Annual Report and Accounts

Annual Report and Accounts

China Nonferrous Gold Limited

28 June 2017

Annual Report and Accounts

China Nonferrous Gold Limited 中国有色黄金有限公司 (AIM: CNG), the mineral exploration and development company currently developing the Pakrut gold project in the Republic of Tajikistan, today announces its final results for the year ended 31 December 2016.

The results below are extracted from the Company’s audited Annual Report and Financial Statements. Copies of the Annual Report will be posted to shareholders today and are available on the Company’s website (www.cnfgold.com) and from the Company’s office at Unit 2.24, The Plaza, 535 Kings Road, London SW10 0SZ.

For further information please visit the Company’s website (www.cnfgold.com) or contact:

China Nonferrous Gold Limited
David Tang, Managing Director
Tel: [phone]
or
Investec Bank Plc
Jeremy Ellis, George Price
Tel: [phone]
or
Beaufort Securities Limited
Jon Belliss
Tel: [phone]
or
Blytheweigh
Tim Blythe, Camilla Horsfall, Nick Elwes
Tel: [phone]

Project Summary

The Pakrut gold project, of which CNG has 100 per cent ownership, is situated in Tajikistan approximately 120km northeast of the capital city Dushanbe. Pakrut is located within the Tien Shan gold belt, which extends from Uzbekistan into Tajikistan, Kyrgyzstan and Western China, and which hosts a number of multi-million ounce gold deposits.

About Tajikistan

Tajikistan is a secular republic located in Central Asia. The country is a member of the Commonwealth of Independent States and the Shanghai Cooperation Organisation. Tajikistan hosts numerous operating precious metal mines as well as the largest aluminium smelter in Central Asia. CNG's management team has extensive experience in the mining industry in Tajikistan.

Chairman’s Statement

As the Chairman of the Board, it gives me great pleasure to present the Chairman’s Statement of the annual report for the year ended 31 December 2016. This was a momentous year for the Group during which 230,000 tonnes of ore were processed with 5,479 tonnes of gold concentrate produced. The total gold ingot production by the end of the year was 162kg.The period under review also saw, in June 2016, the ribbon-cutting ceremony of the Pakrut gold project and the Group was delighted that this ceremony was attended by Tajikistan President Rahmon. The ceremony was a highlight of the year.

Shortly after the year end however, the Pakrut mine site and Vahdat smelting plant experienced snowfall not seen for over 50 years which resulted in an avalanche, landslide and subsequent flooding at the mine site. The conditions at the mine site were so severe that full access to the mine site was restricted until May 2017. This materially impacted the operations of the Group and the management team is in the process of working to repair the damage while the mine site continues to suffer from flooding. Primarily as a result of the adverse weather conditions, in particular due to lack of access to inventory, insufficient time has been available to prepare all of the financial information necessary for the auditor to form an opinion on the financial statements. This has been intensified by the fact that key members of the finance team were lost during 2016, although the search for suitable replacements is ongoing. Now that access to the mine site has been reopened the Group will prepare and provide all outstanding audit information in respect of the year ended 31 December 2016 and continue to work with the auditors to review the relevant records and perform inventory counts. The Group will ask the auditor to perform an enhanced review on the 30 June 2017 interim figures. The Directors are also reviewing the structure of the accounting team to ensure that it is appropriately staffed and skilled to resolve the current situation.

Construction

Whilst 2016 saw many key project developments at the Pakrut project, the business made a number of important operational decisions. These included the selection of a backfilling system, mining method, underground production capacity and resources and reserves verification amongst others. As a result of the time required to ensure the appropriate options were considered fully it was not possible to fully establish the mine underground tunneling project. Despite this, the Group was pleased to achieve 2,386 meters of tunneling with1,694 metres of cutting completed during the period under review. However, further tunneling is still required.

The construction of all the processing units within the processing and smelting plant was completed during 2016 and neither plant was damaged by the avalanche. Furthermore, certain deficiencies within the processing units have been addressed and will improve the efficiency of the units going forwards.

Construction of the 2.5 kilometre access road to the Lufujia tailings dam was completed during the year. The Group has also completed a topographical map survey of the site as well as carried out engineering studies. Construction of the new tailings dam is expected to commence in early 2018. In the meantime the temporary tailings dam has been reinforced.

The maintenance and improvement of external roads around the Pakrut gold mine area was also an area of focus during the year. In addition, the construction of a permanent camp is expected to be finalised by the second half of 2018.

Project Operation

Trial production commenced at the Pakrut gold project in the fourth quarter of 2015 with the first gold poured in January 2016. In the first quarter of 2016 production was halted to resolve a number of minor technical issues at the processing plant. At the same time, LLC Pakrut also carried out the necessary maintenance and rectified a number of minor issues at the smelting plant. Once rectification was completed the connection between the smelting plant and processing plant was finalised enabling the Company to undertake production. Trial production recommenced in the second quarter of 2016 and ramped up to achieve 2,000 tonnes per day during October2016.

In the year ended 31 December 2016, a total of 230,000 tonnes of ore was processed. 5,479 tonnes of gold concentrate was produced and 162 kg of finished gold was produced by the smelting plant. This is held in inventory at 31 December 2016 and has since been sold in 2017.

Financial Results

As progress on the Pakrut project accelerated, expenditure continued to be incurred by the Group on development and construction work during the year and stood at US$72,768,000 (2015: US$112,572,000). Administration expenditure was US$5,100,000 (2015: US$3,166,000). The overall loss incurred by the Group was US$6,310,000 (2015: US$6,150,000).

During the course of the year the Group signed financing agreements with CNMC International Capitals Company Limited, an associate of China Nonferrous Metals International Mining Co., Ltd for a loan facility of USD$120 million (“CNMC Loan”) and with China Construction Bank Corporation Macau Branch for a loan facility of up to USD$100 million (“CCBC Loan”). In addition, the 2012 China Nonferrous Metals Int’l Mining Co., Ltd. facility signed in May 2012,was extended post period end. The total balance outstanding under the loans noted above amounted to US$254.35 million at the end of the year.

It is the opinion of the board of directors that the Group requires additional funds to continue as a going concern. The Directors anticipate raising additional loan funding to complete the construction of the mine and to bring the mine into production, while also managing the repayments due on current loans. In this respect, the Directors have received a letter of support from a substantial shareholder, China Nonferrous Metal Mining Group (CNMC) Co.,Ltd, to provide the funding and support required to bring the mine into production. It should be noted however, that due to the disclaimer of opinion within the Financial Statements, no reference is made by the auditor regarding any conclusion drawn by the Directors in respect of going concern.

Post balance sheet events

As noted above, in early 2017, the Pakrut region suffered extreme snowfall which resulted in a serious avalanche, landslide and flooding. This disrupted the local traffic to the site and resulted in the interruption of power supply in the Pakrut area, whilst several buildings also collapsed and certain equipment was damaged. The mine was submerged below the main ramp at the 2,230 metre level and the avalanche halted all gold production and operations.

In the immediate aftermath, progress at rectifying the damage caused by the avalanche has been very slow primarily due to access to the mine site. The road has now been reopened and a temporary solution to restore the power supply was reached at the end of May 2017. There is still however significant damage to a number of high-voltage wire towers which require repairing and the drainage work required to recommence mining will not commence until a permanent solution to the power supply situation is resolved. The equipment for the tailing filter press also requires restoration to allow operations to be resumed.

In 2016, LLC Pakrut purchased mining property insurance. In accordance with this the provider visited the mine site to investigate and evaluate the loss. Whilst claims are expected to be made throughout the year as the damage and impact of the avalanche and landslide becomes clearer, an initial claim of RMB62.7 million (US$:9.2 million) has been made, although this is currently subject to agreement by the insurance provider.

Outlook

The Group’s immediate focus in the aftermath of the avalanche is to recommence production as well as work with the appropriate authorities and agencies to help repair the damage that has occurred in the local community. The Group does not expect operations at the mine site to return to normal levels until the first quarter of 2018. Consequently, the Pakrut gold mine will not achieve the originally budgeted sales revenue for the year ending 31 December 2017, save for the sale of existing inventory. As a result, the Group will continue to monitor its financial position and is in discussions with CNMC International Capitals Company Limited regarding its repayment obligations.

Beyond this, the backfilling station is expected to be completed in April 2018, and the soil excavation work for the tailing dam is expected to be completed at the end of 2017. It is also intended that the ventilation system for construction and mining operations will be carried out, in the areas not affected by the flood, above the level of 2,230 metres.

It has been a difficult year and the Group has faced unfortunate circumstances beyond the Group’s control which has led to the necessity to divert the time and resources of the Group to rectify. Despite this, the Group has made significant progress and in that respect I would like to take this opportunity to thank all our employees, management and advisors for their continued efforts in 2016 and thank our shareholders for their continued support. I very much look forward to updating our shareholders further on the mine developments and production levels.

Xiang Wu

Chairman
Director

June 2017

Independent Auditor’s Report to the Members of China Nonferrous Gold Limited

We have audited the Financial Statements of China Nonferrous Gold Limited for the year ended 31 December 2016 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows, the Accounting Policies and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is made solely to the Company’s members, 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 auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone, other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of Directors and Auditor

As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the Financial Statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Financial Statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Because of the matters described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.

Scope of the audit of the Financial Statements

An audit involves obtaining evidence about the amounts and disclosures in the Financial Statements sufficient to give reasonable assurance that the Financial Statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed, the reasonableness of significant accounting estimates made by the Directors, and the overall presentation of the Financial Statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited Financial Statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Basis for Disclaimer of Opinion on the Financial Statements

The audit evidence available to us was limited because we were unable to obtain full access to accounting records due to the high levels of snowfall at the Pakrut mine site and Vahdat smelting plant, together with the consequential effect from avalanches, landslides and flooding which was further impacted by the loss of key accounting personnel. Management has therefore been prevented from undertaking key accounting procedures in respect of the Group financial statements, which include counting physical inventories; undertaking key accounting reconciliations on inventories, payables, mines under construction and intercompany balances; reconciling the value of work performed by contractors at the accounting reference date; preparing an impairment assessment to include an estimate of the damage caused at the mine site and potential recoveries from the associated insurance claim; and performing a going concern review based upon revised budgets and cash flow forecasts. The preparation of financial information was significantly delayed as a result of the adverse weather which resulted in insufficient time for management to prepare the required audit information and resolve the issues created. As a result of the significant outstanding information, we have been unable to obtain sufficient appropriate audit evidence on which to form an audit opinion, including the appropriateness of the going concern basis.

Disclaimer of Opinion on Financial Statements

Because of the significance of the matters described in the Basis for Disclaimer of Opinion on Financial Statements paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly we do not express an opinion of the Financial Statements.

PKF Littlejohn LLP 1 Westferry Circus

Chartered Accountants and Registered Auditor Canary Wharf

London E14 4HD

June 2017 United Kingdom

CHINA NONFERROUS GOLD LIMITED Consolidated Statement of Comprehensive Income Year ended 31 December 2016	Â	Â	2016	Â	2015
			US$000		US$000
Revenue			–		–
Cost of sales			–		–
Gross Profit			–		–
Administrative expenses			(5,100)		(3,166)
Loss on foreign exchange			(1,215)		(2,988)
						Â
Operating Loss			(6,315)		(6,154)
Finance income			5		4
Finance costs			–		–
						Â
Loss before Income Tax			(6,310)		(6,150)
Income tax			–		–
						Â
Loss for the year attributable to owners of the parent			(6,310)		(6,150)
						Â
Total comprehensive income attributable to owners of the parent for the year			(6,310)		(6,150)
						Â
Basic and Diluted Earnings per share attributable to owners of the parent (expressed in dollars per share)			$(0.0165)		$(0.0161)

All of the activities of the Group are classed as continuing.

CHINA NONFERROUS GOLD LIMITED

Consolidated Statement of Financial Position

Year ended 31 December 2016

	Â	Â	As at 31 December 2016 US$000	Â	As at 31 December 2015 US$000
						Â
Non-Current Assets
Intangible assets			-		-
Mines under construction			317,297		244,529
Property, plant and equipment			3,946		11,624
Total Non-Current Assets			321,243		256,153
						Â
Current Assets
Inventories			28,166		39,390
Trade and other receivables			4,084		1,010
Cash and cash equivalents			12,357		2,213
Total Current Assets			44,607		42,613
Non-Current Liabilities
Borrowings			(227,684)		(56,437)
Provisions for other liabilities and charges			(704)		(646)
Total Non-Current Liabilities			(228,388)		(57,083)
						Â
Current Liabilities
Borrowings			(26,667)		(132,583)
Trade and other payables			(82,209)		(74,204)
Total Current Liabilities			(108,876)		(206,787)
Net Current Liabilities			(64,269)		(164,174)
Net Assets			28,586		34,896
						Â
Equity attributable to the owners of the parent
Share capital			38		38
Share premium			65,901		65,901
Other reserve			10,175		10,175
Retained earnings			(47,528)		(41,218)
Total Equity			28,586		34,896

These Financial Statements were approved and authorised for issue by the Directors on June 2017 and are signed on their behalf by

Mr Weili Tang
Managing Director

CHINA NONFERROUS GOLD LIMITED

Consolidated Statement of Changes in Equity

Year ended 31 December 2016

Attributable to owners of the parent

	Â	Share capital US$000	Â	Share premium US$000	Â	Other reserve US$000	Â	Retained earnings US$000	Â	Total US$000
Balance at 1 January 2015		38		65,711		10,175		(35,068)		40,856
Loss and Total comprehensive income for the year		-		-		-		(6,150)		(6,150)
											Â
Issue of ordinary shares		-		190		-		-		190
Total contributions by and distributions to owners of the parent, recognised directly in equity		-		190		-		-		190
Balance at 31 December 2015		38		65,901		10,175		(41,218)		34,896
											Â
Balance at 1 January 2016		38		65,901		10,175		(41,218)		34,896
Loss and Total comprehensive income for the year		-		-		-		(6,310)		(6,310)
		38		65,901		10,175		(47,528)		28,586
Total contributions by and distributions to owners of the parent, recognised directly in equity		-		-		-		-		-
Balance at 31 December 2016		38		65,901		10,175		(47,528)		28,586

Description and purpose of reserves:

a) Share capital: share capital consists of amounts subscribed for share capital at nominal value.

b) Share premium: share premium consists of amounts subscribed for share capital in excess of nominal value.

c) Other reserve: other reserve comprises the capital reorganisation reserve under the scheme of arrangement.

d) Retained earnings: cumulative net gains and losses recognised in the consolidated statement of comprehensive income. Also included in this figure is an amount of $7.39m (2015: $8.14m), being the share options and warrants reserve established in 2013 as part of the capital restructuring program. This consists of the fair value of options and warrants outstanding at the year end.

CHINA NONFERROUS GOLD LIMITED

Consolidated Statement of Cash Flows

Year ended 31 December 2016

	Â	31 December	Â	31 December
		2016		2015
		US$000		US$000
					Â
Cash flows from Operating Activities (note 24)		306		44,042
					Â
Net cash generated from Operating Activities		306		44,042
					Â
Cash flows from Investing Activities
Payments for mining rights and construction in progress		(66,391)		(111,999)
Purchase of property, plant and equipment		(333)		(2,282)
Movement in inventories		11,224		(14,658)
Interest received		5		4
		Â		Â
Net cash used in Investing Activities		(55,495)		(128,935)
					Â
Cash flows from Financing Activities
Cash acquired from contractor
Proceeds from issuance of equity share capital		-		190
Proceeds from borrowings (net of capitalised issue costs)		244,837		110,909
Repayment of borrowings		(167,435)		(31,375)
Interest paid		(12,069)		(10,890)
		Â		Â
Net cash generated from Financing Activities		65,333		68,834
					Â
Net increase/(decrease) in Cash and cash equivalents		10,144		(16,059)
Cash and cash equivalents at beginning of the year		2,213		18,272
Cash and cash equivalents at end of the year		12,357		2,213

Major non-cash transactions

Year ended 31 December 2016

During the year the Group made drawdowns from its loan facility with CNMC of USD 10,162,387, which under the terms of the agreement were paid directly to CNMIM as part settlement of its loan facility with CNMIM.

Year ended 31 December 2015

During 2015 the Group made drawdowns from its loan facility with CNMIM of USD 10,470,925, and made drawdowns from ICBC loan facilities of USD 100,000,000, which under the agency arrangement were paid directly to suppliers and contractors in order to settle the Group’s liabilities for mine construction, power line construction and the provision of processing plant equipment and materials.

Notes to the Financial Statements

1. Basis of Preparation

The principal accounting policies applied in the preparation of these Consolidated Financial Statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee (IFRSIC) as adopted by the European Union. The Financial Statements have been prepared on a historical cost basis.

2. Critical Accounting Estimates, Assumptions and Judgements

The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities are set out below. Estimates and assumptions are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets and liabilities affected in future periods.

The Group has identified the following areas where significant estimates, assumptions and judgements are required. The most significant judgement for the Group is the assumption that exploration and development at its sites will ultimately lead to a commercial mining operation. Failure to do so could lead to the write-off of the mine under construction assets and property, plant and equipment relating to the particular site.

Estimated impairment of mines under construction

The Group tests annually whether exploration, evaluation and licensing assets and mines under construction have suffered any impairment. The recoverable amounts of the cash generating units (“CGUs”) have been determined based on value in use calculations which require the use of estimates and assumptions such as long-term commodity prices, discount rates, operating costs, future capital requirements and mineral resource estimates (see below). These estimates and assumptions are subject to risk and uncertainty and therefore there is a possibility that changes in circumstances will impact the recoverable amount. Management has assessed its CGUs as being individual exploration and mine sites, which is the lowest level for which cash inflows are independent of those of other assets or CGUs.

In assessing the carrying amounts of its exploration, evaluation and licensing assets and mines under construction at Pakrut, the Directors have used an independently prepared and Director approved bankable feasibility study. The assessment period used in the report is the anticipated life of the mine to the expiration of the licence in 2030, which consists of 1 year to prepare for full production, and 13 years of full production. Gold revenues have been estimated over that period at a price of US$1,100 per ounce to US$1,210. These estimates are based on, and are consistent with, external sources of information. The calculation assumes a mining capacity of 2,000 tonnes of ore daily increasing to 4,000 tonnes per day. The total cost per ounce including royalties, taxes, depreciation and amortisation is US$698, after taking into account external information available and adjusted according to prevailing market prices and forecasts over the period of production. Royalties have been calculated at 6% of sales revenues and corporate income tax at 14%, according to the relevant laws in Tajikistan. A discount rate of 10% has been utilised.

The calculations have been tested for sensitivity to changes in the key assumptions. The most sensitive inputs in the calculation of the value in use are operating costs, the gold price, and the discount rate. An impairment to the mine value would occur if gold prices fell to the five year low, costs were to increase by 10%, and the discount factor used were to increase to 12%.

Certain of the Group’s other exploration and evaluation projects are at an early stage of development and no JORC compliant resource estimates are available to enable value in use calculations to be prepared. The Directors therefore undertook an assessment of the following areas and circumstances which could indicate the existence of impairment:

• The Group’s right to explore in an area has expired, or will expire in the near future without renewal.
• No further exploration or evaluation is planned or budgeted for.
• A decision has been taken by the Board to discontinue exploration and evaluation in an area due to the absence of a commercial level of reserves.
• Sufficient data exists to indicate that the book value will not be fully recovered from future development and production.

The rights of LLC Pakrut to carry out exploration and evaluation activity at the Pakrut deposit expired on 1 April 2014. The Exploration Licence area includes the Pakrut, Eastern Pakrut, Rufigor and Sulfidnoye gold and mineral deposits. The renewal application by the Group to extend the Exploration Licence is being considered by the Government of Tajikistan. Although the Directors are not aware of any legal or other impediments which would ultimately prevent approval of the licence extension, the Directors fully impaired the carrying value of the exploration and evaluation assets relating to Eastern Pakrut, Rufigar and Sulfidnoye during 2014 due to non-renewal of the Exploration Licence as at 31 December 2014. The licences remain unapproved as at 31 December 2016. Exploration and evaluation activities can continue at the Pakrut Gold Deposit in the area covered by the Mining Licence.

In making their assessment consideration has been given to the adverse weather conditions (heavy snowfall) experienced at the mine site in Tajikistan shortly after the year end, which resulted in damages to buildings and equipment, and the expected cost required to repair said damages and from where this cost will be sourced, including insurance proceeds.

Approval of Pakrut reserves by Tajik Department of Geology

In November 2011, the Government of the Republic of Tajikistan issued the Pakrut Gold Project mining licence to LLC Pakrut. According to the terms of the licence, the amount of ore that can be mined is variable depending upon the mine plan. The plan submitted by the Group envisages an initial processing capacity of 660,000 tons of ore per annum, increasing to 1,320,000 tons per annum. The mining licence is valid until 2 November 2030.

The mining licence issued in November 2011 currently entitles the Group to mine JORC compliant resources (measured, indicated and inferred) of 904,000 ounces out of total JORC compliant resources of 4,383,000 ounces at Pakrut, excluding the Eastern Pakrut, Rufigar and Sulfidnoye ore zones. The JORC compliant resources include the results from the Group’s exploration and evaluation work subsequent to the mining licence issue date.

LLC Pakrut has sought approval of the increased JORC compliant resources from the Tajik Department of Geology and the Scientific and Technical Counsel which includes the results of all exploration and evaluation activities undertaken by the Group between 2009 and 2013. The application is currently subject to that approval process and the Directors are not aware of any legal or other impediments which would prevent approval of their application and therefore permit the Group to mine the increased resources. However, the approval process currently remains incomplete.

The mine design and construction work undertaken to date, together with the assessment of the recoverable amount of ‘Mines under Construction’ (see below), is based upon the total quantity of JORC compliant resources of which part falls outside the area covered by the mining licence and still subject to formal approval, as noted above. Failure to obtain this approval would lead to an impairment of ‘Mines under Construction’, together with inventories, and also impact the going concern basis of preparation of the Financial Statements. The Group has made the judgement that this approval will be forthcoming. No provision for impairment has been recognised in these Financial Statements relating to this uncertainty.

Mineral resource and reserve estimates

Reserves are estimates of the amount of resources that can be economically and legally extracted from the Group’s mining properties. The Group estimates its mineral resources based on information compiled by appropriately qualified persons relating to the geological and technical data on the size, depth, shape and grade of the ore body and suitable production techniques and recovery rates. This analysis requires complex geological judgements to interpret the data. The estimation of the recoverable amount is based upon factors such as estimates of commodity prices, future capital expenditure and production costs along with geological assumptions made in estimating the size and grade of the resources.

The Group estimates and reports mineral resource estimates in line with the principles contained in the Australasian Code for Reporting Exploration Results, Mineral Resources and Ore Reserves (December 2004), which is prepared by the Joint Ore Reserves Committee (JORC) of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Minerals Council of Australia, known as the “JORC Code”. The determination of a JORC resource is itself an estimation process that involves varying degrees of uncertainty depending on how the resources are classified (i.e. measured, indicated or inferred).

As additional geological information is produced during the operation of a mine and through additional exploration activity, mineral resource estimates may change. Such changes may impact on the Group’s reported financial position which includes the carrying value of mines under construction, property, plant and equipment and inventories.

Mine rehabilitation provision

Rehabilitation costs will be incurred by the Group at the end of the operating life of the Pakrut mine and some of the processing facilities. The Group assesses its rehabilitation provision at each reporting date. The ultimate rehabilitation costs are uncertain and cost estimates can vary in response to various factors, including estimates of the extent and costs of rehabilitation activities, regulatory changes, inflation rates and changes in discount rates. These uncertainties may result in future actual expenditure differing from the amounts currently provided and there could be significant adjustments to the provisions established which would affect future financial results. The provision as at 31 December 2016 represents management’s best estimate of the present value of future rehabilitation costs required.

Production start date

The Group assesses the stage of the Pakrut mine under construction to determine when it moves into the production phase, this being when the mine is substantially complete and ready for its intended use. The criteria used to assess the start date are determined based on the unique nature of the mine construction project, the complexity of the project and its location. The Group considers various relevant criteria to assess when the production phase is considered to have commenced. At this point, all related amounts are reclassified from ‘Mines under construction’ to ‘Mine Properties’ and ‘Property, plant and equipment’. Some of the criteria used to identify the production start date include:

• Level of capital expenditure incurred compared to the original construction cost estimate;
• Completion of testing of the mine plant and processing equipment; and
• Ability to produce metal in a saleable form.

When the mine development and construction project moves into the production phase, the capitalisation of certain costs ceases and costs are either regarded as forming part of the cost of inventory or expensed, except for costs that qualify for capitalisation. It is also at this point that depreciation commences.

Going concern

The Group’s ability to continue as a going concern is dependent on a variety of factors including its ability to secure further financing, the amount of insurance received, the time required to bring the mine into production and the timing of the first gold sales. As a result in performing their going concern assessment the Directors exercised their judgment accordingly in relation to these factors.

3. Finance Income and Costs

	Â	2016	Â	2015
		US$000		US$000
Finance Income
Interest income on short term bank deposits		5		4
					Â
Finance Costs
Interest expense on shareholder’s loans wholly repayable within five years		8,967		5,099
Interest expense on bank borrowings wholly repayable within five years		4,530		3,673
Less: Borrowing costs capitalised in qualifying assets		(13,497)		(8,772)
Provisions: Unwinding of discount		58		53
Less: Unwinding of discount capitalised in qualifying assets		(58)		(53)
Finance costs		-		-

4. Earnings per Share

	Â	2016	Â	2015
		US$		US$
					Â
Basic and diluted earnings per share		(0.0165)		(0.0161)

The basic earnings per share is calculated by dividing the loss attributable to equity holders after tax of US$6,310,000 (2015 – loss US$6,150,000) by the weighted average number of shares in issue and carrying the right to receive dividend. For the year ended 31 December 2016 this was 382,392,292 (2015 – 382,232,000) shares.

As the Group has incurred a loss for the year, no option or warrant is potentially dilutive, and hence the basic and diluted earnings per share are the same. At year end there were 1,525,000 (2015 – 5,625,000) share options outstanding that are potentially dilutive in future.

5. Mines under Construction

Cost	Â	Mining rights US$000	Â	Construction in progress US$000	Â	Total US$000
							Â
At 1 January 2015		35,595		96,935		132,530
Additions including foreign exchange differences		(573)		112,572		111,999
At 31 December 2015		35,022		209,507		244,529
Additions including foreign exchange differences		-		72,768		72,768
At 31 December 2016		35,022		282,275		317,297
At 31 December 2015		35,022		209,507		244,529

Mining rights comprise exploration and evaluation assets up to the date the Pakrut Gold Project was determined to be technically feasible and commercially viable. All subsequent exploration and evaluation expenditure at this site is capitalised within mining rights. Mining rights also includes the subsoil contract signature bonus, a share based payment for securing the Pakrut Mining Licence and payments to obtain land use rights.

Construction in progress comprises the mine, smelting plant, tailings pond, power lines and road construction work carried out at the Pakrut Gold Project by contractors and directly by the Group. It also includes the borrowing costs associated with the loan to finance the mine construction from China Nonferrous Metals Intl Mining Co. Limited (“CNMIM”) and China Construction Bank (“CCB”), together with associated legal, professional and consultancy costs.

Mines under construction are not depreciated until construction is completed and the assets are available for their intended use, signified by the formal commissioning of the mine for production.

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