2011 Annual Report Building on ďŹ rst mover success
www.lydianinternational.co.uk
Lydian International is a mineral exploration and development company with expertise and a proven track record in discovering and developing new gold projects in unfamiliar and frontier settings. The probability of discovering large, “World-Class” gold projects is higher in prospective yet under explored regions. Lydian has illustrated this unequivocally with its discovery of the Amulsar gold project in Armenia in 2006. Lydian is also actively exploring in other prospective regions of Eastern Europe where it is building and maintaining a promising portfolio of early stage pipeline projects. Lydian has a strong social agenda and a unique understanding of the complex political backdrop to the region in which it operates. Lydian develops its projects responsibly with exceptional emphasis on social and environmental awareness and care. The company minimises environmental impact and engages local communities in order to deliver relevant and sustainable social development initiatives. Lydian’s influential shareholders are the International Finance Corporation, part of the World Bank Group and the European Bank for Reconstruction and Development. Both provide Lydian with in-country support and valuable advice to manage environmental, social and governance risks, bolstering Lydian’s competitive advantage in securing and retaining high quality assets.
Table of Contents
Chief Executive Officer’s Statement ________________________________ 2 Management’s Discussion and Analysis ____________________________ 7 Financial Results of Operations ____________________________________ 13 Appendix 1 __________________________________________________________ 26 Appendix 2 __________________________________________________________ 27 Report of Management ____________________________________________ 37 Independent Auditors’ Report _____________________________________ 38 Financial Statements _______________________________________________ 39 Consolidated Income Statements ________________________________ 39 Consolidated Statements of Comprehensive Income ___________ 39 Consolidated Statements of Financial Position ___________________ 40 Consolidated Statements of Changes in Equity __________________ 41 Consolidated Statements of Cash Flows __________________________ 43 Notes to Consolidated Financial Statements _____________________ 44
2011 Annual Report | Lydian International | 1
Chief Executive OďŹƒcer’s Statement Tim Coughlin, CEO
of the additional ounces added to the global resource in 2011 were found simply by closing in the drillspacing. This adds substantial confidence to the geologic model at Amulsar as it confirms the connectivity of gold mineralised faults and fractures and opens up further resource potential at other localities where the drill-spacing is still wider apart. The Company therefore plans to drill a further 25,000 metres of combined infill, step-out and exploration drilling in 2012 with the aim being to push the total combined resource beyond the 4 million ounce mark this year.
2011 was without doubt the busiest and most eventful year in Lydian’s life culminating in December with the Company receiving the prestigious Mining Journal Outstanding Achievements award for Exploration at the International Mines and Money Conference in London. After approximately 35,000 metres of further exploration drilling, Amulsar now moves into the privileged league of plus 3 million ounce gold resources with an updated CIM compliant resource estimate of 68.2 Mt at 1.0 g/t Au (for 2.1 million ounces) of Indicated Category resources and 36.1 Mt at 0.9 g/t Au (for 1.1 million ounces) of Inferred Category resources. This puts this new discovery firmly in the top 15% of all known gold deposits in the world: something for which both Lydian and Armenia should be justifiably proud of. What is maybe even more important is that this resource still remains open in all directions. Good results from systematic step out drilling at Arshak in 2011 have highlighted potential for approximately 1 kilometre along strike to the southeast where previous drilling has intersected low-grade but anomalous gold results. The resource is also completely open at depth. Of equal interest and importance is the amount of resource ounces added this year by infill drilling: half
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In July of 2011 the Company released a Preliminary Economic Assessment of the Amulsar project. This was based on the 2010 resource and on 1.64 million mineable ounces only, but it still returned a robust $515M NPV and 45% IRR. Cash costs were estimated to be low compared to industry averages and ranged from approximately $420 to $500/ounce for 5Mt and 10Mt per-annum production scenarios respectively. Bankable Feasibility work has been on-going and is on track for completion in Q2 2012. The production flowchart has now been locked-in and comprises threestage crushing, conveying and stacking, cyanidation-leaching and gold-silver recovery in a conventional carbon adsorption, desorption, and regeneration (ADR) plant. As part of the Bankable Feasibility Study requirements, representative core and bulk surface samples were sent to Kappes, Cassiday & Associates for metallurgical testing. The results verified the excellent leach recoveries obtained during previous testing of composite samples at SGS and Wardell Armstrong International. Average gold leach recoveries for Tigranes and Artavasdes were 89.4% and 86.0% respectively. Mine layout and mine design has been focussed specifically on minimising any adverse environmental and social impacts. The crushing plant and overland/portable conveyors will be enclosed to minimise noise and dust, whilst the design of the Heap Leach Pad includes state-of-the-art solution reticulation systems and breach monitoring and mitigation systems. Any waste dump run-off will be
Chief Executive Officer’s Statement Tim Coughlin, CEO
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CASPIAN P SEA 42º
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ARMENIA AR AZERBA AZERBAIJAN R
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treated using lime neutralization, followed by a combined system of natural wetlands and an ionexchange plant. Lydian has identified and placed orders for its long lead time items including particularly the Caterpillar ore mining fleet and has commenced discussions with engineering companies to complete detailed engineering design and engineering, procurement and construction management works. Lydian is committed to helping its local communities and to leaving positive sustainable impacts that will benefit the region and serve as a long-standing legacy well after the mine has been closed and rehabilitated. Lydian will employ a local workforce to operate the Amulsar mine. A skills survey recently completed in the project’s immediate communities reveals a ready
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supply of suitably educated persons who could be trained as mining fleet operators, engineers and mechanics. Training of local professionals commenced two years ago with Company-supported graduate degrees in geology and engineering. A training component has also been added to the Company’s mine-fleet delivery contract. Elsewhere on the social side the Company has completed at least 10 of its current and on-going initiatives in the local village communities of Gorayk, Gndevaz and Saravan. These projects included construction of a natural gas pipeline to serve the Saravan community, renovation of the kindergarten in the village of Gndevaz and implementation of the “Kinderwall” public internet program in Gorayk. The Company has also formalised a joint venture agreement with the local Armenian NGO and Human
2011 Annual Report | Lydian International | 3
Chief Executive OďŹƒcer’s Statement Tim Coughlin, CEO
Amulsar Gold Project Exploration Upside
Dignity and Peace Charity Foundation for the implementation of new gardening technologies in local communities and has been working on other joint social initiatives with both local and international NGO’s. Elsewhere within the region and amongst its broader communities the Company has provided funds for the Syunik Province Child Development
4 | Lydian International | 2011 Annual Report
Fund, sponsored international sports events and purchased an ambulance for the hospital in Jermuk. Before centuries of tree harvesting, the lower slopes of the Amulsar region were dominated by evergreen forest. As part of a major reforestation and environmental rehabilitation project the Company will
Chief Executive OďŹƒcer’s Statement Tim Coughlin, CEO
Arshak Upside Potential
initially plant around 5,000, at least two metre tall, native poplar and birch saplings along relevant roadsides to minimise any immediate visual impact the project may have. Following that and during and after mine development and production, the Company will expand this reforestation program to the lower, once forested slopes of Amulsar thus
returning it to its original character and providing new habitat for native wildlife. At Amulsar, Lydian is now very much focussed on expanding the resource, on completing its Bankable Feasibility Study and on attaining all remaining material permits. The Company already has its Heap
2011 Annual Report | Lydian International | 5
Chief Executive Officer’s Statement Tim Coughlin, CEO
Leach operation approved and is in the process of securing final approval for its now expanded open pit and waste dump facility. Lydian’s other exploration activities are now focussed on neighbouring Georgia and particularly on its new Zoti gold project in the west of the country. The Company has established an office in the port city of Batumi and is preparing geologic maps and collecting further geochemical and geophysical data in preparation for drilling this year. On the financing side the Company is well-funded to ensure completion of its exploration programs, completion of the Bankable Feasibility Study and detailed engineering components at Amulsar and to ensure down payment and ordering of all mine infrastructure. 2011 was an exciting year for Lydian and 2012 promises to be even more so.
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Management’s Discussion & Analysis Consolidated Financial Condition and Results of Operations for the three and twelve month periods ended December 31, 2011
The following is Management’s Discussion and Analysis (“MD&A”) of the consolidated financial condition and results of operations of Lydian International Limited (“Lydian” or the “Company”) for the three and twelve month periods ended December 31, 2011. This discussion should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2011, prepared in accordance with the International Financial Reporting Standards (“IFRS”). The information provided herein supplements, but does not form part of, the consolidated financial statements. This discussion covers 2011 as well as the subsequent period up to the date of this MD&A, March 23, 2012. All monetary figures are expressed in British Pounds unless otherwise indicated.
Business Overview The Company is a gold-focused mineral exploration and development company specialising in emerging and transitional environments. Currently the Company is focused on Eastern Europe, primarily in the Caucasus region, exploring and developing precious metal assets. The Company’s main project is a gold exploration and development project (the “Amulsar Project”) located in Armenia. In addition, the Company holds a license covering an early-stage gold prospect (the “Zoti Project”) in the Guria region of Georgia.
The Company’s principal objective is to continue its exploration and development of the Amulsar Project. The Company will continue the ongoing exploration drilling and mine development program at the Amulsar Project and is conducting a bankable feasibility study, for which the financial numbers are expected to be completed in the second quarter of 2012. The Company will also conduct detailed engineering studies to finalise mine design and complete the permitting process at Amulsar. Developing the Amulsar Project into a profitable gold mining operation will depend upon the Company’s ability to raise sufficient project financing, acquire all permits, complete construction and advance the Amulsar Project to production. The Company currently does not have any commercial operations or revenue. The Company expects that its current assets are sufficient to finance the Amulsar Project to and through the completion of the bankable feasibility study and the necessary detailed engineering stages, carry out the work recommended in the Technical Report, continue exploration work on the Zoti Project in Georgia and pay all amounts that become due on or prior to December 31, 2012 to Newmont Overseas Exploration Limited (“Newmont”) pursuant to the purchase agreement (the “Newmont Purchase Agreement”) dated February 26, 2010 between the Company and Newmont.
2011 Annual Report | Lydian International | 7
Management’s Discussion & Analysis Consolidated Financial Condition and Results of Operations for the three and twelve month periods ended December 31, 2011
Fourth Quarter and Recent Highlights •
The Company completed a bought deal equity financing, pursuant to which it issued 15,625,000 and 2,343,750 ordinary shares (the “Ordinary Shares”) of the Company on March 9, 2012 and March 15, 2012, respectively, at a purchase price of CAD$2.56 per Ordinary Share, for aggregate gross proceeds to the Company of CAD$46 million.
•
On March 21, 2012 the Company announced that the European Bank of Reconstruction and Development (the “EBRD”) were to exercise their pre-emptive rights in full with respect to the bought deal above by purchasing an aggregate of 1,419,732 Ordinary Shares (the “New Shares”) at a purchase price per Ordinary Share of CAD$2.56 for an aggregate purchase price of CAD$3,634,514.
•
On March 13, 2012 the Company announced that it received its environmental approval for the processing of gold-silver ore using heap leach technology as part of the permitting process at its Amulsar Project in Armenia.
•
On March 9, 2012, the Company filed a technical report (the “Technical Report”) titled “2012 Mineral Resource Estimate Amulsar Gold Project NI 43-101 Technical Report” prepared by Independent Mining Consultants, Inc., dated March 3, 2012, in respect of an updated resource estimate for its Amulsar Project announced by the Company on January 23, 2012 (see page 11).
•
On March 5, 2012, the Company announced the appointment of Mr. Tim Richards as Senior Mine Manager to oversee the development of its Amulsar Project.
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On March 5, 2012, the Company announced the engagement of Endeavour Financial to provide financial advisory services with respect to financing the development of the Amulsar Project.
•
On January 3, 2012, the Company announced that it notified Newmont of its deferral of payment of US$5 million owing to Newmont until no later than December 31, 2012, which was then made in full together with interest (US$100,000) owing thereon on March 13, 2012.
8 | Lydian International | 2011 Annual Report
•
On December 15, 2011, the Company announced that International Finance Corporation (“IFC”) purchased an aggregate of 4,000,000 Ordinary Shares from the Company at a price of £0.3125 (approximately CAD$0.50) per share for gross proceeds of £1,250,000 (approximately CAD$2,006,600), pursuant to the terms of an option granted to IFC under the investor rights and shareholders’ agreement between the Company and IFC.
•
On November 29, November 2, October 18, October 4 and September 19, 2011, the Company released drill results from its 2011 drilling program, consisting of approximately 35,000 metres of combined diamond and reverse circulation drilling (for a total of approximately 90,000 metres). Drilling results to date indicate potential resource extensions for up to 1km to the northeast of Tigranes, 1km to the southwest at Orontes, to the southeast at Arshak and at Erato to the northnorthwest of Tigranes/Artavasdes. Deeper drill holes have also identified possible resource extensions at depth and below the current proposed pit outline.
•
On November 15, 2011, the Company reported further metallurgical results from the Amulsar Project, indicating average recoveries of 94% for master composite samples obtained after 47 days leaching.
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On October 11, 2011, the Company announced that its 100% owned subsidiary, Georgian Resource Company LLC, acquired a 40 year combined exploration-mining license covering an early-stage gold prospect known as “Zoti” in the Guri region of the Ozurgeti province in Georgia.
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On October 3, 2011, the Company announced the change of land status from agricultural to industrial at its Amulsar Project.
•
The Company also continued to make progress toward meeting its goal of commencing production at its Amulsar Project in 2014, in respect of which it expects to be able to produce a bankable feasibility by around the end of the second quarter 2012.
Management’s Discussion & Analysis Consolidated Financial Condition and Results of Operations for the three and twelve month periods ended December 31, 2011
Update of Mineral Resource
36.1 Mt at 0.9 g/t Au (1.1 million ounces) of inferred category resources (see Table 1), based on a 0.40 g/t gold cutoff grade.
On March 9, 2012, the Company filed the Technical Report in respect of an updated mineral resource estimate for its Amulsar Project that was announced by the Company on January 23, 2012. The updated resource estimate comprises 68.2 Mt at 1.0 g/t Au (2.1 million ounces) of indicated category resources and
The resource estimate in the Technical Report and summarised below updates the resource estimate contained in the preliminary economic assessment (the “PEA”) report on the Amulsar property titled “Development of Amulsar Heap Leach Facility, Preliminary Economic Assessment” dated August 12,
Recent Developments
2011 Annual Report | Lydian International | 9
Management’s Discussion & Analysis Consolidated Financial Condition and Results of Operations for the three and twelve month periods ended December 31, 2011
2011 and prepared by K D Engineering Company, Inc. (KDE). The resource estimate contained in the PEA does not include the results of any drilling since December 31, 2010. The updated resource in the Technical Report was developed from approximately 35,000 metres of additional combined diamond and reverse circulation exploration drilling (for a total of approximately 90,000 metres) carried out in 2011. Gold at the Amulsar Project is hosted primarily in sub-vertical faults, associated breccia veins and sheeted fractures with faults and breccia veins generally trending northwestsoutheastwards and sheeted fracture zones trending northeast-southwestwards. Sub-horizontal possibly strata-bound mineralisation also controls some of the gold at the Amulsar Project.
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The updated resource estimate comprised a total of 1.7 million ounces gold in the indicated category and 0.6 million ounces gold in inferred category (using a 0.4g/t cut-off ) from the contiguous Tigranes and Artavasdes areas and 0.5 million ounces gold in the indicated category and 0.4 million ounces inferred category from the Erato prospect, which is located approximately 900 metres to the northnorthwest of Tigranes & Artavasdes (see Table 2).
Management’s Discussion & Analysis Consolidated Financial Condition and Results of Operations for the three and twelve month periods ended December 31, 2011
Table 1 Gold-Silver Mineral Resource Gold Cutoff Tonnes Grade, g/t (x 1000) 0.75 28,107 0.50 51,153 0.40 68,207 0.30 95,798 0.20 140,336
Indicated Mineral Resource Gold, g/t Silver, Ounces g/t Gold 1.61 4.90 1,453,109 1.16 4.17 1,902,840 0.98 3.84 2,146,888 0.80 3.47 2,454,779 0.62 3.13 2,806,449
Ounces Silver 4,428,007 6,858,117 8,420,888 10,687,685 14,122,486
Inferred Mineral Resource Tonnes Gold, g/t Silver, Ounces (x 1000) g/t Gold 15,235 1.45 4.55 709,265 27,189 1.08 4.37 943,219 36,056 0.92 4.00 1,069,983 48,907 0.77 3.63 1,212,336 75,461 0.59 3.10 1,421,733
Ounces Silver 2,228,700 3,820,079 4,636,980 5,707,887 7,521,111
Table 2 Amulsar Gold-Silver Mineral Resource by Project Area Gold Cutoff Tonnes Grade, g/t (x 1000) 0.75 21,409 0.50 39,749 0.40 53,337 0.30 73,478 0.20 105,303
TIGRANES & ARTAVASDES AREAS Indicated Mineral Resource Inferred Mineral Resource Gold, g/t Silver, Ounces Ounces Tonnes Gold, g/t Silver, Ounces g/t Gold Silver (x 1000) g/t Gold 1.61 5.29 1,108,893 3,641,244 8,204 1.31 5.44 344,482 1.15 4.48 1,465,843 5,725,349 16,808 0.95 4.85 512,838 0.97 4.12 1,661,690 7,065,185 23,142 0.81 4.36 603,420 0.80 3.76 1,885,202 8,882,657 32,771 0.67 3.92 710,145 0.63 3.44 2,136,327 11,646,540 48,790 0.53 3.55 836,095
Gold Cutoff Tonnes Grade, g/t (x 1000) 0.75 6,698 0.50 11,403 0.40 14,871 0.30 22,320 0.20 35,032
Indicated Mineral Resource Gold, g/t Silver, Ounces g/t Gold 1.60 3.64 344,558 1.19 3.08 436,645 1.02 2.84 486,249 0.79 2.52 568,352 0.60 2.18 670,162
Ounces Silver 1,434,902 2,620,930 3,244,032 4,130,223 5,568,739
ERATO PROSPECT Ounces Silver 783,870 1,129,191 1,357,864 1,808,391 2,455,382
Inferred Mineral Resource Tonnes Gold, g/t Silver, Ounces (x 1000) g/t Gold 7,030 1.62 3.51 365,027 10,380 1.29 3.59 430,178 12,914 1.13 3.34 467,101 16,136 0.97 3.06 502,710 26,671 0.68 2.28 584,819
Ounces Silver 793,341 1,198,090 1,386,772 1,587,505 1,955,113
This mineral resource estimate has been confined within a theoretical floating cone open pit geometry which ensures an extra level of confidence by precluding ounces that are unlikely to be mined. The floating cone parameters used a US$1,300/oz gold price and current estimates of project operating costs and gold recovery. At the 0.40 g/t gold cutoff grade, 98% of the unconfined global gold ounce estimate lies within this theoretical open pit geometry, which the Company believes indicates the robustness of the mineral resource.
2011 Annual Report | Lydian International | 11
Management’s Discussion & Analysis Consolidated Financial Condition and Results of Operations for the three and twelve month periods ended December 31, 2011
Exploration Update and Activities Amulsar Project The Company’s Amulsar Project area covers a region of high-sulphidation, epithermal-type gold mineralisation located in central Armenia and was discovered by Lydian in 2006. The exploration licences for the Amulsar Project are held 100% by Geoteam CJSC, an Armenian registered closed joint stock company. The outstanding shares of Geoteam are held 95% by Lydian Resources Armenia Ltd. (a 100% owned indirect subsidiary of the Company) and 5% by Lydian’s local director. In December 2010, the Company acquired an option to purchase this minority interest. The Company has made all of the payments of cash and Ordinary Shares that were required to be made by it prior to the date of this MD&A in order to maintain the option. On August 22, 2011, the Company filed a Preliminary Economic Assessment (PEA) of the Amulsar Project on SEDAR. The PEA is based on the estimated resources at only the Tigranes and Artavasdes areas (i.e. not including the Erato area) and shows a pre-tax Base Case Net Present Value using a 5% discount rate amounting to US$515 million, with an IRR of 45%. The PEA was based on a US$1000 optimised pit-shell, 1.64m mineable ounces, US$1,200 gold price, 85% recoveries and had a +30% contingency capital tolerance. In 2011, the Company completed approximately 35,000 metres of combined diamond and reverse circulation exploration drilling. Results indicate that the current resource shell may extend further in all directions. This further drilling resulted in the updated resource estimate summarized above. In addition, the Company identified further gold mineralisation one kilometre away towards the southwest at the Orontes prospect area. On November 15, 2011, the Company also reported metallurgical results from Amulsar showing average recoveries of 94% for Master Composite Samples obtained after only 47 days leaching. The Company contracted KD-Engineering (USA) to conduct a bankable feasibility study (BFS) at the Amulsar Project. The study team comprises KD-Engineering (process design), Golder Associates (USA; leach pads and geotechnical work), Independent Mining Consultants (USA; resources and pits) and Wardell Armstrong International (UK; environment and social). The financial numbers for the BFS are expected to be completed by around the end of Q2 2012. On March 12, 2012 the Company announced that as part of the permitting process for the development of its Amulsar project, it has received approval for the Company’s planned processing of gold-silver using heap leach technology. The Company now requires environmental impact assessment approval for its expanded open-pit and waste dump facilities and land status change for the surface rights underlying the project infrastructure. Once those approvals have been secured, detailed engineering plans will need to be submitted as they are complete for construction approvals.
Zoti Project On October 11, 2011, the Company announced that its 100% own subsidiary Georgian Resource Company LLC acquired a 40 year combined exploration-mining license over a new gold project in Georgia known as the Zoti Project. The Company currently plans to carry out approximately 1,500 metres of exploratory drilling at the Zoti Project in 2012.
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Financial Results of Operations
Selected Financial Information The financial information has been prepared in accordance with International Financial Reporting Standards (IFRS). All monetary amount references in this document are to British Pounds unless otherwise indicated.
Statement of Operations The following is a summary of selected information for the three and twelve month periods ended December 31, 2011 and comparative financial information for the corresponding periods in the Company’s previous financial year. British Pounds Interest income Joint partner contributions Total expenses Net income (loss) Loss per share (basic and diluted)
Three months ended December 31 2011 (£) 2010 (£) 14,226 14,566 1,615,208 3,652,009 (1,600,982) (3,637,443) 0.02 0.04
Twelve months ended December 31 2011 (£) 2010 (£) 44,297 25,073 5,999,185 5,912,122 (5,954,888) (5,887,049) 0.06 0.08
During the twelve month periods ended December 31, 2011 and 2010 the Company had no revenues. Its only income was bank interest. In the twelve month period ended December 31, 2011, the Company recorded a loss of £5,954,888 (6 pence per share) compared to £5,887,049 (8 pence per share) during the corresponding period in 2010. There were several increases in the Company’s cost structure in 2011 compared to 2010, including an increase of: £1,067,762 of funds allocated to employee benefit reserves in respect of option vesting; £416,815 of administrative expenses, and £193,712 of effective interest charge relating to the unwinding of the discount attributable to the payment to Newmont. Costs relating to the disposal of property and plant incurred in year ended December 31, 2011 totaled to £99,315 compared to nil in 2010, exploration and evaluation assets write off pertaining to the Company’s Nor Arvik project and expenditures incurred in 2011 for its former Drazhnje lead-zinc and silver project (the “Drazhnje Project”) in Kosovo totaled £165,215 compared to £2,113,572 impartment 2010. There were no extraordinary transactions or significant end of reporting period adjustments during the twelve month period ended December 31, 2011. During the twelve month period ended December 31, 2011, there were some fluctuations between the British Pound, Canadian Dollar, Euro, Armenian Dram, Georgian Lari and U.S. Dollar. This resulted in changes to the value of the Company’s exploration assets as reported in British Pounds. Details of these changes are set out below. The Company attempts to protect itself from variations in exchange rates by holding its cash in currencies roughly in proportion to the Company’s anticipated expenditures in those currencies.
Income Tax Expense There was no tax payable by the Company in the twelve month period ended December 31, 2011 and the same period in 2010. As at December 31, 2011, the Company had taxation losses of £5,986,965 (December 31, 2010£4,956,551) that had not been recognised, as there is insufficient evidence of taxable profit in the near future.
2011 Annual Report | Lydian International | 13
Financial Results of Operations
Sumary of Operating Cash Flows, Investing and Financial Activities The following table summarises the Company’s cash flow for the three and twelve month periods ended December 31, 2011 and comparative financial information for the corresponding interim periods in the Company’s previous financial year. British Pounds Net cash provided (used) by operating activities Net cash used by investing activities Net cash provided (used) by financing activities
Three months ended December 31 2010 (£) 2011 (£) (1,189,170) (122,589) (2,419,468) (1,129,301) 1,482,534 13,187,581
Twelve months ended December 31 2011 (£) 2010 (£) (4,671,986) (2,606,805) (7,645,787) (6,466,916) 3,539,646 24,344,997
Summary of Balance Sheet Data The following table summarises the Company’s financial position as at the dates indicated:
Current assets Property and equipment Intangible assets Exploration and evaluation assets Other non-current assets Other long-term financial assets Total Assets Current liabilities Non-current liabilities Equity Total liabilities and equity
As at December 31, 2011 (£) 8,712,341 476,012 95,522 23,739,005 1,371,935 126,600 34,521,415 7,002,493 28,800 27,490,122 34,521,415
As at December 31, 2010 (£) 17,237,596 402,587 59,350 16,497,640 686,274 34,883,447 3,313,826 2,648,561 28,921,060 34,883,447
During the fourth quarter of 2011, the cash and cash equivalents of the Company decreased by £2,038,958 as a result of payments of exploration drilling services, payments to vendors for Amulsar Project development costs, payments to vendors for supply of services and goods, and payments to employees. As at December 31, 2011, the Company’s cash and cash equivalents was £8,301,907 compared to £17,058,692 on December 31, 2010. The Company’s net amount of exploration and evaluation assets (EEA) increased by £7,241,365 in the twelve month period ended December 31, 2011, which include a write off of its Nor Arevik project and 2011 expenditures of the Drazhnje Project totaling £165,215 and exchange rate differences that resulted in a decrease of EEA of £241,230. The increase of EEA is mainly related to the cost of exploration drilling and development of the Amulsar Project, including payments of concession fees and duties, the cost of samples, laboratory assays and environmental studies and other costs and cost associated with the acquisition of exploration-mining licenses in Georgia. In the twelve month period ended December 31, 2011, investment in property, plant and equipment totaled £348,417, which was mainly aimed to support the exploration and development of the Amulsar Project. Within the same period, a total of £99,315 relates to disposal of fixed and intangible assets. Other current assets increased by £231,530 during this period, mainly as result of prepayments to suppliers and deposits for the Zoti Project.
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Financial Results of Operations
Exploration and Evaluation Assets Exploration and evaluation costs are costs incurred directly in exploration and evaluation as well as the cost of mineral licenses as per IFRS 6. Exploration and evaluation costs incurred during the three and twelve month periods ended December 31, 2011 were £2,526,100 and £7,647,810, respectively, compared to £621,910 and £14,046,352 in the corresponding periods in 2010 (of which the purchase of Newmont’s interest in the former joint venture between the Company and Newmont comprised £11,015,916). These exploration and evaluation costs were related to exploration work on the Company’s exploration projects as follows: Project Armenia • Amulsar • Nor Arevik Georgia • Zoti Kosovo • Drazhnje Total
Cumulative as at December 31, 2011
Cumulative as at December 31, 2010
23,535,396 -
16,451,783 45,857
203,609
-
23,739,005
16,497,640
The increase in exploration and evaluation assets for the Amulsar Project in the twelve month period ended December 31, 2011 from the same period in 2010 mainly relates to the cost of exploration drilling, development of the project, payments of concession fees and other duties, the cost of samples laboratory assays, payment for the extension of the exploration license area and the cost of environmental studies related to the project. In 2011, the Company relinquished one of its early-stage Nor Arevik exploration licenses located in southern Armenia. The decision was made after the Company received and analysed the results of laboratory assays from exploration drilling in 2011. Capitalised costs pertaining to that project in amount of £140,859 were charged as of December 31, 2011. The Company incurred £194,170 of EEA in 2011 with respect to the Zoti Project, which represents the cost of the license and exploration work. Due to uncertainties regarding the Drazhnje Project, the exploration and evaluation assets attributable to Drazhnje were impaired as of December 31, 2010. The Company recognised an impairment loss of £2,113,572 for the year ended December 31, 2010 as a loss from EEA write off. On July 29, 2011, the Company transferred its licenses and certain other assets relating to the Drazhnje Project to Kosovo Metals Group JSC (“KMG”) in accordance with the terms of a binding Heads of Agreement dated March 31, 2011, between the Company and KMG. The Company did not reverse the impairment losses attributable to the Drazhnje Project in 2011 due to the uncertainty of future economic benefits of the Drazhnje Project. The Company also determined that Kosovo Resource Company LLC (“KRC”), as an operating segment, was impaired as of December 31, 2011. The Company is in the process of completing its discontinuation of its operations in Kosovo. In Armenia, the Company’s exploration activities are financed mainly in US Dollars, which are converted into Armenian Drams by the Company’s Armenian subsidiary and then into British Pounds for the group accounts. The cumulative totals are therefore affected by currency fluctuations between British Pounds, US Dollars and Armenian Drams. There has been significant devaluation of the Armenian Dram in 2011 following strengthening in 2010, so the cumulative expenditure in Armenia shown above can differ from the actual expenditure made in US Dollars.
2011 Annual Report | Lydian International | 15
Financial Results of Operations
On July 29, 2011, the Company completed the transfer of its licenses and certain other assets in connection with its former Drazhnje Project to KMG. The Company is in the process of winding up KRC through a members’ voluntary liquidation process. When the liquidation process is completed, the Company will have no operations in Kosovo.
Summary of Quarterly Results The following is a summary of results from the Company’s eight most recently completed quarters:
Net sales or total revenues Net income (loss) Loss per share (basic and diluted)
Q4 2011 (£) (1,600,982) 0.02
Q3 2011 (£) (1,402,189) 0.01
Q2 2011 (£) (1,598,306) 0.02
Q1 2011 (£) (1,353,411) 0.01
Net sales or total revenues Net income (loss) Loss per share (basic and diluted)
Q4 2010 (£) (3,637,443) 0.04
Q3 2010 (£) (940,826) 0.01
Q2 2010 (£) (840,892) 0.01
Q1 2010 (£) (467,888) 0.01
Outstanding Share Data A summary of outstanding shares options and warrants is set out below.
Ordinary Shares Other options Warrants
As at March 23, 2012 Number 123,464,168 3,311,758
As at December 31, 2011 Number 104,075,686 3,311,758
As at December 31, 2010 Number 93,659,798 100,000 12,087,146
The Company has one class of issued equity shares, being Ordinary Shares.
Management and Staffing During the twelve month period ended December 31, 2011, there were no significant changes to the key management and staffing of the Company other than those mentioned below. On March 5, 2012, the Company announced the appointment of Mr. Tim Richards as Senior Mine Manager to oversee the development of its Amulsar Project. Mr Richards is an Australian Mining Engineer with 12 years open-pit mine development and production experience acress Australia, Africa and Europe. In January 2011, the Company established an advisory board to provide technical expertise and advice on developing the Amulsar Project through the feasibility stage to production. The advisory board was initially comprised of Mr. Nerses Karamanukyan, Mr. Patrick Gorman, and Ms. Liz Wall. On March 15, 2011, who was Mr. Karamanukyan appointed as General Manager Caucasus of the Company. On July 24, 2011, the Company hired a new Operations Manager and on July 27, 2011, the Company’s Project Manager resigned.
16 | Lydian International | 2011 Annual Report
Financial Results of Operations
Liquidity and Capital Resources Lydian had working capital of £1,709,848 as at December 31, 2011 compared to £13,923,770 on December 31, 2010. The Company had total assets of £34,521,415 at December 31, 2011 compared to £34,883,447 on December 31, 2010, which include deferred exploration expenditures of £23,739,005 (£16,497,640 on December 31, 2010). The Company’s principal source of liquidity as at December 31, 2011 was cash and cash equivalents of £8,301,907 compared to £17,058,692 on December 31, 2010. This decrease in the cash and cash equivalents balance was primarily the result of £4,671,986 million cash used in operating activities and £7,645,787 of capital expenditures on property, equipment and intangible assets, exploration costs, partially offset by net proceeds of £3,539,646 from the issuance of shares from warrants and stock options exercised during the year. Cash surplus to the Company’s requirements was invested in money market deposits. Following the year ended December 31, 2011, the Company completed a CAD$46 million equity financing and received net proceeds of CAD$43,240,000 after deducting the underwriters’ fee of CAD$2,760,000. The Company used US$5,100,000 of the net proceeds of the offering to pay all amounts that were owing to Newmont as of March 13, 2012, and intends to use the remainder of the net proceeds to progress the Amulsar Project to and through the completion of a bankable feasibility study and the necessary detailed engineering stages, including carrying out the work recommended in the Technical Report (approximately £6,800,000) and completing additional engineering studies (approximately £3,800,000); for continued exploration work on the Zoti Project (approximately £633,000); to pay US$5 million to Newmont on or prior to December 31, 2012 in accordance with the Newmont Purchase Agreement; and for general working capital purposes and expenditures in the normal course of business (approximately £5,900,000). The Europen Bank of Reconstruction and Development are to exercise their pre-emptive rights in full with respect to the bought deal above by purchasing an aggregate of 1,419,732 Ordinary Shares (the “New Shares”) at a purchase price per Ordinary Share of CAD$2,56 for an aggregate purchase price of CAD£3,634,514. It is management’s opinion, based on the Company’s current liquidity position and estimates of project expenses, that the Company’s liquid assets will be sufficient to discharge liabilities and fund the above-noted expenditures in connection with the Amulsar Project and the Zoti Project. The future exploration and development of the Amulsar Project and the Zoti Project will require the Company to raise additional capital through a combination of equity and debt financings. The Company is conducting a bankable feasibility study, for which the financial numbers are expected to be completed in the second quarter of 2012, and intends to conduct engineering studies to evaluate potential development scenarios for the Amulsar Project, including its future capital requirements. The Company’s liquidity is affected by a number of key factors and risks. Reference is made to the “Risks and Uncertainties” section of the MD&A for a discussion of these factors and their impact on the Company’s liquidity. The Company has made certain expenditure commitments to the licensing authorities for the Company’s projects. Should these expenditure targets not be met, the applicable licenses will not automatically be forfeited, but any shortfall will be considered by the applicable regulatory authority as a factor in whether to renew such licenses.
Contractual Obligations The Company has contractual obligations as follows:
Operating lease obligations Purchase obligations Total contractual obligations
Total (£) 2,230,115 2,230,115
Up to 1 year (£) 146,306 146,306
1-5 years (£) 497,820 497,820
More than 5 years (£) 1,585,989 1,585,989
2011 Annual Report | Lydian International | 17
Financial Results of Operations
Taxes Paid in Armenia and Kosovo Summary of payments to the Armenian and Kosovo State Budgets The following information is provided as part of an initiative by Publish What You Pay (a global civil society coalition) to achieve transparency of oil, gas and mining company payments to agencies and representatives of those governments as a first step towards a more accountable system for the management of natural resources. Amounts paid in Armenian Drams to Armenian Government
Fee for licenses area extension New license acquisition State duty on mining license Concession fee Social Insurance Funds employer Social Insurance Funds individual Customs duty Property tax Income tax Non resident withholding tax VAT Nature protection fee Penalties and fines Total Equivalent GBP
12 months to December 31, 2011 8,700,000 11,200,000 20,097,500 39,988,100 10,962,000 11,431,179 419,500 108,320,000 14,000,000 40,956,121 509,235 266,583,635 445,770
12 months to December 31, 2010 14,000,000 10,000,000 11,387,500 25,193,100 7,927,000 1,436,022 203,750 65,523,100 16,500,000 8,492,726 123,400 4,012,200 164,798,798 285,801
Amounts paid in Euros to Kosovo Government
12 months to December 31, 2011 8,227 5,286 5,286 4,188 22,987 20,029
12 months to December 31, 2010 6,627 7,945 7,945 13,165 35,682 30,623
Financial and Other Instruments The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and investment in Tigris. The net fair value of the financial assets and financial liabilities approximates their carrying value. The Company’s exposure to changes in market interest rates, relates primarily to the Company’s cash deposits. The Company maintains a balance between the liquidity of cash assets and the interest rate return thereon. The carrying amount of financial assets, net of any provisions for losses, represents the Company’s maximum exposure to credit risk.
18 | Lydian International | 2011 Annual Report
Financial Results of Operations
Significant Transactions, Contracts and Off Balance Sheet Arrangements Significant contracts existing as of December 31, 2011 are described below. On April 23, 2010, the Company purchased from Newmont all of Newmont’s interest in the former joint venture between the Company and Newmont known as the Caucasus Venture, including all of Newmont’s interest in the Amulsar gold property in Armenia. The consideration was a mixture of committed and contingent payments. The committed payments included the issuance by Lydian of three million Ordinary Shares to Newmont on the closing of the transaction and three payments of US$5 million; the first of which was paid in 2010 and the second was due on or before December 31, 2011 and the third on or before the earlier of December 31, 2012 and the date that is 90 days after a bankable feasibility on any portion of the Amulsar property is complete and the Company has received all the necessary material permits to move into production. The Company made the US$5 million payment that was due on December 31, 2012 on March 13, 2012, together with interest owing thereon, calculated at the rate of 10% per annum commencing on December 31, 2011. In addition, the Company agreed to pay Newmont, following the start of commercial production at the Amulsar Project, a 3% Net Smelter Royalty (NSR). However, at any time prior to the date that is 20 days following commencement of commercial production, Lydian may at its option elect to buy out the 3% NSR and instead pay to Newmont the aggregate sum of US$20 million, without interest, in 20 equal quarterly installments of US$1 million commencing on the first day of the third calendar month following the start of commercial production. Furthermore, the Company has a one-time option prior to the commencement of Commercial Production to prepay these quarterly installments in a single cash payment using an annual discount rate of 10%. This equates to a payment of approximately US$15,600,000. These potential post production payment(s) do constitute an “obligation or a constructive obligation”, as the triggering event of commercial production has not yet occurred. Therefore, these potential payments are not shown on the balance sheet. On December 9, 2010, the Company entered into an option agreement (the “Geoteam Option Agreement”) to purchase the remaining 5% non-controlling interest (the “non-controlling interest”) of the Company’s 95% indirectly owned subsidiary. The aggregate purchase price payable by the Company in connection with any exercise of the Call Option or the Put Option will be CAD$500,000 in cash and 2,000,000 Ordinary Shares (the “Payment Shares”) in the capital of the Company. On January 18, 2011, June 27, 2011 and December 20, 2011, the Company issued 500,000, 250,000 and 250,000 Payment Shares, respectively, pursuant to the Geoteam Option Agreement. A further four equal installments of 250,000 Ordinary Shares are issuable bi-annually in 2012 and 2013. The Company does not have any other off-balance sheet type arrangements.
Risks and Uncertanties The following risks and uncertainties, among others, should be considered when evaluating the Company and its outlook.
Mineral Resources The Company’s mineral resources are estimates, and no assurance can be given that the estimated resources are accurate or that the indicated level of gold will be produced. Such estimates are, in large part, based on interpretations of geological data obtained from drill holes and other sampling techniques. Actual mineralisation
2011 Annual Report | Lydian International | 19
Financial Results of Operations
or formations may be different from those predicted. Further, it may take many years from the initial phase of drilling before production is possible, if at all, and during that time the economic feasibility of exploiting a discovery may change. Mineral resource estimates for properties that have not commenced production are based, in many instances, on limited and widely spaced drill hole information, which is not necessarily indicative of the conditions between and around drill holes. Accordingly, such mineral resource estimates may require revision as more drilling information becomes available or as actual production experience is gained. It should not be assumed that all or any part of the Company’s mineral resources constitutes or will be converted into reserves.
Metal Prices Even if the Company’s exploration program is successful on its mineral projects, there are many factors beyond the control of the Company that may affect the marketability of any minerals discovered. Metal prices have historically fluctuated widely and are affected by numerous factors beyond the Company’s control, including international, economic and political trends, expectations for inflation, currency exchange fluctuations, interest rates, global or regional consumption patterns, speculative activities and worldwide production levels. The effect of these factors cannot accurately be predicted.
Price Volatility of Other Commodities The Company’s profitability is also affected by the market prices of commodities, which are consumed or otherwise used in connection with the operations, such as diesel fuel, natural gas, electricity and cement. Prices of such commodities are also subject to volatile price movements over short periods of time and are affected by factors that are beyond the Company’s control.
Foreign Operations The Company’s significant exploration and development project is located in Armenia. This project could be adversely affected by exchange controls, currency fluctuations, taxation and laws or policies of Armenia affecting foreign trade, investment or taxation. Changes in mining or investment policies or shifts in political attitude in Armenia may adversely affect the Company’s business. Operations may be affected by governmental regulations with respect to restrictions on production, price controls, export controls, income taxes, expropriation of property, maintenance of claims, environmental legislation, land use, land claims of local people, water use and mine safety. These factors cannot be accurately predicted.
Foreign Exchange The Company operates internationally and is therefore exposed to foreign exchange risks arising from foreign currency fluctuations. The Company raises finance in Canadian Dollars, accounts in British Pounds and incurs expenses in mainly six currencies – the Euro, the British Pound, the U.S. Dollar, the Canadian Dollar, the Armenian Dram and the Georgian Lari. The Company’s risk management policy is to hold cash in the Euro, British Pound, the U.S. Dollar and the Canadian Dollar, broadly in line with its currency expenditure forecasts. The Company does not currently hedge its foreign exchange exposure.
Counterparty Risk The Company does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. We do not anticipate a loss for non-performance by any counterparty with whom we have a commercial relationship.
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Financial Results of Operations
Taxation Risk The Armenia tax system could impose substantial burdens on the Company. The Company is subject to a broad range of taxes imposed at federal, regional and local levels. Laws related to these taxes have been in force for a relatively short period relative to tax laws in more developed market economies and few precedents with regard to the interpretation of these laws have been established. No assurances can be made that any new tax laws introduced by the Government of Armenia will not result in the Company having to pay significantly higher taxes, which could have a materially adverse effect on the Company’s business.
Environmental Risks and Hazards All phases of the Company’s operations are subject to environmental regulations in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors and employees. There is no assurance that future changes in environmental regulations, if any, will not adversely affect the Company’s operations. Environmental hazards may exist on the properties in which the Company holds interests which are unknown to the Company at present and which have been caused by previous or existing owners or operators of the properties. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed and may include corrective measures requiring capital expenditures, installation of additional equipment or remedial actions. Parties engaged in the exploration or development of mineral properties may be required to compensate those suffering loss or damage by reason of the exploration activities and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations. Amendments to current laws, regulations and permits governing operations and activities of exploration companies, or more stringent implementation thereof, could have a material adverse impact on the Company and cause increases in exploration expenses.
Exploration Exploration is highly speculative in nature and exploration projects involve many risks that even a combination of careful evaluation, experience and knowledge may not eliminate. If a site with gold or other precious metal mineralisation is discovered (and this may not happen), it may take several years from the initial phases of drilling until production is possible, if at all. Substantial expenditures are normally required to locate and establish mineral reserves and to construct mining and processing facilities. While the discovery of an ore body may result in substantial rewards, few properties that are explored are ultimately developed into producing mines.
Political The majority of the Company’s operations are carried out in Eurasia and, as such, the Company’s operations are exposed to various levels of political risks and uncertainties. These risks and uncertainties vary from country to country and include, but are not limited to: terrorism; corruption; crime; hostage taking or detainment of personnel; military repression; extreme fluctuations in currency exchange rates; high rates of inflation; labour unrest; the risks of war or civil unrest; expropriation and nationalisation; renegotiation or nullification of existing concessions, licenses, permits and contracts; absence of reliable regulatory and judiciary process; changes in taxation policies; restrictions on foreign exchange and repatriation; changing political conditions; currency controls, and governmental regulations that favour or require the awarding of contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. Any changes in mining or investment policies
2011 Annual Report | Lydian International | 21
Financial Results of Operations
or shifts in political attitude in Eurasia may adversely affect the Company’s operations and financial condition. Failure to comply with applicable laws, regulations and local practices relating to mineral right applications and tenure could result in loss, reduction or expropriation of entitlements.
Insurance The Company’s business is subject to a number of other risks and hazards, including adverse environmental conditions, industrial accidents, labour disputes, unusual or unexpected geological conditions, ground or slope failures, cave-ins, changes in the regulatory environment and natural phenomena such as inclement weather conditions, floods, hurricanes and earthquakes. Such occurrences could result in damage to mineral properties or production facilities, personal injury or death, environmental damage to the Company’s properties or the properties of others, monetary losses and possible legal liability. Although the Company maintains insurance to protect against certain risks in such amounts as it considers to be reasonable, its insurance will not cover all the potential risks associated with Company’s operations. The Company may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. The Company might also become subject to liability for pollution or other hazards which may not be insured against or which the Company may elect not to insure against because of premium costs or other reasons. Losses from these events may cause the Company to incur significant costs that could have a material adverse effect upon its financial performance and results of operations.
Governmental Laws and Regulations The activities of the Company are subject to various laws governing prospecting, development, production, taxes, labour standards and occupational health, toxic substances, land use, water use, land claims of local people and other matters. Although the Company currently carries out its operations in accordance with all applicable rules and regulations, no assurance can be given that new rules and regulations will not be enacted or that existing rules and regulations will not be applied in a manner that could limit or curtail production or development. The Company’s operations and development activities are subject to receiving and maintaining permits from appropriate governmental authorities. There is no assurance that the Company will be successful in obtaining or maintaining the necessary licences and permits to continue its exploration and development activities in the future.
Difficulty in Obtaining Future Financing The further development and exploration of mineral properties in which the Company holds an interest or which the Company acquires may depend upon the Company’s ability to obtain financing through joint ventures, debt financing, equity financing or other means. There is no assurance that the Company will be successful in obtaining required financing as and when needed. Volatile precious metals markets may make it difficult or impossible for the Company to obtain debt financing or equity financing on favorable terms or at all. Failure to obtain additional financings on a timely basis may cause the Company to postpone development plans, forfeit rights in its properties or reduce or terminate its operations. Reduced liquidity or difficulty in obtaining future financing could have an adverse impact on the Company’s future cash flows, earnings, results of operations, and financial condition and could result in a default under its agreement with Newmont pursuant to which the Company’s subsidiary acquired a 100% interest in the Venture.
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Financial Results of Operations
Related Party Transactions Related parties include the Board of Directors, close family members and enterprises which are controlled by these individuals as well as certain persons performing similar functions. The sole operating director of Geoteam CJSC and Kavkaz Zoloto CJSC, Hayk Aloyan, holds 5% of the shares in Geoteam and Kavkaz Zoloto. On January 18, 2011, on June 27, 2011 and on December 31, 2011 the Company issued accordingly 500,000, 250,000 and 250,000 Ordinary Shares to Hayk Aloyan pursuant to the Geoteam Option Agreement. The directors and key management are the directors of Lydian International Limited. The remuneration of directors and key management was as follows:
Aggregate emoluments Fair value of granted share options vest
Twelve months ended December 31, 2011 (£) 339,747 926,357
Twelve months ended December 31, 2010 (£) 331,287 285,048
The following table sets out the number of stock options awarded to directors of the Company under the Company’s stock option plan during the three and twelve month periods ended December 31, 2011. Date of grant May 2, 2011 April 23, 2010
Number of options 1,500,000 1,550,000
Exercise price CAD$2.52(1.59 pound) CAD$1.03 (67 pence)
Expiry May 2, 2016 October 23, 2012
There were no other share based payments during reportable periods.
Critical Accounting Estimates and Policies Critical judgements in applying the Company’s accounting policies In the application of the Company’s accounting policies, the directors are required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The significant critical judgment that the directors have made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements is the policy on exploration and evaluation costs. In particular, management is required to assess exploration and evaluation assets for impairment with reference to the indicators provided in IFRS 6. Note 12 to the Company’s Consolidated Financial Statements as of December 31, 2011 discloses the carrying values of such assets. As part of this assessment, management considered whether indicators of impairment exist at December 31, 2011. The recoverability of exploration and evaluation costs is dependent on a number of factors common to the natural resource sector. These include the extent to which the Company can establish economically recoverable reserves on its properties, the availability of the Company to obtain necessary financing to complete the development of such reserves and future profitable production or proceeds from the disposition thereof. The Company will use the evaluation work of professional geologists, geophysicists and engineers for estimates in determining whether to
2011 Annual Report | Lydian International | 23
Financial Results of Operations
commence or continue mining and processing. These estimates generally rely on scientific and economic assumptions, which in some instances may not be correct, and could result in the expenditure of substantial amounts of money on a deposit before it can be determined whether or not the deposit contains economically recoverable mineralisation.
Key sources of estimation uncertainty The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
Changes in accounting policies During three and twelve month periods ended December 31, 2011 there were no changes in the Company’s accounting policies. In 2010 the Company adopted IFRS 3 Business Combinations (Revised) and IAS 27 Consolidated and Separate Financial Statements (Amended) that resulted in how the Company accounts for the non-controlling interest.
Disclosure Controls and Internal Controls over Financial Reporting Disclosure controls and procedures are designed to provide reasonable assurance that material information is gathered and reported to senior management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to permit timely decisions regarding public disclosure. Management is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”). ICFR is a process designed by or under the supervision of the Chief Executive Officer and Chief Financial Officer, and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company used the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organisations of the Treadway Commission (COSO) for the design of the Company’s ICFR. All internal control systems have inherent limitations and therefore our ICFR can only provide reasonable assurance and may not prevent or detect misstatements due to error or fraud. The Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation of the design and operating effectiveness of the Company’s disclosure controls and procedures and ICFR as of the date of this MD&A, that disclosure controls and procedures and ICFR are not effective due to the material weakness in ICFR as described below. The material weakness identified did not result in any adjustments to the Company’s financial statements for the three months and year ended December 31, 2011 or any prior period. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The Company continues to review and document its disclosure controls and procedures, including internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that its systems evolve with its business. In order to ensure that its disclosure is reported in accordance with applicable requirements, the Company has implemented an internal procedure that requires all of its press releases to be reviewed by counsel. There have been no other significant changes in the Company’s ICFR that occurred during the year ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s ICFR.
24 | Lydian International | 2011 Annual Report
Financial Results of Operations
Management’s Responsibility For Financial Statements The information provided in this report, including the financial statements, is the responsibility of management. In the preparation of these statements, estimates are sometimes necessary to make a determination of future values for certain assets or liabilities. Management believes such estimates are based on careful judgments and have been properly reflected in the accompanying financial statements. Management maintains a system of internal controls to provide reasonable assurance that the Company’s assets are safeguarded and to facilitate the preparation of relevant and timely information.
Information On Incurred Expenses Material costs incurred in the twelve month periods ended December 31, 2011 and 2010 were as follows: Cost type (1)Exploration and evaluation deferred expenditures (2)Employees benefit and expenses Administrative and other expenses Services and consumables used Audit and consulting expenses Interest expenses EEA write off Depreciation and amortisation Other costs
2011 (£) 7,647,810 3,007,019 983,015 683,957 329,320 547,743 165,215 102,172 108,744 13,647,620
2010 (£) 14,046,352 1,708,707 566,200 649,943 367,966 354,031 2,113,572 126,034 25,669 19,958,474
(1)These expenditures are capitalised as exploration and evaluating assets. (2)In 2010, the allocation to employee benefit reserves found (relating to vesting options) totalled to £556,895 while
the corresponding number in the same period in 2011 was £1,624,657 so the net amount of increase is £1,067,762. The balance in the increase over this period relates to an increase in the number of employees and some increases in salaries.
2011 Annual Report | Lydian International | 25
Appendix 1 Cautionary Note Regarding Forward-Looking Statements
This MD&A contains “forward-looking statements” that involve a number of risks and uncertainties. Forwardlooking statements include, but are not limited to, statements with respect to the future price and the estimation of mineral reserves and resources, the realisation of mineral estimates, the timing and amount of estimated future production, costs of production, capital expenditures, costs and timing of the development of new deposits, success of exploration activities, permitting time lines, currency fluctuations, requirements for additional capital, government regulation of mining operations, environmental risks, unanticipated reclamation expenses, title disputes or claims, limitations on insurance coverage and timing and possible outcome of pending litigation. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates”, or “does not anticipate”, or “believes”, or variations of such words and phrases or that state that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved. Forward-looking statements are based on the opinions and estimates of management as of the date such statements are made and they involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any other future results, performance or achievements expressed or implied by the forward-looking statements. Such factors include, among others: the actual results of current exploration activities; actual results of current reclamation activities; conclusions of economic evaluations; changes in project parameters as plans continue to be refined; future prices of mineral resources; fluctuations in metal prices, as well as those risk factors discussed or referred to in this MD&A under the heading “Risk and Uncertainties” and other documents filed from time to time with the securities regulatory authorities in all provinces and territories of Canada and Jersey. Although the Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Such statements are based on a number of assumptions which
26 | Lydian International | 2011 Annual Report
may prove to be incorrect, including, but not limited to, assumptions about: • • • • • • • • • •
general business and economic conditions; the supply and demand for, deliveries of, and the level and volatility of prices of gold; the timing of the receipt of regulatory and governmental approvals for the Company’s projects; the availability of financing for the Company’s development of its properties on reasonable terms; the ability to procure equipment and operating supplies in sufficient quantities and on a timely basis; the ability to attract and retain skilled staff; exploration timetables; planned production timetables; market competition; and the accuracy of the Company’s resource estimate (including, with respect to size, grade and recoverability) and the geological, operational and price assumptions on which it is based.
The Company undertakes no obligation to update forwardlooking statements if circumstances or management’s estimates or opinions should change except as required by securities regulatory requirements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Cautionary Note to United States Investors Concerning Estimates of Measured, Indicated and Inferred Resources: This MD&A uses the terms “Measured”, “Indicated” and “Inferred” Resources. United States investors are advised that while such terms are recognised and required by Canadian regulations, the U.S. Securities and Exchange Commission (“SEC”) does not recognise them. “Inferred Mineral Resources” have a great amount of uncertainty as to their existence and as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of feasibility or other economic studies. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable.
Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2011 drilling programme at Amulsar
Year
2011
Drill Hole
Dip
Azimuth
Total Depth (m)
DDA-079
-60
120
165.0
DDA-080 DDA-081 DDA-082 DDA-083 DDA-084 DDA-085 DDA-086
-60 -60 -60 -60 -60 -60 -60 -60
30 140 120 120 320 120 110 120
60.0 100.4 50.0 40.0 112.9 80.0 269.6 122.0
DDA-087
Including
DDA-088 DDA-089 DDA-090 DDA-091 DDA-092
-60 -60 -60 -60 -60
Including Sulphide 120 120 110 315 120
52.0 91.0 175.9 104.0 192.0
DDA-093
-70
120
227.0
DDA-094
-60
210
182.6
DDA-095
-60
120
217.1
DDA-096
-60
120
206.9
DDA-097
-60
110
80.0
DDA-098
-60
70
148.0
DDA-099 DDA-100 DDA-101 DDA-102
-60 -60 -60 -60
70 70 280 280
74.0 158.9 47.0 50.5
DDA-103
-60
110
96.2
DDA-104
-60
110
81.0
DDA-105
-50
120
202.2
DDA-106
-60
30
199.5
DDA-107 DDA-108 DDA-109 DDA-110
-60 -60 40 -60
110 70 -60 245
66.4 57.5 189.9 57.2
Intersection Gold (g/t) (m) 0.0 13.0 13.0 1.0 16.0 20.0 4.0 1.1 26.0 28.0 2.0 1.0 39.0 48.0 9.0 0.9 52.0 59.0 7.0 1.1 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 13.0 16.0 3.0 1.3 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 0.0 42.0 42.0 0.3 48.0 56.0 8.0 1.4 31.0 103.0 72.0 0.8 33.0 45.0 12.0 0.0 64.0 87.0 23.0 1.0 87.0 99.0 12.0 0.8 BOGGED AND LOST NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 57.0 60.0 3.0 1.1 70.0 73.0 3.0 1.0 158.0 160.0 2.0 1.4 164.0 168.0 4.0 1.0 24.0 26.0 2.0 1.1 32.0 34.0 2.0 0.9 90.0 92.0 2.0 1.0 0.0 69.0 69.0 1.0 79.0 84.0 5.0 0.9 122.0 127.0 5.0 1.2 137.0 140.0 3.0 1.1 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 11.0 14.0 3.0 1.0 137.0 148.0 (EOH) 11.0 1.2 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 125.0 132.0 7.0 1.0 23.0 24.0 1.0 2.1 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 0.0 18.0 18.0 1.0 0.0 101.0 101.0 2.2 1.0 3.0 2.0 1.6
From (m)
To (m)
Cut-oямА 0.2g/t gold, maximum down-hole internl dilution 10m. All intersections are oxide gold, not true widths.
2011 Annual Report | Lydian International | 27
Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2011 drilling programme at Amulsar
Year
Drill Hole
Azimuth
-60 -60 -60 -60 -60 -60 -60
250 Including 290 290 290 115 120 100
DDA-118
-60
65
159.0
DDA-119 DDA-120 DDA-121 DDA-122 DDA-123 DDA-124 DDA-125
-60 -60 -60 -60 -60 -60 -60
20 35 160 80 210 215 210
137.0 91.7 76.0 147.5 104.0 64.7 85.4
DDA-126
-60
300
188.0
DDA-127 DDA-128 DDA-129 DDA-130 DDA-131 DDA-132 DDA-133 DDA-134
-60 -60 -60
35 120 35
89.5 140.7 73.0
-60 -60 -60 -60
300 30 30 35
64.4 88.5 85.2 170.0
DDA-135
-60
120
152.7
DDA-136 DDAM-137 DDA-138
-60
210
95.0
-60
40
85.0
DDA-139
-60
120
174.4
DDAM-140 DDA-141
-60
130
61.0
DDA-142
-60
260
100.9
DDA-143 DDA-144 DDA-145 DDA-146
-60 -60 -60 -60
260 30 70 10
64.4 57.1 73 101.0
DDA-111 DDA-112 DDA-113 DDA-114 DDA-115 DDA-116 DDA-117
2011
Total Depth (m) 150.1
Dip
60.0 25.5 31.0 180.0 125.2 80.0
DDA-147
-60
250
112.7
DDA-148 DDA-149 DDA-150 DDA-151
-50 -60 -60
50 120 210
108.2 100 136.5
DDA-152
-60
210
225.3
DDA-153 DDAG-154
-60 -60
105 310
94 43.7
DDAG-154A
-70
310
36.4
Intersection Gold (g/t) (m) 55.0 124.0 69.0 3.8 68.0 100.0 32.0 7.9 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 1.0 120.0 119.0 1.3 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 116.0 118.0 2.0 2.0 128.0 132.0 4.0 1.0 92.0 136.0 44.0 3.3 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 59.0 61.0 2.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 37.0 45.0 8.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 37.0 4.0 1.5 33.0 82.0 85.0 3.0 1.5 100.0 113.0 13.0 1.6 12.0 14.0 2.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 22.0 24.0 2.0 1.0 PQ CORE FOR METALLURGY NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 22.0 55.0 33.0 1.0 0.0 8.0 8.0 1.0 48.0 66.0 18.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD PQ CORE FOR METALLURGY 4.0 7.0 3.0 1.0 0.0 2.0 2.0 5.8 21.0 25.0 4.0 1.0 87.0 92.0 5.0 1.0 97.0 107.0 10.0 1.0 128.0 130.0 2.0 1.0 PQ CORE FOR METALLURGY BOGGED AND LOST (TO BE REDRILLED) 20.0 23.0 3.0 1.0 51.0 53.0 2.0 1.4 89.0 92.0 3.0 1.0 BOGGED AND LOST (TO BE REDRILLED) BOGGED AND LOST (TO BE REDRILLED) NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 0.0 20.0 20.0 1.9 48.0 111.0 63.0 2.0 PQ CORE FOR METALLURGY 90.0 104.0 14.0 1.1 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 89.0 92.0 1.0 1.1 78.0 86.0 8.0 1.0 134.0 137.0 3.0 1.7 208.0 218.0 10.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 14.0 18.0 4.0 1.0 8.0 16.0 8.0 1.0 25.0 28.0 3.0 1.1 From (m)
To (m)
Cut-oямА 0.2g/t gold, maximum down-hole internl dilution 10m. All intersections are oxide gold, not true widths.
28 | Lydian International | 2011 Annual Report
Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2011 drilling programme at Amulsar
Year
Drill Hole
Dip
Azimuth
Total Depth (m)
DDAG-154B DDA-155
-60
130
72.6
DDA-156
-60
125
209.5
DDA-157
-60
230
123
DDA-158
-60
305
71
DDA-159
-60
130
190.8
DDA-160 DDA-161 DDA-162 DDA-163 DDA-164 DDA-165 DDA-166
-60 -60 -70 -60 -60 -60 -65
125 125 230 90 120 110 245
110.3 201.5 191.6 98 99.7 110.4 105
DDA-167
-60
125
161.6
DDA-168 DDA-169 DDA-170 DDA-171 DDA-172
-60
190
120
-70 -60 -60
125 305 305
164.5 56.5 86.4
DDA-173
-60
300
193.2
2011
DDA-174 DDA-175
80
-70
151.2
DDA-176 DDA-177
-60 -60
300 120
52.8 149.8
DDA-178
-60
205
140.9
DDA-179
-60
250
88
DDA-180
-60
115
91
DDA-181 DDA-182
-60 -60
240 225
172.5 80
DDA-183
-60
215
101
DDA-184
-60
210
94.1
DDA-185 DDA-186 DDA-187 DDA-188 DDAGLP-189 DDAGLP-190 DDAGLP-191
-60 -60 -60 -60
120 160 215 120
160 150 90 120
DDA-192
-70
300
136.4
From (m)
To (m)
Intersection (m)
Gold (g/t)
GEOTECH HOLE NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 61.0 13.0 1.1 48.0 80.0 10.0 1.0 70.0 96.0 9.0 1.2 87.0 156.0 46.0 1.0 110.0 187.0 2.0 1.1 185.0 39.0 3.0 1.1 36.0 53.0 64.0 11.0 0.9 54.0 64.0 10.0 1.0 121.0 132.0 11.0 1.1 138.0 149.0 11.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 83.0 163.0 80.0 1.0 GEOTECHNICAL DRILL HOLE NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 74.0 78.0 4.0 1.1 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 25.0 19.0 1.0 6.0 41.0 43.0 2.0 1.2 96.0 105.0 9.0 1.4 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD PQ CORE FOR METALLURGY GEOTECHNICAL DRILL HOLE 44.0 54.0 10.0 1.0 GEOTECHNICAL DRILL HOLE 49.0 54.0 5.0 1.0 66.0 68.0 2.0 1.1 83.0 96.0 13.0 1.0 125.0 134.0 9.0 1.4 149.0 168.0 19.0 1.5 PQ CORE FOR METALLURGY 23.0 39.0 16.0 1.1 68.0 70.0 2.0 1.5 GEOTECHNICAL DRILL HOLE 123.0 133.0 10.0 1.0 22.0 26.0 4.0 1.0 45.0 124.0 79.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 6.0 15.0 9.0 1.0 29.0 44.0 15.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 3.0 47.0 44.0 1.0 0.0 3.0 3.0 1.0 10.0 25.0 15.0 1.0 38.0 40.0 2.0 1.6 1.0 4.0 3.0 1.1 34.0 38.0 4.0 1.1 85.0 87.0 2.0 1.0 30.0 34.0 4.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE 2.0 22.0 20.0 1.0 36.0 45.0 9.0 0.9 100.0 106.0 6.0 1.0 125.0 136.4 (EOH) 11.4 1.0
Cut-oямА 0.2g/t gold, maximum down-hole internl dilution 10m. All intersections are oxide gold, not true widths.
2011 Annual Report | Lydian International | 29
Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2011 drilling programme at Amulsar
Year
2011
Drill Hole
Dip
Azimuth
DDA-193 DDA-194
-70 -60
210 42
Total Depth (m) 132.9 152
DDA-195
-60
302
116.4
DDA-196 DDAGLP-197 DDAGLP-197A DDAGLP-198 DDAGLP-199
-60
310
85.3
DDA-200
-60
304
399.6
-60
123.5
270.9
-60
110
72
DDA-223
-60
122.7
146
DDA-224 DDAGLP-225 DDAGLP-226 DDAGLP-227 DDAGLP-228 DDAGLP-229 DDAGLP-230 DDAGLP-231 DDAGLP-232 DDAGLP-233 DDAGLP-234 DDAGLP-235 DDAGLP-236 DDAGLP-236A DDAGLP-237 DDA-238 DDA-239 DDAGLP-240 DDAGLP-241 DDAGLP-242 DDAGLP-243 DDAGLP-244 DDAGLP-245
-60
30
13
-60 -60
110 110
81.5 100
DDAGLP-201 DDAGLP-202 DDAGLP-203 DDAGLP-204 DDAGLP-205 DDAGLP-206 DDAGLP-207 DDAGLP-208 DDAGLP-209 DDAGLP-210 DDA-211 DDAGLP-212 DDAGLP-213 DDAGLP-214 DDAGLP-215 DDAGLP-216 DDAGLP-217 DDAGLP-218 DDAGLP-219 DDA-220 DDAGLP-221 DDAGLP-222
Intersection Gold (g/t) (m) 64.0 76.0 12.0 3.5 73.0 139.0 66.0 1.0 50.0 52.0 2.0 1.2 109.0 111.0 2.0 1.9 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE 105.0 107.0 2.0 1.0 193.0 49.0 1.2 144.0 GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE 216.0 225.0 9.0 1.0 GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE NO SIGNIFICANT INTERSECTIONS >1G/T GOLD GEOTECH HOLE GEOTECH HOLE 30.0 32.0 2.0 1.0 47.0 146 (EOH) 99.0 4.0 BOGGED AND ABANDONED GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE
From (m)
To (m)
Cut-oямА 0.2g/t gold, maximum down-hole internl dilution 10m. All intersections are oxide gold, not true widths.
30 | Lydian International | 2011 Annual Report
Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2011 drilling programme at Amulsar
Year
Drill Hole
Azimuth
-60
120
-60 -60
120 121.5
DDA-265
-60
128
DDAGLP-266 DDAGLP-267 DDAGLP-268 DDAGLP-269 DDA-270 DDA-271 RCA-304 RCA-305
-60 -60
120 120
RCA-306
-60
300
RCA-307
-60
120
-60
120
RCA 309 RCA 310 RCA 311
-60 -60 -60
Including 120 120 300
RCA 312
-60
120
RCA 313 RCA 314
-60 -60
110 120
RCA 315
-60
120
RCA-316 RCA-317 RCA-318
-60 -60 -60
30 30 30
RCA-319
-60
30
DDA-246 DDAGLP-247 DDAGLP-248 DDAGLP-249 DDAGLP-250 DDAG-251 DDA-252 DDA-253 DDAGLP-254 DDAGLP-255 DDAGLP-256 DDAGLP-257 DDAGLP-258 DDAGLP-259 DDAGLP-260 DDAGLP-261 DDAGLP-262 DDAGLP-263 DDAGLP-264
2011
Dip
RCA-308
Total Depth (m)
From (m)
To (m)
Intersection (m) 2.0 2.0
Gold (g/t)
50.0 1.1 48.0 220.6 151.0 1.6 149.0 GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE 73.5 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 112.4 GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE 0.0 39.0 39.0 1.0 85.8 55.0 59.0 4.0 1.0 GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE GEOTECH HOLE NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 110.0 67.0 69.0 2.0 1.0 56.0 62.0 6.0 167.0 0.9 2.0 5.0 3.0 0.0 55.0 160.0 75.0 130.0 1.1 152.0 156.0 4.0 0.9 13.0 64.0 77.0 1.1 113.0 116.0 3.0 1.0 200.0 127.0 139.0 12.0 1.0 159.0 182.0 23.0 1.2 8.0 10.0 2.0 1.0 17.0 20.0 3.0 0.9 185.0 94.0 96.0 2.0 1.0 130.0 140.0 10.0 1.0 130.0 185 (EOH) 55.0 1.6 157.0 185 (EOH) 28.0 2.7 22.0 28.0 6.0 140.0 1.0 153.0 129.0 135.0 6.0 0.9 65.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 2.0 13.0 11.0 1.0 125.0 26.0 46.0 20.0 1.1 110.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 149.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 22.0 32.0 10.0 0.9 42.0 48.0 6.0 1.1 58.0 61.0 3.0 1.1 150.0 79.0 85.0 6.0 1.0 107.0 109.0 2.0 1.8 140.0 144.0 4.0 1.1 126.0 71.0 126.0 (EOH) 55.0 1.0 140.0 99.0 140.0 (EOH) 41.0 0.9 102.0 146.0 44.0 1.0 167.0 87 116 29 0.9 160.0 148 152 4 1.0
Cut-oямА 0.2g/t gold, maximum down-hole internl dilution 10m. All intersections are oxide gold, not true widths.
2011 Annual Report | Lydian International | 31
Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2011 drilling programme at Amulsar
Year
Drill Hole
Dip
Azimuth
RCA-320 RCA-321 RCA-322
-60 -60 -60
120 30 210
Total Depth (m) 160.0 139.0 180.0
RCA-323
120
95.0
RCA-324 RCA-325 RCA-326 RCA-327 RCA-328 RCA-329
300 300 120 300 110 110
83.0 23.0 120.0 170.0 175.0 125.0
110
239.0
RCA-330
Including RCA-331
110
239.0
RCA-332
110
203.0
RCA-333
120
227.0
RCA-334
300
119.0
RCA-335
300
239.0
RCA-336 RCA-337
120 120
155.0 107.0
RCA-338
120
117.0
2011
RCA-339 RCA-340
-60 -60
120 120
147.0 153.0
RCA-341
-60
120
191.0
RCA-342 RCA-343
-60 -60
120 120
197.0 131.0
RCA-344
-60
120
113.0
RCA-345
-60
120
151.0
RCA-346
-60
120
125.0
RCA-347
-60
50
167.0
RCA-348
-60
50
215.0
RCA-349
-60
40
191.0
Intersection Gold (g/t) (m) NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 93.0 117.0 24.0 1.0 119.0 126.0 7.0 1.0 3.0 5.0 2.0 1.1 10.0 12.0 2.0 1.2 38.0 42.0 4.0 1.1 52.0 55.0 3.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD BOGGED AND LOST NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 129.0 152.0 23.0 1.1 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 12.0 15.0 3.0 1.0 70.0 76.0 6.0 1.0 137.0 144.0 7.0 1.0 172.0 239.0 (EOH) 67.0 1.0 232.0 239.0 (EOH) 7.0 6.6 0.0 17.0 17.0 1.0 25.0 26.0 1.0 3.6 57.0 59.0 2.0 1.0 84.0 86.0 2.0 1.2 102.0 129.0 27.0 1.0 58.0 60.0 2.0 1.9 149.0 156.0 7.0 0.9 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 62.0 65.0 3.0 1.0 92.0 101.0 9.0 1.0 115.0 117.0 2.0 1.0 197.0 200.0 3.0 1.0 84.0 103.0 19.0 1.2 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 24.0 26.0 2.0 1.1 46.0 54.0 8.0 0.9 92.0 103.0 11.0 1.0 106.0 135.0 29.0 1.6 117.0 119.0 2.0 1.2 90.0 116.0 26.0 1.0 125.0 131.0 6.0 1.4 139.0 192.0 53.0 1.0 75.0 108.0 33.0 1.0 13.0 20.0 7.0 1.0 79.0 81.0 2.0 1.0 102.0 112.0 10.0 1.0 14.0 21.0 7.0 1.0 129.0 141.0 12.0 1.0 1.0 16.0 15.0 1.0 101.0 109.0 8.0 1.0 1.0 21.0 20.0 1.1 141.0 144.0 3.0 1.1 153.0 157.0 4.0 1.6 5.0 8.0 3.0 1.0 10.0 15.0 5.0 1.0 22.0 132.0 110.0 1.0 159.0 163.0 4.0 1.1 193 214 21 2.9 39.0 45.0 6.0 0.9 56.0 58.0 2.0 1.2 82.0 103.0 21.0 10.7
From (m)
To (m)
Cut-oямА 0.2g/t gold, maximum down-hole internl dilution 10m. All intersections are oxide gold, not true widths.
32 | Lydian International | 2011 Annual Report
Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2011 drilling programme at Amulsar
Year
2011
Drill Hole
Dip
Azimuth
Total Depth (m)
RCA-350
-60
50
143.0
RCA-351
-60
35
161.0
RCA-352
-60
50
185.0
RCA-353
-60
45
179.0
RCA-354
-60
45
193.0
RCA-355 RCA-356 RCA-357 RCA-358 RCA-359
-60 -60 -60 -60 -60
50 310 315 100 310
191.0 184.0 119.0 131.0 113.0
RCA-360
-60
30
189.0
RCA-361
-60
50
149.0
RCA-362
-60
110
160.0
RCA-363
-60
115
131.0
RCA-364
-60
110
170.0
RCA-365 RCA-366
-60 -60
115 100
119.0 166.0
RCA-367
-60
110
143.0
RCA-368
-60
105
184.0
RCA-369 RCA-370 RCA-371 RCA-372 RCA-373 RCA-374 RCA-375
-60 -60 -60 -60 -60 -60 -60
120 125 190 30 120 115 155
185.0 107.0 113.0 160.0 144.0 149.0 167.0
RCA-376
-60
115
113.0
Intersection Gold (g/t) (m) 17.0 6.0 1.0 11.0 52.0 15.0 1.0 37.0 63.0 4.0 1.1 59.0 70.0 2.0 1.1 68.0 83.0 10.0 1.0 73.0 98.0 2.0 1.0 96.0 112.0 114.0 2.0 1.2 59.0 47.0 1.2 12.0 93.0 95.0 2.0 1.1 101.0 109.0 8.0 1.0 141.0 146.0 5.0 1.3 137.0 161 (EOH) 24.0 1.0 1.0 4.0 3.0 1.1 30.0 40.0 10.0 1.0 56.0 64.0 8.0 1.0 120.0 140.0 20.0 1.0 156.0 158.0 2.0 1.5 0.0 73.0 72.0 1.0 110.0 112.0 2.0 1.3 168.0 68.0 1.2 99.0 5.0 9.0 4.0 1.1 12.0 14.0 2.0 1.0 20.0 22.0 2.0 1.0 28.0 30.0 2.0 1.1 117.0 119.0 2.0 1.2 135.0 138.0 3.0 1.1 161.0 163.0 2.0 1.0 31.0 34.0 3.0 1.0 2.0 22.0 20.0 2.0 77.0 87.0 10.0 1.0 37.0 106.0 68.0 1.0 26.0 48.0 22.0 2.2 32.0 52.0 20.0 1.0 88.0 104.0 16.0 1.2 118.0 120.0 2.0 1.0 132.0 137.0 5.0 2.0 176.0 189(EOH) 13.0 1.0 36.0 73.0 37.0 1.0 109.0 117.0 8.0 1.0 133.0 135.0 2.0 1.2 56.0 70.0 14.0 1.5 79.0 84.0 5.0 1.8 25.0 30.0 5.0 1.3 5.0 7.0 2.0 1.0 26.0 34.0 8.0 1.1 82.0 84.0 2.0 1.3 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 21.0 28.0 7.0 1.1 53.0 57.0 4.0 1.2 13.0 19.0 6.0 1.2 62.0 68.0 6.0 1.1 0.0 98.0 98.0 1.5 4.0 6.0 2.0 1.0 58.0 77.0 19.0 1.0 31.0 74.0 43.0 0.9 109.0 136.0 27.0 1.4 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 58.0 64.0 6.0 1.0 112.0 113 (EOH) 1.0 1.5
From (m)
To (m)
Cut-oямА 0.2g/t gold, maximum down-hole internl dilution 10m. All intersections are oxide gold, not true widths.
2011 Annual Report | Lydian International | 33
Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2011 drilling programme at Amulsar
Year
2011
Drill Hole
Dip
Azimuth
Total Depth (m)
RCA-377
-60
120
191.0
RCA-378
-60
130
197.0
RCA-379
-60
265
137.0
RCA-380
-60
335
183.0
RCA-381
-60
120
191.0
RCA-382
-60
30
182.0
RCA-383
-60
40
155.0
RCA-384
-60
130
215.0
RCA-385
-60
30
137.0
RCA-386
-60
305
179.0
RCA-387
-60
120
11.0
RCA-388
-60
115
220.0
RCA-389
-50
30
137.0
RCA-390
-60
120
143.0
RCA-391
-60
30
100.0
RCA-392
-60
25
149.0
RCA-393
-60
30
53.0
RCA-394
-60
300
179.0
RCA-395
-60
300
161.0
RCA-396 RCA-397
-60 -60
30 25
149.0 131.0
RCA-398
-60
25
185.0
From (m) 22.0 91.0 112.0 119.0 140.0 157.0 0.0 46.0 149.0 2.0 19.0 99.0 90.0 143.0 162.0 45.0 55.0 124.0 136.0 48.0 83.0 120.0 122.0 7.0 65.0 93.0 133.0 165.0 48.0 28.0 120.0 23.0 205.0 2 88.0 5.0 85.0 104.0 127.0 71.0 84.0 52.0 131.0 13.0 40.0 76.0 104.0 142.0 2.0 75.0 10.0 105.0 19.0 26.0 71.0 161.0
Intersection (m) 30.0 8.0 94.0 3.0 116.0 4.0 121.0 2.0 147.0 7.0 160.0 3.0 28.0 28.0 68.0 22.0 176.0 27.0 9.0 7.0 23.0 4.0 109.0 10.0 112.0 22.0 152.0 9.0 164.0 2.0 52.0 7.0 60.0 5.0 130.0 6.0 138.0 2.0 76.0 28.0 96.0 13.0 122.0 2.0 125.0 3.0 9.0 2.0 67.0 2.0 110.0 17.0 136.0 3.0 207.0 42.0 54.0 6.0 39.0 11.0 145.0 25.0 BOGGED AND LOST 179.0 156.0 207.0 2.0 56 54 90.0 2.0 58.0 53.0 89.0 4.0 112.0 8.0 129.0 2.0 73.0 2.0 90.0 6.0 77.0 25.0 133.0 2.0 18.0 5.0 52.0 12.0 BOGGED AND LOST 89.0 13.0 107.0 3.0 167.0 25.0 23.0 21.0 161 (EOH) 86.0 149(EOH) 139.0 111.0 6.0 21.0 2.0 28.0 2.0 77.0 6.0 163.0 2.0 To (m)
Cut-o 0.2g/t gold, maximum down-hole internl dilution 10m. All intersections are oxide gold, not true widths.
34 | Lydian International | 2011 Annual Report
Gold (g/t) 1.5 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.1 1.0 1.1 1.2 1.0 1.0 1.0 1.0 1.0 1.1 1.0 1.1 1.1 1.4 1.0 1.1 1.3 1.1 1.0 1.0 1.0 1.1 1.7 1.0 1.1 1.1 1.3 1.3 1.0 1.9 1.0 1.0 1.0 1.1 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.9 1.4
Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2011 drilling programme at Amulsar
Year
Drill Hole
Dip
Azimuth
Total Depth (m)
RCAW-399 RCAW-400 RCAW-401 RCAW-402 RCAW-402A RCAW-403 RCAW-404 RCAW-405 RCAW-405A RCAW-406 RCAW-407 RCAW-408 RCA-409
-60
300
143.0
RCA-410
-60
30
155.0
RCA-411
-60
30
159
RCA-412
-60
30
200.0
RCA-413
-60
25
161.0
RCA-414
-60
25
107.0
RCA-415
-60
30
167.0
RCA-416
-70
310
51.0
RCA-417
-60
30
185.0
RCA-418
-60
115
209.0
RCA-419
-60
115
218.0
RCA-420 RCA-421
-60 -60
120 115
143.0 179.0
RCA-422
-60
120
200.0
RCA-423
-60
210
195.0
RCA-424 RCA-425 RCA-426
-60 -60 -60
300 120 120
160.0 65.0 155.0
RCA-427
-60
115
131.0
RCA-428 RCA-429 RCA-430
-60 -60 -60
215 210 35
126.0 119.0 185.0
RCA-431
-60
30
139
2011
From (m)
To (m)
Intersection (m)
Gold (g/t)
WATER HOLE WATER HOLE WATER HOLE WATER HOLE WATER HOLE WATER HOLE WATER HOLE WATER HOLE WATER HOLE WATER HOLE WATER HOLE WATER HOLE 112.0 124.0 12.0 1.0 53.0 69.0 16.0 1.4 122.0 151.0 29.0 1.0 5.0 8.0 3.0 1.1 50.0 52.0 2.0 1.0 66.0 68.0 2.0 1.2 90.0 95.0 5.0 1.0 115.0 117.0 2.0 1.1 41.0 46.0 5.0 1.2 78.0 147.0 69.0 1.1 190.0 194.0 4.0 1.2 55.0 58.0 3.0 1.3 75.0 96.0 21.0 1.1 117.0 129.0 12.0 1.1 135.0 138.0 3.0 1.0 146.0 151.0 5.0 1.2 24.0 30.0 6.0 1.0 5.0 27.0 22.0 1.9 70.0 72.0 2.0 1.8 131.0 138.0 7.0 1.0 7.0 16.0 9.0 1.0 51.0 54.0 3.0 1.0 120.0 178.0 58.0 1.0 132.0 142.0 10.0 1.0 150.0 152.0 2.0 1.0 155.0 174.0 19.0 1.0 66.0 74.0 8.0 1.0 134.0 161.0 27.0 1.0 169.0 171.0 2.0 1.0 188.0 215.0 27.0 4.2 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 109.0 148.0 39.0 1.0 114.0 146.0 31.0 1.6 173.0 175.0 2.0 1.2 99.0 102.0 3.0 1.2 121.0 123.0 2.0 1.0 158.0 175.0 17.0 1.0 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD BOGGED AND LOST NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 63.0 68.0 5.0 2.9 84.0 89.0 5.0 1.3 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 36.0 117.0 81.0 1.0 64.0 71.0 7.0 1.0 76.0 78.0 2.0 1.0 84.0 97.0 13.0 1.0 107.0 127.0 20.0 1.0 137.0 139 (EOH) 2.0 1.1
Cut-oямА 0.2g/t gold, maximum down-hole internl dilution 10m. All intersections are oxide gold, not true widths.
2011 Annual Report | Lydian International | 35
Appendix 2 Table of Drill results (Intersections greater than 1g/t gold) 2011 drilling programme at Amulsar
Year
Drill Hole
Dip
Azimuth
RCA-432 RCA-433
-70 -60
250 300
Total Depth (m) 89.0 166.0
RCA-434
-60
210
173
RCA-435 RCA-436
-60 -60
300 300
116.0 143.0
RCA-437
-60
110
179
RCA-438
-60
110
173
RCA-439
-60
110
177
RCA-440
-60
110
29.0
RCA-441
-60
105
251
RCA-442
-61.3
116.6
239.0
RCA-443
-60
117.5
173
RCA-444 RCA-445 RCA-446 RCA-447
-60 -60 -60 120.5
36 305 120 -60
170.0 197.0 119.0 137
RCA-448
-62.3
117.1
155
RCA-449
-60
120
209
RCA-450
-60
110
245
RCA-451
-63.7
109.8
167
RCA-452 RCA-453
-62.4 -61
103.3 105
125 188
RCA-454
-62
117.2
161
RCA-455
-65
208.2
143
2011
Intersection Gold (g/t) (m) NO SIGNIFICANT INTERSECTIONS >1G/T GOLD NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 1.0 4.0 3.0 1.1 49.0 54.0 5.0 0.9 63.0 67.0 4.0 0.9 85.0 116.0 31.0 1.0 81.0 84.0 3.0 1.1 61.0 83.0 22.0 1.0 47.0 58.0 11.0 1.1 103.0 113.0 10.0 1.1 36.0 35.0 1.0 1.0 63.0 91.0 28.0 1.0 1.0 10.0 9.0 1.0 18.0 24.0 6.0 1.0 90.0 92.0 1.0 1.0 110.0 124.0 14.0 1.0 157.0 159.0 2.0 1.0 BOGGED AND ABANDONED 69.0 75.0 6.0 1.9 85.0 89.0 4.0 1.1 251(EOH) 146.0 1.6 105.0 209.0 239 (EOH) 30.0 1.0 87.0 92.0 5.0 1.3 117.0 169.0 52.0 0.9 27.0 128.0 101.0 1.1 42.0 180.0 138.0 1.5 70.0 74.0 4.0 0.9 NO SIGNIFICANT INTERSECTIONS >1G/T GOLD 59.0 61.0 2.0 1.3 85.0 99.0 14.0 1.0 78.0 80.0 2.0 2.2 187.0 190.0 3.0 1.1 197.0 206.0 9.0 1.0 41.0 83.0 42.0 1.0 192.0 194.0 2.0 1.0 211.0 215.0 4.0 1.0 26.0 32.0 6.0 0.9 56.0 59.0 3.0 1.0 72.0 74.0 2.0 1.1 79.0 88.0 9.0 0.9 71.0 74.0 3.0 1.0 144.0 148.0 4.0 1.6 1.0 22.0 21.0 1.0 49.0 53.0 4.0 1.8 21.0 55.0 34.0 1.1 93.0 96.0 3.0 1.1
From (m)
To (m)
Cut-oямА 0.2g/t gold, maximum down-hole internl dilution 10m. All intersections are oxide gold, not true widths.
36 | Lydian International | 2011 Annual Report
Report of Management As of March 23, 2012 To the Shareholders of Lydian International Limited
We are responsible for the preparation and fair presentation of the Consolidated Financial Statements, as well as the financial reporting process that gives rise to such Consolidated Financial Statements. This responsibility requires us to make significant accounting judgments and estimates. For example, we are required to choose accounting principles and methods that are appropriate to the Company’s circumstances, and we are required to make estimates and assumptions that affect amounts reported. Fulfilling this responsibility requires the preparation and presentation of our Consolidated Financial Statements in accordance with international financial reporting standards. We also have responsibility for the preparation and fair presentation of other financial information in this report and to ensure the consistency of this information with the financial statements. We are responsible for developing and implementing internal controls over the financial reporting process. These controls are designed to provide reasonable assurance that relevant and reliable financial information is produced. To gather and control financial data, we have established accounting and reporting systems supported by internal controls over financial reporting and an internal audit program. We believe that our internal controls over financial reporting provide reasonable assurance that our assets are safeguarded against loss from unauthorized use or disposition, that receipts and expenditures of the Company are made only in accordance with authorization of management and directors of the Company and that our records are reliable for preparing our Consolidated Financial Statements and other financial information in accordance with applicable international financial reporting standards and in accordance with applicable securities rules and regulations. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. We have established disclosure controls and procedures, internal controls over financial reporting and corporate-wide policies to ensure that Lydian International’s consolidated financial position, results of operations and cash flows are presented fairly. Our disclosure controls and procedures are designed to ensure timely disclosure and communication of all
material information required by regulators. We oversee, with assistance from management, these controls and procedures and all required regulatory disclosures. To ensure the integrity of our financial statements, we carefully select and train qualified personnel. We also ensure our organisational structure provides appropriate delegation of authority and division of responsibilities. Our policies and procedures are communicated throughout the organisation. Our Board of Directors is responsible for reviewing and approving the Consolidated Financial Statements and for overseeing management’s performance of its financial reporting responsibilities. Their financial statement-related responsibilities are fulfilled mainly through the Audit Committee. The Audit Committee is composed entirely of independent directors and includes three directors with financial expertise. The Audit Committee meets regularly with management and the independent registered Chartered Accountants to review accounting policies, financial reporting and internal control issues and to ensure each party is properly discharging its responsibilities. The Audit Committee is responsible for the appointment and compensation of the independent registered Chartered Accountants and also considers their independence, reviews their fees and (subject to applicable securities laws) pre-approves their retention for any permitted non-audit services and their fee for such services. The independent registered Chartered Accountants have full and unlimited access to the Audit Committee, with and without the presence of management.
Timothy Coughlin President and Chief Executive Officer March 23, 2012
Roderick Corrie Chief Financial Officer March 23, 2012
2011 Annual Report | Lydian International | 37
Independent Auditors’ Report As of March 31, 2012 To the Shareholders of Lydian International Limited
We have audited the accompanying consolidated financial statements of Lydian International Limited and its subsidiaries, which comprise the consolidated statement of financial position as at December 31, 2011 and 2010, and the consolidated income statements, statements of comprehensive income, statements of changes in equity, and statements of cash flows for the year ended December 31, 2011 and 2010, and a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall
38 | Lydian International | 2011 Annual Report
presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Lydian International Limited and its subsidiaries as at December 31, 2011 and 2010, and their financial performance and cash flows for the years then ended in accordance with International Financial Reporting Standards.
Signed “Grant Thornton LLP” Chartered Accountants Licensed Public Accountants March 23, 2012 Mississauga, Canada
Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
Consolidated Income Statements For years ended December 31, 2011 and 2010 Notes
December 31, 2011 £
December 31, 2010 £
Interest income Total income
5
44,297 44,297
25,073 25,073
Employee salaries and benefits expense Services and consumables used Administrative and other expenses Consulting expenses Depreciation and amortisation expenses Interest expense Other gains (losses) Total expenses
6
(3,007,019) (683,957) (983,015) (329,320) (102,172) (547,743) (345,959) (5,999,185)
(1,708,707) (649,943) (566,200) (367,966) (126,034) (354,031) (2,139,241) (5,912,122)
(5,954,888) (5,954,888)
(5,887,049) (5,887,049)
(5,899,696) (55,192) (5,954,888)
(5,856,554) (30,495) (5,887,049)
(0.06)
(0.08)
Loss before tax Income taxes Loss for the year
21 7
8
Loss for the year attributable to: Common shareholders Non-controlling interest
Loss per share attributable to owners of the parent (basic and diluted)
9
Consolidated Statements of Comprehensive Income For years ended December 31, 2011 and 2010 Notes Loss for the year Other comprehensive income: Exchange differences arising on translation of foreign operations Total comprehensive loss for the year Comprehensive loss for the year attributable to: Common shareholders Non-controlling interest
December 31, 2011 £
December 31, 2010 £
(5,954,888)
(5,887,049)
(640,353)
102,959
(6,595,241)
(5,784,090)
(6,512,381) (82,860) (6,595,241)
(5,750,878) (33,212) (5,784,090)
2011 Annual Report | Lydian International | 39
Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
Consolidated Statements of Financial Position December 31, 2011 £
December 31, 2010 £
10 11 12 13 14
476,012 95,522 23,739,005 1,371,935 126,600 25,809,074
402,587 59,350 16,497,640 686,274 17,645,851
15 16
8,301,907 410,434 8,712,341
17,058,692 178,904 17,237,596
34,521,415
34,883,447
43,850,290 345,076 2,079,136 (164,441) -
37,778,041 1,202,829 655,985 448,244 715,506
20
(1,795,654) (17,232,781) 27,081,626 408,496 27,490,122
(1,037,816) (11,333,085) 28,429,704 491,356 28,921,060
Non-current liabilities Due to Newmont Provisions Total non-current liabilities
21 22
28,800 28,800
2,648,561 2,648,561
Current liabilities Accrued liabilities and other payables Current portion of Due to Newmont Total current liabilities
23 21
858,361 6,144,132 7,002,493
399,648 2,914,178 3,313,826
34,521,415
34,883,447
Notes ASSETS Non-current assets Property and equipment Intangible assets Exploration and evaluation assets Other non-current assets Other long-term financial assets Total non-current assets Current assets Cash and cash equivalents Other current assets Total current assets TOTAL ASSETS EQUITY AND LIABILITIES Capital and reserves Share capital Warrants Equity settled employee benefits reserve Translation of foreign operations Other reserves – shares issuable Other reserves – option to purchase non-controlling interest Accumulated deficit Total equity attributable to the parent Non-controlling interest Total equity
TOTAL EQUITY AND LIABILITIES
40 | Lydian International | 2011 Annual Report
17 18 19 20
Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
Consolidated Statements of Changes in Equity
Balance at December 31, 2009 New equity share capital subscribed Equity share capital issued in Newmont deal (Note 21) Cost of shares issued Proceeds from exercised warrants Proceeds from exercised options Attributable to exercised warrants Attributable to exercised options Attributable to expired warrants Attributable to expired options Issue of warrants Modification of warrants Employee share options issued during the year Non controlling interest arising from Newmont deal Prepayment on option and shares issuable to purchase non-controlling interest (Note 20) Total comprehensive loss for the year Balance at December 31, 2010
Share capital including, premium and discounts £
Warrants £
Equity settled employee benefits reserve £
Translation of foreign operations £
Other reserves £
Other Reserves Share Issuable £
Accumulated deficit £
9,265,576
2,870,252
322,682
342,568
-
-
(5,476,531)
7,324,547
-
7,324,547
22,852,747
-
-
-
-
-
-
22,852,747
-
22,852,747
1,954,143
-
-
-
-
-
-
1,954,143
-
1,954,143
(1,419,039)
-
-
-
-
-
-
(1,419,039)
-
(1,419,039)
2,562,533
-
-
-
-
-
-
2,562,533
-
2,562,533
671,066
-
-
-
-
-
-
671,066
-
671,066
1,706,097 (1,706,097)
-
-
-
-
-
-
-
Non Attributable controlling to owners interest £ £
Total £
208,404
-
(208,404)
-
-
-
-
-
-
252,402
(252,402)
-
-
-
-
-
-
-
15,188
-
(15,188)
-
-
-
-
-
-
(195,167)
195,167
-
-
-
-
-
-
-
(95,909)
95,909
-
-
-
-
-
-
-
-
-
556,895
-
-
-
-
556,895
-
556,895
-
-
-
-
-
-
-
-
524,568
524,568
-
-
-
-
(1,037,816)
715,506
-
(322,310)
-
(322,310)
-
-
-
105,676
-
-
(5,856,554)
(5,750,878)
(33,212)
(5,784,090)
37,778,041 1,202,829
655,985
448,244
(1,037,816)
715,506
(11,333,085)
28,429,704
491,356 28,921,060
2011 Annual Report | Lydian International | 41
Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
Consolidated Statements of Changes in Equity
Balance at December 31, 2010 Proceeds from exercised warrants Proceeds from exercised options Attributable to exercised warrants Attributable to exercised options Attributable to expired options Employee share options issued during the year Prepayment on option and shares issuable to purchase non-controlling interest (Note 20) Total comprehensive loss for the year Balance at December 31, 2011
Share capital including, premium and discounts £
37,778,041
Other reserves £
Other Reserves Share Issuable £
Accumulated deficit £
448,244
(1,037,816)
715,506
(11,333,085)
28,429,704
491,356
28,921,060
3,088,622
-
-
-
-
3,088,622
-
3,088,622
451,024
-
-
-
-
451,024
-
451,024
-
-
-
-
-
-
-
857,753
Warrants £
Equity settled employee benefits reserve £
Translation of foreign operations £
1,202,829
655,985
(857,753)
Non Attributable controlling to owners interest £ £
Total £
172,656
(172,656)
-
-
-
-
-
-
-
28,850
(28,850)
-
-
-
-
-
-
-
1,624,657
-
-
-
-
1,624,657
1,624,657
(757,838)
(715,506)
-
-
1,473,344
-
-
-
-
-
(612,685)
43,850,290
345,076
2,079,136
(164,441)
42 | Lydian International | 2011 Annual Report
(1,795,654)
-
(5,899,696)
(6,512,381)
(82,860)
(6,595,241)
(17,232,781)
27,081,626
408,496 27,490,122
Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
Consolidated Statements of Cash Flows December 31, 2011 ÂŁ
December 31, 2010 ÂŁ
(4,671,986) (4,671,986)
(2,606,805) (2,606,805)
44,297
25,073
(413,348) (7,082,435) (129,500) (64,801) (7,645,787)
(213,678) (6,278,311) (6,466,916)
3,539,646 3,539,646
26,086,346 (1,419,039) (322,310) 24,344,997
Net (decrease) increase in cash and cash equivalents
(8,778,127)
15,271,276
Cash and cash equivalents, beginning of year
17,058,692
2,234,790
Effects of exchange rate changes on the balance of cash held in foreign currencies
21,342
(447,374)
8,301,907
17,058,692
Notes Cash flows from operating activities Payments to suppliers and employees Net cash outflow from operating activities Cash flows from investing activities Interest received Payments for property and equipment and intangible assets Exploration costs paid Long term investment Deposits made Net cash used by investing activities Cash flows from financing activities Proceeds from issuance of share capital Payments for share issue costs Payment for other equity reserves Net cash generated in financing activities
Cash and cash equivalents, end of the year
10,11 12 14 16
2011 Annual Report | Lydian International | 43
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
1. General Information Lydian International Limited (the “Company”) is a company continued under the laws of Jersey effective on December 12, 2007 (formerly existing under the laws of Alberta, Canada). The registered office address of the Company is 1st Floor, Capstan House, La Route es Nouaux, St. Helier, Jersey JE2 4ZY, Channel Islands. The Company’s ordinary shares (“Ordinary Shares”) began trading on the Toronto Stock Exchange (“TSX”) on January 10, 2008 under the symbol “LYD”. The Company, together with its subsidiaries, (the ‘Group’) is a mineral exploration and development group of companies focused on emerging and transitional environments, and is developing precious and base metal assets located in Armenia and Georgia under exploration licenses granted by local authorities. The Group’s main exploration project is gold at Amulsar, Armenia. The principal accounting policies of the Group are further described in Note 3.
2. Adoption of New and Revised Accounting Standards i)
Standards and Interpretations effective in the current period
In the current period the Group has adopted the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the “IASB”) and International Financial Reporting Interpretations Committee (the “IFRIC”) of the IASB that are relevant to its operations and effective for annual reporting periods beginning on January 1, 2011. ii)
Standards and Interpretations in issue but not yet adopted
Amendment to IAS 1, “Financial statement presentation” The main change resulting from these amendments is a requirement for entities to group items presented in Other comprehensive income (OCI) on the basis of whether they are potentially reclassifiable to profit or loss subsequently (reclassification adjustments). The amendments do not address which items are presented in OCI. IFRS 9 “Financial Instruments” The IASB aims to replace IAS 39 Financial Instruments: Recognition and Measurement in its entirety. IFRS 9 is being issued in phases. To date, the chapters dealing with recognition, classification, measurement and derecognition of financial assets and liabilities have been issued. These chapters are effective for annual periods beginning January 1, 2015. Further chapters dealing with impairment methodology and hedge accounting are still being developed. Management have yet to assess the impact of this new standard on the consolidated financial statements. However, they do not expect to implement IFRS 9 until all of its chapters have been published and they can comprehensively assess the impact of all changes. Consolidation Standards A package of consolidation standards are effective for annual periods beginning or after January 1, 2013. Information on these new standards is presented below. The Group’s management have yet to assess the impact of these new and revised standards on the Group’s consolidated financial statements. IFRS 10 “Consolidated Financial Statements” supersedes IAS 27 “Consolidated and Separate Financial Statements” and SIC 12 “Consolidation – Special Purpose Entities”. It revised the definition of control together with accompanying guidance to identify an interest in a subsidiary. However, the requirements and mechanics of consolidation and the accounting for any noncontrolling interests and changes in control remain the same. IFRS 11 “Joint Arrangements” supersedes IAS 31 “Interests in Joint Ventures”. It aligns more closely the accounting by the investors with their rights and obligations relating to the joint arrangement. In addition, IAS 31’s option of using proportionate consolidation for joint ventures has been eliminated. IFRS 11 now requires the use of the equity accounting method, which is currently used for investments in associates. IFRS 12 “Disclosure of Interests in Other Entities” integrates and makes consistent the disclosure requirements for various types of investments, including unconsolidated structured entities. It introduces new disclosure requirements about the risks to which an entity is exposed from its involvement with structured entities.
44 | Lydian International | 2011 Annual Report
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
IFRS 13 “Fair Value Measurement” does not affect which items are required to be fair-valued, but clarifies the definition of fair value and provides related guidance and enhanced disclosures about fair value measurements. It is applicable for annual periods beginning on or after January 1, 2013. The Group’s management have yet to assess the impact of this new standard on the Group’s consolidated financial statements. Management anticipates that those standards and interpretations deemed applicable to the Company’s business will be adopted in the Company’s financial statements of future periods as they become effective and that the adoption will have no material impact on the financial statements of the Company in the periods of initial application other than for additional disclosures.
3. Significant Accounting Policies The principal accounting policies applied in the preparation of these consolidated financials are set out below. These policies have been consistently applied to all the financial periods presented unless otherwise stated. Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board as of December 31, 2011. Basis of preparation The consolidated financial statements have been prepared on the historical cost basis and presented in British Pounds. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its ‘subsidiaries’). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. 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 deconsolidated from the date that control ceases. The results of subsidiaries acquired or disposed of during the period are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. Non-controlling interests, presented as part of equity, represent the portion of a subsidiary’s profit or loss and net assets that is not held by the Company. The Company attributes total comprehensive income or loss of subsidiaries between the owners of the parent and the non-controlling interests based on their respective ownership interests. Transactions with non-controlling interests that do not result in a loss of control are accounted for as transactions with equity owners of the group. Any difference between the amount of the adjustment to the non-controlling interest and any consideration paid or received is recognised as a separate reserve within equity.
2011 Annual Report | Lydian International | 45
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
Details of the Company’s direct and indirect subsidiaries at December 31, 2011 and December 31, 2010 are as follows:
Name of subsidiary
Place of incorporation or Registration
Lydian Holdings Ltd (BVI) Lydian Resources Kosovo (BVI) Lydian Resources Armenia (BVI) Lydian Resources Georgia Limited Geoteam CJSC Georgian Resource Company LLC Kavkaz Zoloto CJSC Kosovo Resource Company LLC
British Virgin Islands British Virgin Islands British Virgin Islands Jersey Armenia Georgia Armenia Kosovo
Effective Ownership Interest 2011 2010 100% 100% 100% 100% 95% 100% 95% 100%
100% 100% 100% 100% 95% 100% 95% 100%
Principal activity Intermediate holding company Intermediate holding company Intermediate holding company Intermediate holding company Mineral exploration Mineral exploration Dormant company *No activities, in liquidation process
*Currently Kosovo Resource Company LLC is in Members’ Voluntary Liquidation process.
Interest in joint ventures Where a consolidated member of the Group participates in unincorporated joint ventures, that member accounts directly for its proportionate share of the jointly controlled assets, liabilities and related income and expenses which are then similarly included in the consolidated financial statements of the Group. Foreign currencies The individual financial statements of each entity in the Group are prepared in the currency of the primary economic environment in which the entity operates (its “functional currency”). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in British Pounds, which is presentation currency for these consolidated financial statements. Although the parent company has a functional currency of Canadian Dollars, management assesses the Company’s performance in British Pounds. In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. At each reporting date, monetary items denominated in foreign currencies are retranslated at rates prevailing at the reporting date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences are recognised in profit or loss in the period in which they arise. For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s operations are expressed in British Pounds using exchange rates prevailing at the reporting date. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transaction are used. Exchange differences arising, if any, are recognised directly into other comprehensive income and transferred to the Group’s translation of foreign operations reserve. Such exchange differences are recognised in profit or loss in the period in which the foreign operation is disposed. Fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the exchange rates prevailing at the acquisition date. Share-based payments Equity-settled awards, including share options and warrants, are measured at fair value at the date of grant and recognised over the vesting period, based on the Group’s estimate of equity-settled awards that will eventually vest, along with a corresponding increase in equity. Fair value is measured using the Black-Scholes Option Pricing Model taking into consideration management’s best estimate of the expected life of the option, the expected share price volatility, the risk free rate, the expected dividend yield and the estimated number of shares that will eventually vest. Taxation The group has no taxable profit and no current income tax. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax base used in the computation of taxable profit, and are accounted for using the liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences
46 | Lydian International | 2011 Annual Report
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of the related asset or liability in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries except where the group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each reporting date and increased or reduced to the extent that it is probable, or no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at tax rates that are expected to apply in the period in which the liability is settled or the asset realised based on tax rates that have been enacted or substantively enacted by the reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Current and deferred tax are recognised as an expense or income in the profit or loss, except when they relate to items credited or debited directly to equity, in which case the tax is also recognised directly in equity, or where they arise from the initial accounting in a business combination. Property and equipment Property and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment for amortisation purposes. The gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the income statement. Expenditure to replace a component of an item of property equipment that is accounted for separately is capitalised and the existing carrying amount of the component written off. Other subsequent expenditure is capitalised if future economic benefits will arise from the expenditure. All other expenditure, including repair and maintenance, is recognised in the income statement as incurred. Depreciation is charged to the income statement based on the cost, less estimated residual value, of the asset on a straight-line basis over the estimated useful life. Depreciation commences when the assets are available for use. The estimated useful lives are as follows: • Motor vehicles • Equipment
3 – 5 years 1 – 5 years
Intangible assets Intangible assets, which are acquired by the Group entities and which have finite useful lives are stated at costs less accumulated amortisation and impairment losses. Amortisation is charged to the income statement on a straight line basis over the estimated useful lives of the intangible assets, which are estimated to be 3-10 years for computer software. Impairment of land and intangible assets with indefinite useful lives or not available for use Assets that have an indefinite useful life that are not subject to amortisation or are not available for use are evaluated for impairment annually. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the fair value less costs to sell and value in use. If the recoverable amount of an asset or cash generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately. Where an impairment loss subsequently reverses, the carrying amount of the asset or cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset or cash-generating unit in prior years. A reversal of an impairment loss is recognised as income immediately.
2011 Annual Report | Lydian International | 47
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
Impairment of property and equipment and intangible assets with finite lives Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the fair value less costs to sell and value in use. If the recoverable amount of an asset or cash generating unit is estimated to be less than its carrying amount, the carrying amount of the asset or cash-generating unit is reduced to its recoverable amount. Impairment losses are recognised as an expense immediately. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the property and equipment at the date the impairment is reversed does not exceed what the cost less accumulated depreciation would have been had the impairment not been recognised. Exploration and evaluation assets Exploration and evaluation expenditures comprise costs incurred directly in exploration and evaluation as well as the cost of mineral licenses. They are capitalised as exploration and evaluation assets subsequent to acquisition of the licenses and pending determination of the feasibility of the project. Borrowing costs attributable to the exploration and evaluation of mineral licences are expensed as incurred. When the existence of economically recoverable reserves and commercial viability are established, the related exploration and evaluation assets are reclassified as intangible assets or property, plant and equipment as appropriate. Where a project is abandoned or is determined not to be economically viable, the related costs are written off. Impairment is assessed when facts and circumstances suggest that the carrying amount of an asset may exceed its recoverable amount. Supplies Supplies are sample bags, small tools and other similar items stored to support drilling operations. Supplies are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business and selling expenses. The cost of supplies is based on the first-in first-out principle and includes expenditure incurred in acquiring the supplies and bringing them to their existing location and condition. Financial assets Financial assets other than hedging instruments are divided into the following categories: • loans and receivables • financial assets at fair value through profit or loss • available-for-sale financial assets • held-to-maturity investments. Financial assets are assigned to the different categories on initial recognition, depending on the characteristics of the instrument and its purpose. A financial instrument’s category is relevant for the way it is measured and whether any resulting income and expense is recognised in profit or loss or directly in equity. Generally, the Group recognises all financial assets using settlement day accounting. An assessment of whether a financial asset is impaired is made at least at each reporting date. All income and expense relating to financial assets are recognised in the income statement except for income or loss on any available-for-sale financial assets which are recognised in equity. Other receivables Other receivables are initially recognised at fair value. Subsequently they are measured at amortised cost less provision for impairment. A provision for impairment of receivables is established when there is objective evidence that the Group may not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor and default and delinquency in payments are considered indicators that the receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted at the original effective interest rate. The balance of the allowance is adjusted by recording a charge or income to the statement of income of the reporting period. Any amount written-off with respect to other receivable balances is charged against the existing allowance for doubtful accounts. All accounts receivable for which collection is not considered probable are written-off.
48 | Lydian International | 2011 Annual Report
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
Other Investments Investments in equity securities that are neither subsidiaries nor associates are categorised as available-for-sale instruments. These assets are measured at fair value, both initially and subsequently, with changes in fair value, except for impairment losses and certain foreign exchange gains and losses, recognised in other comprehensive income until the asset is sold. Impairment losses are recognised in the consolidated income statement as incurred, as are foreign exchange gains and losses arising on monetary items. Foreign exchange gains and losses arising on non-monetary items, such as an investment in an equity instrument, are recognised in other comprehensive income. When an investment is derecognised, the cumulative gain or loss in accumulated other comprehensive income is reclassified to the consolidated income statement. Impairment of financial assets Financial assets, other than those carried at fair value through profit or loss, are assessed for indicators of impairment at each reporting date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the financial asset have been impacted. For financial assets carried at amortised cost, the amount of the impairment 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 financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade and other receivables where the carrying amount is reduced through the use of an allowance account. With the exception of available-for-sale equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the financial asset at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. In respect of available-for-sale equity instruments, any increase in fair value subsequent to an impairment loss is recognised directly in equity. Financial liabilities The Group’s financial liabilities include accrued liabilities and other payables and the amount due to Newmont, which are initially recognised at fair value and subsequently stated at amortised cost. Trade payables are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after reporting date. Equity An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Restoration and rehabilitation A provision for restoration and rehabilitation is recognised when there is a present obligation as a result of exploration and development activities undertaken, it is probable that an outflow of economic benefits will be required to settle the obligation, and the amount of the provision can be measured reliably. The estimated future obligations include the costs of dismantling and removal of facilities, restoration and monitoring of the affected areas. The provision for future restoration costs is the best estimate of the present value of the expenditure required to settle the restoration obligation at the reporting date. Future restoration costs are reviewed annually and any changes in the estimate are reflected in the present value of the restoration provision at each reporting date. The initial estimate of the restoration and rehabilitation provision relating to exploration and development activities is capitalised into the cost of the related asset and amortised on the same basis as the related asset. Changes in the estimate of the provision of restoration and rehabilitation are treated in the same manner, except that the unwinding of the effect of discounting on the provision is recognised as a finance cost rather than being capitalised into the cost of the related asset. Interest income Interest income and expenses are reported on an accrual basis using the effective interest method. Employee benefits The Group makes contributions for the benefit of employees to the Jersey, Armenian and Georgia State pension funds. The contributions are expensed as incurred.
2011 Annual Report | Lydian International | 49
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
Provisions A provision is recognised in the Statement of Financial Position when the Group has a legal or constructive obligation as a result of past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Operating leases Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Loss per share Basic loss per ordinary share is calculated by dividing the loss attributed to shareholders of the parent for the period by the weighted average number of ordinary shares outstanding during the period. Diluted loss per ordinary share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. Business segments The Group operates in one business segment, mineral exploration. Geographical segments The directors of the Group are of the opinion that three geographical segments, Armenia, Georgia and head offices in Jersey (Channel Islands), existed as at December 31, 2011 and December 31, 2010. At December 31, 2010, Kosovo represented a geographical segment which was wound down in 2011. Other reserves Other reserves are equity instruments of the Company for purchase of non-controlling interests in its subsidiaries.
4. Critical Accounting Judgments and Key Sources of Estimation Uncertainty Critical judgments in applying the Group’s accounting policies In the application of the Group’s accounting policies, which are described in note 3, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The most significant critical judgment that members of management have made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements is the policy on exploration and evaluation assets. In particular, management is required to assess exploration and evaluation assets for impairment. Note 12 discloses the carrying values of such assets. As part of this assessment, management has carried out an assessment whether there are indicators of impairment. If there are indicators, management performs an impairment test on the major assets within this balance. The recoverability of exploration and evaluation assets is dependent on a number of factors common to the natural resource sector. These include the extent to which the Group can continue to renew its exploration and future development licenses with local authorities, establish economically recoverable reserves on its properties, the availability of the Group to obtain necessary financing to complete the development of such reserves and future profitable production or proceeds from the disposition thereof. The Group will use the evaluation work of professional geologists, geophysicists and engineers for estimates in determining whether to commence or continue mining and processing. These estimates generally rely on scientific and economic assumptions, which in some instances may not be correct, and could result in the expenditure of substantial amounts of money on a deposit before it can be determined whether or not the deposit contains economically recoverable mineralisation. Key sources of estimation uncertainty The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
50 | Lydian International | 2011 Annual Report
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
There are tax matters that have not yet been confirmed by taxation authorities. While management believes the provision for income taxes is adequate, these amounts are subject to measurement uncertainty. Adjustments required, if any, to these provisions will be reflected in the period where it is determined that adjustments are warranted. The Black-Scholes Option Pricing Model was developed for use in estimating the fair value of traded options which were fully tradable with no vesting restrictions. This option valuation model requires the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options and warrants have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the calculated fair value, such value is subject to measurement uncertainty.
5. Geographical Segments The Group is engaged in one business activity, mineral exploration. The three key geographical segments for these activities are located in Armenia, Kosovo and Georgia. The Group’s head office activities are located in Jersey (Channel Islands) which relate to administrative matters. All transactions between segments are measured at fair value. All balances, income and expenses between segments are eliminated in full on consolidation. The geographical segmented information on income statement items is given below:
Interest income Armenia Georgia Kosovo Head office activities Loss for the year Armenia Georgia Kosovo Head office activities Loss from disposal of property and equipment Armenia Georgia Kosovo Head office activities Depreciation and amortisation Armenia Gorgia Kosovo Head office activities Property, equipment and intangible asset expenditures Armenia Georgia Kosovo Head office activities
As of and for year ended December 31, 2011 £
As of and for year ended December 31, 2010 £
44,297 44,297
25,073 25,073
1,103,851 9,372 292,712 4,548,953 5,954,888
665,230 2,496,815 2,725,004 5,887,049
8,715 90,600 99,315
-
28,393 56,483 17,296 102,172
26,175 96,604 3,255 126,034
384,192 29,156 413,348
75,370 89,853 48,455 213,678
2011 Annual Report | Lydian International | 51
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
The geographical segmented information on certain Statement of Financial Position items is given below: As of December 31, 2011 £
As of December 31, 2010 £
23,535,396 203,609 23,739,005
16,497,640 16,497,640
454,800 21,212 476,012
250,142 142,000 10,445 402,587
59,283 36,239 95,522
19,912 3,503 35,935 59,350
Exploration and evaluation assets Armenia Georgia Kosovo Head office activities
Property and equipment Armenia Georgia Kosovo Head office activities
Intangible assets Armenia Georgia Kosovo Head office activities
Total assets Total liabilities
Armenia £ 25,662,197 21,360,459
December 31, 2011 Kosovo Georgia £ £ 268,609 5,197,678 279,783
Head office activities £ 34,995,611 6,742,717
Eliminations £ (26,405,002) (26,549,344)
Consolidated £ 34,521,415 7,031,293
Total assets Total liabilities
Armenia £ 17,505,160 11,305,236
December 31, 2010 Kosovo Georgia £ £ 375,305 5,384,814 -
Head office activities £ 33,505,501 5,798,857
Eliminations £ (16,502,519) (16,526,520)
Consolidated £ 34,883,447 5,962,387
52 | Lydian International | 2011 Annual Report
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
6. Employee Salaries and Benefit Expenses
Salaries and other compensation Allocation to equity settled employee benefits reserve
Year ended December 31, 2011 £ (1,382,362) (1,624,657) (3,007,019)
Year ended December 31, 2010 £ (1,151,812) (556,895) (1,708,707)
Year ended December 31, 2011 £ (99,315) (14,026) (165,215) (67,403) (345,959)
Year ended December 31, 2010 £ 3,633 (2,113,572) (29,302) (2,139,241)
7. Other Gains (Losses)
Disposal of property and equipment Other (loss) gain Exploration and evaluation assets write-off (Note 11) Foreign currency losses
8. Taxation There was no taxes payable by the Group in the year ended December 31, 2011 and corresponding period in 2010.
Loss before taxation Tax at 17.0% (2010, 16.0 %) Items which are not deductible for tax purposes Losses not recognised Income tax expense
Year ended December31, 2011 £ (5,954,888) (1,012,331) 837,161 175,170 -
Year ended December 31, 2010 £ (5,887,049) (941,928) 338,340 603,588 -
The Group had taxation losses under jurisdiction of Jersey (Channel Islands), Armenia, Georgia and Kosovo (subject to confirmation with the tax authorities) as at December 31, 2011 amounting to approximately £5,986,965 (December 31, 2010: £4,956,551) that have not been recognised as there is insufficient evidence of taxable profits. Tax losses incurred by Armenian and Georgian companies expire in the fifth year subsequent to when they are incurred. The tax rate in Armenia is 20%, in Kosovo is 10% and in Georgia is 15%. Expenses incurred at the head office are non-deductible. The effective tax rate for these Consolidated Financial Statements is calculated as weighted average of tax losses to deductible expenses in each jurisdiction.
9. Loss Per Share Loss per share of £0.06 for the year ended December 31, 2011 (December 31, 2010: £0.08) has been calculated on the basis of the net loss of £5,899,696 (December 31, 2010 loss: £5,856,554) on 97,130,280 (December 31, 2010: 75,128,582) shares being the weighted average number of shares in issue. As a result of the losses incurred during the years ended December 31, 2011 and 2010, the potential shares to be issued from the exercise of options and warrants are not included in the computation of diluted per share amounts since the result would be anti-dilutive. Accordingly, the diluted loss per share and the basic loss per share for all periods presented are the same.
2011 Annual Report | Lydian International | 53
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
10. Property and Equipment COST At January 1, 2010 Additions Exchange difference As at December 31, 2010
Motor Vehicles £ 107,387 33,567 4,535 145,489
Equipment £ 533,380 139,383 7,651 680,414
Land £ -
Total £ 640,767 172,950 12,186 825,903
Additions Disposal Exchange difference As at December 31, 2011
133,269 (32,364) (4,962) 241,432
214,989 (395,697) (10,864) 488,842
159 1 160
348,417 (428,061) (15,825) 730,434
At January 1, 2010 Charge for the year Exchange difference As at December 31, 2010
Motor Vehicles £ 48,829 24,233 1,218 74,280
Equipment £ 213,910 134,819 307 349,036
Land £ -
Total £ 262,739 159,052 1,525 423,316
Charge for the year Disposals Exchange difference As at December 31, 2011
38,810 (30,433) (1,905) 80,752
127,133 (299,282) (3,217) 173,670
-
165,943 (329,715) (5,122) 254,422
Motor Vehicles £ 160,680 71,209
Equipment £ 315,172 331,378
Land £ 160 -
Total £ 476,012 402,587
ACCUMULATED DEPRECIATION
CARRYING AMOUNT At December 31, 2011 At December 31, 2010
In the year ended December 31, 2011, depreciation of £78,749 has been capitalised to exploration and evaluation costs (2010: £45,213).
54 | Lydian International | 2011 Annual Report
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
11. Intangible Assets COST
Computer Software £ 57,806 40,728 2,183 100,717
As at January 1, 2010 Additions Exchange difference As at December 31, 2010 Additions Disposal Exchange difference As at December 31, 2011
64,931 (26,481) (1,998) 137,169
ACCUMULATED AMORTISATION As at January 1, 2010 Charge for the year Exchange difference As at December 31, 2010
£ 24,055 17,078 234 41,367
Charge for the year Disposal Exchange difference As at December 31, 2011
26,341 (25,512) (549) 41,647
CARRYING AMOUNT At December 31, 2011 At December 31, 2010
95,522 59,350
In year ended December 31, 2011, amortisation of £11,363 has been capitalised to exploration and evaluation costs (2010: £4,883).
12. Exploration and Evaluation Assets (“EEA”) Cost
At January 1, 2010 Additions EEA write off Exchange difference At December 31, 2010 Additions EEA write off Exchange difference At December 31, 2011
Armenia project Amulsar £ 1,977,063 13,904,136 570,584 16,451,783
Georgia project Zoti £ -
Armenia project Nor Arevik £ 44,808 1,049 45,857
Kosovo projects
Total
£ 2,319,251 97,408 (2,113,572) (303,087) -
£ 4,296,314 14,046,352 (2,113,572) 268,546 16,497,640
7,331,629 (248,016) 23,535,396
194,170 9,439 203,609
97,655 (140,859) (2,653) -
24,356 (24,356) -
7,647,810 (165,215) (241,230) 23,739,005
2011 Annual Report | Lydian International | 55
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
The increase of deferred exploration expenditures in the twelve month period ended December 31, 2011 in the Armenia Amulsar project was mainly a result of exploration drilling and studies costs, development cost of the project, mining license state duty and exploration license concession fee payments, capitalised salaries of employees engaged in exploration, rentals for areas under exploration, costs of environmental studies, and costs pertaining to exploration camp maintenance. The Management of the Company decided to relinquish one of its early stage exploration licenses called Nor Arevik located in southern Armenia. The decision was taken after receiving and analysing results of laboratory assays from exploration drilling holes drilled earlier in 2011. Due to low mineralisation the Company lost its interest in further exploration in the area. Capitalised costs pertaining to that project in amount of £140,859 were charged to income as of December 31, 2011. During September 2011 the Company’s 100% owned subsidiary Georgian Resource Company LLC acquired a combined exploration mining license over Zoti, an early-stage gold project in Georgia. The balance of EEA at the Georgian project Zoti represents the cost of the license and cost of exploration studies. IFRS 6 requires that regular impairment assessments are made. The directors carried out a review as of December 31, 2011 and are satisfied that on the basis of the current plans and status of operations, there are no indications of impairment on the Amulsar or Zoti assets. In 2011, the Company decided not to continue with its projects in Kosovo and relinquished the corresponding licenses. As of December 31, 2011 the carrying value of these projects totaling £165,215 (December 31, 2010: £2,113,572 was written off in the income statement (Note 7). On July 29, 2011 the Company transferred one of the licenses “Drazhnje license” and relevant in-country exploration assets to Kosovo Metals Group (“KMG”). Non-cash transactions that increased EEA are as follows:
Purchase of Newmont interest Payable to suppliers of drilling services and project development Capitalised amortisation and depreciation Mine rehabilitation reserve
Year ended December 31, 2011 £ 446,463 90,112 28,800 565,375
Year ended December 31, 2010 £ 7,687,418 30,527 50,096 7,768,041
13. Other Non-Current Assets Other non-current assets at December 31, 2011 and 2010 relate to Geoteam CJSC and Kavkaz Zoloto CJSC long-term receivables from the State input VAT and borrowings provided to persons who provide regular services to Geoteam CJSC. VAT input will be refunded by the Tax Authorities or offset with other tax liabilities through future sales of product or services. Borrowings are refunded on a regular basis from income received from provision of services. Management believes that the receivables from the State and borrowings are fully recoverable.
VAT input Geoteam CJSC VAT input Kavkaz Zoloto CJSC Long term borrowings
December 31, 2011 £ 1,356,726 12,760 2,449 1,371,935
December 31, 2010 £ 682,394 3,880 686,274
14. Other Long-Term Financial Assets Other long-term financial assets relate to purchase of 1,000,000 ordinary shares of Tigris Resources Limited which represents approximately 3.9% of its share capital. Tigris Resources Limited is focused on discovering, acquiring and developing gold and copper projects in Turkey and is not a listed company. At December 31, 2011, the carrying value approximates its fair value.
56 | Lydian International | 2011 Annual Report
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
15. Cash and Equivalents For the purpose of the cash flow statement, cash and cash equivalents include cash on hand and in banks and investments in money market instruments. As at December 31, 2011 and 2010 , the money market investments had a one month maturity period.
16. Other Current Assets The Group as at December 31, 2011 and 2010 holds the following other current assets:
Supplies VAT and HST refundable Deposits Other receivables and prepayments
December 31, 2011 £
December 31, 2010 £
10,531 25,304 124,801 249,798 410,434
8,153 27,716 60,000 83,035 178,904
17. Share Capital Share capital of the Company consists of fully paid ordinary shares. The Company has one class of shares, being ordinary shares. The Company is authorised to issue an unlimited number of ordinary shares. The Company’s ordinary shares have no par value. All shares are equally eligible to receive dividends and repayment of capital and represent one vote at the shareholders’ meeting of the Company.
Number of ordinary shares issued and fully paid: Total outstanding number of shares, January 1 Issued under share based payment Shares issued for cash Shares issued on exercise of warrants and share options Total outstanding number of shares, December 31
2011
2010
93,659,798 1,000,000 9,415,888 104,075,686
52,891,191 3,000,000 29,033,857 8,734,750 93,659,798
During the year ended December 31, 2011 the Company issued a total of 1,000,000 shares for payment of “Geoteam Option Agreement” (Note 20). During the year ended December 31, 2011 the Company issued 8,675,388 and 740,500 ordinary shares pursuant to the exercise of warrants and share options, respectively.
18. Warrants At December 31, 2011 the Company had 3,311,758 (December 31, 2010: 11,987,146) outstanding investor and broker warrants to subscribe for ordinary shares at a price CAD$0.59 (approximately 37 pence). Warrants may be exercised at any time from the date of vesting to the date of their expiry converting into one ordinary share of the Company. A total of 8,675,388 warrants were exercised to ordinary shares of the Company during the year ended December 31, 2011 (December 31, 2010: 6,887,250). No warrants were granted in the year ended December 31, 2011. A total of 945,300 investor warrants were granted during the year ended December 31, 2010. The fair value of warrants granted in 2010 was £195,167 and was recorded in the statement of changes in equity. The incremental fair value of warrants modified in 2010 was £95,909 and was allocated in the statement of changes in equity. The fair value was determined using the Black Scholes Option Pricing Model using assumptions as disclosed below. On May 14, 2010, the Company amended the terms of 4,000,000 outstanding warrants (the “IFC Warrants”) held by International Finance Corporation, an insider of the Company by virtue of it
2011 Annual Report | Lydian International | 57
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
holding more than 14% of the issued and outstanding ordinary shares, to extend the expiry date of the IFC Warrants from January 10, 2011 to January 10, 2012. The following reconciles the outstanding and exercisable share warrants granted under by the Company:
Balance at December 31, 2009 Investor warrants granted Warrants exercised Warrants expired Balance at December 31, 2010 Warrants exercised Balance at December 31, 2011
Number of Warrants 18,739,581 945,300 (6,887,250) (810,485) 11,987,146 (8,675,388) 3,311,758
Weighted average exercise price 36 pence 47 pence 37 pence 44 pence 36 pence 36 pence 37 pence
The warrants outstanding and exercisable at the end of the reporting period can be exercised any time before May 22, 2014. Weighted average exercise price of outstanding warrants are adjusted to their equivalents in British Pounds. The warrants issued and modified were priced using the Black Scholes Option Pricing Model using the following assumptions: 2011 -
Expected volatility Expected option life Risk free rate Dividend yield
2010 66% 2-3.5 years 1.6% 0%
19. Share Based Payments - Employee Share Option Plan The Company’s employee share option plan grants options to employees, directors and service providers of the Company to purchase ordinary shares of the Company. In accordance with terms of the employee share option plan, the exercise price of the granted options shall be determined at the time the option is granted provided that such price shall be not less than the market price of the ordinary shares. Share options granted under the plan carry no rights to dividends and no voting rights. Each of the Company’s share options are convertible into one ordinary share of the Company. Share options may be exercised at any time from the date of vesting to the date of their expiry. Charges in relation to equity settled share-based payments are credited to an Equity settled employee benefits reserve’, therefore no liabilities have been recorded in respect to these plans. The following summarises the outstanding share options granted under the employee share option plan:
Balance at December 31, 2009 Granted Expired Exercised Balance at December 31, 2010
58 | Lydian International | 2011 Annual Report
Number of options 2,475,000
Weighted average exercise price 27 pence
3,110,000 (125,000) (1,847,500)
79 pence 36 pence 38 pence
3,612,500
67 pence
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
Number of options Granted Expired Exercised Balance at December 31, 2011
Range of exercise price
Less than £0.63 (CAD $1) £0.63-£1.26 (CAD$1-$1.99) £1.27-£1.90 (CAD$2-$3)
Number outstanding
345,000
Outstanding options Weighted average remaining life years 0.6
2,290,000 (175,000) (740,500)
Weighted average exercise price 1.58 pounds 69 pence 61 pence
4,987,000
1.12 pounds
Weighted average exercise price £ 0.28
Exercisable options Weighted Number average exercisable exercise price £ 345,000 0.28
1,962,000
0.8
0.67
1,962,000
0.67
2,680,000 4,987,000
3.8 2.3
1.56 1.12
1,467,500 3,774,500
1.54 0.97
The weighted average share price during the year ended December 31, 2011 was £1.54 (December 31, 2010: 93 pence). Weighted average exercise price of outstanding share options are adjusted to their equivalents in British Pounds. The weighted average fair value per share options granted during the year ended December 31, 2011 was 81 pence (year ended December 31, 2009: 31 pence). Options were priced using the Black Scholes Option Pricing Model using the following assumptions:
Expected volatility Expected option life Risk free rate Dividend yield
2011 63% 5 years 1.7% 0%
2010 66% 2 years 1.6% 0%
During the year ended December 31, 2011 £1,624,657 (December 31, 2010: £556,895) was included in employee benefits expense in the consolidated income statement. The share options outstanding and exercisable at December 31, 2011 had a weighted average remaining contractual life of 2.3 years (December 31, 2010: 1.7 years).
20. Other Reserves - Option to Purchase Non-Controlling Interest On December 9, 2010, the Company entered into an option agreement (the “Geoteam Option Agreement”) to purchase the remaining 5% noncontrolling interest (the “non-controlling interest”) of the Company’s 95% indirectly owned subsidiary, Geoteam CJSC. In accordance with the terms of the option (the “Call Option”), the Company has the right to purchase the non-controlling interest on the earlier of December 9, 2013 and the occurrence of certain transactions, including a transaction involving a change of control of the Company. The Company also granted an option (the “Put Option”) to the holder of the non-controlling interest, whereby the holder of the non-controlling interest can require the Company to purchase the non-controlling interest at any time during the period of the Call Option if the Company is in default of its obligations under the call option or at the end of the option period, December 9, 2013. The aggregate purchase price payable by the Company in connection with any exercise of the Call Option or the Put Option will be CAD$500,000 in cash and 2,000,000 ordinary shares (the “Payment Shares”) in the capital of the Company. Under the Geoteam Option Agreement during 2011 and 2010 the Company issued 1,000,000 ordinary shares. During the year ended December 31, 2011 the Company has recognised a total of £757,838 pursuant to 500,000 ordinary shares issued (December 31, 2010: £1,037,816 for 500,000 shares issuable and a cash installment of CAD$500,000). During 2011, the Company issued shares for £715,506 (CAD$1,100,000) considered issuable at the end of 2010.
2011 Annual Report | Lydian International | 59
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
21. Due to Newmont On February 26, 2010, the Company entered into an agreement (the “Purchase Agreement”) with Newmont pursuant to which the Company’s 95% owned subsidiary, Geoteam CJSC, purchased all of Newmont’s interest in the joint venture known as the Caucasus Venture (the “Venture”) between the Company and Newmont. In consideration for the purchase of Newmont’s interest in the Venture and the related termination of the Venture, the Company will; (i) issue to Newmont three million ordinary shares and (ii) make certain pre-production and then post-production payments to Newmont. The post production payments are dependent on production occurring and this allows Lydian to fund the required payments out of direct revenue from the Amulsar gold project or through alternate available funds. See Note 27. Prior to production, the Company is obligated to pay Newmont US$15 million in three US$5 million installments. The first was paid on the Closing, the second was due on or before December 31, 2011 and the third on or before the earlier of December 31, 2012 and the date that is 90 days after a bankable feasibility on any portion of the Amulsar property is complete and the Company has received all the necessary material permits to move into production. Pursuant to the terms of the agreement with Newmont, in December 2011 the Company notified Newmont of its intention to defer the second US$5 million payment to no later than December 31, 2012, the deferred payment was charged interest at the rate of 10% per annum commencing December 31, 2011 until it was paid on March 13, 2012. The third installment is recorded using a discount of 10%, the rate negotiated between the parties for purposes of determining amounts payable should the Company exercise its rights to settle prior to the maturity dates.
Undiscounted amount payable at December 31, 2010 Discount at 10% Amortised cost as of December 31, 2010
US $ 10,000,000 (1,323,392) 8,676,608
£ 6,411,489 (848,750) 5,562,739
Undiscounted amount payable at December 31, 2011 Discount at 10% Amortised cost as of December 31, 2011
US $ 10,000,000 (455,732) 9,544,268
£ 6,437,510 (293,378) 6,144,132
Within the year ended December 31, 2011 £547,743 was recorded as an effective interest charge relating to unwinding of the discount and has been reflected in the income statement (year ended December 31, 2010: £354,031).
22. Provisions The provision for restoration and rehabilitation represents the present value of future outflow of economic benefits that will be required by the concession agreement signed between Geoteam CJSC and Government of the Republic of Armenia. The provision recognised as of December 31, 2011 relates only to rehabilitation of Amulsar mine areas affected by exploration activities as development of the mine has not commenced.
Balance at December 31, 2010 Additions Balance at December 31, 2011
December 31, 2011 £ 28,800 28,800
December 31, 2010 £ -
23. Accrued Liabilities and Other Payables
Accrued liabilities and trade payables Wage accruals
60 | Lydian International | 2011 Annual Report
December 31, 2011 £ 727,197 131,164 858,361
December 31, 2010 £ 302,948 96,700 399,648
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
24. Financial Risk Management The Group manages its exposure to financial risks by operating in a manner that minimises its exposure to the extent practical. The main financial risks affecting the Group are discussed below: Capital risk management The Group manages its capital structure and makes adjustments to it, based on the funds available to the Group, in order to support the acquisition, exploration and development of mineral properties. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Group’s management to sustain future development of the business. The properties in which the Group currently has an interest are in the exploration stage, as such, the Group is dependent on external financing to fund its activities. The Group intends to raise additional finance by issuing new share capital, debt or entering into joint arrangements to carry out planned exploration and to pay for administrative costs. The Group will continue to assess new properties and seek to acquire an interest in additional properties if it believes there is sufficient geologic or economic potential and if it has adequate available or committed financial resources to complete such acquisitions. Management reviews its capital management approach on an interim basis. Management believes that its approach, given the relative size of the Group, is reasonable. The Group is not subject to externally imposed capital requirements. The Group defines capital as the aggregate of total equity, excluding non-controlling interest, which totals £27,081,626 (December 31, 2010: £28,429,704). Total equity comprises share capital, warrants, and reserves and accumulated deficit as disclosed in the consolidated statements of changes in equity. Liquidity risk The ultimate responsibility for liquidity risk rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group’s cash requirements and balances are projected for the Group as a whole and for each country in which operations and capital expenditures are conducted. The Group plans to meet these requirements through the mix of available funds, equity financing on a required basis, project debt financing, if available, entering into joint arrangements and cash to be provided by the exercise of warrants and share options in the future. To date the Group has relied on shareholder funding to finance its operations. As the Group has finite cash resources and no material income, the liquidity risk is significant and is managed by controls over timing of expenditures. All short-term financial liabilities which relate to accrued liabilities and other payables and due to Newmont as disclosed in note 21 and 23 mature within one year of December 31, 2011. Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. Currency risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Group’s measurement currency. The Group’s management monitors the exchange rate fluctuations on a continuous basis and acts accordingly. The Group’s expenses include amounts incurred in British Pounds, Armenian Dram, Canadian Dollar, Euros, Georgian Laries and the U.S. Dollar. The Group’s exchange risk is therefore related to movements between these currencies. The Group has a downside risk to strengthening of the Euro, Armenian Dram, Georgian Lari or U.S. and Canadian Dollar as this increases expenses in British Pound terms. The Group’s currency risk policy is to diversify its cash resources in the British Pound, the U.S. Dollar, the Canadian Dollar and the Euro roughly in proportion to expected future expenditure over the following twelve months. This is done to reduce the risk of the Group holding virtually all of its monetary assets in a single currency when the expenditure base is spread over five main currencies. Currency risk sensitivity The following table details the Group’s sensitivity to a 10% increase and decrease in the British Pound against the relevant foreign currencies. A 10% increase or decrease is used when reporting currency risk internally to key management personnel and represents management’s assessment of
2011 Annual Report | Lydian International | 61
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
the reasonably possible change in foreign exchange rates. The sensitivity analysis includes on outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 10% change in foreign currency rates. The sensitivity analysis includes loans to operations within the Group where the denomination of the loan is in currency other than the currency of the lender. The Group’s net assets and liabilities are predominately held in British Pounds, U.S. Dollars, Canadian Dollars, Euros and Armenians Drams. The numbers below indicate an influence on equity where the British Pound strengthens 10% against the relevant currency.
Other comprehensive December 31, 2011 income (profit or loss) (£) December 31, 2010
Canadian Dollar 289,801 1,398,277
Euro 11,513 25,882
U.S. Dollar 284,410 361,842
Armenian Dram 2,311,861 924,902
Georgian Lari 18,402 -
Interest rate risk Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates. Other than the deferred amount due to Newmont, the Group has no other fixed or floating rate borrowings. Cash and cash equivalents also bear interest at floating rates. Interest rate sensitivity A 100 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the reasonably possible change in interest rates. With a 100 basis point increase in interest rates the income would be higher by £112,350 and in case of decrease the loss higher by £44,297 for the twelve month period ended December 31, 2011. This analysis assumes all other variables are assumed constant. Credit risk management Credit risk arises when a failure by counter parties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the reporting date. As the Group has no revenue or trade receivables, management considers credit risk as low. Up front deposits are on occasion paid to major suppliers primarily relating to exploration drilling contracts. The payment of these deposits is considered by the management on a case by case basis and the progress on the contract carefully reviewed. During the years ended December 31, 2011 and December 31, 2010 there were no material impairment provisions required for any of the financial assets. There are no material financial assets that the Group considers past due. At December 31, 2011, the Group did not have any significant credit risk exposure to any counterparty or any group of counterparties having similar characteristics. The credit risk on cash and cash equivalents is considered by management to be limited because the counterparties are financial institutions with high credit ratings assigned by international credit rating agencies. The carrying amount of financial assets recorded in the consolidated financial statements represents the Group’s maximum exposure to credit risk. Financial assets Fixed rate financial assets are cash held on fixed term deposit. Cash at bank is held to finance the Group’s short-term cash requirements. The Group invests its available cash in bank deposits only. At December 31, 2011 and December 31, 2010, cash and cash equivalents were as follows:
December 31, 2011 December 31, 2010
Fixed rate assets £ 6,742,322 16,139,215
Cash assets £ 1,559,585 919,477
Total £ 8,301,907 17,058,692
Average period for which rates are fixed (months)
Average interest rates for fixed rate assets
One One
0.4% 0.4%
Fair value of financial assets and liabilities All financial assets and financial liabilities are recorded at amortised cost in the consolidated financial statements. Management believes that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the consolidated financial statements approximate their fair values due to their short-term nature. The Newmont liability bears interest at a rate that approximates the estimated market rate of interest.
62 | Lydian International | 2011 Annual Report
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
25. Related Party Transactions The parent and ultimate controlling party of the Group is Lydian International Limited. No individual party had overall control of the Company or Group during the periods being presented. Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below. Related parties include the Board of Directors, close family members and enterprises which are controlled by these individuals as well as certain persons performing similar functions. The non-executive members of the Board of Directors do not have employment or service contracts with Lydian International Limited and neither are they entitled to any termination benefits. None of the directors are entitled to pension benefits. The sole director and country manager of Geoteam CJSC and director of Kavkaz Zoloto CJSC holds 5% of the shares in Geoteam CJSC and 5% of the shares in Kavkaz Zoloto CJSC. Within 2011 pursuant to “Geoteam Option Agreement” the Company issued to Hayk Aloyan 1,000,000 ordinary shares (Note 20). The directors and key management are the directors of Lydian International Limited. The remuneration of directors and key management was as follows:
Aggregate emoluments Share based payments
Year ended December 31, 2011 £ 339,747 926,357
Year ended December 31, 2010 £ 331,287 285,048
26. Operating Lease and Purchase Commitments The Group leases office premises with a lease term of up to 3 years. The group does not have an option to purchase the leased asset at the expiry of the lease period. In 2011 Geoteam CJSC has endorsed long term rent contracts for lands under rock allocations. Non-cancellable operating lease commitments are disclosed below:
Up to one year More than one year and no later than five years More than five years
December 31, 2011 £ 146,306 497,820 1,585,989 2,230,115
December 31, 2010 £ 68,137 55,279 123,416
27. Contingencies Newmont Deal On April 23, 2010 the Group purchased all of Newmont’s interests in the Group’s joint venture which included Newmont’ interests in the Amulsar gold property. The consideration was a combination of committed and contingent payments. The committed payments included 3 million ordinary shares of the Company and one payment of US$5 million, which have now been issued and paid – the second on 13 March 13, 2012 - and one payment of US$5 million which is due by the end of 2012 (Note 21). In addition the Group agreed to pay Newmont, following the start of commercial production, a 3% Net Smelter Royalty (“NSR”). However, between April 23, 2010 and the date that is 20 days following commencement of commercial production, Lydian may at its option elect to buy out the 3% NSR and instead pay to Newmont the aggregate sum of US$20 million (approximately £12.8 million), without interest, in 20 equal quarterly installments of US$1 million commencing on the first day of the third calendar month following the start of commercial production. Furthermore, the Company has a one-time option prior to the commencement of commercial production to prepay these quarterly installments in a single cash payment using an annual discount rate of 10%. This equates to a single payment of approximately US$15.6 million (approximately £10.6 million).
2011 Annual Report | Lydian International | 63
Notes to the Consolidated Financial Statements For the years Ending December 31, 2011 and 2010
These potential post production payment(s) do not meet the definition of an obligation or a constructive obligation as the triggering event, commencement of commercial production, has not happened yet. These potential payments are therefore not recorded on the consolidated Statement of Financial Position at December 31, 2011. Drazhnje licenses On July 29, 2011 the Company completed the transfer of Drazhnje licenses (the Property) to KMG as per agreement with it (Note 12). KMG agreed to commence Commercial Production at a date no later than end 2014. In the event that Commercial Production commences, KMG will pay to Lydian a CAD$2 million cash payment and an overriding perpetual net smelter royalty of 2% on all metals produced at the Property. Economic benefits attributable to this agreement are contingent and assets from it are not recognised in these financial statements.
28. Other Matters Armenia and Georgia related risks The Group’s operations are subject to extensive government laws and regulations, concerning mine safety, subsoil and land use and environmental protection in Armenia and Georgia. The Group incurs substantial capital and operating costs to comply with increasingly complex laws and regulations covering its operations. Regulation in Armenia and Georgia governing discharge of materials into the environment is likely to evolve in a manner which will require stricter standards of compliance. Non-compliance with environmental regulations or the increasing cost of compliance with such regulations could have a material adverse effect on the Group’s business, operating results and financial condition. The Armenian and Georgian tax systems could impose substantial burdens on the Group. The Group is subject to a broad range of taxes imposed at federal, regional and local levels. Laws related to these taxes have been in force for a short period relative to tax laws in more developed market economies and few precedents with regard to the interpretation of these laws have been established. New tax laws introduced by the governments may result in the Group having to pay significantly higher taxes, which could have a materially adverse effect on the Group’s business. Social risks and business environment Some of the Group’s assets are located in Armenia and Georgia, countries which are establishing a more western-style business environment. There are still substantial differences between Armenia and Georgia and the developed business environment and the systems in the West. Some of these differences and the ongoing process could adversely affect the Group and its operations or disrupt normal business activity. Armenia and Georgia are still developing the legal framework required for market economy. Failure to obtain approvals from Armenian and Georgian authorities could cause the Group’s operations to suffer or could result in the loss of its mineral rights or its assets.
29. Subsequent Events On February 27, 2012 the Company filed a preliminary short form prospectus in respect of a bought deal offering. The Company entered into an underwriting agreement with GMP Securities L.P. and Scotiabank which have agreed to purchase 15,625,000 ordinary shares of the Company at a purchase price of CAD$2.56 per ordinary share for aggregate gross proceeds to the Company of CAD$40 million which was completed on March 9, 2012. In addition, the Company has granted the underwriters an option to purchase up to an additional 2,343,750 ordinary shares at the offering price. The option was exercised on March 15, 2012. Also the EBRD took up its pre-emptive rights on March 21, 2011and a further 1,419,732 ordinary shares were issued to them at a purchase price of CAD$2.56 per ordinary share. The consolidated financial statements for the year ended December 31, 2011 have been approved for issue by the Board of Directors on March 23, 2012.
64 | Lydian International | 2011 Annual Report
Auditors Grant Thornton LLP Suite 401, 350 Burnhamthorpe Road W Mississauga, Ontario L5B 3J1 Canada Tel: +1 416 360 2369 Fax: +1 905 804 0509 Attn: Jeremy Jagt E Mail: jjagt@GrantThornton.ca Website: www.grantthornton.ca Corporate Lawyers Irwin Lowy LLP 130 Adelaide Street West Suite 1010 Toronto, Ontario M5H 3P5 Canada Tel: +1 416 361 2515 Fax: +1 416 361 2519 Attn: Eric Lowy Email: elowy@irwinlowy.com Website: www.irwinlowy.com Transfer Agents Olympia Transfer Services Inc. Suite 920, 120 Adelaide Street West Toronto, Ontario M5H 1T1 Canada Tel: +1 416 364 7185 Fax: +1 416 364 1827 Attn: Lisa Clarkin Email: clarkinl@olympiatrust.com Website: www.olympiatrust.com
Head Office 1st Floor, Capstan House La Route Es Nouaux St. Helier Jersey JE2 4ZJ, Channel Islands Tel: +44 1534 747 890 Fax: +44 1534 758 708 Attn. Andy McNally E-mail: andy.mcnally@lydianinternational.co.uk Investor Relations - Global 1st Floor, Capstan House La Route Es Nouaux St. Helier Jersey JE2 4ZJ, Channel Islands Tel: +44 1534 715 472 Mobile: +44 7797 738 777 Attn. Lucy Fowler E-mail: lucy.fowler.@lydianinternational.co.uk Toronto Office 34, King Street East 9th Floor Toronto Ontario M5C 2X8 Canada Tel: +1 416 504 8001 E-mail: info@lydianinternational.co.uk Operations Office - Armenia Aygedzor District 1, Building 22, Apartment 37, Yerevan 0019, Republic of Armenia Tel: +3 741 058 6037 Fax: +3 741 054 6037 Attn. Hayk Aloyan E-mail: hayk.aloyan@lydianinternational.co.uk