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KEFI Minerals Plc

KEFI Minerals at the forefront of the gold and copper sector

KEFI Minerals plc (LON:KEFI), the gold exploration and development company with projects in the Federal Democratic Republic of Ethiopia and the Kingdom of Saudi Arabia, is pleased to announce its audited financial results for the year ended 31 December 2019.

Notice of AGM and Annual Report

The Annual General Meeting will be in Sydney, Australia, at 6pm local time on Thursday 13 August 2020 at 49 Pennant Ave, Denistone East NSW 2112, Australia.

Information on the resolutions to be considered at the AGM can be found in the Notice of AGM that has been made available to shareholders of the Company as an electronic communication along with forms of proxy and direction (the “AGM Materials”) as well as the Annual Report and Accounts for the year ended 31 December 2018 (the “Annual Report”). The AGM Materials and Annual Report are available on KEFI’s website at www.kefi-minerals.com.

The Board takes its responsibility to safeguard the health of its shareholders, stakeholders and employees seriously and the AGM is being held in accordance with the current legislation in force as a result of COVID-19.  As a result, KEFI’s AGM will be held as a closed meeting and shareholders will not be permitted to attend in person this year.

As physical attendance at the AGM will not be permitted, shareholders who wish to register their votes on the resolutions to be put to the AGM should do so by completing and signing the proxy form that accompanies the Notice of AGM as soon as possible in accordance with the instructions printed on the proxy form.  Shareholders are advised to appoint the chairman of the meeting as their proxy to ensure that their vote is counted.  Any other named proxy will not be allowed to enter the meeting.

Because of these COVID-19 related restrictions, we will conduct a shareholder webinar to provide an informal presentation by senior management and answer questions. Shareholders are encouraged to submit questions. Details of the webinar will be announced separately.

Executive Chairman’s Report

KEFI’s patience and tenacity has established our position at the forefront of the gold and copper sector in one of the world’s great under-developed minerals provinces – the Arabian-Nubian Shield (“ANS”). Over the past year KEFI has continued to advance the Tulu Kapi Gold Project (the “Project” or “Tulu Kapi”) toward development in Ethiopia and has discovered a copper-zinc-gold-silver deposit (predominantly copper-gold) at Hawiah in Saudi Arabia.

We have decided to propose a name-change of the Company to KEFI Gold and Copper PLC, to reinforce our mission and recognise our now-established position in those metals through the discoveries and acquisitions we have made.

KEFI’s standing in both countries is that of a steadfast and respected operator of local joint ventures and exciting ground positions. In our view, KEFI has control of the most attractive project in each country. Our assets, relationships and people provide a strong platform to develop profitable mines in Ethiopia and Saudi Arabia. Even with political turmoil, capital market volatility and the global COVID-19 pandemic, KEFI continues to make progress.

It is notable that both Ethiopia and Saudi Arabia have prioritised development of the mining sector and the relatively new leaders of both countries are implementing reforms to further develop and open up their societies and economies.

Gold has just recently become one of the best performing investment sectors, with the gold price increasing since our last Annual General Meeting by 20% from c. US$1,400/oz to c.US$1,700/ounce.

The current price provides compelling economics for KEFI’s projects and, in my view, gold prices could continue to increase as interest rates remain low as monetary expansion and government debt continues to rise globally. The spot gold price now also sits at more than US$600/oz higher than our Tulu Kapi Ore Reserves assumption of US$1,098/oz set in 2015 and US$300/oz higher than our recently revised base case assumption of US$1,400/oz.

The Board of Directors is mindful that our schedule setbacks have tested the patience of shareholders as well as that of the communities that host us, even though much is attributable to extraneous factors beyond the Company’s control. To maximise alignment with shareholders, the Company encourages investment in Company shares by the Board and Senior Management who have, in aggregate, invested more into Company shares since KEFI took control of the Project in 2014 than they have, in aggregate, received as cash remuneration. And some key external service providers have accepted payment in shares. We know that none of these key contributors have sold any of those shares. The Company’s Board is deeply appreciative of all its personnel’s dedication and of the support the Company receives from all stakeholders.

Along with fellow Directors and Management, I strongly believe that we now have the opportunity to advance and excel in what will be a rebound for our sector and our locations. This targeted success will have resulted from your support and the Company’s caution, focus and tenacity. Now should be opportune to develop our first operation and for KEFI to also go onto the front foot in both Ethiopia and Saudi Arabia for growth from exploration.

Development-Ready Gold Mine – Tulu Kapi

Our first production is planned at Tulu Kapi in the Oromia Region of Western Ethiopia. The planned Tulu Kapi open pit gold mine and processing facility is typical of many such “open-pit-CIL-gold-projects” around the world and uses standard technology and the latest industry practices, long-applied in mature highly-regulated mining jurisdictions such as Scandinavia, Australia and North America. Tulu Kapi has an Ore Reserve of 1.1 million ounces of gold within the Mineral Resources of 1.7 million ounce of gold. Tulu Kapi will also provide an operating base in the heart of Ethiopia’s most prolific gold district where gold has been mined for millenia.

Our key priority over the past year has been to finalise the Tulu Kapi funding. Along with our longstanding partner, the Government of Ethiopia, we have designed TKGM as a “public-private partnership”. Whilst locally termed a “partnership” the TKGM corporate structure would remain unaffected other than introducing new minority shareholders, with KEFI remaining the controlling shareholder.  To that end, we have worked hard with an Ethiopian private sector investment company with a view to it joining us. We hope they succeed despite the current local liquidity strains experienced and other effects of the COVID-19 pandemic and we are preparing to introduce other investors as required.

In late 2019, KEFI announced that it had selected its preferred project infrastructure finance proposal, being a bank-loan based proposal received from Eastern and Southern African Trade and Development Bank (“TDB”) and Africa Finance Corporation (“AFC”), two leading African development finance institutions as underwriters and co-lenders (the “Co-Lenders”). A term sheet was signed, subject to their internal credit approval processes. Subsequently, key provisions which required regulatory review for foreign loans has received approvals from the Ethiopian central bank. In preparation for financial close of the Project funding, TKGM continues to work closely with Project contractors (Perenti and Lycopodium) and the Co-Lenders. This work includes documentation, repricing contracts and adjusting all our detailed plans to take account of the various COVID-19 protocols. The updated 2020 Tulu Kapi Plan now forms the basis for planning.

The Directors of TKGM and KEFI have resolved that, notwithstanding COVID-19, the Company remain focused on using every reasonable effort to preserve the overall scheduled target of starting gold production at Tulu Kapi in 2022 and remain focused on financial close of the Project funding in October 2020.

The 2020 Tulu Kapi Plan now has more reliable assumptions due to finalisation of infrastructure design and the updated cost inputs. In light of the improved gold price environment, we have adopted a gold price range of US$1,400-1,800/oz for illustrative modelling purposes. Against this gold price range the updated economic projections indicate an attractive outlook for returns, and are as follows:

o  All-in Sustaining Costs of US$856-884/oz, (note that royalty costs increase with the gold price);

o  All-in Costs (“AIC”) of US$1,066-1,094/oz;

o  Average EBITDA of US$78-129 million per annum.

KEFI bases the finance structure on a flat gold price of US$1,400/oz, the costs and schedules of the 2020 Tulu Kapi Plan, founded on the JORC (2012) based Ore Reserve Report (Snowden 2015), and the refined Definitive Feasibility Study as optimised between our Project management team and the principal contractors. We have then run a range of sensitivity analyses to ensure robust coverage of fixed obligations under a range of scenarios. The plans and analyses are, as usual, being reviewed by independent experts for the Co-Lenders, for full finance closing.

During construction, we will appoint the plant and mine managers and they will continue to refine the 2020 Tulu Kapi Plan in light of 2021 grade-control drilling in the first mining zones and we will review the cut-off grade which was based on what now appears to be an overly conservative gold price of US$1,098/oz.

KEFI’s Exploration Programmes

The Arabian-Nubian Shield has been the Company’s focus since 2008 when KEFI was invited to be the operator of an exploration joint venture in Saudi Arabia. The discoveries since then, by ourselves at Jibal Qutman (gold) and Hawiah (copper-gold), and others in projects such as Jabel Sayed (Barrack Gold in Saudi Arabia) and at Dish Mountain (Allied Gold in Ethiopia) since then, have reinforced our excitement.

KEFI, through its local-joint venture companies, has a portfolio of exploration licences and applications of over 2,000 square kilometres at various stages within highly prospective areas selected from the proprietary database we have been developing and refining since 2006. Our exploration programmes will advance in parallel with the development activities.

Our most recent discovery, in late 2019, was of copper-zinc-gold-silver mineralisation at Hawiah in Saudi Arabia. The first 69 drill holes identified three distinct massive sulphide lodes which vary in thickness from 3 metres up to a maximum of 19 metres. The overall results to date were encouraging and we are working towards reporting a maiden Mineral Resource for Hawiah in accordance with the JORC Code shortly.

For the purposes of indicating the potential economic importance for KEFI shareholders, the in-situ metal content of the initially interpreted 12 million tonnes at Hawiah, at current metal prices, would approximate the analogous in-situ metal content of the 1 million ounce reserve in the open-pit at KEFI’s Tulu Kapi Gold Project in Ethiopia. This reflects an assumed 2% copper-equivalent average grade, which initial assay results would suggest is reasonable. The system has significant exploration potential at depth where it remains open. It also has exploration potential in the oxidised zone at surface and, more speculatively, in the original feeder or stockwork zone which has not yet been located.

In Ethiopia, the most advanced and immediately significant exploration target is also at depth below the known deposit, in this case focused on the continuation of the Tulu Kapi deposit below the planned open pit. In our view, the potential to expand Tulu Kapi’s Mineral Resource is high as it remains open along strike, down plunge and at depth. The economic potential is also enhanced by the gold grades increasing with depth as well as the ore lenses thickening, making underground mining potentially attractive. The average grade of the Mineral Resource below the planned open pit is 5.7g/t gold.

A number of other gold prospects have been identified within trucking distance of Tulu Kapi. Proposed exploration activity will be significantly expanded with this focus, as these prospects have the scope and potential to add substantial value by providing additional ore to the Tulu Kapi processing facility.

The potential of the Arabian-Nubian Shield has recently been more widely recognised and the world’s two largest gold companies, Barrick Gold and Newmont Mining, are now active in Saudi Arabia and Ethiopia respectively.

Capital Management

The improving gold price and strong outlook has not been reflected in the share prices of smaller gold mining companies, as demonstrated by the VanEck Vectors Junior Gold Mine (“GDXJ”) trading at only a quarter of its peak in 2011 when gold was trading at c.US$1,900/ounce. GDXJ is based on +US$100 million companies and the stock market for micro-caps like KEFI have generally performed much worse.

In both Ethiopia and Saudi Arabia, our project predecessors and partners have provided much of the project funding to date. And going forward, development funding will be largely at project levels, in TKGM or G&M as the case may be. Nevertheless, KEFI shareholders have suffered dilution as KEFI funded the exploration, acquisition and early progress and all of us long term shareholders certainly deserve to see reward for our patience and effort. KEFI pushes forward and it now seems to be the most supportive environment for our sector and our emerging region since our IPO.

The Directors are seeking to close the gap between the Company’s market capitalisation and the significantly higher intrinsic valuations of the Company’s projects. For example, KEFI’s share of Tulu Kapi’s NPV (see explanation in Finance Director’s Report) at the current gold price of US$1,700/oz, equates to £153 million, according to the Company’s financial model prepared by its project finance adviser, which is approximately nine times the Company’s current market capitalisation of £18 million at the time of writing. This places no value on KEFI’s beneficial interest Jibal Qutman Gold and Hawiah Copper-Gold in Saudi Arabia.

For good order, a key caveat to our plans for the coming year is how the COVID-19 pandemic plays out over time. At the time of writing, both Ethiopia and Saudi Arabia have fortunately been impacted much less severely than most other countries. Infrastructure projects and mine developments such as Tulu Kapi are likely to be key contributors to reviving economies from the unprecedented disruption caused by the pandemic. Further information in respect of funding is included within the strategic report and note 2.  

Annual General Meeting

Post the period end we welcomed RAB Capital as a substantial shareholder and we are extremely grateful for the patience and support of our communities and our Governments, our principal contractors, our hard-working small organisation of highly-experienced personnel and, of course, our 1,000’s of extremely patient shareholders. We humbly acknowledge and appreciate that all shareholder resolutions over the past six years have received a very supportive 90% or more approval at the respective general meetings.

The Annual General Meeting will be in Sydney, Australia at 6pm on Thursday 13 August 2020 at 49 Pennant Ave, Denistone East NSW 2112, Australia.

The Board takes its responsibility to safeguard the health of its shareholders, stakeholders and employees seriously and the AGM is being held in accordance with the current legislation in force as a result of COVID-19.  As a result, KEFI’s AGM will be held as a closed meeting and shareholders will not be permitted to attend in person this year.

As physical attendance at the AGM will not be permitted, shareholders who wish to register their votes on the resolutions to be put to the AGM should do so by completing and signing the proxy form that accompanies the Notice of AGM as soon as possible in accordance with the instructions printed on the proxy form.  Shareholders are advised to appoint the chairman of the meeting as their proxy to ensure that their vote is counted.  Any other named proxy will not be allowed to enter the meeting.

Because of these COVID-19 related restrictions, we will conduct a shareholder webinar to provide an informal presentation by senior management and answer questions. Shareholders are encouraged to submit questions. Details will be announced separately.

Yours faithfully,

Harry Anagnostaras-Adams

Executive Chairman

29 June 2020

Finance Director’s Report

There is no doubt that equity raisings have been frustrating for KEFI shareholders given the need to raise capital at disappointingly low share prices. This is the result of a difficult share market for our sector coupled with the delays experienced in recent years in both Ethiopia and Saudi Arabia which have undergone substantive political and regulatory change. While we cannot underestimate the work ahead to close all our financings and start development, we can confirm again that we have preserved and strengthened an excellent platform to complete the task.

Since assuming control of Tulu Kapi in Ethiopia in January 2014, KEFI has established significant Mineral Resources, carried out a Definitive Feasibility Study, completed several international construction tenders and assembled the core of the financing consortium. In Saudi Arabia, KEFI has discovered a gold deposit and more recently a copper-gold deposit.

Going forward, it is our intention to complete the Tulu Kapi financing at the Project level. This plan includes significant investment at the Project level by local Ethiopian partners including the Government and a mandate to African development banks TDB and AFC as proposed Co-Lenders to provide project debt funding.

We maintain a small, efficient and economical corporate office in Cyprus. Other than our Nicosia-based corporate management and financial control/corporate governance team, all operational staff are based at the sites for project work. This approach increases efficiency at a lower cost and includes all senior management and some other service providers often taking KEFI shares in lieu of a portion of salary or fees, further reducing cash outlays. None have sold their shares.

Partnering in Saudi Arabia

In the Kingdom of Saudi Arabia, KEFI conducts all its activities through Gold and Minerals Co. Limited (“G&M”), our joint venture company with Abdul Rahman Saad Al Rashid and Sons Limited (“ARTAR”). KEFI is fortunate to have such a large and strong Saudi group as a partner.

KEFI is the operator and the tenement applications are made by ARTAR on behalf of our joint venture company G&M. This has proved efficient for a number of reasons and KEFI has the right to instruct that the tenements be transferred to G&M.

The joint venture looks forward to development and expansion in the minerals sector which the Saudi Government has made a national strategic priority. Potential development funding for Hawiah is anticipated to be more straightforward than in Ethiopia because of the simpler partnership structure and the very strong local development lending institutions for this prioritised sector.

Partnering in Ethiopia

KEFI’s wholly-owned subsidiary KEFI Minerals (Ethiopia) (“KME”) and the Government of Ethiopia formed Tulu Kapi Gold Mines Share Company (“TKGM”) in 2017 as the Project company for developing Tulu Kapi. The exploration projects outside the Tulu Kapi Mining License area are not part of TKGM and remain within KME.

In May 2017, the Government of Ethiopia formally committed to an Ethiopian Birr equivalent of US$20 million equity investment in TKGM.

In February 2018, the Ethiopian Ministry of Mines, Petroleum and Natural Gas formally transferred the Mining License from KME to TKGM in accordance with our agreement.

The final structure is subject to refinement and closing. But based on current proposals and estimates of capital spending and capital contributions, KEFI will be majority owner of KME which in turn will be majority shareholder of TKGM. Based on current base case planning, upon closing of project finance, the ownership of the Tulu Kapi Gold Project via TKGM would be circa:

·      22% by the Ethiopian Government;

·      22% by other private investors; and

·      56% by KME.

KME would be owned 80% by KEFI and 20% by other investors, which would result in KEFI’s beneficial ownership of TKGM being c. 45% and the combined interest of other investors c.33%. Government would hold 22%. However it is an objective to minimize Project equity dilution by increasing the use of subordinated debt which may be offtake-linked.

Other investors any Project equity and that proposed arrangement is being refined to take into account the recent rescheduling of the Project and its budget. The Government and KEFI have agreed changes to their shareholder agreement and the TKGM foundation documents to admit additional Project equity investors into TKGM.

The Government of Ethiopia has already commenced construction of the offsite infrastructure (electricity and roads) required for Tulu Kapi that it is funding.

The partners remain focused on using every reasonable effort to preserve the overall scheduled target of starting full gold production at Tulu Kapi in 2022 and remain focused on full financial close of the Project funding in October 2020.

Tulu Kapi Development Funding

The Tulu Kapi Gold Project consortium now includes KEFI, the Government of Ethiopia, the project contractors Lycopodium and Perenti, which should soon be joined by proposed Ethiopian local investors and mandated Lenders TDB and AFC.

Excluding the past investment of over US$60 million to the end of 2019 and also excluding the c. US$50 million mining equipment supplied by the mining contractor, the overall funding plan for Tulu Kapi is summarised in the tables below which has been updated for the 2020 Plan and compared with that reported in 2019:

TKGM Application of Funds in 2020

 2019             US$ millions2020             US$ millions
On-site Infrastructure106110
Mining2927
Off-site Infrastructure2020
Owner’s Costs (community, working capital, project management)5445
Interest during grace and other finance effects3319
Aggregate Funding Requirements242221

TKGM Sources of Funds in 2020

 2019               US$ millions2020             US$ millions
Government Equity2020
KEFI Equity (excluding historical investment)1010
Other Equity Investors Combined with Subordinated Debt and Offtake Facilities5281
Senior Secured Infrastructure Finance160110
Aggregate Sources242221

Note: The KEFI equity 2020 contribution has commenced and the financing of the balance is planned as part of the arrangements with Other Equity Investors, combined with refunds or recognition (as the case may be) at closing for funding TKGM development costs.

Between 2016 and 2018 the Company’s project finance activities were hampered by states of emergency in Ethiopia. Conventional mining project contracting was nevertheless tendered successfully. For debt finance, an innovative bond-lease based financing was mandated and progressed from 2017 until 2019.

The banks once again became interested in Ethiopian mining project finance in 2019 and TKGM accepted, subject to condition and completion,  a conventional bank-loan based proposal.

In late 2019, KEFI announced that it had selected its preferred project infrastructure finance proposal, being a bank-loan based proposal received from TDB and AFC, two leading African banks as underwriters and co-lenders. A term sheet was signed, subject to their internal credit approval processes. Subsequently, key provisions which required regulatory review for foreign loan have received approval from the Ethiopian central bank.

The bank-based proposal is considered to be more attractive and more straightforward to execute and the proposed bank lenders are familiar with Ethiopia.  Considerable savings are expected from the bank-loan proposal in the cost of debt-servicing and administration, especially during the Project development and start-up period.

The plant and ancillary infrastructure will be built and its performance guaranteed by Lycopodium, which is one of the leading gold plant specialist engineering groups and has an exemplary track-record in Africa, where it has built many such plants for over 20 years.

The open pit mine will be built and operated by Perenti, through its wholly-owned subsidiary, African Mining Services Limited, which has been a leading African mining contractor for over 25 years.

The off-site infrastructure is being built and operated by the Ethiopian Roads Authority and the Electric Power Corporation. Both of these Government entities have received budget approval and executed sub-contractor and procurement documentation.

The Ethiopian Finance Ministry and Central Bank have approved the terms of the proposed project finance package, subject to approving final closing documentation. These terms include the right to use standard project debt financing, leasing, a debt/equity capital ratio of up to 70/30, recognition of historical expenditure in the calculation of the capital ratio, and the right to use gold price hedging and the application of market-based long-term fixed interest rates. Whilst these matters are conventional mining project finance terms, they are new to Ethiopia and so it was considered important to ensure all stakeholders are in full agreement with all key arrangements before commencing full activities on the ground.

Whilst the challenges of structuring and implementing project financing in emerging or frontier markets have created the many reported delays and costs, the finance plan is reasonably conventional for mining project finance internationally and we are now in the stages of implementation for development start-up.

The balance sheet of TKGM at full closing of all project finding will reflect all equity subscriptions which are currently estimated to exceed US$120 million (Ethiopian Birr equivalent) along with the all the planned assets and liabilities.

Tulu Kapi Project Economics

From a gold price-risk viewpoint, the development and finance plans withstand a flat gold price for the next ten years of c. US$1,100/oz – which approximates the lowest gold price experienced in over ten years. The average gold price for the past ten years was US$1,365/oz.

At the current gold price of circa US$1,700/oz, KEFI estimates:

·    net cash flow of the open pit mine to be US$481 million; and

·    the Definitive Feasibility Study (“DFS”) based NPV of the open pit (US$300 million) added to that of the PEA-based NPV of the underground mine (US$110 million), totals to the aggregate Project NPV at 8% of US$411 million. NPV’s are on after-tax cash net cash flows as at today.

On this basis and after taking into account that KEFI has already invested nearly all of its contribution to the Project equity, KEFI’s 45% beneficial interest in Tulu Kapi only is US$185 million (approximately £153 million), about nine times the current market capitalisation of the Company.

Accounting Policies

KEFI’s book value of the investment in KME, which holds the Company’s share of the Tulu Kapi Gold Project is only £13 million as at 31 December 2019 and will be reviewed by the Board in due course. It is important to note KEFI’s planned 45% beneficial interest in the underlying valuation of Tulu Kapi Gold Project is £145 million based on project net present value. As regards the Company’s investment in Saudi Arabia, the 34% KEFI interest in G&M is carried at nil despite the reporting of Mineral Resources at Jibal Qutman and the apparent exploration success a Hawiah

In addition, the balance sheet of TKGM at full closing of all Project funding will reflect all historical equity subscriptions which are currently estimated to exceed £94 million or US$120 million (Ethiopian Birr equivalent) at full project finance closing. In Saudi Arabia, the book value of shareholders’ funds reflects historical equity subscriptions into G&M of £14.9 million or US$19.7 million (Saudi Riyal equivalent) as at 31 December 2019.

KEFI Working Capital Funding

The planned Project-level funding is all aimed at allowing TKGM to stand on its own feet when it is reasonably possible.

KEFI will continue to provide the necessary management and financial support to TKGM until it establishes its own structures and becomes self- sufficient. The ability of KEFI to  provide this ongoing support  depends in turn  upon the  continued backing of  KEFI in the capital markets. This has been the case since the formation of the Company and is set out in  Note 2 of the Financial Statements (Going Concern) and referenced in the Audit Report. The financial support provided by KEFI for TKGM has been sourced by KEFI primarily from issues of ordinary equity capital and from time to time we have availed ourselves of short-term bridging advances for working capital from shareholders.

At a meeting of shareholders on 28 May 2020, shareholders granted an updated authority for share issues to the Board of Directors, within strict limits as set out in the meeting documents, thus ensuring adequate flexibility in managing working capital whilst proceeding with the implementation of full project finance closing for the Tulu Kapi Gold Project and other activities planned for the next twelve months. Support from shareholders is not taken for granted and the Board and management (also shareholders) appreciate this.

John Leach

Finance Director

29 June 2020

Consolidated Financial Statements

Year ended 31 December 2019

Independent auditor’s report to the members of Kefi Minerals Plc

Opinion

We have audited the financial statements of Kefi Minerals Plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the year ended 31 December 2019 which comprise of the consolidated statement of comprehensive income, consolidated and company statements of financial position, consolidated statement of changes in equity, company statement of changes in equity, consolidated statement of cash flows, company statement of cash flows and notes to the financial statements, including a summary of significant accounting policies.

The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

In our opinion:

•           the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2019 and of the Group’s loss for the year then ended;

•           the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union ;

•           the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and

•           the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material uncertainty relating to going concern

We draw your attention to note 2 of the financial statements which explains that the Parent Company and the Group’s ability to continue as a going concern is dependent on the Company’s ability to raise adequate financing from lenders, shareholders or other investors before Q3 2020, in order to meet operational commitments and overheads. In addition to this, the Group have noted further uncertainty created by the COVID-19 pandemic which could impact the ability to raise further funds. These conditions indicate the existence of a material uncertainty which may cast significant doubt over the Parent Company’s and the Group’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

We considered going concern to be a Key Audit Matter based on our assessment of risk and the effect on our audit strategy. We performed the following work in response to this key audit matter:

•           We reviewed the latest cash flow forecasts for the Group, which covered 13 months from the date of approval of these financial statements. Our work included assessment of the cash outflows against historical data and publicly stated plans for further development of the exploration asset

•           We reviewed committed expenditure and minimum spend amounts under licence agreements and other contracts

•          We agreed the opening cash position in the cash flow forecast to recent bank statements

•           We discussed with the Directors how they intend to raise the funds necessary for the Group to continue as a going concern in the required timeframe and considered their judgment in light of the Group’s previous successful fundraisings and strategic financing. We reviewed correspondence with potential investors.

•          We reviewed the adequacy of disclosures included within the financial statements

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the material uncertainty related to going concern section above, the following matter was identified:

Carrying value of exploration assets

The exploration and evaluation assets of the group, as disclosed in note 12, represent the key assets for the group.

Judgment  is required in whether costs are capitalised or expensed in accordance with the Groups accounting policies.

Management performed an impairment indicator review to assess whether there were any indicators of impairment for the Tulu Kapi exploration asset and whether an impairment test was required to be performed. No indicators of impairment of the asset were identified.

There are a number of estimates and judgements used by management in assessing the exploration and evaluation assets for indicators of impairment under applicable accounting standards. These estimates and judgements are set out in Note 4 of the financial statements and the subjectivity of these estimates along with the material carrying value of the assets make this a key audit area.

How we addressed the matter in our audit:

We considered the indicators of impairment applicable to the Tulu Kapi exploration asset, including those indicators identified in IFRS 6: ‘Exploration for and Evaluation of Mineral Resources’ and reviewed management’s assessment of these indicators. The following work was undertaken:

•           We reviewed the licence documentation to confirm that the exploration permits are valid, and to check whether there is an expectation that these will be renewed in the ordinary course of business

•           We tested a sample of costs capitalised to check that these meet the capitalisation criteria of applicable accounting standards by agreeing the costs to supporting documentation

•           We made specific inquires of management and reviewed market announcements, budgets and plans which confirms the plan to continue investment in the Tulu Kapi project subject to sufficient funding being available, as disclosed in note 2.

•           We considered whether the detailed feasibility study performed by Micon suggested any indicators of impairment for the project.

•           Based on our knowledge of the Group, we considered whether there were any other indicators of impairment not identified by management

•           We have reviewed the adequacy of disclosures provided within the financial statements in relation to the impairment assessment against the requirements of the accounting standards.

Key observations:

Based on our work performed we considered management’s assessment and the disclosures included in the financial statements to be appropriate.

Our application of materiality

We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. These help us to establish transactions and misstatements that are significant to the financial statements as a whole, to determine the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually on balances and on the financial statements as a whole. 

We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take into account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole.

We set materiality for the financial statements as a whole at £340,000 (2018: £384,000) which represents 1.5% (2018: 2%) of gross assets which is the figure that we considered be of most interest to the users of the financial statements given the nature of the Group’s operations.

The parent company was audited to a materiality of £294,000 (2018: £235,000) based on 1.5% (2018: 2%) of the gross assets.

Performance materiality is the application of materiality at the individual account or balance level set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. Performance materiality was set at 75% (2018: 75%) of the above materiality levels. Group performance materiality was set at £255,000 (2018: £,289,000) with company performance materiality set at £220,000 (2018: £154,000).

We agreed to report to the Audit and Risk Committee all individual audit differences in excess of £17,000 (2018:£19,000) being 5% of financial statement materiality, in addition to differences below this threshold that warranted reporting on qualitative grounds.

Component materiality was set at £199,000 (2018:£200,000).

An overview of the scope of our audit

The group operates through one main trading subsidiary undertaking based in Ethiopia which was considered to be a significant component for the purposes of the group financial statements, as well as one joint venture company. The financial statements also include a number of non-trading subsidiary undertakings, as set out in note 13.1.

In establishing our overall approach to the group audit, we determined the type of work that needed to be performed in respect of each subsidiary. A full scope audit of the Ethiopian subsidiary was carried out by a locally based component auditor which was not a BDO network firm. We held initial discussions with and issued formal instructions to the component auditor regarding their risk assessment and proposed scope of work to ensure that this would adequately address matters of greatest significance from the perspective of our group audit. We held virtual meetings with the component auditor as the audit progressed and carried out a full review of the component auditor’s working papers which were prepared in English as well as submission of group reporting. All significant risks were audited by the BDO Group audit team.

We also performed analytical review procedures in respect of the joint venture company and the non-trading subsidiaries.

Other information

The Directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Opinions on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken in the course of the audit:

•           the information given in the strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

•           the strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.

Matters on which we are required to report by exception

In the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors’ report.

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

•           adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

•           the Parent Company financial statements are not in agreement with the accounting records and returns; or

•          certain disclosures of Directors’ remuneration specified by law are not made; or

•          we have not received all the information and explanations we require for our audit.

Responsibilities of Directors

As explained more fully in the Statement of Directors Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the

aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

Use of our report

This report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.  Our audit work has been undertaken so that we might state to the Parent Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Jack Draycott (Senior Statutory Auditor)

For and on behalf of BDO LLP, Statutory Auditor

London UK

29 June 2020

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

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Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.