Preliminary Results Announcement 2013

RNS Number : 4232D
Asia Resource Minerals PLC
28 March 2014
 



 

 

 

 

 

 

 

For Immediate Release                                                                                                                                               28 March 2014

 

Asia Resource Minerals plc ("ARMS" or the "Company")

Preliminary Results Announcement 2013

 

A Renewed Vision

• A fresh start under the new name of Asia Resource Minerals plc

• A strengthened management team

• A refreshed Board

• Enhanced governance and financial controls

• Successful separation from the Bakrie Group and an intention to return at least $400m to shareholders

• A near term focus on maximising the thermal coal opportunity at PT Berau

Financial Highlights

• Revenue of $1.4bn (2012: $1.5bn)

• Underlying EBITDA of $176m (2012: $321m-restated) - reflecting continued impact of weak thermal coal prices

• Group net debt of $507m (2012: $514m)

• Capital expenditure substantially reduced to $46m (2012: $101m-restated)

Operational Performance

• Full year production of 23.5mt, up 11.7% (2012: 21.0mt)

• Production cost of sales held flat on a per tonne basis $38.6/t (2012: $38.7/t)

• Stripping ratio of 8.8bcm/t

• Average realised price $59.6/t (2012:$70.9/t)

• A number of major initiatives launched as part of Asset Optimisation Programme

 

Nick von Schirnding, Chief Executive Officer of Asia Resource Minerals plc said, "I am pleased to report that we exceeded our production target for the year. In the continuing weak environment for thermal coal prices, we remain resolutely focused on cost reduction and asset optimisation. We now look forward to maximising the opportunity at PT Berau as we begin a new chapter in the Company's life."

 

For enquiries, please contact:

 

 

Asia Resource Minerals plc

 

Sean Wade          

+44 (0) 20 7201 7511

RLM Finsbury

 

Ed Simpkins / Charles O'Brien       

+44 (0) 20 7251 3801


 

 

Financial information for the year ended 31 December 2013

US$ million, except per share amounts

31 December 2013

31 December 2012* Restated

Revenue

1,425

1,531

Operating loss1

 

(23)

(775)

Underlying EBITDA2

 

176

321

Cash flow from operations

199

368

Loss before tax3

 

(169)

(2,427)

Loss attributable to owners of the parent

(212)

(2,331)

Underlying loss4

(173)

(60)

Loss per share (US$):



Basic loss per share5

(0.88)

(9.67)

Underlying loss per share6

(0.72)

(0.25)

Capital expenditure

46

101

Net debt

507

514

* The 2012 numbers have been restated to reflect the write off of deferred stripping and the associated tax effect thereof resulting from the implementation of IFRIC 20 and the reclassification of a prepaid lease from other non-current assets to property, plant and equipment.

 

Notes

1 Operating loss is after charging $149 million (2012: $116 million) in respect of the amortisation of fair value adjustments created as a result of the acquisition of PT Berau.

2 Underlying earnings and underlying EBITDA exclude separate items. Separate items are those items of financial performance that the Group believes should be separately disclosed. Separate items include when applicable, impairment of goodwill and other assets, costs of acquiring and integrating acquisitions, fundamental restructuring of business, profit or loss on disposal of a business or significant other asset, material claims and settlements and significant gains and losses on derivative instruments.

3  After charging $140 million (2012: $107m) in respect of the amortisation of fair value adjustments created as a result of the acquisition of PT Berau and $nil (2012: $3m) as a result of the acquisition of PT Bumi.

4  After charging $74 million (2012: $60m) in respect of the amortisation of fair value adjustments created as a result of the acquisition of PT Berau and $nil (2012: $3m) as a result of the acquisition of PT Bumi.

5  Basic loss per share is calculated as loss for the financial period divided by the weighted average number of ordinary shares in issue for the period. The basic weighted average number of ordinary shares is 241 million (2012: 241 million).

6  Underlying loss per share is calculated as underlying earnings divided by the weighted average number of ordinary shares in issue for the period.

The Group presents underlying loss and underlying EBITDA as an additional measure to provide greater understanding of the underlying business performance of its operations. The adjustments to arrive at underlying loss and underlying EBITDA are:


Year to
31 December 2013 $m

 

Year to
31 December 2012* $m

Restated

Loss attributable to owners of the parent

(212)

(2,331)

Exclusions from underlying earnings:



Costs associated with corporate transaction

18

-

Impairment of goodwill

-

815

Non-controlling interest element of impairment of goodwill

-

(227)

Other exceptional costs

6

152

Share of loss of associate

-

167

Reclassification of share of other comprehensive income of associate to Income  

Statement

-

(6)

Loss on reclassification of associate to an investment

-

1,394

Movement on financial instruments at fair value through profit or loss

15

(24)

Separate Items

39

2,271

Underlying loss

(173)

(60)

Add back/(deduct):



Depreciation and amortisation

175

129

Finance income

(13)

(14)

Finance costs

144

135

Income tax

83

124

Non-controlling interest

(40)

7

Underlying EBITDA

176

321

* The 2012 numbers have been restated to reflect the write off of deferred stripping and the associated tax effect thereof resulting from the implementation of IFRIC 20.

Financial and Operating Results

2013 was a very challenging but transformational year for the Group. Against a backdrop of shareholder turmoil and continued weak thermal coal prices, the underlying business performed well in terms of production growth, cost control and further enhancement to our systems of governance and financial controls.

Whilst sales volumes increased 11% in the year to 23.3mt, this was offset by a 16% reduction in the average selling price. Production at PT Berau grew by 11.7% in 2013 to 23.5mt from 21.0mt in 2012. Underlying EBITDA was $176m (2012: $321m-restated).

The Separation Transaction

At our General Meeting on 17 December 2013, our shareholders voted overwhelmingly for the Separation Transaction as well as a change of name to Asia Resource Minerals plc.

On 25 March 2014 we announced the completion of the Separation Transaction which involved the disposal of our 29.2% stake in PT Bumi and the sale of the Bakrie Group's entire 23.8% indirect interest in the Company to RACL, a company owned by Samin Tan. Companies controlled by Samin Tan now own 47.6% of the total shares in the Company.

While the timing of completion was delayed, the price of $501 million paid by the Bakries for the PT Bumi stake was completed according to the original terms and at more than three times the market value of PT Bumi in Indonesia prior to completion.

Following the successful conclusion of the transaction, our intention is to return at least $400 million of cash to shareholders.

Management Changes

In October, we significantly strengthened our management team with the appointments of Paul Fenby as Chief Financial Officer, and Keith Downham as Chief Mining Officer, both based in Jakarta. Paul's initial focus is on optimising the Group's capital structure and strengthening our financial controls, while Keith is responsible for our new Life of Mine plan and ongoing asset optimisation programme. A number of other management appointments have also been made.

Board Changes

There have been significant changes to the composition of the Board in the year under review with the resignations of Messrs. Yeo and Harsono, the changes which took place at the general meeting of shareholders on 21 February 2013 with the departure of Messrs Mizrahi and Rathod and the appointment of Sir Richard Gozney, and the retirement from the Board of Lord Renwick, Sir Graham Hearne and Scott Merrillees who did not seek re-election at the Company's annual general meeting held on 26 June 2013.

During 2013 the Nomination Committee has been working on the restructuring of the Board. This led to the appointment of Nick Salmon and Chris Walton as Independent Non-Executive Directors on 1 January 2014, and Nick's appointment as Senior Independent Director on 1 February 2014. This process is ongoing and further appointments continue to be considered.

As announced separately, Chris Walton became Chairman of the Board when Samin Tan stepped down as Chairman. Mr Tan has remained as a Non-Executive Director of the Company.

As announced on 23 December 2013, Steven Shapiro has informed the Board that he will not be seeking re-election at the Company's AGM to be held on 5 June 2014.

Strategy

The three pillars of the Group's near term strategy are:

·      Optimisation - we are optimising our asset base by improving efficiency and cutting costs aggressively across the Group

·      Organic Growth - we are focused on delivering profitable production growth at PT Berau

·      Capital Structure - we are optimising our capital structure and currently exploring a range of refinancing options to reduce our interest costs

Optimisation

Good progress continues to be made in respect of the Group's asset optimisation programme, to reduce costs and improve efficiencies.

An optimised Life of Mine plan has been completed, which will aim to maximise value and further enhance the efficiency of current mining methods. Discussions are also at a very advanced stage with a number of mining contractors to effect rate reductions starting in 2014. In addition the number of contractors has been rationalised by the removal of some of the smaller higher cost contractors. Projects are underway to ensure that the Group realises the lowest costs for tyres and explosives.

Conceptual level studies have been completed into the use of conveyors to transport both waste material and coal, and initial outcomes from these studies suggest there is potential to further reduce costs. The current focus is to advance the studies and engineering on these projects for potential implementation.

Fuel consumption for both mine fleet and shipping has been reduced by around five million litres through the use of additives which improve combustion and instituting controls that reduce wastage. Further fuel initiatives are currently being worked on, including the implementation of fuel management systems and improved fuel pricing. Fuel is one of the Group's largest costs, in 2013 it spent $227 million on fuel.

Annualised exploration costs have been reduced by 11% to $11.5m (2012: $12.95m) through maximising the utilisation of drilling equipment. The number of rigs has been reduced; as has the overall number of geologists.

In terms of barging productivity, sea trials have been completed on 330ft barges with a load capacity of 11,000 tonnes, against current 270ft barges with a 7,000 tonne load capacity. Two larger barges have been brought into service with plans to replace the entire fleet operating from the Suaran port as existing contracts end during 2014. A dredging programme at the Lati port has allowed the load on each barge to be increased from 5,500 to over 7,000 tonnes.

Marketing commissions on the sale of coal have been reduced by 0.5% from 3.5% to 3.0% from January 2014 and discussions on further reductions are underway.

Organic growth

I am pleased to report that we grew production at PT Berau by 11.7% in 2013 to 23.5mt from 21.0mt in 2012. We currently expect 2014 to be another solid year of growth with the incremental production increase forecast to come largely from Binungan. The Company's mine plan envisages growth in production for 2014 of around 10% although that remains dependent upon the successful outcome of our discussions with the Indonesian authorities about increasing the current quota beyond 23mt.

Capital structure

As at 31 December 2013, the Group had net debt of $507m (2012: $514m). We are currently exploring a range of refinancing options to reduce our interest costs.

Health, Safety, Environment and Communities

We run our business in a socially and environmentally responsible way. Employee safety, environmental protection and the wellbeing of local communities are essential to our corporate identity and values. In terms of safety, I am pleased to report that for the second year running, we had no fatalities. It is also pleasing to note that Berau won a Silver Award in 2013 for its performance in both safety and Environmental Management practices.

Outlook

Whilst the coal price may well remain muted in the near term due to supply issues, we believe that the longer term outlook for thermal coal continues to be well underpinned by growth in demand from Asian countries. We believe it will remain a vital source of cost-competitive energy globally for the foreseeable future.

Principal Risks and Uncertainties

The Principal Risks and Uncertainties disclosure can be found at the end of this announcement under Supplementary Information.

Business Unit Performance

In 2013 PT Berau grew production by 11.7% versus 2012 to 23.5 million tonnes, despite operations being suspended at the end of the year because the government imposed production limit had been reached.

The additional coal production was from lower strip ratio, higher margin pits, most notably Binungan 7. This resulted in an overall reduction of the strip ratio by 8% to 8.8 bcm/tonne. All mines at PT Berau performed well throughout the year with weather delays in line with the plan during the first quarter. At the end of the year operations at the small, high cost Sambarata B East pit were suspended resulting in a 500,000t reduction. PT Berau also moved to consolidate its mining contractors from seven to five.

Coal processing and shipping also delivered strong performances for the year, with record shipments at 23.3mt for the year, 10.6 % above the 2012 performance and the vessel loading rate topped 28.1kt/day. PT Berau successfully trialled 330 foot barges between the Suaran port and the Muara Pantai transhipment point, which will result in a more efficient barging operation in the future. In addition dredging of the Segah River near the Lati port has allowed barges to be loaded to in excess of 7,000 tonnes, whereas previously cargos were capped at 5,500 tonnes.

PT Berau's average selling price (on a free on board basis) ("ASP") was $59.6 per tonne for 2013 (2012:$70.9 per tonne), reflecting ongoing weakness in thermal coal markets. The ASP was stronger in the first half because older sales contracts had not expired. Production costs for the year were $38.6/tonne and in line with 2012. Whilst the strip ratio and waste hauling distances were lower, these savings were offset by increased coal hauling distance and the impact of the one week shutdown at the end of the year. In light of the ongoing weak market conditions PT Berau reduced its need for capital expenditure, by rescheduling projects and identifying more cost efficient solutions, this resulted in capital expenditure of $46 million (2012 :$101 million-restated).

In terms of sales by destination, 85% were exports (mainland China: 36%, Taiwan: 19%, India 12%, South Korea: 10%, Rest of Asia: 8%), with the remaining 15% sold domestically into Indonesia.

Conclusion

Now that the long and painful process of the Separation Transaction is complete, with enhanced controls in place and with a number of significant cost reduction programmes underway, I am confident that we are in a better position to deliver value to our shareholders.

Statement of Directors' Responsibilities

Each of the Directors confirm that to the best of their knowledge:

• the condensed consolidated financial standards, which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and loss of the Group and the undertakings included in the consolidation taken as a whole;

• the preliminary results announcement includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

A list of current Directors is maintained on the Company's website: www.asiarmplc.com

This responsibility statement has been prepared in connection with the preliminary results announcement of the Company for the year ended 31 December 2013.

By order of the Board

 

 

Nick Von Schirnding

Chief Executive Officer

28 March 2014

 



 

Production Report for the Year ended 31 December 2013

 

PT Berau: Operating Data






FY 2013

FY 2012

FY 2013 vs

FY 2012

Coal mined (mt)





23.5

21.0

12%

Sales (mt)





23.3

21.1

11%

FOB average selling price ($/t)





59.6

70.9

(16%)

Production cost of sales ($/t)





38.6

38.72,3

-

* The full year production target of 23mt was reached a week ahead of the end of the year and in line with Indonesian mining regulations, PT Berau therefore stopped producing for the last week of December 2013. Fixed costs continued to be incurred, thus impacting production cost of sales per tonne for the quarter.

The effect of IFRIC 20 on the Production cost of sales is given below:

 

PT Berau: Production Cost of Sales





FY 2013

FY 2012

FY 2013 vs FY 2012

Production cost of sales (excluding IFRIC 20) ($/t)




37.4

37.82

1.2%

IFRIC 20 cost increase ($/t)




1.2

0.9

35.1%

Production cost of sales (including IFRIC 20) ($/t)




38.6

38.72,3

-

 

Notes

1 Bank cubic metres (bcm) of overburden removed per tonne of coal mined

2 Restated for impact of 'other exceptional costs'

3  Restated for impact of IFRIC 20

 

Coal mined




Q1

2013

Q2

2013

Q3

2013

Q4

2013

FY 2013

FY 2012

FY 2013 vs FY 2012

Lati


mt

2.3

2.8

2.7

2.6

10.4

10.7

(3%)

Binungan


mt

1.8

2.1

2.0

2.0

8.0

5.4

47%

Sambarata


mt

1.2

1.3

1.3

1.3

5.1

4.9

5%

Total


mt

5.3

6.2

6.0

5.9

23.5

21.0

12%

Average realised prices


$/t

60.4

62.3

58.5

57.2

59.6

70.9

(16%)

Sales volumes


mt

5.5

6.0

6.0

5.9

23.3

21.1

11%

Production cost of sales


$/t

39.4

35.2

39.7

40.0*

38.6

38.72,3

-

 

Notes

1 Bank cubic metres (bcm) of overburden removed per tonne of coal mined

2 Restated for impact of 'other exceptional costs'

3  Restated for impact of IFRIC 20

 



 

Condensed Consolidated Financial Statements

Consolidated income statement

For the year ended 31 December

2013
$m

2012
$m*
Restated

Revenue

1,425

1,531

Cost of sales

(1,265)

(1,138)

Gross profit

160

393

General and administrative expenses

(102)

(133)

Distribution and marketing expenses

(57)

(68)

Costs associated with corporate transactions

(18)

-

Impairment of goodwill

-

(815)

Other exceptional costs

(6)

(152)

Operating loss

(23)

(775)

Share of loss of associate

-

(167)

Loss on reclassification of associate to an investment

-

(1,394)

Reclassification of share of other comprehensive income of associate to Income Statement

-

6

Loss before finance items and income tax

(23)

(2,330)

Finance income

13

14

Finance costs

(144)

(135)

Movement on financial instruments at fair value through profit or loss

(15)

24

Net finance costs

(146)

(97)

Loss before income tax

(169)

(2,427)

Income tax

(83)

(124)

Loss for the year

(252)

(2,551)




Loss attributable to:



Owners of the parent

(212)

(2,331)

Non-controlling interests

(40)

(220)




Loss per ordinary share

$

$

Basic

(0.88)

(9.67)

Diluted

(0.88)

(9.67)

* The 2012 numbers have been restated to reflect the write off of deferred stripping and the associated tax effect thereof resulting from the implementation of IFRIC 20, and the impact of implementing IAS 19 (revised). Refer to Note 3a.



 

Consolidated statement of comprehensive income

For the year ended 31 December

2013
$m

 2012
$m*
Restated

Loss for the year

(252)

(2,551)




Other comprehensive income/(expense)



Items that will not be reclassified to profit or loss



Remeasurement of post employment benefit obligations

2

(1)

Items that may be subsequently reclassified to profit or loss



Reclassification of share of other comprehensive income of associate to Income Statement

-

(6)

Share of other comprehensive income of associate

-

4

Change in value of available for sale financial asset

(223)

(84)

Total other comprehensive expense

(221)

 (87)

Total comprehensive expense for the year

(473)

 (2,638)




Total comprehensive expense attributable to:



Owners of the parent

(433)

(2,418)

Non-controlling interests

(40)

(220)

* The 2012 numbers have been restated to reflect the write off of deferred stripping and the associated tax effect thereof resulting from the implementation of IFRIC 20 and the impact of implementing IAS 19 (revised). Refer to Note 3a.

Items in the above statement are disclosed net of tax, the income tax relating to each component of other comprehensive income is disclosed in Note 8.



 

Balance Sheet

As at 31 December

2013
$m

 2012
$m*
Restated

Non-current assets



Goodwill

518

518

Exploration and evaluation assets

7

5

Property, plant and equipment

2,821

2,951

Derivative financial assets

9

24

Other non-current assets

8

5

Total non-current assets

3,363

3,503




Current assets



Inventories

39

39

Trade and other receivables

528

592

Available for sale financial asset

149

372

Restricted cash

-

124

Cash and cash equivalents

452

457

Total current assets

1,168

1,584

Total assets

4,531

5,087




Current liabilities



Trade and other payables

806

833

Borrowings

11

12

Current taxation

132

119

Total current liabilities

949

964




Non-current liabilities



Borrowings

948

959

Deferred tax liabilities

1,148

1,206

Provisions

34

33

Total non-current liabilities

2,130

2,198

Total liabilities

3,079

3,162




Equity



Ordinary shares

4

4

Share premium

141

141

Merger reserve

2,248

2,248

Accumulated losses

(1,336)

(903)

Total attributable to owners of the parent

1,057

1,490

Non-controlling interests

395

435

Total equity

1,452

1,925

Total equity and liabilities

4,531

5,087

* The 2012 numbers have been restated to reflect the write off of deferred stripping and the associated tax effect thereof resulting from the implementation of IFRIC 20, reclassification of a prepaid lease from other non-current assets to property, plant and equipment and the impact of implementing IAS 19 (revised). Refer to Note 3a.



 

Statement of Changes in Equity



Attributable to owners of the parent






Ordinary shares
$m

Share premium
$m

Merger reserve
$m

Retained earnings/ (accumulated losses)
$m

Total
$m

Non- controlling interest
$m

Total

Equity
$m



At 1 January 2012 (as previously reported)

4

141

2,248

1,533

3,926

685

4,611



Prior period restatement for IFRIC 20*

-

-

-

(15)

(15)

(5)

(20)



Prior period restatement for IAS 19 (revised)*

-

-

-

(3)

(3)

-

(3)



Balance at 1 January 2012 (restated)*

4

141

2,248

1,515

3,908

680

4,588



Dividend paid to non-controlling interests

-

-

-

-

-

(25)

(25)



Loss for the year

-

-

-

(2,323)

(2,323)

(218)

(2,541)



Prior period restatement for IFRIC 20*

-

-

-

(8)

(8)

(2)

(10)



Loss for the year (restated)*

-

-

-

(2,331)

(2,331)

(220)

(2,551)



Other comprehensive expense for the year

-

-

-

(86)

(86)

-

(86)



Prior period restatement for IAS 19 (revised)*

-

-

-

(1)

(1)

-

(1)



Other comprehensive expense for the year (restated)*

-

-

-

(87)

(87)

-

(87)



Total comprehensive expense (restated)*

-

-

-

(2,418)

(2,418)

(220)

(2,638)



At 31 December 2012 (restated)*

4

141

2,248

(903)

1,490

435

1,925



Loss for the year

-

-

-

(212)

(212)

(40)

(252)



Other comprehensive expense for the year

-

-

-

(221)

(221)

-

(221)



Total comprehensive expense

-

-

-

(433)

(433)

(40)

(473)



At 31 December 2013

4

141

2,248

(1,336)

1,057

395

1,452


* The 2012 numbers have been restated to reflect the write off of deferred stripping and the associated tax effect thereof resulting from the implementation of IFRIC 20 and the impact of implementing IAS 19 (revised). Refer to Note 3a.



 

Statement of Cash flows

For the year ended 31 December

2013
$m

2012
$m*

Restated

Net cash flows generated from operations

199

368

Other exceptional costs

(6)

(135)

Interest paid

(118)

(99)

Tax paid

(149)

(214)

Net cash used in operating activities

(74)

(80)




Cash flows from investing activities



Interest received

3

5

Purchase of property, plant and equipment

(30)

(78)

Capitalised exploration and evaluation expenditure

(2)

(1)

Movement in restricted cash

124

(23)

Dividends received from associate

-

9

Net cash generated from/(used in) investing activities

95

(88)




Cash flows before financing activities

21

(168)




Cash flows from financing activities



Proceeds from borrowings

-

498

Repayment of borrowings

(8)

(346)

Dividends paid to non-controlling interests in subsidiaries

-

(25)

Net cash generated from financing activities

(8)

127




Net decrease in cash and cash equivalents

13

(41)

Opening cash and cash equivalents

457

507

Effect of foreign exchange rates

(18)

(9)

Closing cash and cash equivalents

452

457

* The 2012 numbers have been restated to reflect the reclassification of a prepaid lease from other non-current assets to property, plant and equipment.

 

 



 

NOTES TO THE FINANCIAL STATEMENTS

1. General Information

Further to the approval of shareholders on 17 December 2013, Bumi plc changed its name to Asia Resource Minerals plc, with effect from 19 December 2013. Asia Resource Minerals plc (formerly Bumi plc) (the "Company") is a company domiciled and incorporated in the UK. The address of the registered office is Atlas House, 3rd Floor, 173 Victoria Street, London, SW1E 5NH. The Company along with its main operating subsidiary, PT Berau Coal Energy Tbk ("PT Berau"), a coal mining group of companies listed on the Indonesia Stock Exchange and their subsidiaries comprise "the Group". The Company also holds an investment in PT Bumi Resources Tbk ("PT Bumi") which is also listed on the Indonesia Stock Exchange and which was classified as an associate from the date of acquisition to 30 September 2012 and as an available for sale asset thereafter. PT Bumi is also engaged in coal mining operations and exploration and development of mineral mining concessions.

2. Basis of Preparation

(a) Statement of compliance

The Financial Statements for the year ended 31 December 2013 included in this announcement were authorised for issue in accordance with a resolution of the Board of Directors on 28 March 2014.

The preliminary financial information as at and for the year ended 31 December 2013 included in this report is unaudited and does not have the status of statutory accounts within the meaning of Section 434 of the Companies Act 2006.  This preliminary announcement does not constitute the Group's full financial statements for the year ended 31 December 2013. The preliminary financial information is based on accounts which are subject to audit, Board approval and filing with the Registrar of Companies. The financial information for the year ended 31 December 2012 is derived from the statutory accounts for that year, where applicable restated for the introduction of the new accounting interpretation IFRIC 20 "Stripping costs in the production phase of a surface mine", IAS 19 (revised) "Employee Benefits" and the reclassification of a prepaid lease from other non-current assets to property, plant and equipment. Please see Note 3a for the effect to the condensed consolidated financial statements of the changes to accounting standards. The effect of the reclassification of the prepaid lease is to increase property, plant and equipment by $20m and decrease the value of other non-current assets by $20m.

b) Going Concern

In adopting the going concern basis for preparing the financial statements, the Directors have considered the business activities as well as the Group's principal risks and uncertainties. Based on the Group's cash flow forecasts and projections, the Board is satisfied that the Group will be able to operate within the level of its facilities for the foreseeable future. For this reason, the Group continues to adopt the going concern basis in preparing its financial statements.

3. Summary of new accounting policies and reporting changes

The accounting policies applied in these condensed Financial Statements for the year ended 31 December 2013 are consistent with those of the annual Financial Statements for the year ended 31 December 2012, as described in those Financial Statements, with the exception of standards, amendments and interpretations effective in 2013 and other presentational changes.

(a)   Standards, amendments, and interpretations effective or adopted in 2013 and other reporting changes

The only standard or interpretation issued implemented in the year, that had a material impact on the accounts are:

i)    IFRIC 20 "Stripping costs in the production phase of a surface mine". The adjustment to property, plant and equipment, non-controlling interest and retained earnings is shown in the table below.

ii)   IAS 19 (revised) "Employee Benefits".  The adjustment to post employment benefit obligations, non-controlling interest and retained earnings is shown in the following table:

US$ millions

Property, Plant and Equipment - Deferred Stripping Costs

Post Employment  Benefit  Obligation

Non-Controlling Interests

(Accumulated Losses)/Retained Earnings

Balance at 31 December 2011 (reported)

36

(6)

685

1,533

Impact of IFRIC 20

(36)

-

(9)

(27)

Impact of IAS 19 (revised)

-

(5)

-

(5)

Tax effect of the above adjustment

-

-

4

14

Balance at 31 December 2011 (restated)

-

(11)

680

1,515






Balance at 31 December 2012 (reported)

54

(9)

442

(876)

Impact of IFRIC 20

(54)

-

(13)

(41)

Impact of IAS 19 (revised)

-

(7)

-

(7)

Tax effect of the above adjustment

-

-

6

21

Balance at 31 December 2012 (restated)

-

(16)

435

(903)

(b)   Standards, amendments and interpretations that are issued but not yet applied by the Group

The only issued standard not yet applied by the Group which could have an effect on future Financial Statements is IFRS 9 Financial Instruments. The mandatory effective date of this standard has not yet been determined by the IASB, however the Group are continuing to assess the impact that it may have.

Although still in discussion, potential changes to IFRS 10, IAS 27 and IAS 28 relating to the unit of account for investments could have a significant impact. The IASB is proposing to issue an exposure draft in 2014 to clarify the fair value measurement of quoted investments in subsidiaries, joint ventures and associates. The current proposals state that the fair value measurement of an investment composed of quoted financial instruments should be the product of the quoted price of the financial instrument multiplied by the quantity of instruments held. The IASB noted that quoted prices in an active market provide the most reliable evidence of fair value. In the same way, the IASB also tentatively decided that the fair value measurement of cash generating units (CGUs) for impairment testing when those CGUs correspond to a quoted entity should be the product of their quoted price multiplied by the quantity of instruments held.  Management continue to monitor the IASB discussions, but maintain their current interpretation of the present standards is that, for consolidated subsidiaries, the individual assets such as goodwill and mining properties should be assessed by reference to how a typical industry participant would value the underlying mining concession, using discounted future cash flows incorporating future development plans. If the fair value of PT Berau was measured on the basis of multiplying the quoted price by the number of shares held, the value would be $451m (2012: $597m). This would lead to an impairment in the Income Statement of $741m in 2013.

4. Segmental analysis

In accordance with the provisions of IFRS 8 'Operating Segments', the operating segments used to present segment information were identified on the basis of internal reports used by the ARM's Board of Directors to allocate resources to the segments and assess their performance. ARM's Board of Directors is the Group's "chief operating decision maker" within the meaning of IFRS 8.

The Board of Directors considers the business from a product perspective and has determined that the Group has one single reportable segment, being coal mining.  Information on financial performance and net assets is presented in the income statement and balance sheet and information on underlying earnings and underlying EBITDA.

5. Critical accounting judgements and key sources of estimation uncertainty

The preparation of the consolidated financial statements in accordance with IFRS requires the use of critical estimates and assumptions to determine the value of assets and liabilities, and contingent assets and liabilities at the balance sheet date, and revenues and expenses reported during the year. Due to uncertainties inherent in the estimation process, the Group regularly revises its estimates in light of currently available information. Final outcomes could differ from those estimates. The main judgements and estimates used in preparing the Group's consolidated financial statements are presented below.

5.1 Identification of other exceptional costs

PT Berau's new management conducted an extensive review of the financial position at PT Berau in March 2013 and identified significant expenditure, predominantly in 2012, which had no clear business purpose. These costs had been attributed, by former management, to activities or items which might ordinarily have been of value to PT Berau. In conducting its review, management had to apply judgement in assessing expenditure in 2012 and the first quarter of 2013 to determine the substance of counterparties and whether the services performed or assets acquired were of value to the business. This expenditure has been classified as other exceptional costs and shown separately in the Consolidated Income Statement to separate it from costs incurred in the ordinary course of business.

5.2 Determination of coal reserve estimates

The Group reports its coal reserves in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves, 2012 Edition (the "JORC Code"), prepared and published by the Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and Minerals Council of Australia based on advice from an independent third party working with management in house experts. The term "coal reserve" is defined in the JORC Code as the economically mineable part of a measured and/or indicated coal resource. Coal reserves are subdivided in order of increasing confidence into "probable coal reserves" and "proved coal reserves".

Under the JORC Code, the term "coal resource" refers to a concentration or occurrence of coal of intrinsic economic interest in or on the Earth's crust in such form and quantity that there are reasonable prospects for eventual economic extraction. The location, quantity, grade, geological characteristics and continuity of a coal resource are known, estimated or interpreted from specific geological evidence and knowledge. Coal resources are subdivided, in order of increasing geological confidence, into "inferred", "indicated" and "measured" categories.

Reserves and resources determined in this way are used in the calculation of depreciation, amortisation and impairment charges, the assessment of life of mine stripping ratios and in forecasting the timing of the payment of close down and 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 for economic extraction.

There are numerous uncertainties inherent in estimating coal 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.

5.3 Recoverable amount of goodwill and property, plant and equipment

The recoverable amount of goodwill and property, plant and equipment is based on estimates and assumptions regarding, in particular, the expected market outlook and future cash flows associated with the asset. Predicted future cash flows include estimates of future costs to produce, proven and probable reserves and resources, future commodity prices, foreign exchange rates and discount rates.

Judgement and estimation is required for all elements of the future cash flows, but especially the length of the mining licence and the conversion of resources to reserves.

To date, no first generation CCoW has reached its expiration period and therefore there is no precedent for extension, although this is envisaged in the terms of the CCoW. Recent legislation from the Government of Indonesia has indicated that CCoWs may be extended in the form of an Izin Usaha Pertambangan (IUP) issued by the central government. Whilst the terms of the extension would need to be negotiated, the legislation allows for first-term CCoWs, such as that held by PT Berau, to be extended into an IUP without need for a tender. Management has risk adjusted future cash flows based on its estimate of the likelihood of favourable extensions of the mining licence beyond the initial CCoW period to 2035 and subsequently 2045.

Future cash flows are also dependent upon the ability to economically mine in areas where mineable reserves have not yet been established to JORC standards. Judgement is required to support the anticipated conversion of resources to reserves and associated cash flows. Management has based this judgement on their knowledge of the geology and exploration activity conducted in the concession area, prior experience of the conversion of resources to reserves through additional drilling, and an estimate of the production costs and capital expenditure requirements.

5.4 Taxation

Taxes are paid by the Group's subsidiary in Indonesia under a number of different regulations and laws, which are subject to varying interpretations. In addition, these can change frequently and the judicial system does not have well developed rules of precedent. This, in turn, may result in transactions and activities that have not been challenged in the past being scrutinised in greater detail and additional taxes may be assessed based on new interpretations of the legislation and tax positions. Accordingly, management's interpretation of such legislation as applied to the transactions and activity of the Group's subsidiary may be challenged by the relevant authorities.

Under Indonesian tax laws, fiscal periods up until 2007 remain open for 10 years, or until the end of 2013 whichever is earlier and fiscal periods ending after 2007 remain open for five years after the time that the tax becomes due.

At the date of these financial statements, the Group's subsidiary, PT Berau has received several tax assessment letters that are not yet finalised. PT Berau has filed objections and/or appeals that are still in process or pending decisions, the outcomes of which are not presently determinable. Management believes that its interpretation of the relevant legislation is appropriate and the tax position included in these financial statements will be sustained.

5.5 VAT recoverable

There is an ongoing dispute with the Government of Indonesia which resulted from a change in the VAT law in 2001 when coal became a VAT exempt supply. This change meant that PT Berau could no longer claim credits for its input VAT on purchases. However, under the Coal Contract of Works (CCoW), PT Berau is indemnified against Indonesian taxes not in effect at the time of signing of the CCoW. On this basis, PT Berau claimed reimbursement for input VAT paid from 2001. The claims were rejected and PT Berau began setting off the VAT receivable against royalty payments due under the CCoW. The VAT receivable and royalty payable amounts have been presented separately on a gross basis within trade and other receivables and trade and other payables, respectively. Whilst there is no current indication that the amount may not be recoverable, PT Berau management believes that there may be a low risk that the receivable may not be recovered in whole or in part.



 

6. Other Exceptional Costs

As discussed in the Asia Resource Minerals plc (formerly Bumi plc) 2012 Annual Report, new management at PT Berau conducted an extensive review of the financial position of PT Berau in March 2013 and identified significant expenditure, which had no clear business purpose. Previous management at PT Berau had attributed these costs to hauling roads and other construction in progress, land related payments, consulting services and acquisition related goodwill. The expenditure was predominantly incurred in 2012, however expenditure of a similar nature was also incurred in January and February 2013 under previous management and accordingly this has also been presented as other exceptional costs. These amounts are shown separately in the Consolidated Income Statement to separate them from costs incurred in the ordinary course of business.

An analysis of other exceptional costs is set out below:

For the year ended 31 December

2013
$m

2012
$m

Expenditure attributed to hauling roads and other construction in progress

6

79

Expenditure attributed to land related payments

-

42

Consulting services

-

24

Expenditure attributed to goodwill

-

5

Other

-

2

Total other exceptional costs

6

152

7. Underlying earnings and underlying EBITDA

The Group presents underlying earnings and underlying earnings before interest, tax, depreciation and amortisation ("underlying EBITDA") as additional measures to provide greater understanding of the underlying business performance of its operations. Underlying earnings and underlying EBITDA exclude separate items. Separate items are those items of financial performance that the Group believes should be separately disclosed. Separate items include, when applicable, impairment of goodwill and other assets, costs of acquiring and integrating acquisitions, fundamental restructuring of business, profit or loss on disposal of a business or significant other asset material claims and settlements, other exceptional costs and significant gains and losses on derivative instruments.

The results of PT Bumi, which were treated as an associate for the nine months to 30 September 2012, have been excluded from underlying earnings and underlying EBITDA as PT Bumi is being held for sale and it no longer represents a part of the ongoing operations of the Group.

The adjustments made to net earnings to arrive at underlying earnings and underlying EBITDA are explained below:

For the year ended 31 December

2013
$m

2012
$m*
Restated

Loss attributable to owners of the parent*

(212)

(2,331)

Exclusions from underlying earnings:



Costs associated with corporate transactions

18

-

Impairment of goodwill

-

815

Non-controlling interest element of impairment of goodwill

-

(227)

Other exceptional costs

6

152

Share of loss of associate

-

167

Reclassification of share of other comprehensive income of associate to Income Statement

-

(6)

Loss on reclassification of associate to an investment

-

1,394

Movement on financial instruments at fair value through profit or loss

15

(24)

Separate items

39

2,271

Underlying earnings

(173)

(60)

Add back/(deduct):



Depreciation and amortisation*

175

129

Finance income

(13)

(14)

Finance costs

144

135

Income tax*

83

124

Non-controlling interest*

(40)

7

Underlying EBITDA*

176

321

* The 2012 numbers have been restated to reflect the write off of deferred stripping and the associated tax effect thereof resulting from the implementation of IFRIC 20.

 

8. Taxation

For the year ended 31 December

2013
$m

2012
$m*
Restated

Tax charged to the consolidated Income Statement in the year:






UK Corporation Tax at 23.25% (2012: 24.5%)

-

-

Overseas tax



 - In respect of prior years

(52)

(40)

 - Current year

(101)

(150)

Current tax

(153)

(190)

Deferred tax (origination and reversal of temporary differences)

70

66

Total tax charged to consolidated Income Statement

(83)

(124)

* The 2012 numbers have been restated to reflect the write off of deferred stripping and the associated tax effect thereof resulting from the implementation of IFRIC 20 and the impact of implementing IAS 19 (revised).

The deferred tax credit primarily relates to the release of $66m (2012: $60m) of the deferred tax liability linked to the depreciation of mining properties recognised in the Purchase Price Allocation following the acquisition of PT Berau.

Significant judgement is required in determining the Group's income tax liabilities. In arriving at the current and deferred tax liability the Group has taken account of tax issues that are subject to on-going discussions with the relevant tax authorities. Calculations of these liabilities have been based on management's assessment of legal and professional advice, case law and other relevant guidance. Where the expected tax outcome of these matters is different from the amounts that were recorded initially, such differences will impact the current and deferred tax amounts in the period in which such determination is made.

The tax (charge) / credit relating to components of other comprehensive income is as follows:


2013


Before tax
$m

Tax (charge) / credit
$m

After tax
$m

Remeasurements of post employment benefit liabilities

3

(1)

2

 


2012


Before tax
$m

Tax (charge) / credit
$m

After tax
$m

Remeasurements of post employment benefit liabilities

(2)

1

(1)

 



 

9. Earnings per share ("EPS")

The calculation of earnings per ordinary share is based on profit attributable to ordinary shareholders of the Company and the weighted average number of ordinary shares in issue during the year. In addition to the earnings per share required by IAS 33 "Earnings per Share", underlying EPS has also been calculated and is based on earnings excluding the effect of separately disclosed items. It has been calculated to allow shareholders to have a better understanding of the trading performance of the Group. Details of the underlying EPS are set out below:

For the year ended 31 December

2013
$m

2012
$m*
Restated

Loss attributable to ordinary shareholders

(212)

(2,331)

Separate items

39

2,271

Underlying earnings

(173)

(60)




Number of shares (millions)



Basic weighted average number of ordinary shares

241

241

Potentially dilutive share options

1

-

Diluted weighted average number of shares

242

241


$

$

Basic loss per share

(0.88)

(9.67)

Effect of potentially dilutive share options

-

-

Diluted loss per share

(0.88)

(9.67)




Basic underlying earnings per share

(0.72)

(0.25)

Effect of potentially dilutive share options

-

-

Diluted underlying earnings per share

(0.72)

(0.25)

* The 2012 numbers have been restated to reflect the write off of deferred stripping and the associated tax effect thereof resulting from the implementation of IFRIC 20.



 

 

10. Intangible Assets


Exploration and evaluation assets
$m

Goodwill
$m

Cost



At 1 January 2012

4

1,334

Acquired through business combinations

-

4

Additions

1

-

Transfer to other exceptional costs1

-

(5)

At 31 December 2012

5

1,333

Additions

5

-

Transfer to mining properties

(3)

-

At 31 December 2013

7

1,333




Accumulated amortisation and impairment



At 1 January 2012

-

-

Amortisation charge for the year

-

-

Impairment charge for the year

-

(815)

At 31 December 2012

-

(815)

Amortisation charge for the year

-

-

Impairment charge for the year

-

-

At 31 December 2013

-

(815)




Net book value at 31 December 2013

7

518

Net book value at 31 December 2012

5

518

1  This represents goodwill arising on the acquisition of PT Pelayaran Sandita Perkeson Maritim Tbk, PT Kirana Berau and PT Manira Mitra where the excess consideration above the fair value of assets acquired had no business purpose. This was written off to other exceptional costs in 2012.

Impairment tests for goodwill

Goodwill arising through acquisitions has been allocated to individual or Groups of cash generating units (CGUs), each representing the lowest level in the Group at which goodwill is monitored for internal management purposes.

The carrying value of the Group's goodwill of $518m has arisen on the acquisition of PT Berau on 4 March 2011, which is treated as the Group's sole CGU.

The Group's annual impairment review resulted in no impairment charge for the year. PT Berau's recoverable amount has been assessed based on fair value less costs of disposal using discounted cash flows. The discounted cash flow model used to determine the recoverable amount is a level 3 model in the fair value hierarchy as it's valuation includes management assumptions on key unobservable data that significantly affects the fair value.

Expected future cash flows are inherently uncertain and could materially change over time. They are significantly affected by a number of factors including ore reserves and production estimates, commodity prices, discount rates, future operating costs and capital expenditure. Cash flow projections are based on financial budgets and production plans to the end of the Coal Contract of Work (CCoW), including two 10 year extensions, appropriately risk adjusted.

The key assumptions relating to the calculation of PT Berau's fair value less costs of disposal are the long term thermal coal price; production volumes operating costs; and discount rates.

The medium term (2014 to 2018) forecast benchmark thermal coal price is within the range supported by market analysts of $85 to $105 per tonne (2012: $90 to $113 per tonne) in nominal terms. This price is then adjusted for various coal quality parameters, such as calorific value, moisture and sulphur content, to derive the expected realised selling prices on a free on board (FOB) basis.

Post tax cash flows were estimated for the period of the Coal Contract of Work (CCoW), and discounted using a post tax discount rate of between 9.9% and 10.4% (2012: 9.8% and 10.5%) expressed in nominal terms. The operating costs included in the fair value assessment are calculated based on PT Berau's production plans taking into consideration PT Berau is asset optimisation strategies for the remainder of the CCoW. Price assumptions for inputs are based on analysis of market fundamentals and are made consistent with related output price assumptions. The Coal Contract of Work expires in 2025, with further extensions permitted, subject to terms and conditions being agreed. Management has included two 10 year extensions in the fair value less costs of disposal at 31 December 2013, with additional risk adjustments as appropriate.

The excess of recoverable amount over carrying value is around $220m. Whilst the Directors remain confident in the assumptions used in determining the recoverable amount, it is estimated that the following adverse changes in key assumptions would lead to corresponding decreases in fair value less costs of disposal, and would lead to an impairment charge in the year:


Value assigned to the key assumption for 2014 - 2025

Change in the key assumption which would result in the recoverable amount equalling the carrying value

Thermal coal price in nominal terms ($/t)

85-127

2.2%

Operating cost per tonne in nominal terms($/t)

50-62

3.0%

Production volumes (mt)

25-40

7.1%

Discount rate (% absolute)

9.9

1.2%

Each of the sensitivities above was determined assuming the relevant key assumption moved in isolation, except where modifying the thermal coal price directly affects certain input costs, and further assumes that management does not take any mitigating actions. However, this is for disclosure purposes and under those circumstances management could take mitigating action such as changes to the mine plan, cost reduction initiatives and additional sales strategies.

11. Available for sale financial asset - PT Bumi

From 30 September 2012, the investment in associate was reclassified as an available for sale asset.



$m

At 1 January 2012


-

Reclassification following loss of significant influence at PT Bumi


456

Change in value during the period from 30 September 2012


(84)

At 31 December 2012


372




Change in value during the year


(223)

At 31 December 2013


149

The available for sale financial asset consists of 6,061,699,637 ordinary shares in PT Bumi that are quoted on the Indonesia Stock Exchange and are denominated in Indonesian Rupiahs. The valuation of the available for sale financial asset at 30 September 2012, 31 December 2012 and 31 December 2013 has been calculated using the closing bid price for PT Bumi ordinary shares quoted on the Indonesia Stock Exchange on the last working day prior to the relevant dates and the closing US dollar exchange rate against the Indonesian Rupiah. The exchange rates used at 30 September 2012, 31 December 2012 and 31 December 2013 were Rps 9,569: $1 and Rps 9,613: $1 and Rps 12,203: $1 respectively.

12. Consolidated cash flow analysis

Reconciliation of loss before tax to cash flows generated from operations

For the year ended 31 December

2013
$m

 2012
$m*
Restated

Loss before tax

(169)

(2,427)

Add back/(deduct):



Depreciation and amortisation

175

129

Movement on financial instruments at fair value through profit or loss

15

(24)

Impairment of goodwill

-

815

Other exceptional costs

6

152

Share of loss from associate

-

167

Reclassification of share of other comprehensive income of associate to Income Statement


(6)

Loss on reclassification of associate to an investment

-

1,394

Net finance costs

131

121

Foreign exchange losses in operating costs

30

9

Increase in inventories

-

(9)

Decrease/(increase) in receivables

31

(102)

(Decrease)/increase in payables

(20)

148

Increase in provisions

-

1

Cash flows generated from operations

199

368

* The 2012 numbers have been restated to reflect the write off of deferred stripping and the associated tax effect thereof resulting from the implementation of IFRIC 20 and the reclassification of a prepaid lease from other non-current assets to property, plant and equipment.

13. Contingent asset - Litigation recoverable with R Roeslani

On 26 June 2013, the Company and Rosan Roeslani, the former President Director of PT Berau, entered into a settlement agreement providing for the return of $173m to PT Berau, either as assets or cash. The amount is considered as a contingent asset as recovery is not certain and therefore it is not appropriate to recognise a receivable.

There were no significant contingent assets in the Group at 31 December 2012.

14. Related Party Transactions

In the 2012 Bumi plc financial statements, the related party disclosures included transactions for which there was no clear business purpose and where the ultimate beneficiary was unknown. Following the replacement of the Berau President Director on 7 March 2013, controls regarding related party transactions have been enhanced. Prior to 7 March 2013, a further $6m of expenditure was incurred where the ultimate beneficiary was unknown and the business purpose was not clear, as disclosed in Note 6.

The most significant related party transactions in the year to 31 December 2013 are with Bakrie related entities in relation to fuel supply and mining contractor services. These contractual arrangements are in the ordinary course of business and are considered by management to be on acceptable commercial terms. Ongoing transactions with the Recapital related companies, controlled by Rosan Roeslani, all in the ordinary course of business, have been reduced in the latter part of the year.  After 7 March 2013, Recapital related entities ceased to be related parties of ARM.

Related party debtors at 31 December 2012, included $7.1m due from PT Bukit Mutiara, an entity controlled by Recapital. Although no longer considered a related party at 31 December 2013, this amount is overdue and provided for whilst the company pursues repayment.

15. Subsequent events

Separation transaction

On 25 March 2014, ARM completed its disposal of PT Bumi to the Bakrie Group for a cash consideration of $501m.


Supplementary Information

PRINCIPAL RISKS AND UNCERTAINTIES

Risk management

The Board continues to identify, evaluate and manage the risks which the Group and the wider sector face. The risks to which the Group is exposed at any point in time in pursuing its strategic objectives cover a wide range of factors: competition, legislative, fiscal, political, financial, economic, social, reputational and operational. Each could impact EBITDA, operating profits, net assets and liquidity.

The main risks currently facing the Group have been assessed against a backdrop of robust competition from local and foreign producers and a weakening in the Newcastle benchmark of 7.7% over last year. This has prompted a major cost optimisation programme to reduce operating costs wherever possible and management has looked at ways of reducing capital expenditure to minimise the impact on earnings and cash flows. Similar actions are being taken across the sector in Indonesia.

Accordingly, the principal risks and uncertainties which are specific to ARM at this point in time, together with the actions that management is taking to mitigate each, are set out below.

The Board continues to pay particular attention to the effectiveness of management's mitigating actions and progress is monitored in each area.

Risk

Context

Impact

Mitigation

Coal Contract of Works (CCoW)

Failure to secure essential extension to the Group's CCoW  which expires in 2025.

The Group's future post 2025 is dependent on securing extensions to its CCoW in order to continue to operate. To date, no first generation CCoW has reached its initial expiry and therefore there is no precedent for extension although this is envisaged in the terms of the CCoW. Also recent legislation has indicated that CCoWs may be extended in the form of an IUP issued by the central government.

 

Without extension of the CCoW by the Indonesian government mining operations would be forced to stop

Whilst the Group's existing CCoW is not impacted by new regulation, local management remains engaged with the Indonesian government regarding extensions to  the CCoW, for example with regard to the size of the mining areas.

Limitation of production tonnage.

The Group submits annual cost and production budgets to the Government of Indonesia for approval. The government has the discretion to accept or reject the Group's budget.

Annual volumes could be impacted by government policy which may also limit the Group's growth aspirations.

The Group continues to work with government agencies in Indonesia to ensure it is able to mine optimal tonnages. In the event that the Indonesian government caps production volumes, the Group will continue to mitigate the impact through its ongoing cost optimisation programme.



 

Risk

Context

Impact

Mitigation

Coal Price

Sustained weakness in coal prices.

The demand and price for coal in Indonesia is largely determined by global supply and demand and, in turn, by the strength of the global economic environment and its impact on Asia, particularly China. The thermal coal market remains oversupplied, which has continued to put downward pressure on global coal prices. The Group continues to be positive about long term demand for thermal coal.

A sustained weakness in coal prices could result in material and adverse movement in the Group's operating results, asset values, reserves and resources, revenues and cash flows. It may also compromise the ability of the Group to deliver growth in future years as expansion projects may not be viable at lower prices.

The Group is continuing with its aggressive cost optimisation programme which it started in 2013 to offset weakening coal prices. The Group's Life of Mine planning processes, which have been under the control of the Chief Mining Officer since his appointment in October 2013, consider coal price forecasts, operating costs, market demand and production capacity and makes adjustments as far as possible to optimise returns.

 

Coal Mining Operations

Failure to reduce operational costs which is necessary to meet the Group's objective of increasing shareholder value.

A key element of the Group's strategy is to optimise its operational costs of which fuel represents a significant percentage. This exposes the Group to increased fuel prices and policy changes which mandate the use of biofuels. The Group uses approximately 270 million litres of diesel fuel per annum.

The Group will continue  to cut costs further to maintain shareholder value. Its efforts could be partially offset by any increase in diesel prices or change in Indonesian government policy relating to the composition of diesel fuel.

As part of the programme it launched in 2013 to reduce costs the Group has sought improvements  through: increased driver training, trialling use of fuel additives, tendering of new fuel contracts and raising awareness of the impact on fuel usage when planning mining operations. As a result, it has achieved important gains in certain areas, e.g. in 2013 the Group reduced its annual fuel usage by approximately 4 million litres and is targeting a further reduction of 12 million litres (4%) in 2014.

 

Failure to obtain, or experiencing delays in obtaining, approval for permits because of the Group's failure to achieve necessary environmental standards could prevent access to land needed for mining.

Environmental protection is an increasing area of focus for the Indonesian government and is subject to growing global scrutiny. The Group's planned mining areas cover a number of forest areas and before mining can take place a forest use permit (Pinjaam Pakai) must be obtained from the Minister of Forestry.

Enforced changes to the Group's planned mining sequence with consequential financial and reputational consequences.

The Group has a dedicated environmental team which monitors compliance and since 2012 has been following a programme to enhance environmental management. Applications for forest use are submitted well ahead of mining activities and the Group works with regulators to enable timely processing.



 

Risk

Context

Impact

Mitigation

Coal Mining Operations continued

Failure to reach agreement with the landowners on whose land the Group wishes to mine could interrupt its mining operation.

Whilst the Group's CCOW grants coal extraction rights, mining operations can only be carried out with the permission of individual land owners.

 

If the Group is not able to gain access to proposed mining areas the mine plan may need to be adjusted or changed.

The Group has identified land for which it needs to acquire access to carry out mining operations. On-going negotiations are held with landowners in advance to gain access to these areas when required for mining.

Errors or miscalculations in the Group's geological model resulting in the discovery of less coal than expected from individual pits.

The Group uses detailed exploration drilling to define the extent and quality of its coal reserves. Exploration is carried out in advance of mining to the JORC Code. (The JORC Code is a professional code of practice that sets minimum standards for public reporting of minerals exploration results, mineral resources and ore reserves).

Any deviation is likely to only occur in individual pits and limited in its impact given that there are between 10 and 12 pits operating at any one time.

On-going drilling, coal sampling and geological assessment is carried out on a regular basis to ensure the accuracy of the geological model.

Financial

Failure to meet debt service obligations from operating cash flows.

The Group carries significant debt, the interest on which it services through operating cash flows. Additionally, the Group relies on operating cash flows to fund on-going capital and exploration programmes.

Operating cash flow depends on meeting production, pricing and operating cost targets. Failure to meet such targets could affect the Group's ability to fund its on-going programmes and ultimately to not being able to meet debt-service obligations.

 

The Group has significant cash reserves to meet short and medium term liquidity requirements. Nevertheless, it performs regular cash flow forecasting based on the latest economic and operating assumptions. Such forecasts are reviewed regularly by senior management.

A number of items are under discussion with the Indonesian tax authorities which could give rise to additional tax assessments, interest and penalties.

Local management is in dialogue with the tax authorities regarding prior period tax returns going back to 2005. The tax authorities have enquired as to the appropriateness of certain deductions made to income in arriving at taxable profit.

In the event that a number of these current discussions with the tax authorities result in a negative ruling this would result in significant cash out flow from the business.

Local management has sought the assistance of professional tax advisors to support its position in ongoing discussions with the tax authorities. Management has considered the risk to the business and believes the financial statements adequately reflect the risk.

Political Environment in Indonesia

The Group's operations may be affected by political and legal developments in Indonesia, particularly following elections in 2014. Failure to maintain effective relationships with local government and community leaders under the Government's strategy of regional autonomy could lead to disruption in mining operations.

The Group has no control over political and legal changes but recognises that certain of its licences and permits are dependent on its relationships with local government. Its ability to mine freely to meet production targets can only be accomplished with the support of local government and through the Group's community development programmes which include education, health and nutrition, environment and cultural preservation.

Potential impacts include expropriation of assets, further imposition of royalties or taxation targeted at mining companies, licences not being renewed and requirements for local ownership or beneficiation. A breakdown in relationships can also result in civil unrest and the termination of mining permits and leases.

The Group maintains a dialogue with local government, and responds to developments through annual mine planning activities. This dialogue is coordinated through local management. In addition, the Group maintains a full community development programme, working closely with local government to meet the needs of its local communities and this programme provides action to mitigate the environmental impact on the residents of Tanjung Redeb.

 

 

 

Risk

Context

Impact

Mitigation

Management

Inability to recruit, develop or retain the senior management skills required to provide effective oversight of the Group's operations.

The Group has sought to upgrade its management during 2013 across a number of functions but faces difficulty because of certain skills shortages in Indonesia, for example, qualified professionals in the finance and legal areas. This shortage leads to increased competition for skilled management resources. Recruitment and retention can be made more challenging given the remote location of the Group's mining operations and the damage to its reputation being perceived in some quarters in the light of past governance problems.

Lack of management bandwidth can result in increased costs, interruptions to existing operations and delays in new projects. It also raises challenges to management's oversight of its operations.

Local management has arrangements in place to manage recruitment and retention and to appraise and reward performance, and these processes continue to operate effectively. Where gaps have arisen in certain areas, management has found ways to fill these through outsourcing, interim management hires and use of experienced consultants from reputable firms, e.g. "Big Four" accounting firms and international legal practices.





 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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