during the second half of 2008 and January 2009. In February 2009, the Company lifted the force majeure on all sales. As well as providing certainty to customers, this will enable TRG to benefit from contract prices fixed at levels above those currently prevailing in titanium dioxide spot markets. Demand for our product is greater than current production capacity therefore our marketing team are targeting sales to higher margin market segments, such as the welding rod and titanium sponge markets.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 7
Chief Executive’s Review
In 2009, the Company has so far shipped 25,500 tonnes of standard grade rutile and 2,000 tonnes of industrial grade rutile with further significant shipments of 10,000 tonnes of standard grade rutile and 700 tonnes of industrial grade rutile scheduled during May. The forecast production of both rutile grades for 2009 is committed to customers, and it is anticipated that ilmenite shipments will commence in the second half of the year. Outlook Since the end of the year, the Company has seen some weakness in rutile markets as the ongoing financial crisis has created significant uncertainty. However, underlying demand for SRL rutile remains strong, and the Company is confident that there is market demand for additional product. Beyond 2009, pricing will be influenced by prevailing market conditions. The world class nature of the Sierra Rutile deposit is beyond doubt and we are confident that long-term industry trends towards the use of higher grade titanium dioxide feedstocks will reinforce our market position. The continued support of the Government of Sierra Leone gives us further confidence in the prospects for the Company.
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John Bonoh Sisay Chief Executive Officer
8 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
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Business Review
ess REVIEW
Company overview Through its subsidiary Sierra Rutile Limited (“SRL”) Titanium Resources Group owns and operates the Sierra Rutile mine in the south west of Sierra Leone. Mining at Sierra Rutile began in 1967 and the mine operated continuously between 1983 and 1995.
In August 2005, the Company listed on the AIM market of the London Stock Exchange and during the first half of 2006 the Company successfully restarted operations at the Sierra Rutile mine. Strategy Titanium Resources Group aims to create shareholder value by: I Expanding production at its existing operations; I Extending the life of its mines by expanding reserve and resource bases; and I Achieving and maintaining the highest standards of health, safety and environmental performance at its operations and to work in partnership with local communities for mutual benefits, supporting the principles of sustainable development. Sierra Rutile The Sierra Rutile mine is located in the south west of Sierra Leone near the Imperri Hills, some 30 km from the Atlantic Ocean, on low lying coastal plains about 135 km southeast of the capital Freetown. SRL holds mining leases over a land area of 580 sq. km in which nineteen separate rutile deposits have been identified. The mining concession is one of the largest natural rutile deposits known in the world. In 2005, Mine Development Associates estimated that proved and probable reserves at SRL were 259 million tonnes at 1.48% recoverable rutile, giving a projected mine life of 19 years. In addition, the mine produces ilmenite and there is potential for zircon production.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 9
Business Review
The mine currently employs bucket ladder dredges and conventional mineral processing methods to produce rutile, ilmenite and small amounts of zircon concentrate. The mine is self-sufficient. SRL generates its own power, operates its own port, maintains the road infrastructure, has its own hospital and generally provides and maintains its own infrastructure and ancillary services. TRG has a significant exploration programme at Sierra Rutile which is focused on extending the mine-life of existing dredge operations in order to delay the need for the dredges to be moved to new areas. To this end, exploration is targeting areas around the current designated dredge mining areas and a number of potential new deposits have been identified.
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Key Performance indicators Rutile Production Ilmenite Production Turnover Gearing* Assets Turnover** EBITDA Cash & Cash Equivalents Capital Expenditure
Units of measurements Metric Tons Metric Tons US$ million Debt % Debt & Equity T.O % Net Assets US$ million US$ million US$ million
Y2006 73,802 13,819 51.30 14.4% 20.0% 6.0 52.4 37.2
Y2007 82,527 15,750 67.85 15.5% 23.6% -2.8 25.7 57.4
Y2008 78,908 17,528 49.42 28.2% 30.3% -30.4 7.4 31.9
*Gearing, calculated as debt to debt plus equity **The asset turnover ratio, which measures the efficiency of a company’s use of its assets in generating sales revenue
10 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
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iA l Social Responsibility
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Health & Safety System It remains our top priority to protect the health and safety of our workforce. We continue to implement a policy that is consistent with leading global standards and is based on the principle of recording zero harm to our employees.
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s iBiLi ty on
However, during 2008 there were three fatalities at our managed operations, compared to the two we recorded in 2007. Two of the fatalities resulted from the capsizing of Dredge D2 and the third when a contractor employee fell from an elevated working platform during the construction of the new dry plant extension. Although the fatal injuries are regrettable, the lost time injury rate decreased marginally from 2007 despite an increase in the total number of employees and contractors on site. This is encouraging and an early indicator that the numerous safety and health initiatives and safety training courses launched on the SRL mine site are starting to take effect. Whilst recording the long term injury frequency rate is a common metric used in the mining industry, the Company has decided instead to use the absolute number of injuries recorded as an indicator of health and safety performance. This is based upon our belief that by reporting on the individuals who have been injured sufficiently seriously that they are unable to work the next day we will have a much greater and more lasting impact on employee and contractor behaviour than by reporting a statistic.
Key EHS Indicators in 2007 and 2008 Number of: Fatalities Lost Time Injuries Occupational Diseases
2007
2008
2 34 –
3 30 –
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 11
Social Responsibility
Our targets for 2009 are to record no fatalities whilst also reducing our lost time injuries by 25%. We also intend to increase workplace inspections and training programmes for our staff and contractors to ensure that safety processes are optimised and that compliance is improved. Occupational Health & HIV/AIDS Our programmes to address the prevention of HIV/AIDS have continued in 2008. Our partnership with local NGOs, the Mine Workers Union and the National AIDS Secretariat of Sierra Leone has worked well and we will continue to support this work in the year ahead. Our health personnel have now been trained to conduct voluntary testing and counselling and to administer antiretroviral drugs. Our Sierra Rutile Clinic has been the cornerstone of this project with staff supporting all the ongoing programmes. Our clinic treats approximately 2,000 people a month who are mostly our employees and their dependents, however we also run additional weekly clinics in local communities to provide basic and emergency public healthcare. We recorded no new occupational diseases at our operations in 2008. Environment & Communities In conjunction with our local communities we have developed a number of initiatives that are starting to show success. Four additional experimental plots of 0.25ha each were planted in the Lanti sand tailings as part of the Darwin Initiative. This brings the total of experimental plots to 20 since 2007. The four new plots were planted with trees which have the potential to produce economic benefits for local communities, such as cashew, mango and citrus, and four woodlot tree species including Acacia mangium, Acacia auriculiformis, Albezia zygia and Albezia adianthifolia.
SRL Safety Performance 2006-2009
Number of LTIs 12 10 8 6 4 2 0 Jan 08 Mar 08 Sep 08 Nov 08 Jan 09 May 08 May 07 Nov 07 Mar 09 Jan 07 Mar 07 Sep 07 Jul 08 Jul 07
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In November 2008, the Darwin team held their second annual project review meeting at the SRL plant site to discuss findings and challenges of the project. The findings of this project will help in designing a sustainable strategy for the rehabilitation of historic and current mine works at SRL. As part of SRL’s own initiative, a total of about 3ha of disturbed land at the Pejebu West dry mined-out area were also planted with trees. The tree species planted included oil palm, cashew, mango, citrus, Kpeti Kpeti Acacia mangium, Acacia auriculiformis, Albezia zygia, Albezia adianthifoli and, Perinari excelsa. The land will be handed over to local communities in due course. A trial aquaculture project for the rehabilitation of mined out ponds was started in April 2008. Six fish breeding ponds were constructed and stocked with tilapia, a popular species of fish often used in aquaculture. The first crop of fish was harvested in November 2008, and a total of 2,447 brooders and 19,901 juvenile fish were stocked in the Bamba-Belebu pond near Moriba Town. Once the trial project has been proven, the Company will work with external aquaculture experts to determine how to best use the tilapia to provide a sustainable supply of food to local communities. In partnership with a former shareholder, we have completed the construction of a trade school to teach basic trades such as plumbing, electrical, mechanical and fabrication skills to local people. We believe the Sierra Rutile Technical and Vocational Institute has a significant role to play in supporting the long term future of both our business and local communities. By providing the next generation of skilled staff for our mines the Institute will enable us to minimise the use of expatriate and non local employees whilst also improving incomes and work prospects for people living around our operations. We are now working with a leading NGO to establish an operating budget for the school and will then assess options for funding the school in partnership with the Government, NGOs and others. The Sierra Rutile Foundation continues to hold discussions with the local communities on suitable sustainable projects that the Foundation can support.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 13
Principal Risks
Exploration and development risk Mineral exploration and development involves a high degree of risk. Success in exploiting mineral resources and reserves is the result of a number of factors, including the level of geographical and technical expertise, the quality of land available for exploration and other factors. The economics of developing mineral properties are affected by many factors including the cost of operations, variations in grade, fluctuation in prices, fluctuation in exchange rates and others. Operating risks The activities of the group are subject to all of the hazards and risks normally associated with exploration, development and operation of natural resource projects. These risks and uncertainties include environmental hazards, industrial accidents, labour disputes, mechanical failures of the dredges or other key plant or machinery, grade problems, periodic interruptions due to inclement or hazardous weather conditions and other acts of God. Should any of the risks affect the Group, it may significantly reduce production for prolonged periods and cause the cost of production to increase to a point where it would no longer be economic to continue operations. Estimates of mineral reserves and resources Mineral reserves and resources estimates for projects are based on the interpretation of geological data obtained from drill holes and other sampling techniques and feasibility studies which derive estimates of costs based upon anticipated tonnage and grades to be mined and processed. There are numerous uncertainties inherent in estimating ore reserves and assumptions that are valid at the time of estimation may change significantly when new information becomes available. Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of reserves and may, ultimately, result in the reserves being restated. Insurance Common to other mining companies, TRG is subject to risk which could result in damage to or destruction of mineral properties and operating assets, personal injury or death, environmental damage, delays in extraction and possible legal liability. Accordingly, TRG may suffer losses, liabilities or damages against which it cannot insure or against which it may elect not to insure because it is too expensive relative to the perceived risk. Should such liabilities or damages arise, they could reduce or eliminate any future profitability, result in increased costs and the loss of the Group’s assets and a decline in the value of the Company’s securities.
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In April 2009, the Company reached a settlement agreement with the second largest reinsurer in respect of the claim for property damage and business interruption following the capsize of the dredge D2 in July 2008. The Company continues to pursue its claims with the other reinsurers, however there can be no assurance that further agreements will be reached. Competition The mining industry is competitive in all of its phases. The Group faces strong competition from other mining companies in connection with the acquisition of mineral properties, as well as for the recruitment and retention of qualified employees. Larger companies, in particular, may have access to greater financial resources, operational experience and technical capabilities than the Group which may give them a competitive advantage. Volatility of mineral prices The future profitability of the Group will depend on the market price of rutile. Mineral prices fluctuate widely and are affected by numerous factors beyond the Group’s control, including global supply and demand, political and economic conditions, advancements in mineral processing and currency exchange fluctuations. The effect of these factors on the price of rutile cannot accurately be predicted. Political risk The Group’s properties are located in Sierra Leone and its operations may be affected in varying degrees by political and economic instability, crime, fluctuations in currency exchange rates and inflation. Whilst there can be no certainty about the future stability of the country, we note that there was a successful transfer of power following the national elections in August 2007. Protection of assets and personnel The Company is confident that it will be able to maintain effective security in connection with its assets or personnel in Sierra Leone. Unless the Government can provide the necessary degree of peace, order and security, the cost to, and the ability of, the Group to maintain effective security over its assets in Sierra Leone will be adversely affected. The Group maintains its own security team of local employees who are trained and managed by security specialists. The primary focus of the team is on loss prevention. The rapid reaction component of the security team is no longer considered necessary.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 15
Principal Risks
Title to properties The Company is satisfied that it has taken reasonable measures to ensure that proper title to the mining leases of SRL has been obtained and that all grants of mineral rights for the Group’s properties have been registered in the appropriate deeds offices. No assurance can be given, however, that any lease, licence or permit held by the Group will not be challenged or impugned in the future. Government regulation The Group’s mining operations are located in Sierra Leone and are subject to its laws and regulations governing expropriation of property, health and worker safety, employment standards, waste disposal, protection of the environment, mine development, land and water use, prospecting, mineral production, exports, taxes, the protection of endangered and protected species and other matters. While the Group believes that it is in substantial compliance with all material laws and regulations currently affecting its activities, future changes in applicable laws, regulations, agreements or changes in their enforcement or regulatory interpretation could result in changes in legal requirements or in the terms of existing permits and agreements applicable to the Group or its properties, which could have a material adverse impact on the Group’s current operations or future development projects. Where required, obtaining necessary permits and licences can be a complex, time-consuming process and the Group cannot assure whether any necessary permits will be obtainable on acceptable terms, in a timely manner or at all. Environmental regulation Environmental and safety legislation (e.g. in relation to reclamation, disposal of waste products, protection of wildlife and otherwise relating to environmental protection) may change in a manner that may require stricter or additional standards than those now in effect, a heightened degree of responsibility for companies and their directors and employees and more stringent enforcement of existing laws and regulations. There may also be unforeseen environmental liabilities resulting from mining activities, which may be costly to remedy. If the Group is unable to fully remedy an environmental problem, it may be required to stop or suspend operations or enter into interim compliance measures pending completion of the required remedy. The potential exposure may be significant and could have a material adverse effect on the Group. Rehabilitation Costs associated with rehabilitating land disturbed during the mining process and addressing environmental, health and community issues are estimated and provided for based on the most current information available. Estimates may, however, be insufficient and/or further issues may be identified.
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Energy cost and supply The Group’s operations are energy intensive and, as a result, the Group’s costs and earnings could be adversely affected by rising energy costs or by supply disruptions. The following factors could materially adversely affect the Group’s energy position: the unavailability of energy due to a variety of reasons including significant increases in costs of supplied fuel, interruptions in energy supply due to equipment failure or other causes. Currency risk While the Group’s revenue is principally in US dollars, a significant portion of the Group’s expenses incurred in connection with the projects will be in Sierra Leone’s local currency, the Leone. In addition, the EU loan facility is in Euros. As a result, fluctuations in currency exchange rates could have a material adverse effect on the financial condition, results of operation or cash flow of the Group. The Group has not entered into any hedging arrangements with respect to foreign currencies. Dependence on key personnel, contractors, experts and other advisers The success of the operations of the Group is dependent to a significant extent on the efforts and abilities of its management, outside contractors, experts and other advisers. The Company has a small management team and the loss of a key individual could affect the Group’s business. While the Company has entered into service agreements with certain of its key executives, the retention of their services cannot be guaranteed. Accordingly, the loss of any key executive or manager of the Group may have an adverse effect on the future of the Group’s business. Additional Funds The Company does not have sufficient cash resources to rehabilitate Dredge D2, and it continues to pursue its insurance claims for property damage and business interruption. No assurance can be given that the Company will be able to secure funds to rehabilitate the dredge or, if available, that such funds can be obtained on commercially reasonable terms. The availability of equity or debt financing to the Group is likely to be affected by many factors, including world and regional economic and political conditions, fluctuations in the price of the Group’s products, the outlook for the industry, competition for funds for alternative investment projects, and investor confidence in the industry.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 17
Board of Directors
Walter Kansteiner III Non-Executive Chairman Mr. Kansteiner has over twenty years experience with African and emerging market business issues. A founding principal of The Scowcroft Group, he has advised corporations on a wide range of mergers, acquisitions and privatisations throughout Africa and has been involved with transactions in telecommunications, forestry, mining, financial services, healthcare and aviation services. Previously, Mr. Kansteiner served three years as Assistant Secretary of State for African Affairs. In this capacity, he was responsible for U.S. foreign policy in Africa. From 1980 to 1986, Mr. Kansteiner was executive vice president of a commodity trading and processing company, which specialised in tropical commodities (coffee, cocoa and sugar). In addition to his business experience in emerging markets, from 1989 to 1992, Mr. Kansteiner served in the U.S. Government as the Director of African Affairs on the National Security Council staff. He also served as the Africa specialist on the Secretary of State’s Policy Planning Staff, and with the Department of Defense as a member of the strategic minerals task force. He holds graduate degrees in international economics and ethics from American University and Virginia Theological Seminary, respectively. He is a member of the Council on Foreign Relations, and serves on various boards in the U.S. and Africa. John Bonoh Sisay Chief Executive Mr. Sisay started his career as a graduate trainee at the Central Selling Organization (CSO) of De Beers Consolidated Mines, Ltd where he learned the contours of the mining industry, in particular with regards to diamonds. After working at the CSO, Mr. Sisay joined America Minerals Fields, now part of First Quantum, and worked on new acquisitions for the company, particularly in the Democratic Republic of Congo. Mr. Sisay joined SRL in 2001. Jean Lindberg Charles Chief Financial Officer Mr. Charles has significant financial and auditing experience as well as a deep understanding of the Company’s operations. Between April 2005 and October 2008, Mr. Charles held a number of positions at TRG, latterly Group Financial Controller, based at the minesite in Sierra Leone. Whilst at TRG, Mr. Charles was responsible for implementing a new management information system, setting up the accounts department for Sierra Rutile and developing the Company’s multi dredge financial model. Prior to joining TRG, Mr. Charles worked as an auditor for Ernst & Young and as Country Financial Controller of Le Meridien Hotels & Resorts in the Seychelles and Gabon. Mr Charles is a Fellow of the Chartered Association of Certified Accountants, England & Wales (FCCA) and a Non Executive Director of Raphael Fishing Company Limited, a company incorporated in Mauritius. Rod Baker B.SC., M.SC. Non-Executive Director Mr. Baker has over thirty five years experience as a mineral exploration geologist in many countries in five continents. He started his professional career in North Sea gas as a geologist before joining the Anglo American Corporation to work in southern Africa. He then joined a South African consulting group and carried out work for clients such as Rio Tinto, Selection Trust, U.S. Steel, Falconbridge and Billiton on a number of commodities. In 1981, he became an independent consultant working largely for the United Nations and other clients in Africa, India and the Americas. For the last sixteen years he has been engaged mostly in pursuit of his own diamond and gold interests in South America. He has a long familiarity with Sierra Leone and West Africa. He was also a founding director of Diamond Field Resources Inc. Mr. Baker received a B.Sc. in geology from Nottingham University and an M.Sc. in mineral exploration from Leicester University.
18 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
François Colette Non-Executive Director Mr. Colette has more than 25 years experience in mining in Africa having worked for Gécamines as Technical Manager for the West Group and AMFI-Adastra as Congo country manager. While at AMFI-Adastra he was in charge of their copper, cobalt and zinc projects, including Kolwezi Tailings. Between 1990 and 1996, Mr Colette worked mostly as a consultant to Sofremines (France) in relation to a number of copper, cobalt, zinc and gold projects in Romania, Russia, Kazakhstan, Zaire, and Cuba. Raju Jaddoo Non-Executive Director Mr Jaddoo joined the Group prior to its admission to AIM in August 2005. He had previously worked in Africa and Eastern Europe on a wide range of assignments ranging from corporate finance, business consulting and strategic advice on cost improvement and revenue enhancement. His experience covers over twelve countries in Africa including western Africa. Mr Jaddoo has also worked on a number of World Bank funded assignments by providing a broad range of economic, financial, organisational and socio-economic planning services to government and private industry. He has advised and assisted international industry experts in formulating innovative strategies in the provision of public services by the private sector (public private partnerships, executive agencies, contracting out, output based contracts) in diverse fields such as transportation and logistics, power, telecommunications, ports and airports and within the resource industry. Mr Jaddoo qualified as Chartered Accountant in London in 1989 and is currently a Fellow of the Institute of Chartered Accountants in England and Wales. Alex B. Kamara Non-Executive Director Mr. Kamara has considerable experience in the mining industry and in mechanical and electrical engineering. Mr. Kamara was Head of Engineering at SRL from 1982 to 1995, and head of the management team at the Sierra Leonean National Power Authority from 2000-2002. Mr. Kamara is a Sierra Leonean national and has been awarded the Order of Commander of the Rokel by the Government of Sierra Leone, a high civilian award in recognition of his contribution to engineering in Sierra Leone. Mr. Kamara is a Non-Executive Director of Cemmats Group, a Sierra Leonean company which has a number of contracts with Sierra Rutile Limited. Mr. Kamara was appointed as a Non-Executive Director in March 2008.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 19
Advisers
Company Secretary Audrey Irene Hoe-Richardson investors@titaniumresources.com Contact details Titanium Resources Group 20 Hill Cot Road Hillstation Freetown Sierra Leone Registered Agents and Office SHRM Trustees (BVI) Limited Trinity Chambers P.O. Box 4301 Road Town Tortola British Virgin Islands Nominated advisers Ambrian Partners Limited Old Change House, 128 Queen Victoria Street London EC4V 4BJ Stockbrokers Arbuthnot Arbuthnot House 20 Ropemaker Street London EC2Y 9AR Solicitors Olswang Solicitors 90 High Holborn London WC1V 6XX Auditors BDO De Chazal Du Mee 10, Frere Felix De Valois Street Port Louis Mauritius Registrars Computershare Investor Services (Channel Islands) Limited P.O. Box 83 Ordnance House 31 Pier Road St Helier Jersey JE4 8PW Channel Islands Company number 629748
20 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
Directors’ Report
The Directors submit their report and the audited financial statements of the Company for the year ended 31 December 2008. Results and dividend The results of the Company are shown on page 27. The Directors have not declared a dividend during the year (2007: $nil). Principal activities and review of the business The Company’s principal activity is exploring for, producing and marketing industrial minerals, primarily rutile, in Sierra Leone, West Africa. The Company owns the Sierra Rutile mine in Sierra Leone. Health, Safety, Environment and Communities The Company has agreed to take on the same performance obligations as members of the International Council on Mining & Metals and seeks continual improvement in non-financial performance so as to enhance shareholder value. Employee Policies and Involvement Our operations aim to record zero accidents causing harm to any individual through the following standards: I We provide adequate control of health and safety risks and regular monitoring to assess the appropriateness of these risks over time; I We provide appropriate training, equipment and maintenance to prevent accidents; I We consult with employees at all levels to ensure that their instruction, supervision and levels of competency are appropriate to their position; I We review and report on health and safety at our operations as part of internal management practice and external communications; and I The SRL mine site has a fully staffed and equipped clinic which is funded by the company and provides free healthcare for employees, their dependants and the local population. Corporate Governance The Directors intend, where practicable for a company of Titanium Resources’ size and nature, to comply with the Combined Code. The Directors have established audit and remuneration committees. The Company has departed from certain aspects of the guidelines set out in the Combined Code and the Corporate Governance Guidelines for AIM companies published by the QCA in
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 21
Directors’ Report
that the Non-Executive Directors have been granted options. However, the options are not subject to performance criteria. In the opinion of the Directors, these options are not considered to be material enough to either the Company or each Non-Executive Director concerned to impair the independence of the Company’s Non-Executive Directors. At 31 December 2008, the Board comprised three Executive Directors and three Non-Executive Directors. After the end of the year, Jean Lindberg Charles was appointed as a Non-Executive Director and subsequently became an Executive Director, Len Comerford resigned as an Executive Director, Raju Jaddoo resigned as an Executive Director and subsequently became a Non-Executive Director and François Colette was appointed as a Non-Executive Director. The Board now comprises two Executive Directors, being John Sisay as CEO and Lindberg Charles as CFO, and five NonExecutive Directors, being Walter Kansteiner, Raju Jaddoo, Rod Baker, Alex Kamara and François Colette. The Board meets monthly throughout the year, and as and when issues arise which require Board attention. Remuneration Committee The remuneration committee, which is chaired by Mr. Kansteiner, and includes Mr. Baker and Mr. Jaddoo (all Non-Executive Directors), determines the terms and conditions of service, including the remuneration and grant of Options to Directors (both Executive and Non-Executive) and others under the Share Option Scheme and any other future share option schemes and arrangements adopted by the Company. The remuneration committee meets at least once a year. Audit Committee The audit committee, which is chaired by Mr. Jaddoo, and includes Mr. Kamara and Mr. Colette, (all Non-Executive Directors), has primary responsibility for monitoring the quality of internal controls, for ensuring that the financial performance of the Company is properly measured and reported on and for reviewing reports from the Company’s auditors relating to the Company’s accounting and internal controls. The audit committee meets at least three times a year. The Company has adopted a code for Directors’ dealings appropriate for a company with shares admitted to trading on AIM and will take all reasonable steps to ensure compliance by the Directors and any relevant employees.
22 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
Directors and their interests The names of the Directors who held office during the year and after the year end are listed below. Mr. Walter Kansteiner (appointed 16 February 2005) Mr. Len Comerford (resigned on 3 February 2009) Mr. Wayne Malouf (resigned on 24 October 2008) Mr. Raju Jaddoo (appointed 19 July 2005 and became a Non-Executive on 20 April 2009) Sir. Samuel E Jonah (resigned on 24 October 2008) Mr. Rod Baker (appointed 4 August 2005) Baroness Valerie Amos (appointed 10 March 2008 and resigned on 24 October 2008) Mr Alex Kamara (appointed 10 March 2008) Mr John Bonoh Sisay (appointed 10 March 2008 and became CEO on 3 February 2009) Mr Jean Lindberg Charles (appointed 9 February 2009 and became CFO on 20 April 2009) Mr François Colette (appointed 11 May 2009) None of the Directors held shares as at December 31, 2008. Directors held the following options to common shares: Exercise price Date of Grant Date of Expiry Number of Options Mr Walter Kansteiner 47.00p 15 August 2005 15 August 2010 399,999 75.50p 13 February 2008 13 February 2013 125,000 Mr Raju Jaddoo 47.00p 15 August 2005 15 August 2010 300,000 75.50p 13 February 2008 13 February 2013 125,000 Mr Rod Baker 47.00p 15 August 2005 15 August 2010 174,999 75.50p 13 February 2008 13 February 2013 125,000 Mr Len Comerford 77.75p 1 May 2006 1 May 2011 750,000 75.50p 13 February 2008 13 February 2013 125,000 Mr John Sisay 47.00p 15 August 2005 15 August 2010 174,999 75.50p 13 February 2008 13 February 2013 100,000
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 23
Directors’ Report
Share Capital Details are set out in the notes to financial statements. Substantial Shareholders So far as the Directors are aware, the following shareholders had an interest in 3% or more of the voting capital of the Company as at 31 December 2008: Holder No. of common shares Percentage Holding Ospraie Management LLC 114,981,497 49% M&G Investment Management Limited 25,825,000 11% Leopard Titanium Limited 23,427,856 10% Ingalls & Snyder LLC 22,900,000 10% Mackenzie Financial Corporation 16,825,200 7% Going Concern The Board, after making suitable enquiries, is satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, the Board continues to adopt the going concern basis in preparing the financial statements. Annual General Meeting The AGM of the company will be held at 9:00 am (British Summer Time) on 11 June at the offices of Olswang at 90 High Holborn, London, WC1V 6XX. The notice convening the meeting is being sent to shareholders with this report. Resolutions relating to the meeting are set out in the Notice of Meeting. Proxy Voting Proxy cards will be distributed to shareholders with the Notice of the AGM.
24 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
Statement of Directors’ Responsibilities The Directors are required to prepare financial statements that give a true and fair view of the state of affairs of the Company at the end of its financial year and of the profit or loss of the Company for the year. In preparing these financial statements, the Directors are required to: I Select suitable accounting policies and apply them consistently; I Make judgments and estimates that are reasonable and prudent; I State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and I Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are also responsible for keeping proper accounting records, which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the provisions in the International Accounting Standards and International Financial Reporting Standards. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Auditors A resolution for the re-appointment of BDO De Chazal Du Mee as auditors of the Company is to be proposed at the forthcoming annual general meeting.
Audrey Richardson Company Secretary 19 May 2009
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 25
Independent Auditors’ Report to the Members
This report is made solely to the members of Titanium Resources Group Ltd (the “Company”), as a body. 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 auditors’ 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. Report on the Financial Statements We have audited the financial statements of Titanium Resources Group Ltd and its subsidiaries (the “Group”) on pages 6 to 44 which comprise the balance sheets at December 31, 2008 and the income statements, statements of changes in equity and cash flow statements for the year then ended, and a summary of significant accounting policies and other explanatory notes. Directors’ Responsibility for the Financial Statements The directors are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the group’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements on pages 27 to 64 give a true and fair view of the financial position of the Group at December 31, 2008 and of their financial performance and their cash flows for the year then ended in accordance with International Financial Reporting Standards. Report on Other Legal and Regulatory Requirements We have no relationship with or interests in the group other than in our capacity as auditors, tax and business advisers and dealings in the ordinary course of business. We have obtained all information and explanations we have required. In our opinion, proper accounting records have been kept by the group as far as it appears from our examination of those records. Port Louis, Mauritius 19 May 2009 BDO De Chazal Du Mée Chartered Accountants
26 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
Consolidated Balance Sheet
D EC E M B E R 31 , 20 0 8
Notes
2008 USD’000
2007 USD’000
A S S ET S
Non-current assets
Property, plant and equipment Intangible assets Non-current receivables Deferred tax assets
5 6 9 10(a)
125,503 13,311 753 – 139,567
142,348 13,150 753 86,879 243,130 14,890 21,562 211 25,731 62,394 305,524
Current assets
Inventories Trade and other receivables Current tax assets Cash and cash equivalents
11 12 18(d) 28(c)
14,482 23,258 70 7,362 45,172
Total assets
184,739
EQ U I T Y A N D L I A B I L I T I E S
Capital and reserves Share capital Revenue (deficit)/reserve Equity holders’ interest
LIABILITIES
Non-current liabilities
13(a)
238,026 (123,128) 114,898
237,041 4,154 241,195
Borrowings Provisions for liabilities and charges
15 16
45,073 3,261 48,334
44,119 2,833 46,952 17,233 144 17,377 64,329 305,524
Current liabilities
Trade and other payables Borrowings
17 15
21,499 8 21,507
Total liabilities Total equity and liabilities
69,841 184,739
These financial statements have been approved for issue by the Board of Directors on:
}
Directors
The notes on pages 31 to 64 form an integral part of these financial statements. Auditors’ Report on page 26.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 27
Consolidated Income Statement
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
Notes
2008 USD’000
2007 USD’000
Sales Cost of sales Gross loss Other income Administrative and marketing expenses Exceptional item Finance costs Loss before taxation Taxation Loss for the year attributable to equity holders of the group Loss per share (USD) – basic – diluted The notes on pages 31 to 64 form an integral part of these financial statements. Auditors’ Report on page 26.
2(o) 20 22 20 23 24 19 18(a)
49,417 (72,315) (22,898) 518 (7,932) (30,312) (7,707) (2,338) (40,357) (86,925) (127,282)
67,849 (72,261) (4,412) 2,618 (6,281) (8,075) (2,445) (6,497) (17,017) 302 (16,715) (0.07) (0.07)
26(a) 26(b)
(0.52) (0.52)
28 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
Consolidated Statement of Changes in Equity
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
Share capital USD’000
Revenue reserve/ (deficit) USD’000
Total USD’000
Balance at January 1, 2008 Employee share options: – Options vested Loss for the year
At December 31, 2008
237,041 985 – 238,026 198,160 34,658 3,984 239 – 237,041
4,154 – (127,282) (123,128) 20,869 – – – (16,715) 4,154
241,195 985 (127,282) 114,898 219,029 34,658 3,984 239 (16,715) 241,195
Balance at January 1, 2007 Issue of share capital Employee share options: – value of employee services – shares issued on exercise of options Loss for the year
At December 31, 2007
The notes on pages 31 to 64 form an integral part of these financial statements. Auditors’ Report on page 26.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 29
Consolidated Cash Flow Statement
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
Notes Cash flows from operating activities
2008 USD’000
2007 USD’000
Cash absorbed in operations Interest received Interest paid Tax paid
Net cash used in operating activities Cash flows from investing activities
28(a)
(23,986) 436 (1,241) (351) (25,142) (32,803) (210) 99 28,676 (4,238) – – 11,147 11,147 (18,233)
(5,913) 2,182 (81) (500) (4,312) (57,399) (78) 14 – (57,463) 34,658 355 – 35,013 (26,762)
Purchase of property, plant and equipment Purchase of intangible assets Proceeds from disposal of plant Proceeds from disposal of subsidiaries
Net cash generated from/(used in) investing activities Cash flows from financing activities
27(a)
Issue of ordinary shares Proceeds from exercise of options Proceeds from repayment of loan
Net cash from financing activities Net decrease in cash and cash equivalents Movement in cash and cash equivalents
At January 1 Decrease
At December 31
25,587 (18,233) 28(c) 7,354
52,349 (26,762) 25,587
The notes on pages 31 to 64 form an integral part of these financial statements. Auditors’ Report on page 26.
30 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
1. GEN ER AL I N FOR MATION
Titanium Resources Group Ltd is a public limited liability company incorporated and domiciled in the British Virgin Islands. The address of its registered office is at PO Box 4301, Trinity Chambers, Road Town, Tortola, British Virgin Islands. These financial statements will be submitted for consideration and approval at the forthcoming Annual Meeting of shareholders of the group.
2. SIGN I F IC ANT ACCOU NTI NG POLICI ES
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
(a) Basis of preparation
The financial statements of Titanium Resources Group Ltd have been prepared in accordance with International Financial Reporting Standards (IFRS). Where necessary, comparative figures have been amended to conform with change in presentation in the current year. The financial statements are prepared under the historical cost convention, except that available-for-sale investments are stated at their fair value. Amendments to published standards, Standards and Interpretations issued but not yet effective. Certain standards, amendments to published standards and interpretations have been issued that are mandatory for accounting periods beginning on or after January 1, 2009 or later periods, but which the Group has not adopted early. At the date of authorisation of these financial statements, the following new standards and interpretations were in issue but not yet effective: IFRS 8 Operating Segments IFRIC 13 Customer Loyalty Programmes IFRIC 15 Agreements for the construction of Real Estate IFRIC 16 Hedges of a net investment in a Foreign Operation IFRIC 17 Distributions of Non–cash Assets to Owners IFRS 3 Business Combinations (Revised May 2008) IAS 1 Presentation of Financial Statements (Revised May 2008) IAS 16 Property, Plant and Equipment (Revised May 2008) IAS 19 Employee Benefits (Revised May 2008) IAS 20 Government Grants and Disclosure of Government Assistance (Revised May 2008) IAS 23 Borrowing Costs (Revised May 2008) IAS 27 Consolidated and Separate Financial Statements (Revised May 2008) IAS 28 Investments in Associates (Revised May 2008) IAS 29 Financial Reporting in Hyperinflationary Economies (Revised May 2008) IAS 31 Interests in Joint Ventures (Revised May 2008) IAS 32 Financial Instruments: Presentation (Revised May 2008) IAS 36 Impairment of Assets (Revised May 2008) IAS 38 Intangible Assets (Revised May 2008)
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 31
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
2. SIGN I F IC ANT ACCOU NTI NG POLICI ES
(CONTI N U ED)
IAS 39 Financial Instruments: Recognition and Measurement (Revised May 2008) IAS 40 Investment Property (Revised May 2008) IAS 41 Agriculture (Revised May 2008) IFRS 1 First-time Adoption of International Financial Reporting Standards (Revised May 2008) IFRS 2 Share-Based Payment (Revised May 2008) IFRS 5 Non-current Assets Held for Sale and Discontinued Operations (Revised May 2008) The Group is still evaluating the effect that these new or revised standards and interpretations will have on the presentation of its financial statements. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in Note 4.
(b) Investment in subsidiaries Consolidated financial statements
The consolidated financial statements incorporate the financial statements of the company and enterprises controlled by the company (its subsidiaries) made up to December 31, each year. Control is achieved where the company has the power to govern the financial and operating policies of an investee enterprise so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the date of their acquisition or up to the date of their disposal. The consolidated financial statements have been prepared in accordance with the purchase method. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement in the year of acquisition. The results of subsidiaries which are not consolidated are brought into the financial statements to the extent of dividends received. All significant intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used in line with those adopted by the Group.
(c) Property, plant and equipment
Property, plant and equipment are stated at historical cost less accumulated depreciation. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. Cost also includes environmental decommissioning costs that are recognised as a liability. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets.
32 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
2. SIGN I F IC ANT ACCOU NTI NG POLICI ES
(c) Property, plant and equipment (continued)
(CONTI N U ED)
Where an item of property, plant and equipment comprises major components with different useful lives, the components are accounted for as separate items of property, plant and equipment. Subsequent expenditure relating to an item of property, plant or equipment is capitalised when it is probable that the future economic benefits from the use of the asset will increase by more than the expenditure incurred. All other subsequent expenditure is recognised as an expense in the period in which it is incurred.
Deposit, exploration, evaluation, mine development expenditure and deferred project expenditure
In respect of deposit, minerals, exploration, evaluation and deferred project, expenditure is charged to the income statement as incurred except where: – it is expected that the expenditure will be recouped by future exploitation or sale; or – substantial exploration and evaluation activities have identified a mineral resource but these activities have not reached a stage which permits a reasonable assessment of the existence of commercially recoverable reserves in which case the expenditure is capitalised. Expenditure relating to both deposit and dam development and mine development are accumulated separately for each identifiable area of interest. Such expenditure comprises net direct costs and an appropriate portion of related overhead expenditure. Expenditure is carried forward when incurred in areas where economic mineralisation is indicated, but activities have not yet reached a stage which permits reasonable assessment of the existence of economically recoverable reserves, and active and significant operations in relation to the area are continuing. Each such project is regularly reviewed. If the project is abandoned or it is considered unlikely that the project will proceed to development, accumulated costs to that point are written off immediately. Each area of interest is limited to a size related to a known or probable mineral resource capable of supporting a mining operation. Projects are advanced to development status when it is expected that accumulated and future expenditure can be recouped through project development or sale. Expenditure relating to other expenses consists primarily of costs which provides benefit to the development of the mine in general and is not specifically identifiable to a particular project.
Mining leases
The Group’s mining leases are of sufficient duration (or convey a legal right to renew for sufficient duration) to enable all reserves on the leased properties to be mined in accordance with current production schedules.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 33
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
2. SIGN I F IC ANT ACCOU NTI NG POLICI ES
(d) Amortisation and depreciation
(CONTI N U ED)
Amortisation of deferred project expenditure is based on the estimated useful life of the asset to which the expenditure relates. Depreciation is provided at rates calculated to write off the cost of fixed assets to their residual value over their estimated useful lives as follows: Building – 4% Infrastructure – 5% Plant, machinery & equipment – 5% to 20% Vehicles – 3 to 5 years Mineral rights – Based on the estimated life of reserves Exploration, evaluation and mine development – Based on the estimated life on proven and expenditure, and expenditure on mineral rights probable reserves Changes in estimates are accounted for over the estimated remaining economic life of the remaining commercial reserves of each project as applicable.
(e) Intangible assets (i) Goodwill
Goodwill represents the excess of cost of acquisition over the Group’s interest in the fair value of the net identifiable assets of the acquired subsidiaries at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Any net excess of the Group’s interest in the net fair value of acquiree’s net identifiable assets over cost is recognised in the income statement. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. On disposal of a subsidiary, the attributable amount of goodwill is included in the determination of the gains and losses on disposal. Goodwill is allocated to cash–generating units for the purpose of impairment testing.
(ii) Computer software
Acquired computer software licences are capitalised on the basis of costs incurred to acquire and bring to use the specific software and are amortised over their estimated useful lives, estimated to be five years.
(f) Impairment of assets
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the carrying amount of the asset exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).
34 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
2. SIGN I F IC ANT ACCOU NTI NG POLICI ES
(g) Foreign currencies (i) Functional and presentation currency
(CONTI N U ED)
Items included in the financial statements of each of the group’s entities are measured using United States Dollars, the currency of the primary economic environment in which the entity operates (“functional currency”). The consolidated financial statements are presented in United States Dollars, which is the group’s functional and presentation currency.
(ii) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing on the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date the fair value was determined.
(h) Financial instruments (i) Financial assets Categories of financial assets
The group classifies its financial assets as available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its financial assets at initial recognition.
(a) Available-for-sale financial assets
Available for sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within twelve months of the balance sheet date.
Initial measurement
Purchases and sales of financial assets are recognised on trade date, the date on which the company commits to purchase or sell the asset. Investments are initially measured at fair value plus transaction costs for all financial asset except those that are carried at fair value through profit or loss.
Subsequent measurement
Available-for-sale financial assets are subsequently carried at their fair values. Investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 35
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
2. SIGN I F IC ANT ACCOU NTI NG POLICI ES
Subsequent measurement (continued)
(CONTI N U ED)
Unrealised gains and losses arising from changes in the fair value of financial assets classified as available-for-sale are recognised in equity. When financial assets classified as available-for-sale are sold or impaired, the accumulated fair value adjustments are included in the income statement as gains and losses on financial assets. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active, the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions and reference to other instruments that are substantially the same.
Impairment of financial assets
The group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of financial assets classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in equity – is removed from equity and recognised in the income statement. If the fair value of a previously impaired debt security increases and the increase can be objectively related to an event occuring after the impairment loss was recognised, the impairment loss is reversed and the reversal recognised in the income statement. Impairment losses for an investment in an equity instrument are not reversed through the income statement.
(ii) Long term receivables
Long term receivables with fixed maturity terms are measured at amortised cost using the effective interest rate method, less provision for impairment. The carrying amount of the asset is reduced by the difference between the asset’s carrying amount and the present value of estimated cash flows discounted using the effective interest rate. The amount of loss is recognised in the income statement. Long term receivables without fixed maturity terms are measured at cost. If there is objective evidence that an impairment loss has been incurred, the amount of impairment loss is measured as the difference between the carrying amount of the asset and the present value (PV) of estimated cash flows discounted at the current market rate of return of similar financial assets.
(iii) Trade receivables
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of provision is recognised in the income statement.
(iv) Trade payables
Trade payables are stated at fair value and subsequently measured at amortised cost using the effective interest method.
36 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
2. SIGN I F IC ANT ACCOU NTI NG POLICI ES
(v) Borrowings
(CONTI N U ED)
Borrowings are recognised initially at fair value being their issue proceeds net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Preference shares, which are mandatorily redeemable on a specific date, are classified as liabilities. The dividends on these preference shares are recognised in the income statement as interest expense. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least twelve months after balance sheet date.
(vi) Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet.
(vii) Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as deduction, net of tax, from proceeds.
(i) Inventories
Inventories are stated at the lower of cost or net realisable value where cost is defined as follows: Titanium bearing minerals Concentrates Stockpiles Materials Fuel and sundry expenses Goods-in-transit – Production cost and attributable overheads – Production cost – Production cost – Average cost – Purchase cost – Invoice cost excluding freight
Net realisable value is the estimate of the selling price in the ordinary course of business, less the costs of completion and selling expenses.
(j) Deferred income taxes
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates that have been enacted by the balance sheet date and are expected to apply in the period when the related deferred income tax asset is realised or the deferred income tax liability is settled.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 37
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
2. SIGN I F IC ANT ACCOU NTI NG POLICI ES
(j) Deferred income taxes (continued)
(CONTI N U ED)
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be generated against which deductible temporary differences can be utilised.
(k) Agricultural Development Fund
The Group commits the higher of 0.1% (one tenth of one percent) of gross sales revenue in US dollars for each year, based on gross sales free alongside ship at the Sierra Leone Port of Shipment, or USD 75,000 and this shall be used exclusively for the development of agriculture in the areas affected by operations under the mining lease or in areas adjacent thereto within the same chiefdom. The annual amounts are paid over to the separate fund set up and controlled by the GOSL, chiefdom representatives, and the company’s representatives.
(l) Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are capitalised until such time as the assets are substantially ready for their intended use or sale. Other borrowing costs are expensed.
(m) Retirement benefit obligations Short-term employee benefits
The cost of all short-term employee benefits is recognised during the period in which the employees render the related service.
Long-term employee benefits
The Group does not operate any retirement benefit plan for its employees. For a Sierra Leone based company, the company makes a contribution of 10% of the employees’ basic salary to the National Social Security and Insurance Trust for payment of pension to staff on retirement. The employees also contribute 5% of their basic salary to the Trust. The Sierra Leone based company also provides for end of term benefits based on the provisions contained in the Collective Bargaining Agreements; these benefits are paid to employees falling under this category when they leave the company.
Share options scheme
The Group operates a share option scheme. The fair value of the employee services received in exchange for the grant of the options was recognised as an expense up to May 16, 2007, the date on which the conditions pertaining to “consideration to be paid on exercise of the option’’ were changed. Henceforth, the consideration values of the options vesting are accounted as receivables. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted. At each balance sheet date, the entity revises its estimates of the number of options that are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment to equity over the remaining vesting period.
(n) Provision for rehabilitation
Costs of reclamation and rehabilitation are assessed on a regular basis and estimated costs are provided over the life of the mine. The expenditure and provisions include costs of labour, materials and equipment required to rehabilitate disturbed areas, cost of reclamation, plant and infrastructure closure and subsequent environmental monitoring. The estimates are not discounted and are based on current costs, legislature and community requirements and technology. Expenditure relating to ongoing rehabilitation and restoration programmes is charged against the provisions made.
38 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
2. SIGN I F IC ANT ACCOU NTI NG POLICI ES
(o) Revenue recognition
(CONTI N U ED)
Revenue comprises the fair value for the sale of goods and services, net of value-added tax, rebates and discounts and after eliminating sales within the Group. Sales of goods are recognised when goods are delivered and title has passed. Sales of services are recognised in the accounting year in which the services are rendered (by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of total services to be provided). Other income earned by the Group is recognised on the following basis: Interest income – on a time-proportion basis using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised either as cash is collected or on a cost recovery basis as conditions warrant; and I Dividend income – when the shareholder’s right to receive payment is established.
I
(p) Provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources, that can be reliably estimated, will be required to settle the obligation. Provisions for restructuring costs are recognised when the Group has a detailed formal plan for the restructuring which has been notified to affected parties and comprise lease termination penalties and employee termination payments. Provisions are not recognised for future operating losses.
3. F I NANCIAL R I SK MANAGEM ENT
3.1 Financial risks factors
The Group’s activities expose it to a variety of financial risks: (a) market risk (including currency risk, fair value interest risk and price risk); (b) credit risk; (c) liquidity risk; (d) cash flow interest-rate risk; and (e) country risk. The Group’s overall financial risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance. A description of the significant financial risk factors is given below together with the risk management policies applicable.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 39
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
3. F I NANCIAL R I SK MANAGEM ENT
3.1 Financial risks factors (continued) (a) Market risk Currency risk
(CONTI N U ED)
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to Leone (SLL), Euro and Sterling. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. The Group places any excess of liquidity in stable currencies as a means to hedge its exposure to foreign currency risks. At December 31, 2008, if the USD had weakened/strengthened by 5% against the Euro, with all other variables held constant, post-tax loss for the year would have been USD 2,230,000 (2007: USD 2,024,000) higher/lower, mainly as a result of foreign exchange losses/gains on translation of Euro denominated borrowings.
(b) Credit risk
The Group’s credit risk is primarily attributable to its trade receivables. The amounts presented in the balance sheet are net of allowances for doubtful receivables, estimated by the Group’s management based on prior experience and the current economic environment. The Group has no significant credit risk for the time being, as sales are based on off-take agreements with corporate customers. The Group has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history.
(c) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities. The Group aims at maintaining flexibility in funding by keeping committed credit lines available. The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date.
Less than 1 year USD’000 Between 1 and 2 years USD’000 Between 2 and 5 years USD’000 Over 5 years USD’000
At December 31, 2008 Bank borrowings – overdraft Government of Sierra Leone loan Trade and other payables (including tax)
8 – 21,499 21,507
– – – –
– 22,536 – 22,536
– 22,537 – 22,537
At December 31, 2007 Bank borrowings – overdraft Government of Sierra Leone loan Trade and other payables (including tax)
144 – 17,233 17,377
– – – –
– 14,367 – 14,367
– 29,752 – 29,752
40 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
3. F I NANCIAL R I SK MANAGEM ENT
3.1 Financial risks factors (continued)
(CONTI N U ED)
(d) Cash flow and fair value interest rate risk
As the Group has significant interest-bearing assets, its income and operating cash flows are substantially dependent of changes in market interest rates. The Group’s interest rate risk arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest-rate risk. Borrowings issued at fixed rates expose the Group to fair value interest-rate risk. Group policy is to maintain all its borrowings in fixed rate instruments. At year end, all borrowings were at fixed rates.
(e) Country risk
The Group has an operating subsidiary, namely Sierra Rutile Limited, based at Sierra Leone. The Group has taken appropriate insurance cover to mitigate exposure to the risks present there.
3.2 Fair value estimation
The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.
3.3 Capital risk management
The Group’s objectives when managing capital are: I to safeguard the entity’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders, and I to provide an adequate return to shareholders by pricing products commensurately with the level of risk. The Group sets the amount of capital in proportion to risk. The Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt. Consistently with others in the industry, the Group monitors capital on the basis of the debt-to-adjusted capital ratio. This ratio is calculated as net debt to adjusted capital. Net debt is calculated as total debt (as shown in the Balance sheet) less cash and cash equivalents. Adjusted capital comprises all components of equity (i.e. share capital, share premium, minority interest, retained earnings, and revaluation reserve) other than amounts recognised in equity relating to cash flow hedges, and includes some forms of subordinated debt.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 41
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
3. F I NANCIAL R I SK MANAGEM ENT
3.3 Capital risk management (continued)
(CONTI N U ED)
During 2008, the Group’s strategy was to maintain the debt-to-capital ratio at the lower end of the range 5% to 35%, in order to secure access to finance at a reasonable cost. The debt-to-capital ratios at December 31, 2008 and at December 31, 2007 were as follows:
2008 USD’000 2007 USD’000
Total debt Less: cash and cash equivalents Net debt Total equity Debt-to-capital ratio
45,081 (7,362) 37,719 114,898 33%
44,263 (25,731) 18,532 241,195 8%
The increase in the debt-to-capital ratio during 2008 resulted primarily from the cash absorbed in operations and increasing investment in capital assets. As a result, cash and cash equivalent decreased.
4. CR ITIC AL ACCOU NTI NG ESTI MATES AN D J U DGEM ENTS
Estimates and judgements are continuously evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
4.1 Critical accounting estimates and assumptions
The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
(a) Estimated impairment of goodwill
The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 2(e)(i). These calculations require the use of estimates (note 6).
(b) Impairment of Dredge 2
During the year under review, Dredge D2 capsized when mining in the Gangama mine; this resulted in the dredge being damaged. Management has assessed its cost for impairment and consequently recognised an impairment loss of USD 34.3 million with respect to the dredge. The actual amount of loss could be different from the USD 34.3 million depending on the extent of the damage suffered.
42 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
5. P ROP ERT Y, P L ANT AN D EQU I P M ENT ( CO N T I N U E D )
Plant, machinery and equipment USD’000 Mineral sand prospect and mine development USD’000
Infrastructure USD’000 (a) Cost
Capital work in progress USD’000
Dredge 2
Exploration USD’000
Total USD’000
At January 1, 2008 Addition Transfer Impairment charge Disposal of subsidiaries Disposal At December 31, 2008
20,341 740 – – (3,409) – 17,672
144,433 9,670 – – (6,707) (876) 146,520
48,061 3,059 – – (103) – 51,017
52,892 15,368 (16,475) – – – 51,785
25,871 2,475 16,475 (34,300) – – 10,521
1,075 1,491 – – (512) – 2,054
292,673 32,803 – (34,300) (10,731) (876) 279,569
Depreciation
At January 1, 2008 Charge for the year Disposal of subsidiaries Disposal adjustment At December 31, 2008
Net book value
14,785 419 (863) – 14,341
108,348 4,874 (2,132) (859) 110,231
27,024 2,315 (13) – 29,326
168 – – – 168
– – – – –
– – – – –
150,325 7,608 (3,008) (859) 154,066
At December 31, 2008
3,331
36,289
21,691
51,617
10,521
2,054
125,503
(b) Cost
At January 1, 2007 Addition Transfer Disposal At December 31, 2007
19,827 442 72 – 20,341
132,545 11,981 (72) (21) 144,433
41,314 6,747 – – 48,061
32,848 20,044 – – 52,892
8,731 17,140 – – 25,871
30 1,045 – – 1,075
235,295 57,399 – (21) 292,673
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 43
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
5. P ROP ERT Y, P L ANT AN D EQU I P M ENT ( CO N T I N U E D )
Plant, machinery and equipment USD’000 Mineral sand prospect and Mine development USD’000
Infrastructure USD’000 Depreciation
Capital work in progress USD’000
Dredge 2
Exploration USD’000
Total USD’000
At January 1, 2007 Charge for the year Transfer Disposal adjustment At December 31, 2007
Net book value
14,202 576 7 – 14,785
102,859 5,510 (7) (14) 108,348
25,401 1,623 – – 27,024
168 – – – 168
– – – – –
– – – – –
142,630 7,709 – (14) 150,325
At December 31, 2007
5,556
36,085
21,037
52,724
25,871
1,075
142,348
(c) Expenditure capitalised in respect of the construction in progress amounted to USD 0.5 million (2007: USD 1.5 million). Depreciation has not been charged where the assets are presently not in the condition necessary to operate in the manner intended by management. (d) Depreciation charge of USD 7,608,000 (2007: USD 7,709,000) has been charged in cost of sales. (e) During the year under review, Dredge D2 capsized when mining in the Gangama mine, this resulted in the dredge being damaged. Management has assessed its cost for impairment and consequently recognised an impairment loss of USD 34.3 million with respect to the dredge.
Goodwill USD’000 Computer software costs USD’000 Total USD’000
6. I NTANGI B LE ASSETS
(a) Cost
At January 1, 2008 Addition during the year At December 31, 2008
Amortisation
12,876 – 12,876
360 210 570
13,236 210 13,446
At January 1, 2008 Charge for the year At December 31, 2008
Net book value
– – –
86 49 135
86 49 135
At December 31, 2008
12,876
435
13,311
44 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
6. I NTANGI B LE ASSETS
(b) Cost
Goodwill USD’000
Computer software costs USD’000
Total USD’000
At January 1, 2007 Addition during the year At December 31, 2007
Amortisation
12,876 – 12,876
282 78 360
13,158 78 13,236
At January 1, 2007 Charge for the year At December 31, 2007
Net book value
– – –
43 43 86
43 43 86
At December 31, 2007
12,876
274
13,150
(c) Amortisation charge of USD 49,000 (2007: USD 43,000) has been charged in cost of sales. (d) Impairment tests for goodwill: goodwill is allocated to the Group’s cash-generating units identified according to country of operation and business activity.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 45
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
7. I NVESTM ENTS I N SU B SI DIARY COM PAN I ES
(a) The list of the Company’s significant subsidiaries is as follows:
Name 2008 Class of shares held Year/period end Proportion of ownership interest Direct Indirect Proportion of voting power held Direct Indirect Country of incorporation Main business
Titanium Fields Resources Ltd SRL Acquisition No.1 Limited SRL Acquisition No.3 Limited The Natural Rutile Company Limited Sierra Rutile Holdings Limited Sierra Rutile Limited
Ordinary
December 31, 2008
100%
– 100%
–
British Virgin Islands Intermediate holding company British Virgin Islands Intermediate holding company British Virgin Islands Intermediate holding company British Virgin Islands Marketing of Rutile
1 ‘A’ share December 31, 2008
– 100%
–
100%
Ordinary
December 31, 2008
– 100%
–
100%
Ordinary Ordinary Ordinary
December 31, 2008 December 31, 2008 December 31, 2008
– 100% – 97.54% – 97.54%
– – –
100%
97.54% British Virgin Islands Intermediate holding company 97.54% Sierra Leone Extraction, concentration and sale of Rutile and Ilmenite sands – – British Virgin Islands Agricultural projects British Virgin Islands Biofuel projects
Agricultural Resources Group Ltd Biofuel Resources Group Ltd
Ordinary Ordinary
December 31, 2008 December 31, 2008
100% 100%
– 100% – 100%
46 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
7. I NVESTM ENTS I N SU B SI DIARY COM PAN I ES ( CO N T I N U E D )
(a) The list of the Company’s significant subsidiaries is as follows:
Name 2007 Class of shares held Year/period end Proportion of ownership interest Direct Indirect Proportion of voting power held Direct Indirect Country of incorporation Main business
Global Aluminium Limited Bauxite Marketing Ltd Sierra Mineral Holdings 1 Limited Titanium Fields Resources Ltd SRL Acquisition No.1 Limited SRL Acquisition No.3 Limited The Natural Rutile Company Limited Sierra Rutile Holdings Limited Sierra Rutile Limited
Ordinary Ordinary Ordinary Ordinary
December 31, 2007 December 31, 2007 December 31, 2007 December 31, 2007
100%
–
100% – – 100%
– 100% 100% –
– 100% – 100% 100% –
British Virgin Islands Intermediate holding company British Virgin Islands Marketing of Bauxite British Virgin Islands Extraction of Bauxite British Virgin Islands Intermediate holding company British Virgin Islands Intermediate holding company British Virgin Islands Intermediate holding company British Virgin Islands Marketing of Rutile
1 ‘A’ share December 31, 2007
– 100%
–
100%
Ordinary
December 31, 2007
– 100%
–
100%
Ordinary Ordinary Ordinary
December 31, 2007 December 31, 2007 December 31, 2007
– 100% – 97.54% – 97.54%
– – –
100%
97.54% British Virgin Islands Intermediate holding company 97.54% Sierra Leone Extraction, concentration and sale of Rutile and Ilmenite sands – – British Virgin Islands Agricultural projects British Virgin Islands Biofuel projects
Agricultural Resources Group Ltd Biofuel Resources Group Ltd
Ordinary Ordinary
December 31, 2007 December 31, 2007
100% 100%
– –
100% 100%
(b) With the exception of Sierra Rutile Limited, all the subsidiaries are incorporated in the British Virgin Islands (BVI) where there is no legal requirement for the preparation and filing of audited accounts. Titanium Resources Group Ltd is quoted on the AIM market of the London Stock Exchange which requires the publication of annual audited financial statements. (c ) On July 25, 2008, the following subsidiaries, which were involved in the extraction and marketing of bauxite, were disposed: Global Aluminium Limited, Bauxite Marketing Ltd and Sierra Mineral Holdings 1 Limited.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 47
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
8. F I NANCIAL ASSETS
Cost USD’000 Available-for-sale financial assets Provision for impairment USD’000 Net USD’000
(a) The movement in financial assets are as follows:
Unlisted
At January 1, 2007 Additions At December 31, 2007 Additions At December 31, 2008
2,200 – 2,200 – 2,200
(2,200) – (2,200) – (2,200)
– – – – –
(b) Financial assets represent 15/15 fractional interest in “Class B” Share of the subsidiary company, SRL Acquisition No.1 Limited, acquired from Nord Resources Corporation in 2006. The “Class B” Share confers to the group a fixed dividend only and carries no voting rights. Since no other revenue is derived from SRL Acquisition No.1 Limited’s activities in addition to no voting rights, the investment in the “Class B” Share has thus not been accounted for as subsidiary company as required by IAS 27.
9. NON- CU R R ENT R ECEIVAB LES
2008 USD’000 2007 USD’000
Loan to the Government of Sierra Leone (see note (a) below) Other non-current receivables
727 26 753
727 26 753
(a) This represents an amount loaned to Government of Sierra Leone (GOSL) to settle existing obligations to the International Finance Corporation. The loan is unsecured and payment was due at the end of 1995.
10. DEF ER R ED I NCOM E TA X
Deferred income tax is calculated on all temporary differences under the liability method at 30%. (a) There is a legally enforceable right to offset current tax assets against current tax liabilities and deferred income tax assets and liabilities when the deferred income taxes relate to the same fiscal authority on the same entity. The following amounts are shown in the balance sheet: The following amounts are shown in the balance sheet: Deferred tax assets Deferred tax liabilities
2008 USD’000 2007 USD’000
– – –
90,561 (3,682) 86,879
At balance sheet date, the Group had unused tax losses of USD 399,810,000 (2007: USD 345,076,000) available for offset against future profits. In 2008, no deferred tax asset has been recognised in respect of such losses (2007: USD 298,441,000) due to the unpredictability of future profit streams.
48 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
10. DEF ER R ED I NCOM E TA X ( CO N T I N U E D )
(b) The movement on the deferred income tax account is as follows: At January 1 Disposal of subsidiaries (note 27(a)) Income statement (charge)/credit (note 18(a)) At December 31
2008 USD’000
2007 USD’000
86,879 (302) (86,577) –
86,373 – 506 86,879
(c) The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same fiscal authority on the same entity, is as follows: (i) Deferred tax liabilities: At January 1, 2007 Credited to Income statement At December 31, 2007 Disposal of subsidiaries Credited to Income statement At December 31, 2008 (ii) Deferred tax assets: At January 1, 2007 Credited to Income statement At December 31, 2007 Disposal of subsidiaries Charged to Income statement At December 31, 2008
11. I NVENTOR I ES
Tax losses USD’000 Others USD’000 Accelerated tax depreciation USD’000
(4,188) 506 (3,682) 164 3,518 –
Total USD’000
89,531 – 89,531 (466) (89,065) –
1,030 – 1,030 – (1,030) –
2008 USD’000
90,561 – 90,561 (466) (90,095) –
2007 USD’000
Washed Bauxite Rutile Ilmenite Consumables
– 4,878 250 9,354 14,482
2,655 2,995 824 8,416 14,890
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 49
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
12. TR ADE AN D OTH ER R ECEIVAB LES
2008 USD’000
2007 USD’00
Trade receivables Impairment on receivable Advances and prepayments Receivable from option holders (see note (i) below) Other receivable (see note (ii) below)
7,602 – 7,602 10,270 4,886 500 23,258
7,570 (17) 7,553 10,108 3,901 – 21,562
(i) This arises on options vesting after May 16, 2007, date at which the conditions pertaining to “consideration to be paid on exercise of the option” were changed. The amount is receivable from option holders on exercise of options granted to them. (ii) The USD 500,000 represents the contingent element of the disposal proceeds arising on the disposal of the three subsidiaries (see note 7(c)). (iii) The carrying amount of trade and other receivables approximates their fair value. As of December 31, 2008, no amount of trade receivables was impaired (2007: USD 17,000). The amount of the provision was nil as of December 31, 2008 (2007: USD 17,000). The ageing of these receivables is as follows:
2008 USD’000 2007 USD’00
3 to 6 months
–
17
As of December 31, 2008, trade receivables of USD 3,500,000 (2007: USD 2,512,000) were past due but not impaired. These relate to independent customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows:
2008 USD’000 2007 USD’00
0 to 30 days
3,500
2,512
The carrying amount of the group’s trade and other receivables are denominated in the following currencies:
2008 USD’000 2007 USD’00
US Dollar UK Pound
23,258 _ 23,258
17,661 3,901 21,562
50 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
12. TR ADE AN D OTH ER R ECEIVAB LES
(CONTI N U ED)
2008 USD’000
2007 USD’00
Movements on the provision for impairment of trade receivables are as follows: At January 1 Provision for receivable impairment Amount recovered At December 31 The other classes within trade and other receivables do not contain impaired assets.
17 – (17) –
– 17 – 17
The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold any collateral as security.
13. SHAR E C AP ITAL
Number of shares Ordinary shares USD’000
(a) Issued shares and options At January 1, 2007 Proceeds from new issues (See note (ii) below) Employee share option scheme: – Options vested – Difference between exercise price and market price on issue At December 31, 2007 Employee share option scheme: – Options vested At December 31, 2008
214,517,530 27,077,000 3,748,318 – 245,342,848 733,333 246,076,181
198,160 34,658 3,984 239 237,041 985 238,026
(i) The total authorised number of ordinary shares is 500,000,000 shares (2007: 500,000,000 shares) with no par value. All issued shares are fully paid and are admitted on the AIM market of the London Stock Exchange. (ii) At the beginning of May 2007, TRG made a new placement of 27,077,000 common shares. The placing with institutional investors at a price of 65p per share raised £17,600,050 (USD 34.658 million) before expenses. (iii) Reconciliation of number of shares
Number of shares Ordinary shares USD’000
Issued Shares Options vested but not yet exercised
234,664,075 11,412,106 246,076,181
226,790 11,236 238,026
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 51
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
13. SHAR E C AP ITAL
(CONTI N U ED)
On November 30, 2007, certain option holders exercised their options. Accordingly, 385,522 shares were alloted to them and were admitted on AIM market for trading.
(b) Share options – Employees
Share options are granted to directors and to selected employees. The exercise price of the granted option is determined by the Board before such grant. According to section 2.3 of the “Rules of TRG Unapproved Share Option Scheme’’, the price should not be less than the highest of the: Nominal value of the shares; Average of the middle market quotations of the shares as derived from the Official list for the 30 dealing days immediately preceding the Grant date; and I Middle market quotation of the shares as derived from the Official List on the Grant date.
I I
Exercise of the option is not subject to performance-related conditions. The company has granted options at exercise prices ranging from 47p to 78p each varying on the date of grant. One third of the option granted vests immediately, one third vests on the first anniversary of the date of grant, and the remaining third will vest on the second anniversary of the date of grant. The option will lapse and may not in any event be exercised later than the day before the fifth anniversary of the date of grant. In November 2007, certain directors and employees exercised their options. Accordingly, the company alloted 332,991 shares which were admitted on AIM market for trading. For the year ended December 31, 2008, 733,333 options (2007: 3,748,318 options) vested.
(c) Share options – Professional services
In 2005, in consideration of services given to the company by NabarroWells & Co Ltd, (NWCF LLP), the company granted to NWCF LLP an option to subscribe for 936,007 common shares of no par value at a subscription price of 47p each. In 2007, NWCF LLP exercised its option and subscribed for 52,531 shares at 47p per share. The company issued these shares which were admitted on AIM market for trading.
52 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
14. M I NOR IT Y I NTER EST
Pursuant to the First Amendment Agreement dated February 4, 2004, enterred by and between the Government of the Republic of Sierra Leone (GOSL) and Sierra Rutile Limited (SRL) regarding PAYE taxes due from SRL (See note 30), during the year ended December 31, 2007, SRL Acquisition No.3 Limited transferred 2,063 shares (2006: 403 shares) it held in Sierra Rutile Holdings Limited (SRHL) to GOSL, representing 2.063% (2006: 0.403%) ownership interest in SRHL and giving rise to a minority shareholder (GOSL). However, for the year ended December 31, 2008, no further share was transferred to GOSL. At December 31, 2008, the consolidated financial statements of SRHL and SRL showed a negative shareholders’ interests. Consequently, losses attributable to the minority in the consolidated subsidiaries exceeded minority interest in the subsidiaries’ equity. These losses have thus been allocated against the majority interest. The GOSL’s shareholding in SRHL will continue to increase upon future transfer of shares to the GOSL as and when the corresponding PAYE amount is being assigned. Any future reported profit by SRHL and SRL would be allocated to the majority interest until the GOSL’s share of losses previously absorbed by the majority interest is recovered.
15 . B O R R OW I N G S
(a) Non-current: 2008 USD’000 2007 USD’000
Government of Sierra Leone loan
Current:
45,073 8 45,081
44,119 144 44,263
Bank overdraft Total borrowings
(i) The rates of interest on borrowings vary between 8% to 24%. (ii) Government of Sierra Leone borrowing is subject to interest of 8% per annum and is repayable on June 15 and December 15 in each year commencing on the first payment date which is the earlier of 84 months after date of first disbursement or June 15, 2012. The interest is calculated on the basis of a 360 day year consisting of twelve months of thirty days. The Group does not have any undertaking, nor is it contractually bound to create, any lien on or with respect to any of its rights or revenues. The interest is classified as non current as according to section 3.03 of the Loan Agreement between Sierra Rutile Limited and the Government of Sierra Leone, the first interest payment shall not be made by the company until the earliest of the interest payment date occurring thirty-six months after the date of first disbursement, or June 15, 2008. All interest accruing on the principal balance outstanding from time to time on the loan until the first interest payment is due shall be added to the principal balance of the loan and shall accrue interest on the same terms. However, during the year ended December 31, 2008, the Government of Sierra Leone granted the company a moratorium of further two years. As a result, payments of interest have been deferred to June 2010.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 53
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
15 . B O R R OW I N G S
(CONTI N U ED)
(b) The exposure of the Group’s borrowings to interest-rate changes and the contractual repricing dates are as follows:
6 months or less USD’000 6 to 12 months USD’000 1 to 5 years USD’000
Over 5 years USD’000
Total USD’000
At December 31, 2008 Total borrowings At December 31, 2007 Total borrowings
8 144
– –
22,536 14,367
22,537 29,752
2008 USD’000
45,081 44,263
2007 USD’000
(c) The maturity of non-current borrowings is as follows: After one year and before five years After five years
22,536 22,537 45,073
14,367 29,752 44,119
2007 USD’000
(d) Non-current borrowings can be analysed as follows: – After one year and before five years Government of Sierra Leone loan – After five years Government of Sierra Leone loan
2008 USD’000
22,536 22,537 45,073
14,367 29,752 44,119
2006
(e) The effective interest rates at the balance sheet date were as follows:
Euro %
2008 USD % Euro %
USD %
Government of Sierra Leone loan Bank overdraft
8 14.5
– 24.0
8 14.5
– 24.0
(f) The carrying amounts of the group’s borrowings are denominated in the following currencies: Euro US Dollar
2008 USD’000
2007 USD’000
45,076 5 45,081
44,185 78 44,263
(g) The carrying amounts of non-current borrowings are not materially different from their fair value.
54 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
16. P ROVI SION FOR LIAB I LITI ES AN D CHARGES
2008 USD’000
2007 USD’000
At January 1 Additional provision during the year At December 31
2,833 428 3,261
2,150 683 2,833
Rehabilitation
Cost of reclamation and rehabilitation are assessed on a regular basis and estimated costs are provided over the life of the mine. The expenditure and provisions include costs of labour, materials and equipment required to rehabilitate disturbed areas, cost of reclamation, plant and infrastructure closure and subsequent environmental monitoring. The estimates are not discounted and are based on current costs, legislature and community requirements and technology. Expenditure relating to ongoing rehabilitation and restoration programmes is charged against the provisions made.
17. TR ADE AN D OTH ER PAYAB LES
2008 USD’000 2007 USD’000
Trade payables Other payables and accrued expenses Consolidation adjustment on disposal of 2.466% shares in subsidiary
7,498 12,813 1,188 21,499
5,584 10,461 1,188 17,233
Included in other payables and accrued expenses is an amount of USD 3,128,000 (2007: USD 1,288,000) relating to remaining shares to be transferred to the GOSL (see note 30). The carrying amounts of trade and other payables approximate their fair value.
18. I NCOM E TA X
2008 USD’000 2007 USD’000
(a) Current tax on the adjusted loss for the year at 0% – 30% Deferred income tax (Note 10) Minimum turnover tax for the year (Charge)/credit to Income statement
– (86,577) (348) (86,925)
– 506 (204) 302
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 55
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
18. I NCOM E TA X
(CONTI N U ED)
2008 USD’000
2007 USD’000
(b) The tax on the Group’s loss before tax differs from the theoretical amount that would arise using the basic tax rate of the Group as follows: Loss before tax Tax calculated at 0% Effect of different tax rates in different countries Investment allowance Income not subject to tax Expenses not deductible for tax purposes Tax losses on which no deferred income tax asset was recognised Deferred tax adjustment Minimum turnover tax for the year Tax charge/(credit)
(40,357) – (26,849) (181) (7) 1,733 119,943 (8,062) 348 86,925
(17,017) – (13,937) (70) (74) 1,935 – 11,640 204 (302)
(c) Under the provisions of the Sierra Rutile Agreement (Ratification) Act, 2002, tax is charged at an amount not less than 3.5%, of the turnover or more than 37.5%, of the profits of the business in any financial year. A subsequent agreement was reached in June 2003 with the GOSL to reduce the rate to 0.5% of the turnover of the business through the year 2014 and revert to the 3.5% rate in the year 2015. The Group, through its subsidiary Sierra Rutile Limited, is entitled to unutilised tax losses brought forward and capital allowances in respect of fixed asset acquisitions. (d) Current tax liabilities At January 1 Charged to the Income statement (see note 18(a) above) Paid during the year Disposal of subsidiaries At December 31
2008 USD’000 2007 USD’000
(211) 348 (351) 144 (70)
85 204 (500) – (211)
56 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
19. LOSS B EFOR E TA X ATION
2008 USD’000
2007 USD’000
Loss before taxation is arrived at after:
Charging:
Depreciation on property, plant and equipment (note 5) – owned assets Amortisation of intangible assets (note 6) Auditors’ remuneration – Audit and other services Employee benefit expense (note 21)
7,608 49 105 8,919
2008 USD’000
7,709 43 80 7,670
2007 USD’000
20. EXP EN SES BY NATU R E
Depreciation (note 5) Amortisation (note 6) Employee benefit expense (note 21) Changes in inventories of finished goods and work in progress Accounting and audit fee Administrative expenses Advertising and subscription Bank charges Directors and secretarial fees Insurance cost Licence fees Marketing expenses Professional fee Legal and other professional fees Meeting, travelling and accomodation expenses Web hosting charge Management fee Share option adjustment Compensation Claim assessment costs – Solondo Production and shipping costs Mining restoration and rehabilitation Operating overhead Royalties, mining leases and rent Total cost of sales and administrative and marketing expenses
7,608 49 8,919 (6,814) 187 721 23 158 1,563 2,533 17 337 1,029 313 394 7 – – 68 192 50,602 1,073 10,054 1,214 80,247
7,709 43 7,670 (492) 120 240 80 30 1,555 1,882 13 208 904 41 567 5 630 (32) – – 45,973 683 9,019 1,694 78,542
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 57
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
21. EM P LOYEE B EN EF IT EXP EN SE
2008 USD’000
2007 USD’000
Wages and salaries, including termination benefits Payroll oncost, including social security costs Share options granted to directors and employees
7,751 1,168 – 8,919
2008 USD’000
6,778 653 239 7,670
2007 USD’000
22. OTH ER I NCOM E
Interest income Profit from disposal of plant Profit on disposal of 2.063% shares in subsidiary
436 82 – 518
2008 USD’000
2,182 7 429 2,618
2007 USD’000
23. EXCEPTIONAL ITEM
Claims Gain on disposal of subsidiaries (note 27(a)) Professional and other costs associated with disposal of subsidiaries Impairment charges – Dredge D2 Placement cost
300 (28,204) 1,311 34,300 – 7,707
2008 USD’000
– – – – 2,445 2,445
2007 USD’000
24. F I NANCE COSTS
Interest expense: – Government of Sierra Leone loan – Bank overdrafts – Others Total borrowing costs Net foreign exchange transaction (gains)/losses (note 25)
3,647 80 612 4,339 (2,001) 2,338
3,153 25 56 3,234 3,263 6,497
58 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
25. N ET FOR EIGN EXCHANGE (LOSSES)/GAI N S
2008 USD’000
2007 USD’000
The exchange differences (credited)/charged to the income statement are included as follows: Finance costs (note 24)
(2,001)
3,263
26. LOSS P ER SHAR E
(a) Basic loss per share
2008
2007
Loss attributable to equity holders of the group (USD’000) Weighted average number of ordinary shares in issue Basic loss per share (USD)
(b) Diluted loss per share
(127,282) 245,621,354 (0.52)
(16,715) 234,119,944 (0.07)
Loss attributable to equity holders of the group used to determine diluted loss per share (USD’000)
Number of shares
(127,282) 245,621,354 483,333 246,104,687 (0.52)
(16,715) 234,119,944 1,216,667 235,336,611 (0.07)
Weighted average number of ordinary shares in issue Adjustments for share options Weighted average number of ordinary shares for diluted loss per share Diluted loss per share (USD)
27. B U SI N ESS COM B I NATION S
Disposal (a)
On July 25, 2008, the Group disposed of Global Aluminium Limited (GAL) for a total cash consideration of USD 40,500,000. GAL, a wholly owned subsidiary, owns 100% of Bauxite Marketing Ltd (BML) and Sierra Mineral Holdings 1 Limited (SML), the operating company for the Group’s bauxite mine in Sierra Leone. The consideration of USD 40,500,000 includes repayment of an intra-group loan of approximately USD 11,147,000 and is subject to adjustments for working capital and a contingency payment of USD 500,000.
GAL, BML and SML were involved in the extraction and marketing of bauxite. For the period from January 1, 2008 to July 25, 2008, they contributed USD 9,994,000 towards the turnover of the Group (USD 27,022,000 for the year ended December 31, 2007).
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 59
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
27. B U SI N ESS COM B I NATION S
(CONTI N U ED)
2008 USD’000
The net assets of GAL, BML and SML at the date of disposal were as follows: Property, plant and equipment Net deferred tax assets Inventories Trade and other receivables Current tax assets Bank balances and cash Provision for liabilities and charges Non-current payables Trade and other payables Share of net assets Gain on disposal Total consideration 7,723 302 8,121 5,570 144 177 (549) (12,400) (7,939) 1,149 28,204 29,353
Satisfied by:
– Cash – Deferred consideration
28,853 500 29,353
Net inflow arising on disposal:
– Cash consideration received – Cash and cash equivalents in subsidiaries disposed
28,853 (177) 28,676
(b) Pursuant to the First Amendment Agreement dated February 4, 2004, entered by and between the Government of the Republic of Sierra Leone (GOSL) and Sierra Rutile Limited (SRL) regarding PAYE taxes due from SRL (see note 30), on December 20, 2007, SRL Acquisition No.3 Limited (SRL A3) transferred 2,063 shares (2006: 403 shares) it held in Sierra Rutile Holdings Limited (SRHL) to GOSL, representing 2.063% (2006: 0.403%) ownership interest in SRHL, a subsidiary incorporated in British Virgin Islands. SRHL acts as an intermediate holding company. During the year ended December 31, 2008, no such transfer was done.
60 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
27. B U SI N ESS COM B I NATION S
(CONTI N U ED)
2008 USD’000
2007 USD’000
The details of assets acquired and liabilities disposed and the disposal consideration are as follows: Accounts receivables Accounts payables Net assets Profit on disposal Total consideration
28. NOTES TO TH E C ASH F LOW STATEM ENT
(a) Cash used in operations
– – – – –
2008 USD’000
4,731 (3,662) 1,069 429 1,498
2007 USD’000
Loss for the year
Adjustments for:
(40,357)
(17,017)
Depreciation on property, plant and equipment Amortisation of intangible assets Increase in provision for rehabilitation Interest income Interest expense Exchange loss/(gain) on borrowings Profit on disposal of plant Profit on disposal of subsidiaries Impairment of dredge D2 Share option scheme – Employee Profit on disposal of 2.063% (2006: 0.403%) shares in subsidiary Loan amount written back
7,608 49 428 (436) 4,339 (2,144) (82) (28,204) 34,300 – – – (24,499)
7,709 43 683 (2,182) 3,234 4,109 (7) – – (32) (429) (165) (4,054)
Changes in working capital (excluding the effects of acquisition of subsidiaries) – inventories – trade and other receivables – trade and other payables Cash absorbed in operations
408 (1,696) 1,801 (23,986)
610 (3,404) 935 (5,913)
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 61
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
28. NOTES TO TH E C ASH F LOW STATEM ENT
(b) Non cash transactions
(CONTI N U ED)
The principal non cash transaction is the vesting of options granted to directors and selected employees pursuant to share option plan described in note 13(b). As a result, equity increased by USD 985,000 (2007: USD 3,984,000) in respect of 733,333 option shares (2007: 3,748,318 option shares) which vested.
2008 USD’000 (c) Cash and cash equivalents 2007 USD’000
Cash in hand and at bank Short term bank deposits Bank overdrafts Cash and cash equivalents
641 6,721 7,362 (8) 7,354
2008 USD’000
672 25,059 25,731 (144) 25,587
2007 USD’000
29. C AP ITAL COM M ITM ENTS
Property, plant and equipment acquisition contracted for at the balance sheet date but not yet incurred:
5,500
18,011
Since 2006, Sierra Rutile Limited has entered into agreement with PW Mining International Limited for mine development for an amount of USD 10 million. It also has capital commitments in respect of: (i) structural civil works and commissioning of Powerhouse 2 for an amount of USD 2,500,000 (2007: USD 4,411,000). (ii) other work for upgrading of property, plant and equipment amounting USD 3,000,000.
30. AGR EEM ENT WITH TH E GOVER N M ENT OF TH E R EP U B LIC OF SI ER R A LEON E
According to the First Amendment Agreement dated February 4, 2004, entered by and between the Government of the Republic of Sierra Leone and Sierra Rutile Limited, the Government assigned to SRL A 3 all its right, title and interest in, to, and under the future PAYE taxes due from Sierra Rutile Limited to the Government in an amount not exceeding USD 37 million. In consideration for the foregoing assignment, SRL A 3 agreed to transfer up to a 30% equity interest in Sierra Rutile Holdings Ltd to the Government, within 60 days of the end of the calendar year commencing on the ‘’Refurbishment Start Date’’ (i.e April 1, 2005), equal in value to the PAYE amounts accrued during such calendar year. As at December 31, 2007 & 2008, 2,466 shares (2006: 403 shares) were already transferred and PAYE accrued for the year in Sierra Rutile Limited amounted to USD 1,840,000 (2007: USD 1,288,000).
62 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
31. R EL ATED PART Y TR AN SACTION S
(a) Transactions and balances (i) 2008
Professional/Project management fees USD’000
Grant paid USD’000
Bauxite agreement USD’000
Contractual works USD’000
Amount owed to
Total USD’000
Director: Mr. Len Comerford* Enterprise in which Mr. Len Comerford is also a director – PWMIL* Enterprise in which Mr. Alex Kamara is also a director – Cemmats Group**
(ii) 2007
– – (526)
– – –
–
– (5,480) –
– – –
– (5,480) (526)
–
Director: Mr. Len Comerford* Enterprise in which Mr. Len Comerford is also a director - PWMIL* Enterprise in which Mr. Alex Kamara is also a director – Cemmats Group**
– – (692)
– (2,200) –
– (11,762) –
– (9,111) –
– – –
– (23,073) (692)
*During the year ended December 31, 2004, Sierra Mineral Holdings 1 Limited (SMH 1), a former operating subsidiary based in Sierra Leone, entered into a fixedprice mine operating contract with PW Mining International Limited (PWMIL), an enterprise in which Mr Len Comerford is a director. Under the terms of the contract, a fixed rate per annum is payable to PWMIL if bauxite produced is according to specifications. As stated in note 29, SRL also entered into a material mine development contract with PWMIL. The contract covers a period of 5 years. On May 1, 2006, Mr Len Comerford was appointed Chief Executive Officer of TRG. Mr Comerford is not a shareholder of PWMIL and receives no direct benefit from either of these contracts. On December 21, 2007, directors of SMH 1 resolved to make a grant of USD 2,200,000 to PWMIL. On February 3, 2009, Mr Len Comerford resigned as Chief Executive Officer of TRG. **Mr. Alex B. Kamara has been appointed director of TRG on March 10, 2008. Mr. Kamara is also a non-executive director of Cemmats Group, a Sierra Leonean company which has a number of contracts for the supervision of the construction of Dredge 3 and the new power house at SRL.
(b) Loans and advances
Loan and advances are unsecured. No provisions have been made for doubtful debts in respect of amounts owed by related parties.
TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008 63
Notes to the Consolidated Financial Statements
F O R T H E Y E A R E N D E D D EC E M B E R 31 , 20 0 8
31. R EL ATED PART Y TR AN SACTION S ( CO N T I N U E D )
(c) Key management personnel compensation
2008 USD’000
2007 USD’000
Directors’ fee Salaries and short-term employee benefits Post employment benefits Termination benefits Share options-based payment
1,460 3,338 24 91 – 4,913
1,358 2,730 452 – 149 4,689
32. EVENTS AF TER BAL ANCE SH EET DATE
Events after balance sheet date are disclosed only to the extent that they relate directly to the set of financial statements and are material in effect. As at the date of issuing this set of financial statements, there were the following post balance sheet events: (i) On January 23, 2009, Ospraie Management LLC disposed of its entire holding of 114,981,497 common shares, representing 49% of the company’s issued share capital, in an off market transaction to Mr Jean Raymond Boulle. Through his wholly owned company, Mr Jean Raymond Boulle already owned 23,427,856 shares in the company, representing 10% of TRG’s issued share capital. (ii) Following the capsize of Dredge D2, the directors requested that trading in the company’s shares on the AIM market of the London Stock Exchange be suspended. On January 20, 2009, the precautionary suspension was lifted and the shares were immediately restored to trading on AIM. On 15 April 2009, a settlement agreement was reached with one of the major re-insurers of SRL. The reinsurer agreed to settle its share of the Dredge D2 claim. (iii) SRL has completed the construction and commissioning of its low cost MFO power plant.
33. R EPORTI NG CU R R ENCY
The financial statements are presented in thousands of United States Dollar (USD).
34. MA JOR SHAR EHOLDER S
Substantial individual shareholders and corporate investors own up to 89.32% (2007: 90.22%) of the company’s shares. The remaining 10.68% (2007: 9.78%) of the shares is widely held.
64 TITAN I U M R ESOU RCES GROU P LTD AN N UAL R EPORT 2008
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T I TA N I U M R E SO U R C E S
SHRM Trustees (BVI) Limited Trinity Chambers P.O. Box 4301 Road Town Tortola British Virgin Islands