Notes to the consolidated financial statements (1‐9)
FOR THE YEAR ENDED 31 DECEMBER 2013
(all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
- The EuroChem Group and its operations
- Basis of presentation
- Critical accounting estimates, and judgements in applying accounting policies
- Adoption of new or revised standards and interpretations
- Statement of cash flows
- Principal subsidiaries and associates
- Segment information
- Property, plant and equipment
- Mineral rights
1 THE EUROCHEM GROUP AND ITS OPERATIONS
EuroChem Group comprises the parent entity, Open Joint Stock Company Mineral Chemical Company ‘EuroChem’ (the ‘Company’), and its subsidiaries (collectively the ‘Group’ or ‘EuroChem Group’). The Company was incorporated on 27 August 2001 as a closed joint stock company. On 3 April 2006 the Company changed its legal form to an open joint stock company.
A company that holds business interests beneficially for Mr Andrey Melnichenko owns 100% of Linea Ltd registered in Bermuda, which in turn owns 92.2% (31 December 2012: 92.2%) of EuroChem Group S.E. 7.8% of EuroChem Group S.E. (31 December 2012: 7.8%) is held indirectly by Mr. Dmitry Strezhnev, CEO of the Group. As at 31 December 2013 EuroChem Group S.E. owns 87.36% of the Company (31 December 2012: 88.51%). The remaining 12.64% is held by EuroChem Capital Management Ltd, the Group’s wholly-owned subsidiary, and presented as treasury shares in the consolidated statement of financial position (31 December 2012: 11.49%).
The Group’s principal activity is the production of mineral fertilizers (nitrogen and phosphates groups) as well as mineral extraction (iron-ore, apatite, baddeleyite and hydrocarbons), and the operation of the distribution network.
The Group is developing potassium salts deposits with a view to starting the production and marketing of potassium fertilizers. The Group’s manufacturing facilities are based in the Russian Federation, Lithuania and Belgium.
The Company has its registered office at: Dubininskaya St. 53, bld. 6, Moscow, Russian Federation.
2 BASIS OF PREPARATION
Basis of preparation
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) under the historical cost convention, as modified by available-for-sale investments and derivative financial instruments, which are accounted for at fair value.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 periods presented, unless otherwise stated.
Foreign currency translation
The functional currency of each of the Group’s consolidated entities is the currency of the primary economic environment in which the entity operates.
The functional currency is determined separately for each of the Group’s subsidiaries. For Russian subsidiaries the functional currency is the Russian Rouble (‘RR’).
The functional currency of the most Group’s subsidiaries located in Europe is the Euro (‘EUR’), for subsidiaries located in Lithuania, the functional currency is the Lithuanian Lita (‘LTL’) etc.
Monetary assets and liabilities are translated into each entity’s functional currency at the official exchange rate at the respective reporting dates. Foreign exchange gains and losses resulting from the settlement of the transactions and from the translation of monetary assets and liabilities into each entity’s functional currency at year-end official exchange rates are recognised in profit and loss. Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit and loss are recognised in profit and loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets such as equities classified as available-for-sale are recognised in other comprehensive income.
Foreign exchange gains and losses that relate to borrowings and deposits are presented in the consolidated statement of profit or loss and other comprehensive income in a separate line ‘Financial foreign exchange gain/(loss), net’. All other foreign exchange gains and losses are presented in the profit and loss within ‘Other operating income/(expenses), net’.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
These consolidated financial statements are presented in Russian Roubles, which is the functional currency of the Company.
The results and financial position of each Group’s subsidiaries are translated into the presentation currency using the official exchange rate of the Central Bank of the Russian Federation (‘CBRF’) as follows:
(i) assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position;
(ii) income and expenses for the consolidated statement of profit or loss and other comprehensive income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions);
(iii) components of equity are translated at the historical rate; and
(iv) all resulting exchange differences are recognised as currency translation differences in other comprehensive income.
At 31 December 2013 the official exchange rates established by CBRF were: US$ 1 = RR 32.7292 (31 December 2012: US$ 1 = RR 30.3727), Euro 1 = RR 44.9699 (31 December 2012: Euro 1 = RR 40.2286), LTL 1 = RR 13.0338 (31 December 2012: LTL 1 = RR 11.6554). Average rates for the year ended 31 December 2013 were: US$ 1 = RR 31.8480 (2012: US$ 1 = RR 31.0930), Euro 1 = RR 42.3129 (2012: Euro 1 = RR 39.9524), LTL 1 = RR 12.2551 (2012: LTL 1 = RR 11.8400).
Consolidated financial statements.
Subsidiaries are entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group (acquisition date) and are de-consolidated from the date that control ceases.
The acquisition method of accounting is used to account for the acquisition of subsidiaries. Identifable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The Group measures non-controlling interest on a transaction-by-transaction basis, either at: (a) fair value, or (b) the non-controlling interest’s proportionate share of net assets of the acquiree.
Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date. Any negative amount (“negative goodwill”) is recognised in proft or loss, after management reassesses whether it identifed all the assets acquired and all liabilities and contingent liabilities assumed and reviews the appropriateness of their measurement.
The consideration transferred for the acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent consideration arrangements but excludes acquisition related costs such as advisory, legal, valuation and similar professional services. Transaction costs related to the acquisition and incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt as part of the business combination are deducted from the carrying amount of the debt and all other transaction costs associated with the acquisition are expensed. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered.
Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered.
The Company and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies.
Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests which are not owned, directly or indirectly, by the Company. Non-controlling interest forms a separate component of the Group’s equity.
Purchases and sales of non-controlling interests.
The Group applies the economic entity model to account for transactions with owners of non-controlling interest. Any difference between the purchase consideration and the carrying amount of non-controlling interest acquired is recorded as a capital transaction directly in equity. The Group recognises the difference between sales consideration and carrying amount of non-controlling interest sold as a capital transaction in the consolidated statement of changes in equity.
Property, plant and equipment.
Property, plant and equipment are stated at historical cost, less accumulated depreciation and a provision for impairment, where required.
The cost of replacing major parts or components of property, plant and equipment items is capitalised and the replaced part is retired. Minor repair and maintenance costs are expensed when incurred.
At each reporting date management assesses whether there is any indication of impairment of property, plant and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in the profit and loss. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell.
Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in the profit and loss.
Capitalisation of borrowing costs.
Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial time to get ready for intended use or sale (qualifying assets) are capitalised as part of the costs of those assets, if the commencement date for capitalisation is on or after 1 January 2009. The commencement date for capitalisation is when (a) the Group incurs expenditures for the qualifying asset; (b) it incurs borrowing costs; and (c) it undertakes activities that are necessary to prepare the asset for its intended use or sale. Capitalisation of borrowing costs continues up to the date when the assets are substantially ready for their use or sale.
The Group capitalises borrowing costs that could have been avoided if it had not made capital expenditure on qualifying assets. Borrowing costs capitalised are calculated at the Group’s average funding cost (the weighted average interest cost is applied to the expenditures on the qualifying assets), except to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset. Where this occurs, actual borrowing costs incurred less any investment income on the temporary investment of those borrowings are capitalised.
Depreciation of property, plant and equipment (other than oil and gas assets) is calculated using the straight-line method over their estimated useful lives from the time they are ready for use:
|Useful lives in years|
|Buildings and land improvements||15 to 80|
|Transfer devices||25 to 30|
|Machinery and equipment||2 to 30|
|Transport||5 to 25|
|Other items||1 to 8|
Depreciation of oil and gas assets is calculated using the unit-of-production method.
The residual value of an asset is the estimated amount that the Group would currently obtain from disposing of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date.
Remaining useful life of property, plant and equipment.
Management assesses the remaining useful life of property, plant and equipment in accordance with the current technical conditions of assets and the estimated period during which these assets will bring economic benefit to the Group.
Development expenditure incurred by the Group is accumulated separately for each area of interest in which economically recoverable resources have been identified. Such expenditure comprises cost directly attributable to the construction of a mine and the related infrastructure. Once a development decision has been taken, the expenditure in respect of the area of interest is classified in the assets under construction category.
Exploration and evaluation costs related to an area of interest are written off as incurred except they are carried forward as an asset in the consolidated statement of financial position where the rights of tenure of an area are current and it is considered probable that the costs will be recouped through successful development and exploitation of the area of interest. Capitalised costs include costs directly related to exploration and evaluation activities in the relevant area of interest. In accordance with IFRS 6, Exploration for and Evaluation of Mineral Resources, exploration assets are measured applying the cost model described in IAS 16, Property, plant and equipment after initial recognition. Depreciation and amortisation are not calculated for exploration assets because the economic benefits that the assets represent are not consumed until the production phase. Capitalised exploration and evaluation expenditure is written off where the above conditions are no longer satisfied.
All capitalised exploration and evaluation expenditure is assessed for impairment if facts and circumstances indicate that impairment may exist. Exploration and evaluation assets are also tested for impairment once commercial reserves are found, before the assets are transferred to development properties.
Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are charged to profit and loss on a straight-line basis over the period of the lease.
When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term.
Goodwill is carried at cost less accumulated impairment losses, if any. The Group tests goodwill for impairment at least annually and whenever there are indications that goodwill may be impaired. Goodwill is allocated to the cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the business combination. Such units or groups of units represent the lowest level at which the Group monitors goodwill and are not larger than an operating segment.
Gains or losses on disposal of an operation within a cash generating unit to which goodwill has been allocated include the carrying amount of goodwill associated with the operation disposed of, generally measured on the basis of the relative values of the operation disposed of and the portion of the cash generating unit which is retained.
Mineral rights include rights for evaluation, exploration and production of mineral resources under the licences or agreements. Such assets are carried at cost, amortisation is charged on a straight line basis either over the validity period of the license or the agreement, or over the expected life of mine, starting from the date when production activities commence. The costs directly attributable to acquisition of rights for evaluation, exploration and production are capitalised as a part of the mineral rights. If the reserves related to the mineral rights are not economically viable, the carrying amount of such mineral rights is written off.
Mineral resources are recognised as assets when acquired as part of a business combination and then depleted using the unit-of-production method for oil and gas assets based on total proved mineral reserves and straight line method for other assets. Estimated proven and probable mineral reserves reflect the economically recoverable quantities which can be legally recovered in the future from known mineral deposits and were determined by independent professional appraisers when acquired as part of a business combination.
The Group’s intangible assets have definite useful lives and primarily include acquired core process technology, distribution agreements, customer relationships, trademarks, capitalised computer software costs and other intangible assets.
These assets are capitalised on the basis of the costs incurred to acquire and bring them to use.
Intangible assets with definite useful lives are amortised using the straight-line method over their useful lives:
|Useful lives in years|
|Land use rights||50|
|Core process technology||5-18|
The Group tests intangible assets for impairment whenever there are indications that intangible assets may be impaired.
If impaired, the carrying amount of intangible assets is written down to the higher of value in use and fair value less cost to sell.
Classification of financial assets.
The Group classifies its financial assets into the following measurement categories: a) loans and receivables; b) available-forsale financial assets; c) financial assets held to maturity and d) financial assets at fair value through profit and loss. Financial assets at fair value through profit and loss have two subcategories: (i) assets designated as such upon initial recognition, and (ii) those classified as held for trading.
Financial assets held for trading are classified in this category if acquired principally for the purpose of selling in the short term. Trading investments are not reclassified out of this category even when the Group’s intentions subsequently change.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in the current assets, except for those with maturities greater than 12 months after the reporting date, which are classified as non-current assets.
The “Held-to-maturity” classification includes quoted non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group has both the intention and ability to hold to maturity. Management determines the classification of investment securities held to maturity at their initial recognition and reassesses the appropriateness of that classification at each reporting date. At 31 December 2013 and 31 December 2012 the Group did not have any “held to maturity” investments.
All other financial assets are included in the available-for-sale category.
Initial recognition of financial instruments.
Trading investments and derivatives are initially recorded at their fair value. All other financial assets and liabilities are initially recorded at their fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and the transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets.
All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at their trade date, which is the date that the Group commits to deliver a financial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument.
De-recognition of financial assets.
The Group de-recognises financial assets when (i) the assets are redeemed or the rights to cash flows from the assets have otherwise expired or (ii) the Group has transferred substantially all the risks and rewards of ownership of the assets or (iii) the Group has neither transferred nor retained substantially all risks and rewards of ownership but has not retained control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale.
Available-for-sale investments are carried at fair value. Interest income on available-for-sale debt securities is calculated using the effective interest method and recognised in profit and loss. Dividends on available-for-sale equity instruments are recognised in profit and loss when the Group’s right to receive payment is established. All other elements of changes in the fair value are recognised in other comprehensive income and accumulated in equity until the investment is derecognised or impaired at which time the cumulative gain or loss is reclassified from equity to profit and loss.
Impairment losses are recognised in profit and loss when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of available-for-sale investments. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any revaluation loss on that asset previously recognised in other comprehensive income – is reclassified from equity and recognised in profit and loss. Impairment losses on equity instruments are not reversed through profit and loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit and loss, the impairment loss is reversed through the current period’s profit and loss.
Derivative financial instruments.
The Group’s derivative financial instruments comprise forward, options and swap contracts in foreign exchange and securities. The Group’s policy is to measure these instruments at fair value, with resultant gains or losses being reported within the profit and loss. The fair value of derivative financial instruments is determined using actual market data information and valuation techniques based on the prevailing market interest rate for similar instruments as appropriate.
The Group has no derivatives accounted for as hedges.
Investments in associates and joint ventures.
Associates are entities over which the Group has significant influence, but not control, generally accompanying a shareholding of between 20 and 50 percent of the voting rights. The joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Investments in associates and joint ventures are accounted for using the equity method of accounting and are initially recognised at cost. The carrying amount of associates and joint ventures include goodwill identified on acquisition less accumulated impairment losses, if any. The Group’s share of the post-acquisition profits or losses of associates and joint ventures is recorded in the consolidated profit or loss, and its shares of post-acquisition movements in other comprehensive income are recognised in other comprehensive income. Unrealised gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group’s interest in the associates and joint ventures; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Income taxes have been provided for in the consolidated financial statements in accordance with tax legislation enacted or substantively enacted by the reporting date for each country where the Group subsidiaries are registered. The income tax expense comprises current tax and deferred tax and is recognised in the profit and loss unless it relates to transactions that are recognised in other comprehensive income or directly in equity. The most significant Group subsidiaries are registered in Russia, where the corporate income tax rate can range from 15.5% to 20%, depending on applicable rates set by regional authorities (2012: from 15.5% to 20%). For the subsidiaries located outside the Russian Federation tax rates on taxable profit range from 10% to 38.3% (2012: from 10% to 37.6%).
Current tax is the amount expected to be paid to or recovered from the tax authorities in respect of taxable profits or losses for the current and prior periods.
Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill and subsequently for goodwill which is not deductible for tax purposes. Deferred tax balances are measured at tax rates enacted or substantively enacted at the reporting date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.
Deferred income tax is provided on post acquisition retained earnings of subsidiaries, except where the Group controls the subsidiary’s dividend policy and it is probable that the difference will not be reversed through dividends or otherwise in the foreseeable future.
Trade and other receivables.
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables.
Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy and default or delinquency in payments are considered indicators that the trade and other receivables are impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.
The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the profit and loss. When a receivable is uncollectable, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited in the profit |and loss.
Other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
Prepayments are carried at cost less provision for impairment. A prepayment is classified as non-current when the goods or services relating to the prepayment are expected to be obtained after one year, or when the prepayment relates to an asset which will itself be classified as non-current upon initial recognition. Prepayments to acquire assets are transferred to the carrying amount of the asset once the Group has obtained control of the asset and it is probable that future economic benefits associated with the asset will flow to the Group. Other prepayments are written off to profit or loss when the goods or services relating to the prepayments are received. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly and a corresponding impairment loss is recognised in profit or loss for the year.
Cash and cash equivalents.
Cash and cash equivalents include cash in hand, term deposits held with banks, and other short-term highly liquid investments with original maturities of three months or less and bank overdrafts.
Term deposits for longer than three months that are repayable on demand within one working day without penalties or that can be redeemed/withdrawn, subject to the interest income being forfeited, are classified as cash equivalents if the deposit is held to meet short term cash needs and there is no significant risk of a change in value as a result of an early withdrawal. Other term deposits are included into fixed-term deposits.
Cash and cash equivalents are carried at amortised cost using the effective interest method.
Restricted balances are excluded from cash and cash equivalents. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date are included in non-current assets in the consolidated statement of financial position.
Fixed-term deposits are deposits held with banks and have various original maturities and can be withdrawn with early notification and/or with penalty accrued or interest income forfeited.
They are included in the current assets, except for those with maturities greater than 12 months after the reporting date, which are classified as non-current assets.
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is presented in the consolidated statement of changes in equity as a share premium.
The capital contribution received from shareholder, which does not require repayment, or for which the Group will be able to avoid any payments is classified as component of the equity and recorded as a separate reserve in the consolidated statement of changes in equity.
Where any Group company purchases the Company’s shares, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders.
Dividends are recognised as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date. Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the consolidated financial statements are authorised for issue.
Value added tax.
Value added tax (“VAT”) related to revenues is generally payable to the tax authorities on an accrual basis when invoices are issued to customers. VAT incurred on purchases may be offset, subject to certain restrictions, against VAT related to revenues, or can be reclaimed in cash from the tax authorities under certain circumstances.
Management periodically reviews the recoverability of VAT receivables and believes the amount reflected in the consolidated financial statements is fully recoverable within one year.
Borrowings are initially recognised at fair value, net of transaction costs incurred and are subsequently stated at amortised cost using the effective interest method.
Trade and other payables.
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
Investment grants are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Investment grants relating to the purchase of property, plant and equipment are included in non-current liabilities as deferred income and are credited to the profit and loss on a straight-line basis over the expected lives of the related assets.
Provisions for liabilities and charges.
Provisions for liabilities and charges are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.
Asset retirement obligations.
The Group has the obligation to perform recultivation of certain disturbed lands in the areas of its oil and gas drilling and mining activities under the terms of licences and agreements for mineral resources.
The estimated future land restoration costs, discounted to net present value, are added to respective items of property, plant and equipment and corresponding obligations are raised when the constructive obligation to incur such costs arises and these costs could be reliably estimated. Additional items of property, plant and equipment are amortised on a straight-line basis over the useful life of the corresponding asset. The unwinding of the obligation is recognised in profit and loss as part of other financial gain/loss.
Changes to estimated future costs are recognised in the consolidated statement of financial position by either increasing or decreasing the provision for land restoration and asset to which it relates. The Group reassesses its estimation of land restoration provision as at the end of each reporting period. Ongoing restoration costs are recognised as expenses when incurred.
Revenues from sales of goods are recognised at the point of transfer of risks and rewards of ownership of the goods. If the Group agrees to transport goods to a specified location, revenue is recognised when the goods are passed to the customer at the destination point. Revenues from sales of services are recognised in the period the services are provided.
Sales are shown net of VAT and other sales taxes.
Revenues are measured at the fair value of the consideration received or receivable, taking into account the amount of any trade discounts and volume rebates allowed.
Interest income is recognised on a time-proportion basis using the effective interest method.
Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits (such as health services, etc.) are accrued in the year in which the associated services are rendered by the employees of the Group.
Eurochem Antwerpen NV and Eurochem Agro operate defined benefit pension plans, which represent an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. Remeasurements of post-employment benefit obligations are recognised in other comprehensive income. The defined pension obligation of the Group is not material.
Earnings per share.
Earnings per share is determined by dividing the profit and loss attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the reporting year.
A segment is a distinguishable component of the Group that is engaged in providing products or services (operating segment). Segments whose sales or results are ten percent or more of all the segments are reported separately. Segment reporting is prepared in a manner consistent with the internal reporting provided to the chief operating decision-maker.
3 CRITICAL ACCOUNTING ESTIMATES, AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES
The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements 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. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include.
Judgments are required in determining current income tax liabilities (Note 31). The Group recognises liabilities for taxes based on estimates of whether additional taxes will be due. Where the final outcome of various tax matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.
Deferred income tax recognition.
The net deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded in the consolidated statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. In determining future taxable profits and the amount of tax benefits that are probable in the future, management makes judgements and estimates based on the last three years’ taxable profits and expectations of future income that are believed to be reasonable under the circumstances (Note 31).
Certain industrial premises of the Group’s subsidiary OJSC EuroChem Terminal Ust-Luga are located on land occupied under a short-term lease. The management believes that no losses will be sustained by the Group due to the short-term nature of the land lease since it will be able to either purchase the land or to secure its use via a long-term lease agreement in due course.
Related party transactions.
The Group enters into transactions with related parties in the normal course of business. These transactions are priced predominantly at market rates. Judgement is applied in determining whether transactions are priced at market or non-market rates where there is no active market for such transactions. Judgements are made by comparing prices for similar types of transactions with unrelated parties.
4 ADOPTION OF NEW OR REVISED STANDARDS AND INTERPRETATIONS.
The following new standards, amendments to standards and interpretations became effective for the Group from 1 January 2013:
- IFRS 10, Consolidated Financial Statements (issued in May 2011, effective for annual periods beginning on or after 1 January 2013);
- IFRS 11, Joint Arrangements (issued in May 2011, effective for annual periods beginning on or after 1 January 2013);
- IFRS 12, Disclosure of Interests in Other Entities (issued in May 2011, effective for annual periods beginning on or after 1 January 2013);
- IFRS 13, Fair Value Measurement (issued in May 2011, effective for annual periods beginning on or after 1 January 2013). Disclosure required by the standard was made in the consolidated financial statements (Note 36);
- IAS 27, Separate Financial Statements (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013);
- IAS 28, Investments in Associates and Joint Ventures (revised in May 2011 and effective for annual periods beginning on or after 1 January 2013);
- Amendments to IAS 1, Presentation of financial statements (issued June 2011, effective for annual periods beginning on or after 1 July 2012). The amended standard has changed the presentation of the Group’s consolidated financial statements, but had no impact on the measurement of transactions and balances;
- Stripping costs in the Production Phase of a surface Mine, IFRIC 20 (issued in October 2011 and effective for annual periods beginning on or after 1 January 2013);
- Amended IAS 19, Employee benefits (issued June 2011, effective for periods beginning on or after 1 January 2013);
- Disclosures – Offsetting Financial Assets and Financial Liabilities – Amendments to IFRS 7 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2013);
- Amendments to IFRS 1, First-time adoption of International Financial Reporting Standards − Government loans (issued in March 2012 and effective for periods beginning on or after 1 January 2013);
- Improvements to International Financial Reporting Standards (issued in May 2012 and effective for annual periods beginning on or after 1 January 2013);
- Transition Guidance Amendments to IFRS 10, IFRS 11 and IFRS 12 (issued on 28 June 2012 and effective for annual periods beginning on or after 1 January 2013).
Unless otherwise described above, the new standards, amendments to standards and interpretations are not expected to significantly affect the Group’s consolidated financial statements.
- IFRS 9, Financial Instruments Part 1: Classification and Measurement (issued in November 2009, effective for annual periods beginning on or after 1 January 2015, with earlier application permitted). The Group is currently assessing the impact of the standard on its consolidated financial statements;
- Offsetting Financial Assets and Financial Liabilities – Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014);
- Amendments to IFRS 10, IFRS 12 and IAS 27 – Investment entities (issued on 31 October 2012 and effective for annual periods beginning on or after 1 January 2014);
- IFRIC 21 − Levies (issued on 20 May 2013 and effective for annual periods beginning on or after 1 January 2014);
- Amendments to IAS 36 − Recoverable amount disclosures for non-financial assets (issued on 29 May 2013 and effective for annual periods beginning on or after 1 January 2014; earlier application is permitted if IFRS 13 is applied for the same accounting and comparative period);
- Amendments to IAS 39 – Novation of Derivatives and Continuation of Hedge Accounting (issued on 27 June 2013 and effective for annual periods beginning on or after 1 January 2014);
- Amendments to IAS 19 – Defined benefit plans: Employee contribution (issued in November 2013, effective for annual periods beginning on or after 1 July 2014);
- Improvements to International Financial Reporting Standards (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014).
Unless otherwise described above, the new standards, amendments to standards and interpretations are not expected to materially impact the Group’s consolidated financial statements.
5 STATEMENT OF CASH FLOWS
In managing the business, management focuses on a number of cash flow measures including “gross cash flow” and “free cash flow”. Gross cash flow refers to the operating profit after income tax and adjusted for items which are not of a cash nature, which have been charged or credited to the profit and loss. The gross cash flow is available to finance movements in operating assets and liabilities, investing and financing activities. The gross cash flow for the year ended 31 December 2012 was RR 41,108,177 thousand (2011: RR 41,768,188 thousand).
Free cash flows are the cash flows available to providers of finance of the business, be this debt or equity. The free cash inflow for the year ended 31 December 2012 was RR 21,181,585 thousand (2011: outflow of RR 17,672,121 thousand).
Since these terms are not standard IFRS measures EuroChem Group’s definition of gross cash flow and free cash flow may differ from that of other companies.
6 PRINCIPAL SUBSIDIARIES AND ASSOCIATES
The Group had the following principal subsidiaries and associates as at 31 December 2013:
|Name||Nature of business||Percentage of voting rights||Percentage of ownership||Country of registration|
|MCC Eurochem OJSC||Company||–||–||Russia|
|Phosphorit Industrial Group, LLC||Manufacturing||100%||100%||Russia|
|Novomoskovskiy Azot, OJSC||Manufacturing||100%||100%||Russia|
|Novomoskovskiy Khlor, LLC||Manufacturing||100%||100%||Russia|
|Nevinnomysskiy Azot, OJSC||Manufacturing||100%||100%||Russia|
|EuroChem-Belorechenskie Minudobrenia LLC||Manufacturing||100%||100%||Russia|
|Kovdorskiy GOK, OJSC||Mining||100%||100%||Russia|
|Severneft-Urengoy, LLC||Gas extraction||100%||100%||Russia|
|EuroChem Antwerpen NV||Manufacturing||100%||100%||Belgium|
|EuroChem-VolgaKaliy, LLC||Potash project under development||100%||100%||Russia|
|Eurochem-Usolskiy potash complex, LLC||Potash project under development||100%||100%||Russia|
|EuroChem-Fertilizers, LLP||Phosphate project under development||100%||100%||Kazakhstan|
|Sary-Tas Fertilizers, LLP||Other service||59.67%||59.67%||Kazakhstan|
|EuroChem Karatau, LLP||Other service||100%||100%||Kazakhstan|
|EuroChem Trading GmbH||Trading||100%||100%||Switzerland|
|EuroChem Trading USA||Trading||100%||100%||USA|
|Eurochem Agro SAS||Distribution||100%||100%||France|
|EuroChem Agro Asia Pte. Ltd||Distribution||100%||100%||Singapore|
|EuroChem Agro Iberia||Distribution||100%||100%||Spain|
|EuroChem Agricultural Trading Hellas SA||Distribution||100%||100%||Greece|
|EuroChem Agro Spa||Distribution||100%||100%||Italy|
|EuroChem Agro GmbH||Distribution||100%||100%||Germany|
|EuroChem Agro Mexico SA de CV||Distribution||100%||100%||Mexico|
|EuroChem Agro Fertilizer Trade LLP||Distribution||100%||100%||Turkey|
|EuroChem Comercio de Produtos Quimicos Ltda||Distribution||100%||100%||Brazil|
|EuroChem Agro Trading (Shenzhen) Co., Ltd||Distribution||100%||100%||China|
|AgroCenter EuroChem-Volgograd, LLC||Distribution||100%||100%||Russia|
|AgroCenter EuroChem-Krasnodar, LLC||Distribution||100%||100%||Russia|
|AgroCenter EuroChem-Lipezk, LLC||Distribution||100%||100%||Russia|
|AgroCenter EuroChem-Orel, LLC||Distribution||100%||100%||Russia|
|AgroCenter EuroChem-Novomoskovskiy, LLC||Distribution||100%||100%||Russia|
|AgroCenter EuroChem-Nevinnomyssk, LLC||Distribution||100%||100%||Russia|
|AgroCenter EuroChem-Ukraine, LLC||Distribution||100%||100%||Ukraine|
|Ural-RemStroiService, LLC||Repair and constructions||100%||100%||Russia|
|Kingisepp RemStroiService, LLC||Repair and constructions||100%||100%||Russia|
|Kovdor RemStroiService, LLC||Repair and constructions||100%||100%||Russia|
|Novomoskovskiy RemStroiService, LLC||Repair and constructions||100%||100%||Russia|
|Nevinnomysskiy RemStroiService, LLC||Repair and constructions||100%||100%||Russia|
|Volgograd RemStroiService, LLC||Repair and constructions||100%||100%||Russia|
|Tulagiprokhem, LLC||Design engineering||100%||100%||Russia|
|Harvester Shipmanagement Ltd||Logistics||100%||100%||Cyprus|
|Eurochem Logistics International, UAB||Logistics||100%||100%||Lithuania|
|EuroChem Terminal Sillamäe Aktsiaselts||Logistics||100%||100%||Estonia|
|EuroChem Terminal Ust-Luga, LLC||Logistics||100%||100%||Russia|
|Tuapse Bulk Cargo Terminal, LLC||Logistics||100%||100%||Russia|
|Murmanskiy Bulk Cargo Terminal, LLC||Logistics||100%||100%||Russia|
|EuroChem-Energo, LLC||Other service||100%||100%||Russia|
|EuroChem International Holding B.V.||Finance||100%||100%||Netherlands|
|EuroChem A.M. Ltd||Finance||100%||100%||Cyprus|
|EuroChem Capital Management Ltd||Finance||100%||100%||BVI|
|Murmansk Commercial Seaport, OJSC||Logistics||36.20%||48.26%||Russia|
In 2012 the Group completed acquisitions of EuroChem Agro (formerly K+S Nitrogen) and EuroChem Antwerpen NV. The initial provisional purchase price allocations established at the acquisition date were finalised in 2013 without significant adjustments.
7 SEGMENT INFORMATION
The Group is a global agrochemical company producing primarily nitrogen and phosphate fertilizers, as well as certain organic synthesis products. The Group is a vertically integrated business with activities spanning mining (iron-ore, apatite, baddeleyite) and natural gas extraction, fertilizer manufacturing, organic synthesis products, sales and distribution. On a monthly basis the Management Board reviews the financial reports of the Group, evaluates the operating results and allocates resources between the operating segments. Budgets and financial reports are prepared in a standard format according to the IFRS accounting policy adopted by the Group. Sales between segments are carried out on an arm’s length basis. The Management Board assesses the performance of the operating segments based on, among other factors, a measure of profit before taxation adjusted by interest expense, depreciation and amortisation, financial foreign exchange gain or loss, other non-cash and extraordinary items, excluding net profit for the period attributed to non-controlling interests (EBITDA). Since this term is not a standard IFRS measure, EuroChem Group’s definition of EBITDA may differ from that of other companies. The development and approval of strategies, market and risk analysis, the investment focus, technological process changes, and the setting of goals and priorities of the Group are undertaken in line with the segment structure of the Group:
- Nitrogen – the production and sale of nitrogen mineral fertilizers and organic synthesis products and the extraction of hydrocarbons (natural gas and gas condensate) where natural gas is used as the raw material for the production of nitrogen fertilizers and gas condensate is sold;
- Phosphates – the production and sale of phosphate mineral fertilizers and the extraction of ores to produce and subsequently sell baddeleyite and iron-ore concentrates;
- Potash – the development of several deposits of potassium salts (‘potash’) under the licences acquired by the Group with a view to starting production and marketing of potassium fertilizers. No sales have been recorded to date in this segment;
- Distribution – retail sales of mineral fertilizers (including those not produced by the Group), seeds, crop protection items, etc. via a number of retailers located within Russia and the CIS; and
- All other – goods purchased for resale, certain logistics and service activities, central management, investment income and other items.
The segmental results for the year ended 31 December 2013 were:
|External sales||Internal sales||Total sales||EBITDA|
The segmental results for the year ended 31 December 2012 were:
|External sales||Internal sales||Total sales||EBITDA|
A reconciliation of EBITDA to profit before taxation is provided below:
|Depreciation and amortisation||28||(9,876,172)||(8,087,408)|
|Write-off of idle property, plant and equipment||8||(589,715)||(145,775)|
|Write-off of portion of assets at the Gremyachinskoe potash deposit||8||–||(3,685,995)|
|Gain/(loss) on disposal of available-for sale investments, net||12||(1,549,245)||568,382|
|Financial foreign exchange gain/(loss), net||(5,891,792)||4,315,355|
|Other financial gain/(loss), net||30||(944,708)||2,466,212|
|Profit before taxation||18,949,459||40,298,280|
The segmental capital expenditure on property, plant and equipment, intangible assets and mineral rights for the years ended 31 December 2013 and 2012 were:
|Total capital expenditure||32,593,536||28,529,669|
The Group’s main manufacturing facilities are based in the Russian Federation, Lithuania and Belgium.
The analysis of non-current assets other than financial instruments and deferred tax assets by geographical location was:
|31 December 2013||31 December 2012|
|Non-current assets, located in Russia||154,346,456||130,335,126|
|Non-current assets, located in foreign countries||37,009,963||33,919,939|
The analysis of Group sales by region was:
The sales are allocated to regions based on the destination country. During the year ended 31 December 2013 the Group had sales in excess of 10% to Russia and China, which represented 19% and 11% of total Group revenues respectively (2012: no sales in excess of 10% to any country, except for Russia).
During the year ended 31 December 2013 there were no sales in excess of 10% to one customer. During the year ended 31 December 2012 the Group had sales in excess of 10% to one customer which is an international fertilizer trader. Revenues from this customer represented 12% of total Group revenues for the year ended 31 December 2012 and were allocated to the Nitrogen, Phosphates and Other segments.
8 PROPERTY, PLANT AND EQUIPMENT
Movements in the carrying amount of property, plant and equipment were:
|Buildings||Land and Land Improvements||Transfer devices||Machinery and equipment||Transport||Other||
Assets under construction
1 January 2013
|Additions and transfers from assets under construction||1,989,611||3,124,686||986,495||6,725,438||914,967||642,301||19,976,450||34,359,948|
|Changes in estimates of asset retirement obligations (Note 23)||–||(150,390)||–||–||–||–||–||(150,390)|
|Write-off of idle property, plant and equipment||(111,239)||(79,239)||(68,428)||(258,191)||(18,801)||(33,920)||(327,096)||(896,914)|
|Currency translation difference (Note 2)||330,334||185,218||157,344||1,446,575||110,136||24,702||80,474||2,334,783|
31 December 2013
1 January 2013
|Charge for the year||(907,107)||(901,355)||(808,738)||(5,909,029)||(891,081)||(450,188)||–||(9,867,498)|
|Write-off of idle property, plant and equipment||57,072||11,033||30,769||168,737||11,094||28,494||–||307,199|
|Currency translation difference (Note 2)||(86,151)||(74,660)||(50,934)||(463,839)||(24,643)||(14,424)||–||(714,651)|
31 December 2013
|Net Carrying Value|
1 January 2013
31 December 2013
|Buildings||Land and Land Improvements||Transfer devices||Machinery and equipment||Transport||Other||Assets under construction||Total|
|Balance at 1 January 2012||13,122,296||13,759,854||8,094,754||37,633,733||10,548,037||2,422,525||45,854,456||131,435,655|
|Additions and transfers from assets under construction||2,159,564||3,311,727||2,910,371||11,505,941||1,333,415||693,738||7,460,260||29,375,016|
|Acquisitions through business combinations||927,376||–||544,775||7,994,359||25,952||5,175||83,854||9,581,491|
|Changes in estimates of asset retirement obligations (Note 23)||–||187,983||–||–||–||–||–||187,983|
|Write-off of portion of assets at the Gremyachinskoe potash deposit|
|Write-off of grouting technology costs incurred on cage shaft construction||–||–||–||–||–||–||(3,116,000)||(3,116,000)|
|Write-off of advances given to construction company||–||–||–||–||–||–||(484,808)||(484,808)|
|(Write-off)/reversal of write off of idle property, plant and equipment||4,065||–||(1,266)||(98,377)||(25)||(2,574)||(71,694)||(169,871)|
|Currency translation difference (Note 2)||(42,088)||(69,084)||(18,339)||81,675||(24,951)||(5,939)||2,357||(76,369)|
31 December 2012
1 January 2012
|Charge for the year||(956,288)||(671,704)||(610,977)||(4,560,098)||(808,983)||(424,994)||–||(8,033,044)|
|Write-off/(reversal of write off) of idle property, plant and equipment||(3,230)||–||1,209||24,228||9||1,880||–||24,096|
|Currency translation difference (Note 2)||13,155||20,078||10,092||62,824||6,455||3,937||–||116,541|
31 December 2012
|Net Carrying Value|
1 January 2012
31 December 2012
|31 December 2013||31 December 2012|
|Construction in progress||62,738,463||44,657,914|
|Advances given to construction companies|
|and suppliers of property, plant and equipment||6,277,525||4,770,571|
|Total assets under construction||69,323,261||49,643,406|
Write-off of a portion of the assets at the Gremyachinskoe potash deposit
During the year ended 31 December 2012 the Group wrote off a portion of the assets at the Gremyachinskoe potash deposit comprised of expenses previously capitalised amounting to RR 3,116,000 thousand, an advance given to Shaft Sinkers (Pty) Ltd (Shaft Sinkers) of RR 484,808 thousand and RR 85,187 thousand attributed to other debtors, primarily due to problems with the grouting technology employed by Shaft Sinkers in the cage shaft construction and its inability to fulfil contractual obligations (Note 34).
Idle property, plant and equipment write-off
During the year ended 31 December 2013 the Group decided to mothball certain production equipment with cost and accumulated depreciation of RR 896,914 thousand and RR 307,199 thousand, respectively (2012: cost of RR 169,871 thousand and accumulated depreciation of RR 24,096 thousand) and recognised a loss of RR 589,715 thousand in these consolidated financial statements (2012: RR 145,775 thousand) (Note 26, 29).
Evaluation expenses at the Darganovsky and Ravninny potash fields
At 31 December 2013 the Group has capitalised expenses relating to the evaluation stage of the Darganovsky and Ravninny potash fields of RR 307,273 thousand (31 December 2012: RR 214,921 thousand), including capitalised interest of RR 20,395 thousand. These expenses were recognised in property, plant and equipment. In most cases such expenses are paid in the period when the services are provided.
Borrowing costs capitalised
During the year ended 31 December 2013 borrowing costs totalling RR 538,042 thousand (2012: RR 190,713 thousand) were capitalised in property, plant and equipment at an average interest rate of 5.05% p.a. (2012: 4.74% p.a.).
As at 31 December 2013 the land plots under the main production facilities were owned by the Group. Also several Group subsidiaries occupied the land under non-cancellable operating lease agreements, for which the future minimum payments are as follows:
|31 December 2013||31 December 2012|
|Shorter than 1 year||200,267||199,236|
|Between 1 and 5 years||766,215||755,629|
|Longer than 5 years||5,719,063||4,161,056|
9 MINERAL RIGHTS
|31 December 2013||31 December 2012|
|Rights for exploration and production:|
|Verkhnekamskoe potash deposit||4,087,166||4,087,166|
|Gremyachinskoe potash deposit||3,017,781||3,017,781|
|Kok-Jon and Gimmelfarbskoe phosphate deposits||1,170,342||1,110,031|
|Kovdorskiy apatite deposits||166,549||166,549|
|Rights for exploration, evaluation and extraction:|
|Zapadno-Perelyubskiy potash deposit||30,006||30,006|
|Yuzhny hydrocarbon deposit||–||24,455|
|Perelyubsko-Rubezhinskiy hydrocarbon deposit||22,078||22,078|
|Vostochno-Perelyubskiy potash deposit||23,406||23,406|
|Rights for proven and unproven mineral resources:|
|Zapadno-Yaroyakhinsky hydrocarbon deposit||6,759,700||6,854,258|
|Total mineral rights||15,277,028||15,335,730|
Rights for exploration and production
Verknekamskoe and Gremyachinskoe potash deposits.
In accordance with the conditions of the licence agreements including amendments to these agreements for developing the potash deposits, the Group has the following major commitments:
- to commence extraction of potash salt at the Verkhnekamskoe potash deposit by 15 October 2015;
- to commence extraction of potash salt at the Gremyachinskoe potash deposit by 1 November 2014.
The Group has started construction of the mining facilities at both sites.
The management believes that each stage under the license terms for Verkhnekamskoe potash deposit development will be completed according to the schedule.
The licence terms in respect of the timing of Gremyachinskoe potash deposit are already being renegotiated.
As at 31 December 2013 and 31 December 2012 the Verkhnekamskoe and Gremyachinskoe potash deposits were in the development phase.
Kok-Jon and Gimmelfarbskoe phosphate deposits.
In 2012 the Group signed a contract with the authorities of the Republic of Kazakhstan for the extraction of phosphate rock at the Kok-Jon and Gimmelfarbskoe deposits in Kazakhstan’s Zhambyl region. In October 2013 the Group started the development of the Kok-Jon phosphate rock deposit.
Rights for exploration, evaluation and extraction
As of 31 December 2013 the deposits under licences for the exploration, evaluation and extraction were in the exploration phase.
Under the terms of valid licences for the exploration and development of mineral resource deposits, the Group is required to comply with a number of conditions, including preparation of design documentation, commencement of the construction of mining facilities and commencement of the extraction of mineral resources by certain dates. If the Group fails to materially comply with the terms of the licence agreements there are circumstances whereby the licences can be revoked. The management of the Group believes that the Group faces no material regulatory risks in relation to the validity and operation of any of its licences.