CONSOLIDATED BALANCE SHEET
As at 31 December
____________________________________
(All amounts in EUR) Note 2004 2005 2006
___________________ ____ _________ _________ _________
ASSETS
Non-current assets
Property, plant and equipment . . . 6 14,738 39,376 3,959,629 Biological assets . . . 8 – – 963,576 Intangible assets . . . 7 2,244,943 2,982,215 4,771,793 Deferred tax assets . . . 17 – – – ——–—— ——–—— ——–—— 2,259,681 3,021,591 9,694,998
Current assets
Other receivables . . . 11 130,217 297,726 693,884 Available-for-sale financial assets . . . 9 150,440 851,543 22,537,285 Other financial assets at fair value
through profit or loss . . . 10 – – 5,039,726 Cash and cash equivalent . . . 12 32,868 62,834 1,784,055 ——–—— ——–—— ——–—— 313,525 1,212,103 30,054,950 ——–—— ——–—— ——–——
Total assets . . . 2,573,205 4,233,694 39,749,948
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——–——
——–——
EQUITY AND LIABILITIES
Equity attributable to equity holders of the parent
Share capital . . . 13 10,885 12,715 12,715 Share premium . . . 13 409,590 2,755,433 2,755,433 Other reserves . . . 13 371 57,686 1,336,065 Retained earnings . . . 14 1,633,975 (672,941) (6,520,976) ——–—— ——–—— ——–—— 2,054,821 2,152,893 (2,416,763)
Minority interest in equity – – 87,538
——–—— ——–—— ——–——
Total equity . . . 2,054,821 2,152,893 (2,329,225)
Non-current liabilities
Borrowings . . . 15 421,000 1,015,193 1,148,600 Other payables . . . 15 491 13,121 41,302 Deferred tax liabilities . . . 17 130 19,159 – Provisions . . . 18 – 28,877 31,187 ——–—— ——–—— ——–—— 421,621 1,076,350 1,221,089 Current liabilities Borrowings . . . 15 – 300,000 38,601,940 Trade payables . . . 16 28,832 598,903 1,037,033 Other payables . . . 16 67,931 105,548 1,219,111 ——–—— ——–—— ——–—— 96,763 1,004,451 40,858,084 ——–—— ——–—— ——–—— Total liabilities . . . 518,384 2,080,801 42,079,173 ——–—— ——–—— ——–——
Total equity and liabilities . . . 2,573,205 4,233,694 39,749,948
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——–——
——–——
The notes are an integral part of the consolidated financial information.
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December ____________________________________
2004 2005 2006
(15 months)_________ _________ _________
(All amounts in EUR) Note
Other operating income . . . 19 57,438 101,780 218,016 Materials and services . . . 20 (356,328) (1,514,402) (855,991) Employee benefit expenses . . . 21 (78,215) (513,065) (1,393,822) Depreciation, amortization, depletion
and impairment changes . . . 22 (2,516) (4,622) (13,003) Other operating expenses . . . 23 (80,936) (343,503) (32,564,009) ——–—— ——–—— ——–——
Operating loss . . . (460,557) (2,273,812) (34,608,809)
Finance income . . . 24 24 421 1,883 Finance cost . . . 25 (491) (34,633) (3,237,018)
——–—— ——–—— ——–—— Finance cost (net) . . . (467) (34,213) (3,235,135)
––––––––– ––––––––– –––––––––
Loss before income tax . . . (461,025) (2,308,024) (37,843,944)
Income tax (expense)/income . . . 26 – 1,109 178,447 ———–— ————– ——–——
Loss for the year . . . (461,025) (2,306,915) (37,665,497)
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——–——
——–——
Attributable to:
Equity holders of the Company . . . (461,025) (2,306,915) (37,653,035) Minority interest . . . – – (12,462) ——–—— ——–—— ——–——
(461,025) (2,306,915) (37,665,497)
——–——
——–——
——–——
Earnings per share for loss attributable to the equity holders of the Company (expressed in € per share)
Basic and diluted . . . 27 (0.01) (0.03) (0.42)
The notes are an integral part of the consolidated financial information.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity holders of the parent
Share Share Other Retained Minority Total (All amounts in EUR) Note capital premium reserves earnings Total interest equity ___________________ ____ _________ _________ _________ _________ _________ _________ _________ Balance at 9 September 2003 . 10,000 – – – 10,000 – 10,000
——–—— ——–—— ——–—— ——–—— ——–—— ——–—— ——–——
Fair value gains net of tax on available-for-sale
financial assets . . . – – 371 – 371 – 371
——–—— ——–—— ——–—— ——–—— ——–—— ——–—— ——–——
Net income/(expense)
recognized directly in equity . . 9 – – 371 – 371 – 371
Loss for the year . . . (461,025) (461,025) – (461,025)
——–—— ——–—— ——–—— ——–—— ——–—— ——–—— ——–——
Total recognized income and
expense for 2004 . . . – – 371 (461,025) (460,654) – (460,654)
Issue of share capital
(Authorized) . . . 13 885 409,590 – – 410,475 – 410,475 Options issued to acquire assets . . . 14 2,095,000 2,095,000 – 2,095,000 ——–—— ——–—— ——–—— ——–—— ——–—— ——–—— ——–—— Balance at 31 December 2004 10,885 409,590 371 1,633,975 2,054,821 – 2,054,821
——–—— ——–—— ——–—— ——–—— ——–—— ——–—— ——–——
Balance at 1 January 2005 . . 10,885 409,590 371 1,633,975 2,054,821 2,054,821 Fair value gains net of taxon available-for-sale financial assets . . . – – 527 – 527 – 527 ——–—— ——–—— ——–—— ——–—— ——–—— ——–—— ——–—— Net income/(expense) recognized directly in equity . . . 9 – – 527 – 527 – 527
Loss for the year . . . (2,306,915) (2,306,915) – (2,306,915)
——–—— ——–—— ——–—— ——–—— ——–—— ——–—— ——–——
Total recognized income and
expense for 2005 . . . – – 527 (2,306,915) (2,306,389) – (2,306,389)
Issue of share capital
(Authorized) . . . 13 1,830 2,345,843 – – 2,347,673 – 2,347,673
Convertible capital loan . . . 15 – – 56,788 – 56,788 – 56,788
——–—— ——–—— ——–—— ——–—— ——–—— ——–—— ——–——
Balance at 31 December 2005 12,715 2,755,433 57,686 (672,941) 2,152,893 – 2,152,893
——–—— ——–—— ——–—— ——–—— ——–—— ——–—— ——–——
Balance at 1 January 2006 . . 12,715 2,755,433 57,686 (672,941) 2,152,893 – 2,152,893 Fair value gains net of
tax on available-for-sale
financial assets . . . – – 126,442 – 126,442 – 126,442
——–—— ——–—— ——–—— ——–—— ——–—— ——–—— ——–——
Net income/(expense)
recognized directly in equity . . 9 – – 126,442 – 126,442 – 126,442
Loss for the year . . . – – – (37,653,035) (37,653,035) (12,462) (37,665,497)
——–—— ——–—— ——–—— ——–—— ——–—— ——–—— ——–——
Total recognized income
and expense for 2006 . . . – – 126,442 (37,653,035) (37,526,593) (12,462) (37,539,055)
Issue of share capital
(Authorized) . . . 13 – – 825,020 – 825,020 – 825,020
Options issued . . . 14 – – – 31,805,000 31,805,000 – 31,805,000
Convertible capital loan . . . 15 – – 326,917 – 326,917 – 326,917
Minority interest arising
from subsidiary . . . – – – – – 100,000 100,000
——–—— ——–—— ——–—— ——–—— ——–—— ——–—— ——–——
Balance at 31 December 2006 12,715 2,755,433 1,336,065 (6,520,976) (2,416,763) 87,538 (2,329,225)
——–—— ——–—— ——–—— ——–—— ——–—— ——–—— ——–——
The notes are an integral part of the consolidated financial information.
CONSOLIDATED CASH FLOW STATEMENT
2004 2005 2006
(15 months)_________ _________ _________
(All amounts in EUR) Note
Cash flows from operating activities
Loss for the year . . . (461,025) (2,306,915) (37,665,497) Adjustments for:
Tax . . . 26 – (1,109) (178,447) Depreciation and amortization . . . 22 2,516 4,622 13,003 Other non-cash income and expenses . . . .14,18 – 27,417 31,805,000 Interest income . . . 24 (24) (421) (1,883) Fair value gains on other financial assets at fair
value through profit or loss . . . 19 – – (39,726) Interest expense . . . 25 491 34,633 3,237,018
——–—— ——–—— ——–—— (458,041) (2,241,773) (2,830,532) Change in working capital
Decrease/(increase) in other receivables . . . (130,217) (167,509) (396,158) (Decrease)/increase in trade and other payables . . . 96,763 603,537 948,281
——–—— ——–—— ——–—— Change in working capital . . . (33,454) 436,028 552,124 ——–—— ——–—— ——–—— (491,495) (1,805,745) (2,278,408) Interest and other finance cost paid . . . – (12,125) (9,704) Interest income . . . 24 421 1,883 Income taxes paid . . . – – – ——–—— ——–—— ——–——
Net cash used in operating activities . . . (491,471) (1,817,449) (2,286,229)
Cash flows from investing activities
Purchases of property, plant and equipment . . . 6 (17,254) (29,261) (3,931,647) Purchases of biological assets . . . 8 – – (963,576) Purchases of intangible assets . . . 7 (149,943) (737,272) (1,791,187) Purchases of available-for-sale financial assets . . . . 9 (149,938) (1,400,000) (36,468,000) Proceeds from sale of available-for-sale
financial assets . . . 9 – 699,609 14,953,126 Purchases of other financial assets at fair value
through profit or loss . . . 10 – – (5,000,000) ——–—— ——–—— ——–——
Net cash used in investing activities . . . (317,135) (1,466,924) (33,201,284)
Cash flows from financing activities
Proceeds from issue of share capital . . . 13 10,885 1,830 825,020 Share premium . . . 13 409,590 2,345,843 – Proceeds from interest-bearing liabilities . . . 15 421,000 966,667 36,283,714 Capital investment by minority shareholders . . . – – 100,000 ——–—— ——–—— ——–——
Net cash generated from financing activities . . . 841,475 3,314,340 37,208,734
Net increase in cash and bank overdrafts . . . 32,868 29,967 1,721,221
Cash and bank overdrafts at beginning of the year . – 32,868 62,834 ——–—— ——–—— ——–——
Cash and bank overdrafts at end of the year . . . 12 32,868 62,834 1,784,055
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——–——
——–——
The notes are an integral part of the consolidated financial information.
1. General information
Talvivaara Mining Company Ltd (the “Company”) and its established wholly owned subsidiary Talvivaara Project Ltd (together “the Group” or “Talvivaara”) is a mining group whose main activity is the development and exploitation of two polymetallic deposits, Kuusilampi and Kolmisoppi, in Sotkamo, Finland (together the “Talvivaara deposits”). The Company also holds an 80 per cent. interest in Hyena Holding Ab (established on 3 July 2006), an exploration company registered in Sweden and with an exploration target in Morocco (also included in “Group”).
The Company is a limited liability company incorporated on 22 August 2003 and registered in Finland with registered number 1847894-2. The Company’s principal place of business is at Salmelantie 6, 88600 Sotkamo, Finland.
The Group’s principal business is the development of the Talvivaara deposits to produce nickel, zinc, copper and cobalt. The Talvivaara deposits will be mined as open pits. The Group has developed and intends to exploit bioheapleaching technology for the extraction of metals from the ore. To date, the Group has demonstrated the technical feasibility of the technology in large-scale pilot tests on-site.
The results of the feasibility study indicate technical and commercial feasibility of the project and, subject to successful fundraising, the Group intends to commence construction of the mine in 2007. Plant design, earthworks planning and preparatory work for construction of certain infrastructure items, in particular a power line, have already commenced in 2006. The Group expects to start mining and commercial production in 2009, at the latest.
Thus far, the Group has financed its activities through private placement share issues and convertible notes. The Company’s majority shareholder is its founder, Mr. Pekka Perä, with other major share and convertible note holders including OMG Finland Oy (currently, Norilsk Nickel Holdings (Cyprus) Ltd), Varma Mutual Pension Insurance Company, Metso Minerals Oy, Finnish Industry Investment Ltd., and international investment funds Eton Park and Tisbury Capital Management.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of this consolidated financial information are set out below. These policies have been applied to all the periods presented, unless otherwise stated.
Basis of preparation
The consolidated financial information of Talvivaara is prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and in compliance with the IAS and IFRS standards as well as the SIC and IFRIC interpretations in force as at 31 December 2006. IFRS 1, First-time Adoption of International Financial Reporting Standards, has been applied in preparing this financial information. This financial information is Group’s first financial information prepared in accordance with IFRS. The date of transition to IFRS is 9 September 2003. Reconciliation and descriptions of the effect of the transition from Finnish GAAP to IFRS on the Group’s equity and its net income are presented in Note 31.
The consolidated financial information has been prepared under the historical cost convention, as modified by the revaluation of available-for-sale assets and biological assets.
The preparation of financial information in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial information are disclosed in Note 4.
Consolidation
Subsidiaries
Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date on which control ceases.
Intra-group transactions, balances and unrealized gains on intra-group transactions are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
The consolidated financial information includes the parent company Talvivaara Mining Company Ltd and both its 100 per cent. owned subsidiary Talvivaara Project Ltd and 80 per cent. owned subsidiary Hyena Holding Ab in 2006.
Foreign currency translation
Functional and presentation currency
Items included in the financial information of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial information is presented in euros (€), which is the Company’s functional and presentation currency.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement.
Group companies
The results and financial position of all the group entities that have functional currency different from the presentation currency are translated into the presentation currency as follows:
• Assets and liabilities for each balance sheet date presented are translated at the closing rate at the date of the balance sheet;
• Income and expense for each income statement 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 rate on the dates of the transactions); and
• All resulting exchange differences are recognized as a separate component of equity.
When a foreign operation is partially disposed of or sold, exchange differences that were recorded in equity are recognized in the income statement as part of the gain or loss on sale. For the periods covered by this consolidated financial information, all the Group’s entities have the same functional currency as the presentation currency of this consolidated financial information.
Property, plant and equipment
Property, plant and equipment, which at 31 December 2006 include non-industrial buildings acquired in connection with land acquisitions in the mining area, and selected laboratory and pilot scale equipment, are stated at historical cost less accumulated depreciation and any accumulated impairment losses.
Where parts of an item or property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.
Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows:
Buildings life of mine
Machinery and equipment 5 – 15 years Furniture, fixtures and fittings 5 – 10 years
Vehicles 4 years
Useful lives of assets, depreciation methods and any residual values are re-assessed on annual basis. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are recognized within other operating income or expenses, respectively, in the income statement.
Intangible assets
Exploration and evaluation expenditure
The Group has continued its Finnish GAAP policy for the recognition and measurement of exploration and evaluation expenditure, in accordance with IFRS 6 “Exploration for and Evaluation of Mineral Resources”. Exploration and evaluation expenditure are capitalised as exploration and evaluation assets. Capitalisation of exploration and evaluation expenditure commences on acquisition of exploitation rights to mineral deposits. Once the technical feasibility and commercial viability of extracting a mineral resource are demonstrable, expenditure related to such development will not be capitalised as exploration and evaluation assets but as mine development costs.
Exploration and evaluation expenditure includes acquisition of rights to explore, topographical, geological, geochemical and geophysical studies, exploration drilling, trenching, sampling, and activities in relation to evaluation of the technical feasibility and commercial viability of extracting a mineral resource. All external direct costs are capitalised.
Exploration and evaluation expenditures are assessed for impairment when facts and circumstances suggest that the carrying amount of the assets may exceed their recoverable amount. The impairment test is undertaken at the cash generating unit level. The Group has only one cash generating unit, the Talvivaara deposits.
Mine development costs
Once the technical feasibility and commercial viability of extracting a mineral resource are demonstrable, expenditure related to such development will not be capitalised as exploration and evaluation assets but as mine development costs. Mine development costs include costs relating to the development of mineral properties and of technologies used to exploit them and are capitalised until such time as an economic resource is defined and mining commences or the mining property is abandoned. The costs capitalised include the cost of materials and services used or consumed in generating the asset. Absorption of relevant overheads is capitalised only when they are directly attributable to the generation and preparation of the asset. Other mine development costs are recognized in the income statement as an expense as incurred. Intangible assets representing exploration and evaluation or mine development are amortized on a straight line basis over their expected useful lives starting from the commencement of mining activities.
Research and development
Research expenditure is recognized as an expense as incurred. Costs incurred on development projects (relating to bioheapleaching technology) are recognized as intangible assets when the following criteria are fulfilled:
(a) It is technically feasible to complete the intangible asset so that it will be available for use or sale;
(b) Management intends to complete the intangible asset and use or sell it; (c) There is an ability to use or sell the intangible asset;
(d) It can be demonstrated how the intangible asset will generate probable future economic benefits; (e) Adequate technical, financial and other resources to complete the development and to use or sell the
intangible asset are available; and
(f) The expenditure attributable to the intangible asset during its development can be reliably measured. Other development expenditures that do not meet these criteria are recognized as an expense as incurred. Capitalised development costs are recorded as intangible assets and amortized on a straight-line basis over their useful lives, starting from the commencement of mining activities.
Other intangible assets
Other intangible assets that are acquired by the Group are measured at cost less accumulated amortization and accumulated impairment charges. Other intangible asset category comprises acquired software, which will be amortized on a straight-line basis over 5 years.
Biological assets
Biological assets, i.e., living trees, are measured on initial recognition and at each balance sheet date at their fair value less estimated point-of-sale costs. The fair values of biological assets other than young seedlings are determined based on discounted cash flow models whereby the fair value is calculated using cash flows from continuing operations taking into account growth potential. The yearly harvest made from the forecasted tree growth is multiplied by actual wood prices and the cost of both fertilizer and harvesting is then deducted. The fair value is measured as the present value of the harvest from one growth cycle based on productive forestland, taking into consideration environmental restrictions and other reservations. Biological assets that are physically attached to land are recognized and measured at their fair value separately from the land.
The fair value of young seedling stands is the actual reforestation cost of those stands.
The changes in the fair value of biological assets and recognition of agricultural produce harvested from the biological assets at fair value are included in the operating profit.
Provisions
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.
Mine closure and environmental clean-up costs
Provision for mine closure cost is made in respect of the estimated future costs of closure and restoration and for environmental rehabilitation costs (including the dismantling and demolition of infrastructure, removal of residual materials and remediation of disturbed areas) in the accounting period when the related environmental disturbance occurs. The provision is discounted and the unwinding of the discount is included in financing costs as an interest expense. At the time of establishing the provision, a corresponding asset is added to the cost of the related asset as long as the carrying amount of asset does not exceed its recoverable amount. The asset is depreciated over future production from the mine to which it relates. The provision is reviewed on an annual basis for changes in cost estimates, discount rates or life of operations. Changes in the measurement of liability are added to, or deducted from, the cost of the related asset.
For closure and clean-up costs related to a pilot operation, a corresponding provision is made, with unwinding of discount over time until estimated clean-up of such pilot site. However, assuming the technical
feasibility and commercial viability of extracting a mineral resource are not yet demonstrable when the pilot study is commenced, the discounted provision is expensed rather than capitalised.
Impairment of assets
Assets that are subject to amortization, depreciation or depletion are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Currently, the Group has only one cash generating unit, the Talvivaara deposits. Estimates of future cash flows are based on estimates of quantities of mineral resources, and assumptions as to future production levels, future commodity prices, and future cash cost of production and capital expenditure.
The exploration and evaluation assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. Development assets are tested for impairment annually, in accordance with IAS 36.
The recoverable amount of intangible assets not yet available for use is determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on forecasts that incorporate best estimates of selling prices, ore grades, production levels, foreign exchange rates, maintenance capital