Corporate Governance - Accounting

Statement of Accounting Policies

The significant accounting policies adopted by the Group are as follows:

• Basis of Preparation
• Going Concern
• Basis of Accounting
• Basis of Consolidation
• Determination of Ore Reserve Estimates
• Revenue Recognition
• Leases
• Retirement Benefit Costs
• Foreign Currency
• Borrowing Costs
• Taxation
• Operating Loss/Profit
• Exploration and Evaluation Expenditure
• Property, Plant & Equipment
• Deferred Development Expenditure
• Impairment of Tangible Assets
• Inventories
• Financial Assets and Financial Liabilities
• Mine Closure Provision
• Mine Rehabilitation Provision
• Share-based Payments

Basis of Preparation 

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). The financial statements have also been prepared in accordance with IFRSs adopted by the European Union and therefore the Group financial statements comply with Article 4 of the IAS Regulation. The financial statements have been prepared in compliance with Companies Acts 1963 to 2009. 

Going Concern

On 5 March 2010, the Group announced plans to raise approximately £179.6 million (at the time US$270 million before expenses) by means of a fully underwritten equity issue. This funding will enable the Group to proceed with a proposed expansion of the Moma Titanium Minerals Mine on the basis of an Expansion Study which was completed in January 2010. 

The Project lenders have agreed to a number of waivers and amendments to the existing Project financing agreements in connection with the proposed expansion the effectiveness of which are conditional on US$200 million of the proceeds of the equity raising being deposited into the Contingency Reserve Account (an account securing certain obligations of the Group in connection with the financing of the Project) by 30 June 2010. Further detail on these waivers and amendments are set out in Note 19. 

On 29 March 2010, resolutions authorising the share issue were passed by shareholders at an extraordinary general meeting. On 1 April 2010, the conditions of the placing and open offer agreement were satisfied, the Company announced that the newly issued shares had been approved for listing, and the proceeds of the share issue had been received. By 30 June 2010, US$200 million will be deposited to the CRA, satisfying the sole remaining condition to effectiveness of the waivers and amendments. 

Taking account of the relevant factors including those summarised above, the Directors believe that the Group has adequate resources for the foreseeable future and continue to adopt the going concern basis of accounting in preparing the annual financial statements. 

 

Basis of Accounting 

The financial statements are prepared in US Dollars under the historical cost convention. 

Basis of Consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. 

All Group transactions, balances, income and expenses are eliminated on consolidation. 

 

Determination of ore reserve estimates

The Group estimates its ore reserves and mineral resources based on information compiled by Competent Persons as defined in accordance with the Australasian Code for Reporting of Ore Reserves and Mineral Reserves of December 2004 (the JORC Code). Reserves determined in this way are used in the calculation of depreciation, amortisation and impairment charges, the assessment of life of mine and for forecasting the timing of the payment of close-down, restoration costs and clean-up costs. In assessing the life of a mine for accounting purposes, mineral resources are only taken into account where there is a high degree of confidence of economic extraction. 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 final products, production costs or recovery rates may change the economic status of reserves and may, ultimately, result in the reserves being restated. 

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Revenue Recognition

Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for mineral products provided in the normal course of business, net of discounts and related sales taxes. Sales of mineral products are recognised when mineral products have been delivered. Typically, delivery takes place when product is loaded in the customer’s vessel. 

Revenue earned during the period of commissioning the Mine, before it was capable of operating in the manner intended by management, was deducted from costs capitalised in development expenditure. 

Finance income represents deposit interest earned. It is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. 

 

Leases

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the Group. All other leases are classified as operating leases. 

Finance Leases

Assets held under finance lease are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to directly achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s policy on borrowing costs (see below). 

Operating Leases

Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term. 

Retirement Benefit Costs

Payments to defined contribution retirement schemes are charged as an expense as they fall due.

Foreign Currency

The individual financial statements of each Group entity are presented in their functional currency, US Dollars. The consolidated financial statements are expressed in US Dollars, which is the presentation currency for the consolidated financial statements. 

In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at rates prevailing on the balance sheet date. 

Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the income statement for the year. 

 

Borrowing Costs

All borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. 

Taxation

The tax expense represents the sum of the tax currently payable and deferred tax. 

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using the tax rates that have been enacted or substantively enacted by the balance sheet date. 

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that is probable that taxable profits will be available against deductible temporary differences which can be utilised. Such assets and liabilities are not recognised if the temporary differences arise from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. 

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiary undertakings, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. 

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered. 

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is released. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. 

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities. 

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Operating Loss/Profit

Operating loss or profit is from continuing operations. 

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Exploration and evaluation expenditure

Exploration and evaluation expenditure activity involves the search for mineral resources, the determination of technical feasibility and the assessment of commercial viability of an identified resource. Exploration and evaluation expenditure is charged to the income statement as incurred except where the existence of a commercially viable mineral deposit has been established. Capitalised exploration and evaluation expenditure considered to be tangible is recognised as a component of property, plant and equipment at cost less impairment charges. As the asset is not available for use, it is not depreciated. All capitalised exploration evaluation expenditure is monitored for indications of impairment. To the extent that capitalised expenditure is not expected to be recovered it is charged to the income statement. 

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Property, Plant & Equipment

The cost of property, plant and equipment comprises its purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management and the estimated closure costs associated with the asset. Mining and processing plant acquired in 2000 is carried at the revalued amount which is deemed to be the cost of the asset and the surplus is included in the revaluation reserve. 

Construction in progress expenditures for the construction and commissioning of capital projects are deferred until the facilities are operational, at which point the costs are transferred to property, plant and equipment and depreciated at the applicable rates. 

Property, plant and equipment are depreciated over their respective useful lives, or over the remaining life of mine if shorter. The major categories of property, plant and equipment are depreciated as follows: 

Plant & Equipment                          Units of production basis 

Buildings & Airstrip                         20 years 

Mobile Equipment                           3 to 5 years 

Fixtures & Equipment                      3 to 10 years 

Units of production depreciation is calculated using the quantity of heavy mineral concentrates extracted from the mine for processing or sterilised in the period as a percentage of the total quantity of heavy mineral concentrates planned to be extracted in current and future periods based on the mining reserve. The Moma Titanium Minerals Mine reserve is a proven and probable reserve which represents approximately a 28 year life at expected production levels prior to expansion. 

Residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Changes to the estimated residual values or useful lives are accounted for prospectively. 

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Deferred Development Expenditure 

Mineral exploration and project development costs, including finance costs and lender and advisor fees for the Moma Titanium Minerals Mine during the period before the Mine is capable of operating at production levels in the manner intended by management are deferred and included in property, plant and equipment. In addition, expenses including depreciation net of revenue earned during commissioning the Mine in the period before it is capable of operating in the manner intended by management are deferred. These costs include an allocation of costs, including share based payments as determined by management and incurred by Group companies. Interest on borrowings related to the construction and mine development projects is capitalised until the point when the activities that enable the Mine to operate in its intended manner are complete. When the Mine is operating in the manner intended by management, the related costs will be written off over the life of the estimated ore reserve on a unit of production basis. Where the project is terminated or an impairment in value has occurred, related costs are written off immediately.

 

Impairment of Tangible Assets

At each balance sheet date, the Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. 

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. 

If the recoverable amount of the asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. 

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

 

Inventories

Product inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials, direct labour costs and overheads, including depreciation incurred in bringing the inventories to their present location and condition. Cost is calculated using the weighted average method. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Quantities are assessed primarily through surveys and assays. 

Consumable spares are stated at the lower of cost and net realisable value. Cost comprises the purchase price and related costs incurred in bringing the inventories to their present location and condition. Actual cost is calculated using the weighted average method. 

Financial Assets and Financial Liabilities

Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes party to a contractual provision of the instrument. 

Trade receivables

Trade receivables are initially recognised at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. 

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value. 

Financial liabilities and equity

Financial liabilities and equity instruments issued by the Group are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. 

 

Bank borrowings

Interest-bearing bank loans and overdrafts are initially measured at fair value, and are subsequently measured at amortised cost, using the effective rate method. Any difference between the proceeds and the settlement or redemption of borrowings is recognised over the term of the borrowings in accordance with the Group’s accounting policy for borrowing costs (see above). 

 

Trade payables

Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest method. 

Equity instruments

Equity capital issued and committed to be issued by the Company is recorded at the value of proceeds received, net of direct issue costs. The only equity instrument of the Group is ordinary share capital. 

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Mine Closure Provision

The mine closure provision represents the Directors’ best estimate of the Group’s liability for close-down, dismantling and restoration of the mining and processing site, but excluding reclamation of areas disturbed by mining activities, which is covered under the mine rehabilitation provision. A corresponding amount equal to the provision is recognised as part of property, plant and equipment and depreciated over its estimated useful life. The costs are estimated on the basis of a formal closure plan and are subject to regular review. The mine closure provision is determined as the net present value of such estimated costs. Changes in the estimated timing or costs are recorded by an adjustment to the provision and corresponding adjustment to property, plant and equipment. The unwinding of the discount on the mine closure provision is recognised as a finance cost and capitalised if eligible. 

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Mine Rehabilitation Provision

The mine rehabilitation provision represents the Directors’ best estimate of the Company’s liability for reclaiming areas disturbed by mining activities. Reclamation costs are recognised in each period based on the area disturbed in such period. 

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Share-based Payments

The Group issues share options to certain Directors, employees and consultants. Share options are measured at fair value at the date of grant. The fair value determined at the grant date of the share options is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the shares that will eventually vest and adjusted for the effect of non-market based vesting conditions. Fair value is measured using a Black-Scholes pricing model. The share-based payment is capitalised if eligible. The policy described above is applied to all equity-settled share-based payments that were granted after 7 November 2002 that vested after 1 January 2005.