The notes at the bottom of this page are an integral part of these statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended 31 December 2010
1. Nature of operations
The company and its subsidiaries (the 'group') together with its joint ventures carry out exploration and gold mining activities. Currently there are two operating mines in Mali, West Africa: The Morila gold mine, which commenced production in October 2000, and the Loulo mine complex, which commenced production in November 2005. The group also operates a third mine in Côte d'Ivoire, Tongon, which poured its first gold in November 2010. The group also has a portfolio of exploration projects in West and Central Africa.
The interests of the group in its operating mines are held through Morila SA ('Morila') which owns the Morila mine, Somilo SA ('Somilo') which owns the Loulo mine and Tongon SA ('Tongon') which owns the Tongon mine. Randgold holds an effective 40% interest in Morila, following the sale to AngloGold Ashanti Limited on 3 July 2000 of one-half of Randgold's subsidiary, Morila Limited. Management of Morila Limited, the 80% shareholder of Morila SA, is effected through a joint venture committee, with Randgold and AngloGold Ashanti each appointing one-half of the members of the committee. From the date of acquisition AngloGold Services Mali SA ('Anser'), a subsidiary of AngloGold Ashanti, was the operator of Morila. On 15 February 2008 Randgold assumed responsibility for the operatorship.
Randgold holds an effective 80% interest in Somilo. The remaining 20% interest is held by the Malian government. Randgold is the operator of the Loulo mine.
Randgold holds an effective 89% interest in Tongon, 10% is held by the government of Côte d'Ivoire while the remaining 1% is held by a local Ivorian company.
The group also holds an effective interest of 45% in the Kibali gold project in the Democratic Republic of Congo following the acquisition by the company of a joint venture interest in Moto Goldmines Limited in 2009, in conjunction with AngloGold Ashanti.
The group has various exploration programmes ranging from substantial to early stage in Mali, Senegal, Burkina Faso, Côte d'Ivoire and the Democratic Republic of Congo.
2. Significant accounting policies
The principal accounting policies applied in the preparation of these consolidated and company financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
BASIS OF PREPARATION
The consolidated financial statements of Randgold Resources Limited and its subsidiaries have been prepared in accordance with International Financial Reporting Standards and Interpretations (collectively ('IFRS') issued by the International Accounting Standards Board (IASB) as adopted by the European Union and in accordance with Article 105 of the Companies (Jersey) Law of 1991. The consolidated financial statements also comply with IFRS as issued by the IASB, as is required as a result of our listing on Nasdaq in the US. The differences between IFRS as adopted by the European Union and IFRS as issued by the IASB have not had a material impact on the consolidated financial statements for the years presented. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, and various financial assets and financial liabilities (including derivative instruments) which are carried at fair value. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the company's accounting policies. The areas involving a high degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in note 3.
The going concern basis has been adopted in preparing the financial statements. The directors have no reason to believe that the group and company will not be a going concern in the foreseeable future based on forecasts and available cash resources. The viability of the company and the group is supported by the financial statements.
The group and company have adopted the following standards, amendments to standards and interpretations which are effective for the first time this year. Their impact is discussed below. Those standards, amendments to standards and interpretations that are effective for the first time this year but have no impact on the group or company, and are not expected to have an impact in the future, have not been included below.
- Amendments to IFRIC 9 and IAS 39: Embedded Derivatives (effective for annual periods beginning on or after 30 June 2009). This amendment clarifies the treatment of embedded derivatives in host contracts that are reclassified out of fair value through profit or loss following the changes introduced by the Amendments to IAS 39 and IFRS 7: Reclassification of Financial Instruments. This has not had an impact on the group or the company in the current year but may have an impact in future.
- Revised IFRS 3: Business Combinations (effective for annual periods beginning on or after 1 July 2009). The basic approach of the existing IFRS 3 to apply acquisition accounting in all cases and identify an acquirer is retained in this revised version of the standard. It also includes much of the current guidance for the identification and recognition of intangible assets separately from goodwill. However, in some respects the revised standard may result in very significant changes, including: The requirement to write off all acquisition costs to profit or loss instead of including them in the cost of investment; the requirement to recognise an intangible asset even if it cannot be reliably measured; and, an option to gross up the statement of financial position for goodwill attributable to minority interests (which are renamed 'non-controlling interests'). The revised standard does not require the restatement of previous business combinations. This has not had an impact on the group or company in the current year but may have an impact in future.
- Amendment to IAS 27: Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 July 2009). This amendment affects in particular the acquisition of subsidiaries achieved in stages and disposals of interests, with significant differences in the accounting depending on whether or not control is obtained as a result of the transaction, or where a transaction results only in a change in the percentage of a controlling interest. The amendment does not require the restatement of previous transactions. This has not had an impact on the group or company in the current year but may have an impact in future.
- Amendment to IAS 39: Financial Instruments – Recognition and Measurement: Eligible Hedged Items (effective for annual periods beginning on or after 1 July 2009). This amendment clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in the designation of a one-sided risk in a hedged item, and inflation in a financial hedged item. This has not had an impact on the group or company in the current year but may have an impact in future.
- Improvements to IFRSs: 2010 (effective for annual periods beginning on or after 1 January 2010). The improvements in this amendment clarify the requirements of IFRSs and eliminate inconsistencies within and between standards. This has not had a significant impact on the group or company.
- Amendments to IFRS 2: Group Cash-settled Share-based Payment Transactions (effective for annual periods beginning on or after 1 January 2010). This amendment clarifies that, where a parent (or another group entity) has an obligation to make a cash-settled share-based payment to another group entity's employees or suppliers, the entity receiving the goods or services should account for the transaction as equity-settled. The amendment also moves the IFRIC 11 requirements in respect of equity-settled share-based payment transactions among group entities and the clarification of the scope of IFRS 2 contained within IFRIC 8 into IFRS 2 itself. This has not had an impact on the group or company in the current year but may have an impact in future. The following standards, amendment to standards and interpretations which have been recently issued or revised have not been adopted early by the group or company but may have an impact in the future; their expected impact is discussed below.Standards, amendments to standards and interpretations that are not expected to impact the group or company, are not included below.
- Classification of Rights Issues (Amendment to IAS 32) (effective for annual periods beginning on or after 1 February 2010). This Amendment addresses the accounting for rights issues (rights, options or warrants) that are denominated in a currency other than the functional currency of the issuer. Previously such rights issues were accounted for as derivative liabilities. However, the Amendment requires that, provided the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments, such rights issues are classified as equity regardless of the currency in which the exercise price is denominated. This will be applied in the year ending 31 December 2011 but is not expected to have an immediate impact on the company or group.
- IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010). This Interpretation addresses transactions in which an entity issues equity instruments to a creditor in return for the extinguishing of all or part of a financial liability. Broadly, it applies to transactions where the two parties are acting only in their capacity as lender and borrower. It does not address the appropriate treatment for the creditor and does not apply to arrangements in which liabilities are extinguished in return for equity instruments in accordance with the original terms of the financial liability.
For transactions within its scope, where the whole liability is extinguished, the Interpretation requires the equity instruments issued to be measured at their fair value and the difference between that fair value and the carrying value of the financial liability extinguished to be recognised in profit or loss. Where only part of the financial liability is extinguished, some allocation of the consideration between the extinguished portion of the liability and the part of the liability that remains outstanding may be required. This will be applied in the year ending 31 December 2011 but is not expected to have an immediate impact on the company or group.
- Revised IAS 24 Related Party Disclosures (effective for annual periods beginning on or after 1 January 2011). The revision to IAS 24 is in response to concerns that the previous disclosure requirements and the definition of a related party were too complex and difficult to apply in practice, especially in environments where government control is pervasive. The revised standard addresses these concerns by:
- Providing a partial exemption for governmentrelated entities – Until now, if a government controlled, or a significantly influenced, an entity, the entity was required to disclose information about all transactions with other entities controlled, or significantly influenced by the same government. The revised Standard requires such entities to disclose information about individually and collectively significant related party transactions only.
- Providing a revised definition of a related party – The structure of definition of a related party has been simplified and inconsistencies eliminated. Illustrative examples have also been added. The revised definition will mean that some entities will have more related parties for which disclosures will be required. The entities that are most likely to be affected are those that are part of a group that includes both subsidiaries and associates, and entities with shareholders that are involved with other entities.
This will be applied in the year ending 31 December 2011 but is not expected to have an immediate impact on the company or group.
- Improvements to IFRSs (2010) (effective for annual periods beginning on or after 1 January 2011). The improvements in this Amendment clarify the requirements of IFRSs and eliminate inconsistencies within and between Standards. The changes include amendments to:
- IFRS 3 (Revised 2008) 'Business combinations' including: (i) Clarification that the treatment of contingent consideration arising in business combinations occurring before the effective date of IFRS 3(R) continues to be treated under the old requirements. (ii) Limiting the choice to measure non-controlling interests at a proportionate share in recognised amounts of the acquiree's identified net assets to present ownership interests with other components of the non-controlling interest being measured at fair value. (iii) The inclusion or otherwise in the cost of investment of replacement sharebased payment awards provided to employees of the acquiree.
- IFRS 7 'Financial instruments: Disclosures' including clarification that an entity should provide qualitative disclosures in the context of quantitative disclosures to enable users to link related disclosures and hence form an overall picture of the nature and extent of risks arising from financial instruments.
- IAS 1 (Revised 2007) 'Presentation of financial statements' clarifying that the analysis of components of other comprehensive income in the statement of changes in equity may be presented in a note.
- IAS 34 'Interim financial reporting' clarifying the disclosures required in respect of significant events and transactions during the period.
Improvements to IFRSs (2010) also made minor amendments to the wording of IFRIC 13 'Customer loyalty programmes' regarding the valuation of award credits and the transitional arrangements for amendments to IAS 21 'The effects of changes in foreign exchange rates' and IAS 28 'Investments in associates' in respect of the loss of control or significant influence which were introduced by IAS 27 (as amended 2008) 'Consolidated and separate financial statements'. This will be applied in the year ending 31 December 2011 but is not expected to have an immediate impact on the company or group.
- Disclosures – Transfers of Financial Assets (Amendments to IFRS 7) (effective for annual periods beginning on or after 1 July 2011). This Amendment requires the disclosure of information in respect of all transferred financial assets that are not derecognised and for any continuing involvement in a transferred asset, existing at the reporting date, irrespective of when the related transfer transaction occurred. The disclosures are intended to enable users of financial statements: (a) to understand the relationship between transferred financial assets that are not derecognised in their entirety and the associated liabilities; and (b) to evaluate the nature of, and risks associated with, the entity's continuing involvement in derecognised financial assets.
These enhanced disclosures are likely to affect, among others, entities that have debt factoring arrangements. These amendments are not yet endorsed by the EU. This will be applied in the year ending 2012 but is not expected to have an immediate impact on the company or group.
- Deferred Tax: Recovery of Underlying Assets (Amendments to IAS 12) (effective for annual periods beginning on or after 1 January 2012). IAS 12 requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. It can be difficult and subjective to assess whether recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40 Investment Property. The amendment provides a practical solution to the problem by introducing a presumption that recovery of the carrying amount will, normally, be through sale. As a result of the amendments, SIC-21 Income Taxes - Recovery of Revalued Non-Depreciable Assets would no longer apply to investment properties carried at fair value. The amendments also incorporate into IAS 12 the remaining guidance previously contained in SIC-21, which is accordingly withdrawn. These amendments are not yet endorsed by the EU. This will be applied in the year ending 2012 but is not expected to have an immediate impact on the company or group.
- IFRS 9 Financial Instruments (effective for annual periods beginning on or after 1 January 2013). IFRS 9 will eventually replace IAS 39 in its entirety. However, the process has been divided into three main components: Classification and measurement; impairment; and, hedge accounting. As each phase is completed, it will delete the relevant portions of IAS 39 and create new chapters in IFRS 9.
To date IFRS 9 addresses only the classification and measurement of financial instruments. The requirements for financial assets are that they should be:
- Classified on the basis of the entity's business model for managing the financial assets and the contractual cash flow characteristics of the financial asset;
- measured at amortised cost if it meets two conditions: (a) The entity's business model is to hold the financial asset in order to collect the contractual cash flows; and, (b) the contractual terms of the asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principle outstanding; and,
- subsequently measured at amortised cost or fair value depending on the business model of the entity and the terms of the instrument.
Hybrid contracts with a host that is within the scope of IFRS 9 (ie a financial host) must be classified in its entirety in accordance with the classification approach stated above. This eliminates the existing IAS 39 requirements to separately account for an embedded derivative and a host contract. The embedded derivative requirements under IAS 39 continue to apply where the host contract is a non-financial asset and for financial liabilities.
The requirements for classifying and measuring financial liabilities are mostly unchanged from from those set out in IAS 39.
IFRS 9 includes an accounting policy choice allowing investments in equity instruments to be measured at fair value through other comprehensive income. This is an irreversible election made, on an instrument by instrument basis, at the date of initial recognition. Where this option is not taken, all equity instruments with the scope of IFRS 9 will be classified as fair value through profit or loss. Irrespective of the policy choice made, dividends received on equity instruments will always be recognised in profit or loss.
Subsequent reclassification of financial assets between the amortised cost and fair value categories is permitted only when an entity changes its business model for managing its financial assets.
The held to maturity and available for sale classifications have been eliminated. This standard has not yet been endorsed by the EU. This will be applied in the year ending 31 December 2013, once endorsed by the EU. We will review the impact on the company and group closer to the date of implementation, but it is currently expected that it will result in a reclassification of available for sale assets.
The consolidated financial information includes the financial statements of the company, its subsidiaries and the company's proportionate share in joint ventures using uniform accounting policies for like transactions and other events in similar circumstances.
Subsidiaries are entities over which the group has the power to govern the financial and operating policies, generally accompanying an interest of more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the group. The cost of an acquisition is measured at the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Acquisition costs are expensed. Identifiable assets acquired (including mineral property interests) and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the group's share of the identifiable net assets acquired is recorded as goodwill or other identifiable intangible assets. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the statement of comprehensive income.
Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group.
Joint ventures are those entities in which the group holds a long term interest and which are jointly controlled by\ the group and one or more joint venture partners under a contractual arrangement.
The group's interest in such jointly controlled entities is accounted for by proportionate consolidation. Under this method the group includes its share of the joint venture's individual income and expenses, assets and liabilities and cash flows on a line by line basis with similar items in the group's financial statements. Intercompany accounts and transactions are eliminated on consolidation.
The group recognises the portion of gains or losses on the sale of assets by the group to the joint venture that is attributable to the other joint venture partners. The group does not recognise its share of profits or losses from the joint venture that result from the purchase of assets by the group from the joint venture until it resells the assets to an independent party. However, if a loss on the transaction provides evidence of a reduction in the net realisable value of current assets or an impairment loss, the loss is recognised immediately. The results of joint ventures are included from the effective dates of acquisition and up to the effective dates of disposal.
The cost of a joint venture acquisition is measured at the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired (including mineral property interests) and liabilities and contingent liabilities assumed in a joint venture acquisition are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the group's share of the identifiable net assets acquired is recorded as goodwill or other identifiable intangible assets. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the statement of comprehensive income.
INVESTMENT IN SUBSIDIARIES AND JOINT VENTURES
Are stated at cost less any provisions for impairment in the financial statements of the company. Dividends are accounted for when the company becomes entitled to receive them. On the disposal of an investment, the difference between the net disposal proceeds and the carrying amount is charged or credited to the statement of comprehensive income.
An operating segment is a group of assets and operations engaged in performing mining or advanced exploration that are subject to risks and returns that are different from those of other segments. Other parts of the business are aggregated and treated as part of a 'corporate and exploration' segment. The group provides segmental information using the same categories of information the group's chief operating decision maker utilises. The group's chief operating decision maker is considered by management to be the board of directors. The group has only one business segment, that of gold mining. Segment analysis is based on individual mining operations and exploration projects that have a significant amount of capitalised expenditure or other fixed assets.
FOREIGN CURRENCY TRANSLATION
Functional and presentation currency
Items included in the financial statements of each of the group's entities are measured using the currency of the primary economic environment in which the entity operates ('the functional currency'). The consolidated financial statements are presented in US dollars, which is the group and the company's functional and presentation currency.
Transactions and balances
Foreign currency transactions are translated into the relevant functional currency using the exchange rates prevailing at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income.
The results and financial position of material group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentational currency are translated into the presentation currency as follows:
- assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position;
- income and expenses for each statement of comprehensive income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions); and
- all resulting exchange differences are recognised as a separate component of equity.
Mineral properties acquired are recognised at fair value at the acquisition date. Mineral properties are tested annually for impairment on the same basis that property, plant and equipment are when there is an indication of impairment. Mineral properties will be amortised on a units of production basis when the related mine commences production.
PROPERTY, PLANT AND EQUIPMENT
Undeveloped properties upon which the group has not performed sufficient exploration work to determine whether significant mineralisation exists are carried at original acquisition cost. Where the directors consider that there is little likelihood of the properties being exploited, or the value of the exploitable rights has diminished below cost, an impairment is recorded.
Long-lived assets including development costs and mine plant facilities are initially recorded at cost. Where relevant the estimated cost of dismantling the asset and remediating the site is included in the cost of property, plant and equipment, subsequently they are measured at cost less accumulated amortisation and impairment.
Development costs and mine plant facilities relating to existing and new mines are capitalised. Development costs consist primarily of direct expenditure incurred to establish or expand productive capacity and are capitalised until commercial levels of production are achieved, after which the costs are amortised.
Short-lived assets including non-mining assets are shown at cost less accumulated depreciation and impairment.
Depreciation and amortisation
Long-lived assets include mining properties, such as freehold land, metallurgical plant, tailings and raw water dams, power plant and mine infrastructure, as well as mine development costs. Depreciation and amortisation are charged over the life of the mine (or over the remaining useful life of the asset, if shorter) based on estimated ore tonnes contained in proven and probable reserves, to reduce the cost to estimated residual values. Proven and probable ore reserves reflect estimated quantities of economically recoverable reserves, which can be recovered in the future from known mineral deposits. Total proven and probable reserves are used in the depreciation calculation. The remaining useful lives for Morila and Loulo are estimated at four and a minimum of 19 years respectively. Any changes to the expected life of the mine (or asset) are applied prospectively in calculating depreciation and amortisation charges. Short-lived assets which include motor vehicles, office equipment and computer equipment are depreciated over estimated useful lives of between two to five years but limited to the remaining mine life. Residual values and useful lives are reviewed, and adjusted if appropriate, at each statement of financial position date. Changes to the estimated residual values or useful lives are accounted for prospectively.
The carrying amount of the property, plant and equipment of the group is compared to the recoverable amount of the assets whenever events or changes in circumstances indicate that the net book value may not be recoverable. The recoverable amount is the higher of value in use and the fair value less cost to sell. In assessing the value in use, the expected future cash flows from the assets is determined by applying a discount rate to the anticipated pre-tax future cash flows. The discount rate used is derived from the group's weighted average cost of capital. An impairment is recognised in the statement of comprehensive income to the extent that the carrying amount exceeds the assets' recoverable amount. The revised carrying amounts are amortised in line with group accounting policies.
A previously recognised impairment loss is reversed if the recoverable amount increases as a result of a reversal of the conditions that originally resulted in the impairment. This reversal is recognised in the statement of comprehensive income and is limited to the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised in prior years. Assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units) for purposes of assessing impairment. The estimates of future discounted cash flows are subject to risks and uncertainties including the future gold price. It is therefore reasonably possible that changes could occur which may affect the recoverability of mining assets.
All stripping costs incurred (costs incurred in removing overburden to expose the ore) during the production phase of a mine are treated as variable production costs and as a result are included in the cost of inventory produced during the period that the stripping costs are incurred.
Include ore stockpiles, gold in process and supplies and spares and are stated at the lower of cost or net realisable value. The cost of ore stockpiles and gold produced is determined principally by the weighted average cost method using related production costs. Costs of gold inventories include all costs incurred up until production of an ounce of gold such as milling costs, mining costs and directly attributable mine general and administration costs but exclude transport costs, refining costs and royalties. Net realisable value is determined with reference to current market prices. Morila uses a selective mining process and has a few grade categories. Full grade ore is defined as ore above 1.4g/t and marginal ore is defined as ore below 1.4g/t. For Loulo, high grade ore is defined as ore above 3.5g/t and medium grade is defined as ore above 2.0g/t. All stockpile grades are currently being processed and all ore is expected to be fully processed. This does not include high grade tailings at Morila, which are carried at zero value due to uncertainty as to whether they will be processed through the plant. For Loulo, Yalea material less than 0.8g/t is classified as mineralised waste and is not in inventory, while material less than 0.7g/t from Gara is regarded as mineralised waste and is not in inventory.
The processing of ore in stockpiles occurs in accordance with the life of mine processing plan that has been optimised based on the known mineral reserves, current plant capacity and mine design. Stores and materials consist of consumable stores and are valued at weighted average cost after appropriate impairment of redundant and slow moving items. Consumable stock for which the group has substantially all the risks and rewards of ownership are brought on to the statement of financial position.
Is recognised on a time proportion basis, taking into account the principal outstanding and the effective rate over the period to maturity. Borrowing cost is expensed as incurred except to the extent that it relates directly to the construction of property, plant and equipment during the time that is required to complete and prepare the asset for its intended use, when it is capitalised as part of property, plant and equipment. Borrowing cost is capitalised as part of the cost of the asset where it is probable that the asset will result in economic benefit and where the borrowing cost can be measured reliably. No interest or borrowing costs have been capitalised during the year.
These are measured as set out below. Financial instruments carried on the statement of financial position include cash and cash equivalents, receivables, accounts payable, borrowings, derivative financial instruments, and available for sale financial assets.
The group uses derivative financial instruments such as gold forward contracts to manage the risks associated with commodity prices. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value.
The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The group designates certain derivatives as hedges of highly probable forecast transactions (cash flow hedges). The fair value of derivative financial instruments that are traded on an active market is based on quoted market prices at the statement of financial position date. The fair value of financial instruments not traded on an active market is determined using appropriate valuation techniques. At the inception of the transaction, the group documents the relationship between hedge instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. Refer to note 21 for treatment of the group's gold contracts.
Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts accumulated in equity are recycled in the statement of comprehensive income in the periods when the hedged item will affect profit or loss (for instance when the forecast sale that is hedged takes place). When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to profit or loss. The fair values of derivative instruments used for hedging purposes are disclosed in note 21. Movements on the hedging reserve in shareholders' equity are shown in note 21. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months.
Are recognised initially at fair value. There is a rebuttable presumption that the transaction price is fair value unless this could be refuted by reference to market indicators. Subsequently, receivables are measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable may be impaired. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the statement of comprehensive income.
Cash and cash equivalents
Cash and cash equivalents are carried in the statement of financial position at cost. For the purpose of the cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call with banks, other short term highly liquid investments with a maturity of three months or less at the date of purchase and bank overdrafts. In the statement of financial position, bank overdrafts are included in borrowings in current liabilities.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. Availablefor- sale financial assets are designated on acquisition. They are normally included in current assets and are carried at fair value. Where a decline in the fair value of an available-for-sale financial asset constitutes objective evidence of impairment, the amount of the loss is recognised in the statement of comprehensive income, other movements in fair value are recognised in other reserves in equity.
Are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of comprehensive income over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the statement of financial position date.
Accounts payable and other short term monetary liabilities, are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.
The net present value of estimated future rehabilitation costs is provided for in the financial statements and capitalised within mining assets on initial recognition. Rehabilitation will generally occur on closure or after closure of a mine. Initial recognition is at the time of the disturbance occurring and thereafter as and when additional disturbances take place. The estimates are reviewed annually to take into account the effects of inflation and changes in estimates and are discounted using rates that reflect the time value of money. Annual increases in the provision due to the unwinding of the discount are recognised in the statement of comprehensive income as a finance cost. The present value of additional disturbances and changes in the estimate of the rehabilitation liability are capitalised to mining assets against an increase in the rehabilitation provision. The rehabilitation asset is amortised as noted previously. Rehabilitation projects undertaken, included in the estimates, are charged to the provision as incurred.
Environmental liabilities, other than rehabilitation costs, which relate to liabilities arising from specific events, are expensed when they are known, probable and may be reasonably estimated.
Are recognised when the group has a present legal or constructive obligation as a result of past events where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made.
Current tax is the tax expected to be payable on the taxable income for the year calculated using rates (and laws) that have been enacted or substantively enacted by the statement of financial position date. It includes adjustments for tax expected to be payable or recoverable in respect of previous periods.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the temporary difference arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the statement of financial position date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
Deferred tax is provided on temporary differences arising on investments in subsidiaries and joint ventures, except where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future.
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from the proceeds.
The group has defined contribution plans. A defined contribution plan is a pension plan under which the group pays fixed contributions into a separate entity. The group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. For defined contribution plans, the group pays contributions to publicly or privately administered provident funds on a mandatory, contractual or voluntary basis. The group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expenses when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after statement of financial position date are discounted to present value.
Profit-sharing and bonus plans
The group recognises a liability and an expense for bonuses. The group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation.
The fair value of the employee services received in exchange for the grant of options or restricted shares is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options or restricted shares determined at the grant date:
- including any market performance conditions; and
- excluding the impact of any service and non-market performance vesting conditions (for example, proﬁtability, sales growth targets and remaining an employee of the entity over a speciﬁed time period).
Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable or the number of shares that the employee will ultimately receive. This estimate is revised at each statement of financial position date and the difference is charged or credited to the statement of comprehensive income, with a corresponding adjustment to equity. Market performance conditions are included in the fair value assumptions on the grant date with no subsequent adjustment.
The proceeds received on exercise of the options net of any directly attributable transaction costs are credited to equity.
When the options are exercised, the company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.
Determining whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires an assessment of whether fulfilment of the arrangement is dependent on the use of a specific asset or assets and whether the arrangement conveys a right to use the asset. Leases of plant and equipment where the group assumes a significant portion of risks and rewards of ownership are classified as a finance lease. Finance leases are capitalised at the estimated present value of the underlying lease payments. Each lease payment is allocated between the liability and the finance charges to achieve a constant rate on the finance balance outstanding. The interest portion of the finance payment is charged to the statement of comprehensive income over the lease period. The plant and equipment acquired under the finance lease are depreciated over the useful lives of the assets, or over the lease term if shorter.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the statement of comprehensive income on a straight-line basis over the period of the lease.
The company enters into contracts for the sale of gold. Revenue arising from gold sales under these contracts is recognised when the price is determinable, the product has been delivered in accordance with the terms of the contract, the significant risks and rewards of ownership have been transferred to the customer and collection of the sales price is reasonably assured. These criteria are met when the gold leaves the mines' smelt houses. As sales from gold contracts are subject to customer survey adjustment, sales are initially recorded on a provisional basis using the group's best estimate of the contained metal. Subsequent adjustments are recorded in revenue to take into account final assay and weight certificates from the refinery, if different from the initial certificates. The differences between the estimated and actual contained gold have historically not been significant.
Losses on matured hedges are included within revenue as these pertain to losses incurred as gold hedges are settled and the actual price received (see accounting policy on derivatives).
Exploration and evaluation costs
The group expenses all exploration and evaluation expenditures until the directors conclude that a future economic benefit is more likely than not of being realised, ie 'probable'. While the criteria for concluding that an expenditure should be capitalised is always probable, the information that the directors use to make that determination depends on the level of exploration. Exploration and evaluation expenditure on brownfield sites, being those adjacent to mineral deposits which are already being mined or developed, is expensed as incurred until the directors are able to demonstrate that future economic benefits are probable through the completion of a prefeasibility study, after which the expenditure is capitalised as a mine development cost. A 'prefeasibility study' consists of a comprehensive study of the viability of a mineral project that has advanced to a stage where the mining method, in the case of underground mining, or the pit configuration, in the case of an open pit, has been established, and which, if an effective method of mineral processing has been determined, includes a financial analysis based on reasonable assumptions of technical, engineering, operating economic factors and the evaluation of other relevant factors. The prefeasibility study, when combined with existing knowledge of the mineral property that is adjacent to mineral deposits that are already being mined or developed, allow the directors to conclude that it is more likely than not that the group will obtain future economic benefit from the expenditures.
Exploration and evaluation expenditure on greenfield sites, being those where the group does not have any mineral deposits which are already being mined or developed, is expensed until such time as the directors have sufficient information to determine that future economic benefits are probable, after which the expenditure is capitalised as a mine development cost. The information required by directors is typically a final feasibility study however a prefeasibility study may be deemed to be sufficient where the additional work required to prepare a final feasibility study is not significant.
Exploration and evaluation expenditure relating to extensions of mineral deposits which are already being mined or developed, including expenditure on the definition of mineralisation of such mineral deposits, is capitalised as a mine development cost following the completion of an economic evaluation equivalent to a prefeasibility study. This economic evaluation is distinguished from a prefeasibility study in that some of the information that would normally be determined in a prefeasibility study is instead obtained from the existing mine or development. This information when combined with existing knowledge of the mineral property already being mined or developed allow the directors to conclude that more likely than not the group will obtain future economic benefit from the expenditures. Costs relating to property acquisitions are capitalised within development costs.
Dividend distribution to the company's shareholders is recognised as a liability in the group's financial statements in the period in which the dividends are approved by the board of directors and declared to shareholders.
Earnings per share
Is computed by dividing net income by the weighted average number of ordinary shares in issue during the year.
Diluted earnings per share
Is presented when the inclusion of potential ordinary shares has a dilutive effect on earnings per share.
3. Critical accounting estimates and judgements
Some of the accounting policies require the application of significant judgement by management in selecting the appropriate assumptions for calculating financial estimates.
By their nature, these judgements are subject to an inherent degree of uncertainty and are based on historical experience, terms of existing contracts, management's view on trends in the gold mining industry and information from outside sources. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:
FUTURE REHABILITATION OBLIGATIONS
The net present value of current rehabilitation estimates have been discounted to their present value at 3.5% per annum (2009: 3.5%) being an estimate of the prevailing interest rates.
Expenditure is expected to be incurred at the end of the respective mine lives. For further information, including the carrying amounts of the liabilities, refer to note 15. A 1% change in the discount rate on the group's rehabilitation estimates would result in an impact of US$2.8 million (2009: US$1.4 million) on the provision for environmental rehabilitation, and an impact of US$0.2 million (2009: US$0.1 million) on the statement of comprehensive income.
GOLD PRICE ASSUMPTIONS
The following gold prices were used in the mineral reserves optimisation calculations:
Changes in the gold price used could result in changes in the mineral reserve optimisation calculations. Mine modelling is a complex process and hence it is not feasible to perform sensitivities on gold price assumptions.
DETERMINATION OF ORE RESERVES
The group estimates its ore reserves and mineral resources based on information compiled by Competent Persons as defined in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves of December 2004 (the JORC code). Reserves determined in this way are used in the calculation of depreciation, amortisation and impairment charges, as well as the assessment of the carrying value of mining assets.
There are numerous uncertainties inherent in estimating ore reserves and assumptions that are valid at the time of estimation may change significantly when new information becomes available. Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of reserves and may, ultimately, result in the reserves being restated. For further information refer to Annual Reserves and Resources Declaration on page 58.
UNCERTAINTIES RELATING TO TRANSACTIONS WITH A CONTRACTOR
As explained in note 25 to the financial statements, there are uncertainties relating to the value of the securities held in respect of advances to a contractor and also a claim relating to the Loulo development. The amounts reflected in the financial statements reflect the directors' best estimate of the amount that will be recovered in respect of the advances and the outcome of the dispute relating to the cost of the development.
Refer to note 18 for the key assumptions used in determining the value of share-based payments.
AREAS OF JUDGEMENT
Areas of judgement made in applying specific accounting policies that have the most significant effect on the amounts recognised in the financial statements are:
Exploration and evaluation expenditure
The group has to apply judgement in determining whether exploration and evaluation expenditure should be capitalised or expensed. Management exercises this judgement based on the results of economic evaluations, prefeasibility or feasibility studies. Costs are capitalised where those studies conclude that more likely than not the group will obtain future economic benefit from the expenditures.
There are several methods for calculating depreciation, ie the straight line method, the production method using ounces produced and the production method using tonnes milled. The directors believe that the tonnes milled method is the best indication of plant and infrastructure usage.
Carrying values of property, plant and equipment and mineral properties
The group assesses at each reporting period whether there is any indication that these assets may be impaired. If such indication exists, the group estimates the recoverable amount of the asset. The recoverable amount is assessed by reference to the higher of 'value in use' (being the net present value of expected future cash flows of the relevant cash generating unit) and 'fair value less cost to sell'. The estimates used for impairment reviews are based on detailed mine plans and operating plans. Future cash flows are based on estimates of:
- the quantities of the reserves and mineral resources for which there is a high degree of confidence in economic extraction;
- future production levels;
- future commodity prices;
- future cash cost of production, capital expenditure, close down, restoration and environmental clean up; and
- future gold prices (a US$1 000 gold price was used for the current year's impairment calculations (2009: US$1 000).
4. Income taxes
The company is not subject to income tax in Jersey. Somilo SA (Loulo) benefited from a five year tax holiday in Mali until the tax exoneration period expired on 7 November 2010. Tongon SA benefits from a five year tax holiday in Côte d'Ivoire from the commencement of production in November 2010. The benefit of the tax holidays to the group was to increase its net profit by US$30.2 million (2009: US$26.7 million). Accordingly, had the group not benefited from the tax holidays in Mali and Côte d'Ivoire, earnings per share would have been reduced by US$0.33 and US$0.33 for the years ended 31 December 2010 and 2009 respectively. Under Malian tax law, income tax is based on the greater of 35% of taxable income or 0.75% of gross revenue. Under Ivorian tax law, income tax is based on the greater of 25% of taxable income or 0.5% of gross revenue. The Morila, Loulo and Tongon operations have no assessable capital expenditure carry forwards or assessable tax losses, as at 31 December 2010 and 2009 respectively, for deduction against future mining income.
5. Share capital and premium
The total authorised number of ordinary shares is 120 million (2009: 100 million) of US 5 cents each (2009: US 5 cents). All issued shares are fully paid. The total number of issued shares at 31 December 2010 was 91 082 170 shares (2009: 90 100 795). This excludes restricted shares granted but not yet vested and 7 200 treasury shares. Please refer to the statement of changes in equity for more detail on the annual movement of the number of ordinary shares, share capital and share premium, including the movement arising from the issue of restricted shares and exercise of share options.
6. Earnings and dividends per share
Refer to note 18 for details on share options issued to employees. US$15.3 million (US$0.17 per share) was paid as dividends in 2010 (2009: US$9.9 million / US$0.13 per share). On 31 January 2011, the board of directors approved an annual dividend of US$0.20 per share which will result in an aggregate dividend payment of US$18.2 million and is expected to be paid in May 2011. The proposed 2011 dividend is subject to shareholder approval at the annual general meeting to be held on 3 May 2011.
Included in the Moto options are 63 548 options outstanding as at 31 December 2010 (2009: 121 800) which were antidilutive. The total number of potentially issuable shares as at 31 December 2010 is 1 691 174 (2009: 2 643 233).
7.1 Advances to contractors comprise advances made to a contractor at Loulo, MDM Ferroman (Pty) Ltd (in liquidation) ('MDM') of US$10.7 million (2009: US$11.6 million), as well as advances made to BCM of US$7.7 million (2009: US$6.7 million), Afrilog of US$4.1 million (2009: US$9.2 million) and Trident of US$1.4 million (2009: nil). Significant uncertainties exist relating to the recoverability of advances made to MDM. More detail is given in note 25 to the financial statements.
7.2 The taxation debtor relates to indirect taxes owing to the group by the State of Mali, including TVA balances at Loulo US$11.6 million (2009: U$S37 million), as well as refundable duty taxes US$1.8 million (2009: US$1.7 million) and custom duties US$0.6 million (US$0.7 million).
7.3 Prepayments and other receivables include a balance of US$2 million (2009: US$3.7 million) of deferred cash consideration in respect of the sale of the Kiaka project. Refer to note 13 for further details.
The creation and release of provision for impaired receivables have been included in mining and processing costs in the statement of comprehensive income. The other classes within trade and other receivables do not contain impaired assets. The credit quality of receivables that are not past due or impaired remains very high. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The group does not hold any collateral as security. Refer to note 20 for further information on the concentration of credit risk.
All receivable balances are due within 30 days, except for a loan made to Sokimo of US$1.3 million which is due after 12 months.
8. Inventories and ore stockpiles
Ore stockpiles have been split between long and short term based on current Life of Mine plan estimates. The gold in process balance includes an amount of US$11.3 million (2009: US$nil) of gold in process and unsold dore at Tongon at year end following disruptions in Côte d'Ivoire.
9. Property, plant and equipment
Included in property, plant and equipment are long-lived assets which are amortised over the life of the mine and comprise the metallurgical plant, tailings and raw water dams, power plant and mine infrastructure. The net book value of these assets was US$793.6 million as at 31 December 2010 (2009: US$488.8 million). The figures in the prior year company column relate to the mine development at Tongon, at cost. These balances have been transferred to Tongon during 2009.
Included in property, plant and equipment are short-lived assets which are amortised over their useful lives and are comprised of motor vehicles and other equipment. The net book value of these assets was US$42.4 million as at 31 December 2010 (2009: US$10.5 million).
Included in property, plant and equipment are undeveloped property costs of US$7.3 million (2009: US$7.9 million).
MINE DEVELOPMENT COSTS
US$30.6 million, US$15.9 million and US$12.2 million were capitalised during the year on the Kibali, Gounkoto and Massawa projects, following the successful completion of prefeasibility studies on these projects. The figures in the company column relate to the costs which have been capitalised on the Gounkoto and Massawa projects.
No borrowing costs were capitalised as part of additions during the year as no borrowing costs were incurred (2009: nil). Refer to the property, plant and equipment accounting policy note on page 107 for details of each asset category's useful economic life.
10. Mineral properties
11. Investments and loans in subsidiaries and joint ventures
12. Deferred taxation
Temporary differences which are expected to be realised during the Tongon tax holiday are recognised at 0%. The group did not recognise deferred income tax assets of US$3.4 million (2009: US$3.5 million) in respect of rehabilitation costs at Morila amounting to US$9.6 million (2009: US$10 million) that can be carried forward against future taxable incomes but are expected to be incurred once production at the mine has ceased and there is no taxable income.
13. Available for sale financial assets
Additions in the year ending 31 December 2010 consisted of 1.0 million shares being acquired in Volta Resources Inc, as well as the exercise of warrants in Volta Resources Inc resulting in 0.5 million shares being acquired.
Additions in the year ending 31 December 2009 consisted of the group's 50% share of 7.9 million shares in Kilo Goldmines Limited valued at US$1.6 million and an investment in 20 million Volta Resources Inc shares valued at US$7.3 million on acquisition.
The fair value of these investments is US$1.5 million (2009: US$1.8 million) and US$14.4 million (2009: US$16 million) respectively. The shares in Volta Resources were acquired as part of the consideration received for the sale of the Kiaka project in Burkina Faso to Volta Resources. The shares in Kilo Goldmines were acquired as part of the Moto acquisition (refer note 29).
Management has no on-going involvement with the Kiaka project nor Volta Resources and therefore in the absence of significant influence it is deemed to be appropriate to categorise the investments as available for-sale financial assets. Disposals consisted of the sale of 15.5 million shares in Volta Resources, resulting in a profit of US$19.3 million. The auction rate securities ('ARS') have now been disposed with US$42 million received in 2010 following a settlement that was reached in relation to these investments. The gain on settlement of US$13 million has been included in the statement of comprehensive income as a component of finance income and costs. The net effect of this transaction is shown in the table above as 'Settlement of ARS'.
The impairment of asset backed securities has previously been charged to the statement of comprehensive income as a component of finance income and costs.
14. Trade and other payables
14.1 Accruals and other payables include a DTP shareholder loan of US$13 million (2009: US$5.1 million), BCM accruals of US$5 million (2009: US$5 million) and bonus provisions of US$5.3 million (2009: US$ 3.4 million). Accruals and other payables for the company include bonus provisions of US$5.3 million (2009: US$ 3.4 million).
15. Provision for environmental rehabilitation
As at 31 December 2010, US$14 million of the provision relates to Loulo (31 December 2009: US$11.2 million) which is based on estimates provided by environmental consultants. A provision of US$9.7 million (2009: nil) relates to Tongon as production commenced in November 2010. The remaining US$5.9 million relates to Morila (31 December 2009: US$5.7 million). The provisions for rehabilitation costs include estimates for the effect of inflation and changes in estimates and have been discounted to their present value at 3.5% (2009: 3.5%) per annum, being an estimate derived from the risk free rate. Limited environmental rehabilitation regulations currently exist in Mali and in Côte d'Ivoire to govern the mines, so the directors have based the provisions for environmental rehabilitation on standards set by the World Bank, which require an environmental management plan, an annual environmental report, a closure plan, an up-to-date register of plans of the facility, preservation of public safety on closure, carrying out rehabilitation works and ensuring sufficient funds exist for the closure works. However, it is reasonably possible that the group's estimate of its ultimate rehabilitation liabilities could change as a result of changes in regulations or cost estimates. The group is committed to rehabilitation of its properties. It makes use of independent environmental consultants for advice and it also uses past experience in similar situations to ensure that the provisions for rehabilitation are adequate. Current Life of Mine plans envisage the expected outflow to occur at the end of the Life of Mine, which is 2013 for Morila, 2029 for Loulo and 2020 for Tongon.
16. Loans from minority shareholders in subsidiaries
The State of Mali loan to Somilo is uncollateralised and bears interest at the base rate of the Central Bank of West African
States plus 2%. The accrual of interest ceased in the last quarter of 2005 per mutual agreement between shareholders.
The loan is repayable from cash flows of the Loulo mine after repayment of all other loans. In the event of a liquidation
of Somilo the shareholder loans and deferred interest are not guaranteed.
17. Financial liabilities - forward gold sales
All gold price forward sales contracts were delivered into during the year.
18. Employment cost
The group contributes to several defined contribution provident funds. The provident funds are funded on the 'money accumulative basis' with the members and company having been fixed in the constitutions of the funds. All the group's employees, other than those directly employed by West African subsidiary companies, are entitled to be covered by the above-mentioned retirement benefit plans. Retirement benefits for employees employed by West African subsidiary companies are provided by the state social security system to which the company and employees contribute a fixed percentage of payroll costs each month.
SHARE-BASED PAYMENTS – SHARE OPTIONS
The fair value of employee services received as consideration for share options (equity settled) of the company is calculated using the Black-Scholes option pricing model. No options were granted during the year. The key assumptions used in this model for options granted during the year ending 31 December 2009 were as follows:
18.1 Volatility is based on the three year historical volatility of the company's shares on each grant date.
18.2 Weighted average share price for the valuation is calculated taking into account the market price on all grant dates.
18.3 The weighted average exercise price is calculated taking into account the exercise price on each grant date. Please refer to page 92 for details provided on share options, including the number and weighted average exercise price of share options outstanding at the beginning and end of each period, options granted, exercised and lapsed during the period.
18.4 The exercise of the options issued in 2009 is subject to a satisfactory performance level being achieved during the 12 month period prior to the exercise date of each tranche of options. The minimum performance level to be achieved is defined as level 3 in the company's performance management system. Similar performance criteria were attached to the options that were issued in previous years. It is expected that most employees who were awarded share options would achieve a level 3 performance.
More detail is given on page 91 and 92 of the remuneration report in respect of options that were issued, exercised and lapsed during the year.
The table below summarises the information about the options outstanding, including options that are not yet exercisable:
The table below summarises the information about the Randgold Resources Share Option Scheme options that are exercisable as at 31 December 2010 and 2009:
Options over 774 163 ordinary shares were issued in relation to Moto options during the year ending 31 December 2009, as part of the acquisition of the joint venture interest in Moto Goldmines Ltd ('Moto') (refer note 29).
The weighted average exercise price of these options as at 15 October 2009 (the date of completion of the Moto acquisition) was US$56.39 per option. The fair value of these share options has been calculated as US$20.2 million. The Black Scholes valuation model was used to determine the fair value of these options.
The table below summarises the information about the options related to the Moto acquisition that were outstanding and exercisable as at 31 December 2010 and 2009:
SHARE-BASED PAYMENTS – RESTRICTED SHARES
Restricted shares issued to directors and management
The company operates a restricted share scheme for directors and management.
The exercise of these restricted shares shall be subject to a satisfactory performance level being achieved during the 12 month period prior to the exercise date of each tranche of shares. The minimum performance level to be achieved is defined as level 3 on the company's performance management system. The majority of employees to whom restricted shares have been granted are expected to meet this level of performance. The restricted shares issued to executive directors are subject to a market performance condition. This has been assessed and has a minimal impact on the fair value estimate at the grant date.
The fair value of the restricted shares is based on the share price on the day date of granting and the share based payment charge is charged to profit evenly between the grant and vesting dates. The restriction on the shares (no dividends received during the vesting period) has a minimal impact on the fair value estimate at the grant date. The restricted shares have an exercise price of nil.
RESTRICTED SHARES ISSUED TO DIRECTORS AND MANAGEMENT
Movements in the number of restricted shares outstanding and their issue prices are as follows:
Refer to the long term incentive: restricted share award table on page 91 of the remuneration report for further details on these shares and the annual movements.
19. Segmental information
Operating segments have been identified on the basis of internal reports about components of the group that are regularly reviewed by the group's chief operating decision maker. The operating segments included in internal reports are determined on the basis of their significance to the group. In particular, operating mines are reported as separate segments and exploration projects that have significant capitalised expenditure or other fixed assets are also reported separately. Other parts of the group, including the RAL1 joint venture, are included with corporate and exploration. The group's chief operating decision maker is considered by management to be the board of directors. An analysis of the group's business segments, excluding intergroup transactions, is set out below. Major customers are not identifiable because all gold is sold to an agent.
20. Financial risk management
In the normal course of its operations, the group is exposed to gold price, currency, interest rate, liquidity and credit risks. In order to manage these risks, the group may enter into transactions which make use of on-balance sheet derivatives. The group does not acquire, hold or issue derivatives for trading purposes. The group has developed a risk management process to facilitate, control and monitor these risks. The board has approved and monitors this risk management process, inclusive of documented treasury policies, counterpart limits, controlling and reporting structures.
CONTROLLING RISK IN THE GROUP
The treasury committee is responsible for risk management activities within the group. The treasury committee reviews and recommends to the board all treasury counterparts, limits, instruments and hedge strategies. At least two members of the treasury committee need to be present for a decision to be made one of whom needs to be an executive director. The treasury committee is only permitted to invest with institutions with investment ratings of AA- or higher. Two of the banks with which the group is holding deposits are rated below the AA- stipulated per the group's policy but above an A rating. Both these banks have secured government backing in one form or another. In the light of the government support for these two banks it was decided to continue to hold a portion of the group's deposits (limited to 10% per institution) with them. The treasury committee is responsible for managing investment, gold price, currency, liquidity and credit risk. The treasury committee monitors adherence to treasury risk management policy and counterpart limits and provides regular reports. The financial risk management objectives of the group are defined as follows:
- safeguarding the group core earnings stream from its major assets through the effective control and management of
- gold price risk, foreign exchange risk and interest rate risk; effective and efficient usage of credit facilities in both the short and long term through the adoption of reliable liquidity management planning and procedures;
- ensuring that investment and hedging transactions are undertaken with creditworthy counterparts; and
- ensuring that all contracts and agreements related to risk management activities are coordinated, consistently throughout the group and comply where necessary with all relevant regulatory and statutory requirements.
Refer to pages 79 and 80 for details on the group's risk factors included in the corporate governance report.
FOREIGN CURRENCY AND COMMODITY PRICE RISK
In the normal course of business, the group enters into transactions denominated in foreign currencies (primarily euro, South African rand and Communauté Financière Africaine franc). As a result, the group is subject to exposure from fluctuations in foreign currency exchange rates. In general, the group does not enter into derivatives to manage these currency risks. Generally, the group does not hedge its exposure to gold price fluctuation risk and sells at market spot prices. Gold sales are disclosed in US dollars and do not expose the group to any currency fluctuation risk. However, during periods of capital expenditure or loan finance, the company may use forward contracts or options to reduce the exposure to price movements, while maintaining significant exposure to spot prices.
These derivatives may establish a fixed price for a portion of future production while the group maintains the ability to benefit from increases in the spot gold price for the majority of future gold production. The group is also exposed to fluctuations in the price of consumables, such as fuel, steel, rubber, cyanide and lime, mainly due to changes in the price of oil, as well as fluctuations in exchange rates.
The group's exposure to foreign currency arises where a company holds monetary assets and liabilities denominated in a currency different to the functional currency of the group which is the US dollar. The following table shows the impact of a 10% change in the US dollar on profit and equity arising as a result of the revaluation of the group's foreign currency financial instruments.
The sensitivities are based on financial assets and liabilities held at 31 December where balances were not denominated in the functional currency of the group. The sensitivities do not take into account the group's sales and costs and the results of the sensitivities could change due to other factors such as changes in the value of financial assets and liabilities as a result of non-foreign exchange influenced factors.
INTEREST RATE AND LIQUIDITY RISK
Fluctuations in interest rates impact on the value of short term cash investments and interest payable on financing activities (including long term loans), giving rise to interest rate risk. In the ordinary course of business, the group receives cash from its operations and is required to fund working capital and capital expenditure requirements.
The group generally enters into variable interest bearing borrowings. This cash is managed to ensure surplus funds are invested in a manner to achieve maximum returns while minimising risks. The group has in the past been able to actively source financing through public offerings, shareholder loans and third party loans.
The group typically holds financial investments with an average maturity of 30 days to ensure adequate liquidity. The maturity of all financial liabilities is set out in note 21. In the ordinary course of business, the group receives cash from the proceeds of its gold sales and is required to fund working capital requirements. This cash is managed to ensure surplus funds are invested in a manner to achieve market-related returns while minimising risks. The group is able to actively source financing at competitive rates. The counterparts are financial and banking institutions of good credit standing. Management believes that the working capital resources, by way of internal sources and banking facilities, are sufficient to fund the group's currently foreseeable future business requirements.
The other financial instruments of the group that are not included in the tables above are non-interest bearing and are therefore not subject to interest rate risk.
CONCENTRATION OF CREDIT RISK
The group's derivative financial instruments and cash balances do not give rise to a concentration of credit risk because it deals with a variety of major financial institutions. Its receivables and loans are regularly monitored and assessed. Receivables are impaired when it is probable that amounts outstanding are not recoverable as set out in the accounting policy note for receivables. Gold bullion, the group's principal product, is produced in Mali. The gold produced is sold to the largest accredited gold refinery in the world. Credit risk is further managed by regularly reviewing the financial statements of the refinery. The group is further not exposed to significant credit risk, as cash is received within a few days of the sale taking place. Included in receivables is US$14 million (2009: US$40.9 million) (refer to note 7) relating to indirect taxes owing to Morila and Loulo by the State of Mali, which are denominated in FCFA. Receivables also include advances to MDM totalling US$10.7 million net of impairment provision (2009: US$11.0 million) (refer to note 25).
CAPITAL RISK MANAGEMENT
The group's objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in the industry, the group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including borrowings and trade and other payables, as shown in the consolidated statement of financial position) less cash and cash equivalents. Total capital is calculated as equity, as shown in the consolidated statement of financial position, plus net debt.
The following table analyses the group's financial liabilities into the relevant maturity groupings based on the remaining period from the statement of financial position to the contractual maturity date. As the amounts disclosed in the table are the contractual undiscounted cash flows, these balances will not necessarily agree with the amounts disclosed in the statement of financial position.
21. Fair value of financial instruments
The following table shows the carrying amounts and fair values of the group's financial instruments outstanding at 31 December 2010 and 2009. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
The table above shows the level of the fair value valuation hierarchy applied to financial instruments carried at fair value. The total financial assets valued using level 1 is US$15.9 million (2009: US$17.8 million) - company: US$14.4 million (2009: US$16 million) - level 2 US$nil (2009:US$29 million) - company: US$nil (2009:US$29 million) - and level 3 US$nil (2009: US$nil). There have been no transfers between the levels of fair value hierarchy during the current or prior year. Randgold Resources does not hold any financial instruments that are fair valued using a level 3 valuation.
These financial instruments were taken out as part of the Loulo project financing, but some of the contracts which matured in 2006 have been rolled forward. For ounces delivered into hedges the net cash proceeds from the sales were limited to the forward price per the contract as per the previous table. These profits/losses have already been recognised in profit or loss, at the original designated delivery date.
ESTIMATION OF FAIR VALUES
Receivables, accounts payable, bank overdrafts and cash and cash equivalents
The carrying amounts are a reasonable estimate of the fair values because of the short maturity of such instruments. Long term receivables are discounted using the effective interest rate which approximates to a market related rate. The rates used and the fair values are stated in note 7.
LONG TERM BORROWINGS
The fair value for the loans from minority shareholders is based on estimated project cash flows which have been discounted at 3% (2009: 3%).
GOLD PRICE CONTRACTS
All gold price forward sales contracts were delivered into during the year. The group is now fully exposed to the spot gold price on gold sales. The year-end exposure is not representative of the exposure during the year, as hedges were being settled during the year.
22. Commitments and contingent liabilities
23. Related party transactions
In terms of the operator agreement between Morila SA and AngloGold Ashanti Services Mali SA, a management fee, calculated as 1% of the total sales of Morila, is payable to AngloGold Services Mali SA quarterly in arrears. With effect from 15 February 2008, Randgold Resources (through Mining Investment Jersey Limited) assumed responsibility for the operatorship of Morila SA and accordingly receives payment of the management fees.
Randgold Resources (through Randgold Resources (Somilo) Ltd) is the operator of Loulo.
Seven Bridges Trading 14 (Pty) Ltd provided administration services to Rockwell Resources RSA (Pty) Ltd. Dr DM Bristow is a non-executive director of Rockwell Resources International. The balances outstanding at year end related to Rockwell were negligible (2009: nil).
Refer to note 11 for details of the company's investments in and loans to subsidiaries and joint ventures within the group.
24. Non-GAAP information
Randgold Resources has identified certain measures that it believes will assist understanding of the performance of the business. As the measures are not defined under IFRS they may not be directly comparable with other companies' adjusted measures. The non-GAAP measures are not intended to be a substitute for, or superior to, any IFRS measures of performance but management has included them as these are considered to be important comparables and key measures used within the business for assessing performance.
These measures are explained further below:
Total cash costs and cash cost per ounce are non-GAAP measures. Total cash costs and total cash costs perounce are calculated using guidance issued by the Gold Institute. The Gold Institute was a non-profit industry association comprising leading gold producers, refiners, bullion suppliers and manufacturers. This institute has now been incorporated into the National Mining Association. The guidance was first issued in 1996 and revised in November 1999. Total cash costs, as defined in the Gold Institute's guidance, include mine production, transport and refinery costs, general and administrative costs, movement in production inventories and ore stockpiles, transfers to and from deferred stripping where relevant and royalties. Under the company's accounting policies, there are no transfers to and from deferred stripping.
Total cash costs per ounce are calculated by dividing total cash costs, as determined using the Gold Institute guidance, by gold ounces sold for the periods presented. Total cash costs and total cash costs per ounce are calculated on a consistent basis for the periods presented. Total cash costs and total cash costs per ounce should not be considered by investors as an alternative to operating profit or net profit attributable to shareholders, as an alternative to other IFRS measures or an indicator of our performance. The data does not have a meaning prescribed by IFRS and therefore amounts presented may not be comparable to data presented by gold producers who do not follow the guidance provided by the Gold Institute. In particular depreciation, amortisation and share-based payments would be included in a measure of total costs of producing gold under IFRS, but are not included in total cash costs under the guidance provided by the Gold Institute. Furthermore, while the Gold Institute has provided a definition for the calculation of total cash costs and total cash costs per ounce, the calculation of these numbers may vary from company to company and may not be comparable to other similarly titled measures of other companies. However, Randgold believes that total cash costs per ounce are useful indicators to investors and management of a mining company's performance as it provides an indication of a company's profitability and efficiency, the trends in cash costs as the company's operations mature, and a benchmark of performance to allow for comparison against other companies.
Cash operating costs and cash operating cost per ounce are calculated by deducting royalties from total cash costs.Cash operating costs per ounce are calculated by dividing cash operating costs by gold ounces sold for the periods presented.
Randgold previously calculated total cash costs per ounce by dividing total cash costs, as defined above, by ounces produced, as permitted under the guidance. Randgold previously calculated cash operating costs per ounce by dividing cash operating costs, as defined above, by ounces produced. Given the significant difference between ounces produced and ounces sold in the year, together with the fact that, under the definitions above, costs relating to ounces produced but not sold are recognised in the quarter when the ounces are actually sold, the company deemed it appropriate to change the bases for these calculations by dividing total costs and cash operating costs by ounces sold, as this would better match the timing of costs and sales recorded. Historically, this change would not have resulted in materially different cash costs per ounce, however, in the current year the difference was significant and consequently the numbers have been restated on this basis.
Gold sales is a non-GAAP measure. It represents the sales of gold at spot and the gains/losses on hedge contracts which have been delivered into at the designated maturity date. It excludes gains/losses on hedge contracts which have been rolled forward to match future sales. This adjustment is considered appropriate because no cash is received/paid in respect of these contracts.
Profit from mining activity is calculated by subtracting total cash costs from gold sales for all periods presented.
The following table reconciles total cash costs and profit from mining activity as non-GAAP measures, to the information provided in the income statement, determined in accordance with IFRS, for each of the periods set out below:
25. Significant uncertainties relating to transactions with a contractor
The directors believe that the group is entitled to recover US$57.6 million from MDM Ferroman (Pty) Ltd ('MDM') (in liquidation), the contractor which was responsible for construction of the Loulo mine ('the project') until the main construction contract was taken back on 30 December 2005. This comprises payments totalling US$32 million which have been capitalised as part of the cost of the project, US$15.2 million in respect of damages arising from the delayed completion of the project, and advances of US$10.7 million - net of an impairment provision of US$1.3 million - (2009: US$11.0 million - net of an impairment provision of US$1.1 million) included in receivables. Recoveries of US$1.2 million are held in trust.
Of this latter amount, US$7 million is secured by performance bonds and the remainder is secured by various personal guarantees and other assets. As part of the group's efforts to recoup the monies owed, MDM was put into liquidation on 1 February 2006. This resulted in a South African Companies Act Section 417 investigation into the business and the financial activities of MDM, its affiliated companies and their directors. This investigation was concluded in June 2007 and the liquidators have released a statement of MDM's assets and liabilities. In light of this the directors believe that the group will be able to recover the US$10.7 million included in receivables. However, this is dependent on the amounts which can be recovered from the performance bonds, personal guarantees and other assets provided as security. Any shortfall is expected to be recovered from any free residue accruing to the insolvent estate. The recovery process has commenced with summons being issued against creditors who received payment from MDM in terms of the South African Insolvency and Companies Acts and against the insurance company which issued the performance bonds. Of the original amount US$1.6 million has been recovered so far and the process of recovery is ongoing and expected to be complete by the end of 2011. The aggregate amount which will ultimately be recovered cannot presently be determined. Recovery of the other US$47.2 million is dependent on the extent to which the group's claim is accepted by the liquidators and the amount in the free residue. The ultimate outcome of this claim cannot be determined at present. The financial statements do not reflect any adjustment to the cost of the Loulo development that may arise from this claim, or any additional income that may arise from the claim for damages, or any charge that may arise from MDM's inability to settle amounts that are determined to be payable by MDM to the group in respect of the Loulo development.
26. Mining and processing costs and other disclosable items
27. Exploration and corporate expenditure
28. Finance income and costs
29. Acquisition of joint venture interest in Moto Goldmines Limited
There were negligible adjustments to the acquisition date fair values as a result of the settlement of acquisition related costs, but due to the immaterial nature of the final settlement of these costs, a revised acquisition table is not presented. There have been no other adjustments to the acquisition date fair value assumptions.
On 15 October 2009 the acquisition of 100% of Moto Goldmines Limited ('Moto'), as announced on 5 August 2009, was completed. Randgold and AngloGold Ashanti Limited, through their indirect jointly owned subsidiary Kibali (Jersey) Ltd, now control Moto, having acquired all 111 085 009 outstanding Moto common shares.
The acquisition had the following effect on the group's assets and liabilities:
The fair value adjustments arise in respect of under-provided taxation liabilities and payments due to the Democratic Republic of Congo government. The excess of fair value of consideration paid over the fair value of the net assets acquired of US$231 million is wholly attributed to mineral properties as it represents the gold resources of the Kibali gold project; Moto owns a 70% interest in the Kibali project and therefore following the acquisition of the joint venture interest in Moto, Randgold had an indirect 35% interest in Kibali Goldmines SPRL which holds the licence in respect of the Kibali gold project. Randgold's 50% share in Moto has been proportionately consolidated from 15 October 2009 and a 15% non-controlling interest in Kibali Goldmines SPRL recognised. No deferred taxation liability arose on the transaction, as the transaction constituted an acquisition of a joint venture interest and not a business combination.
ACQUISITION OF FURTHER INTEREST IN THE KIBALI PROJECT
On 22 December 2009 Randgold, in conjunction with its joint venture partner AngloGold Ashanti Limited, completed the acquisition of 20% of Kibali Goldmines SPRL, through their indirect jointly owned subsidiary Kibali (Jersey) Ltd. The cash consideration paid was US$113.6 million and therefore each company paid US$56.8 million for their respective 10% shareholding. Randgold also incurred US$1.2 million of transaction costs bringing the total consideration for Randgold's 10% interest to US$58 million. The fair value of the net assets acquired was US$14.5 million. The excess of the fair value of the consideration paid over the fair value of the net assets acquired of US$43.5 million has been wholly attributed to mineral properties as it represents the increase in Randgold's interest in the gold resources of the Kibali gold project. As a result of this further acquisition Randgold has a 45% interest in Kibali Goldmines SPRL; 35% is held indirectly through its joint venture interest in Moto Goldmines Limited and 10% indirectly through its joint venture interest in Kibali (Jersey) Ltd. As a result the non-controlling interest recognised in respect of Kibali Goldmines SPRL has been reduced from 15% to 5% from 22 December 2009.
30. Post statement of financial position events
No significant post statement of financial position events occurred.