Vatukoula Gold Mines Plc : Final Results for period ended 31 August 2013



4 February 2014

Vatukoula Gold Mines plc

('VGM' or 'the Company')

Final Results for the 12 months ended 31 August 2013

Vatukoula Gold Mines Plc (AIM:VGM), the AIM listed gold producer, is pleased to announce its audited results for the year ended 31st August 2013.  Results are based on IFRS and expressed in Pounds Sterling  (£).

Financial

·        Turnover of £39.1 million (2012: £54.9 million) - variance driven by lower gold production

·        Cost of Sales £40.3 million (2012: £53.5 million) - as a result of lower mining costs

·        EBITDA loss of £9 million (2012: £1.5 million) - as a result of lower gold production

·        Underlying operating loss £12.6 million (2012: Loss: £6.6 million)

·        Loss for the period of £15.7 million (2012: Loss: £7.1 million)

·        Continued capital investment of £13.8 million (2012: £16.1 million)

·        Completion of £12.4 million equity placing through the issue of 58.8 million shares in during the year

·        Agreed US$40 million financing to fund the expansion of mine

Operational

·        Gold shipped was 39,517 ounces for the year ended August 2013 compared to 52,616 ounces for the year ended August 2012. This was a result of both a lower grade delivered to the mill and lower tonnes.

·        Ore Processed was 428,978 tonnes in the period under review compared to 479,524 tonnes during the previous period.

·        Capital development decreased from 4,975 metres to 4,498 metres during the year as a result of the constrained cash flow during the period under review

			Year ended 31 August 2013	Year ended 31 August 2012
Ore processed (tonnes)			428,978	479,524
Average ore head grade (grams / tonne)			3.81	4.24
Total Recovery (%)			75.55%	78.57%
Gold shipped (ounces)			39,517	52,616
Revenue (£'000)			39,080	54,925
EBITDA (£'000)			(8,977)	(1,548)
Cash (used) / generated from operating activities (£'000)			(72)	6,257
Loss (£'000)			(15,664)	(7,070)
Cash cost (US$/ounce)			1,606	1,627
Average realised gold price (£/ounce)			989	1,044
Enquiries:

Dear Shareholders,

This is my first annual statement as VGM Chairman, having taken over from Colin Orr-Ewing as non-executive chairman of the board at the end of May 2013. I am honoured to serve as chairman of VGM and to tackle the challenges that VGM may encounter during one of the more difficult periods in the gold mining sector.  Nonetheless I have a firm belief in the Vatukoula Gold Mine and its potential. In a recent report,  by Natural Resource Holdings Ltd, the Vatukoula Gold Mine was ranked 212th   in terms of minerals resources among 580 mines, and ranked 29th among the top 50 producing mines by grade.

Introduction to the role

As part of my planned introduction to the role of chairman, I have had the opportunity to spend some time at the Vatukoula Gold Mine in Fiji, and to meet with many of its senior leaders in a range of forums. I have been extremely impressed by the enthusiasm and professionalism by many of the Group's managers.

I have also been able to meet most of the Company's larger shareholders. Keeping in touch with investors is an essential part of my role and I intend to maintain regular contact with them in future.

Market and economy

During this financial year we have seen a downward pressure on the gold price. This is despite evidence that shows a very positive increase in consumer demand and only a moderate increase in supply. However financial and investment demand has fallen which has been the primary driver for the negative price trend and, as such, I believe that in the short term the gold price is going to be dominated by unpredictable economic shocks and political shocks and an element of speculation amongst traders.

Nonetheless commodity prices have always been cyclical in nature and the gold market is no exception. If the past events are any indication for the future, the gold market has now reached its bottom, and is poised to recover in the future years. Why? Over the last 20 years, since 1993, we have witnessed three major cycles for gold markets.  In January 1996, gold price reached its 7-year high at US$403 per ounce. A bear market followed, triggered by the 1997 Asian financial crisis. In January 2001, gold price reached its bottom at US$253 per ounce. This represents a 37.2% correction from its previous high. Then the gold price embarked on an initially gradual and later accelerated rise. In February 2008, gold price reached its 20 year high at US$973 per ounce.  This represents a 141% rise from its 2001 price.  This new high was followed by a major corrective phase triggered by the US financial crisis. In October 2008, gold price dropped to US$732 per ounce, representing a 24.8% correction over its previous high. This correction is then followed by another bull run in the gold market. In July 2011, gold price reached another new high of US$1,838 ounce, representing a 151% rise over its previous low; 3 quarters later in April 2013, because of the US monetary policy, the gold price fell to as low as US$1, 206 per ounce, representing a 34.4% drop from its previous high.  

I believe that we can conclude from the above events that with each major correction of 25% to 40% in gold price, a major bull run of over 100% could follow, with initial price consolidation at the bottom and later an accelerated rise. If history repeats itself, the gold price might rise to a US$2,000 per ounce level following the current consolidation.   

Another major factor influencing the gold price is China's strategy is to make its Renminbi ("RMB") freely exchangeable and as an international reserve currency. The Chinese government has been preparing for this since 1996 when China made RMB exchangeable under current account. To achieve its goal, China would have to substantially increase its current gold holding of 1,054 tonnes, which represents 1.2% of China's total foreign reserve of US$3.662 trillion in September 2013. In comparison, gold holding accounts for 50% to 70% of foreign reserves for the US and most of the European Union countries. In order to increases its gold holding to the global average of 10% of foreign reserves, China needs to acquire an additional 7,706 tonnes gold, in par with the US gold holding of 8,133 tonnes.

Financial performance

The continued downward pressure on the gold price has made developing and mining at the Vatukoula Gold Mines very difficult. Moreover the delays in securing the capital investment has prevented the mine from embarking on its growth strategy which in turn lowered production below management expectations. The losses this year have increased compared to the same period last year, however this was driven not by an increase in costs but as a result of lower gold prices and lack of capital investment which hampered production.

Financing and shareholder support

As mentioned at last year's Annual General Meeting the Board highlighted that to achieve its production targets it would require US$40 million for capital investment and working capital.  While we secured this financing we continued to receive support from our major shareholders - including DRK Energy Co., Limited ("DRK"), who over the period under review, invested £4.5 million in May 2013 and Zhongrun International Mining Co. Ltd ("Zhongrun"), whom invested £6.6 million in October 2012 and £1.3 million in April 2013.

More importantly this year we finalised the US$40 million investment agreement with Zhongrun. The investment agreement stipulated that the funding will be provided in two tranches of approximately US$20 million each. The first tranche was completed after the year end in November 2013. The second tranche was due for completion at the end of January 2014 and we have subsequently agreed with Zhongrun that they will deliver these funds by the end of February 2014.

I would personally like to thank both DRK and Zhongrun for their continued support in this difficult market.

The Board

2013 saw change on the Board, with the retirement of Colin Orr-Ewing and my appointment as his replacement. I would like to thank Colin for his service to the Group, both as chairman since 2004 and before that as a director of the Group. Continually refreshing is vitally important if a Board is to function as effectively as possible.

In January 2013, Ian Stalker resigned from the board for personal reasons. Ian was appointed as a non-executive director in 2008 and was heavily involved in the initial commissioning of operations at the Vatukoula Gold Mine. His experience and knowledge was invaluable in planning the development of the Vatukoula Gold Mine.

As part of the equity subscription agreement announced in October 2012, VGM agreed with Zhongrun that they were entitled to propose four nominees for election as Directors at the Annual General Meeting ("AGM"). In January 2013, the following directors were appointed as directors of the Group; Mr. Yeung Ng, Mr. Fengwen Zheng and myself.

As part of the equity subscription agreement announced in May 2013, VGM agreed with DRK that they were entitled to nominate two directors for appointment to the board. The two directors appointed were Mr. Yongan Lu and Mr. Wei Li.

In addition, and in order to complete the DRK agreement and comply with the shareholder agreement with Zhongrun, both of which require a board of seven directors, both Kiran Caldas Morzaria and John Francis Kearney agreed to tender their resignations as Directors.

I would like to thank John Kearney for his tireless efforts over the past 4 years. He contributed immensely to the development of the Board and provided the Company with valuable guidance and strategic vision.

Although no longer a Director, Kiran Caldas Morzaria has remained as the Chief Financial Officer of the Group.

I am delighted with these new appointments to the board; their qualities will be invaluable to the Board and to the Group as we continue to develop the business.

Strategic Review Committee

2014 will be a time of both change and consolidation for the Group. There have been a number of changes at both Board and Group executive committee level and there will be new challenges involved in implementing the Group's strategy.

Subsequent to the year-end VGM agreed with Zhongrun to form a strategic review committee, which has been reviewing all aspects of the Vatukoula Gold Mine. It is anticipated that these findings will be made available to the Board during the second quarter of this year. The Group will however continue to grow and develop and I have learned in the short time that I have been involved with the Company that, in this aim, it is well served by a group dedicated and professional employees.

Strategy and key business objectives

We have a clear strategy: to deliver to our shareholders the full potential of the Vatukoula Gold Mine. We aim to achieve this by focusing on four key strategic priorities: expand, sustain, optimise and grow:

In the coming year our key business objectives are:

Expand:

To expedite the underground development and achieve a total capital development of 5,000 metres.

To produce 45,000 ounces of gold.

Sustain:

To re-embark on the resource definition drilling campaign started in 2011.

Optimise:

To review all current suppliers and embark on negotiating longer term contracts which will improve our operational process flow and reduce unit costs.

Grow:

Carry out preliminary field work on identified gold and copper targets in the Tavua basin.

In the longer term our key business objectives are:

Expand:

To produce 100,000 ounces per annum at a cash cost of below US$ 900 per ounce.

Sustain:

Continue resource development drilling at approximately 20,000 metres per annum.

Optimise:

To actively seek investment from international utility and power companies for building a power plant in Fiji, permanently resolving the problem of high power costs.

Grow:

To continue our exploration efforts to upgrade and increase our 4 million once gold Mineral Resource estimate, laying the foundation for future mine expansion.

In addition to the above VGM will be seeking the  opportunity of listing the Company in the Asia or North America markets, where gold companies command a better company valuation.

I firmly believe VGM is poised for growth and future success. With 2013 behind us, I take this opportunity to thank our employees for their tireless efforts and hard work; and acknowledge the support provided to the Company by all our stakeholders and suppliers.

To all who share our optimism for seizing the great opportunities and challenges that lie ahead, we say thanks for your continuing confidence and support.

Y.B. Ian He

Non-Executive Chairman

During the last twelve months the operations at the Vatukoula Gold Mine have been severely hampered by the lack of capital to undertake the necessary development required to establish production levels to our targeted rate. At the beginning of the year we were waiting for the funding that had been agreed to by a Hong Kong based mining investment company but unfortunately those funds never materialised.

As discussed in my last commentary we established that a major capital program was required to undertake the development required.  The mining plan for the year was based on a development program over 18 months, opening up major new areas for long term mining at Vatukoula.  Due to the delay in the funding this program was delayed.  At the end of the year, a full twelve months later, the program has not been commenced.

It is a credit to all the mine staff, from the General Manager to the trainees for the support that they have given to the Company during this trying time.  We have been forced, due to lack of funds, to severely reduce our stock levels, which have impacted on underground equipment availability.  Ore mining has been undertaken on a limited 'where available' basis.  Exploration drilling was also halted in order to maintain funds.  The lack of drill data compounded the planning for new development. 

Operating and Financial Performance

VGM sold 39,517 ounces of gold in the year at an average cost of US$1,606 per ounce. The main driver to the lower cost per ounce was the lower operating costs per tonne which decreased to US$148 per tonne.

The negative movement of the gold price further exacerbated the lower production figures, with our gross loss for the year being £1.2 million. After administrative expenses, foreign exchange gains and depreciation and amortisation expenses the underlying operating loss was £12.6 million.

The lack of funds affected our underground fleet most severely.  Without being able to maintain our stock levels, we were forced to 'rob Peter to pay Paul' with underground equipment.  Critical parts that were required had to be ordered and air freighted to site at an additional cost.

We also continued to face issues as a result of the lack of resource definition, another capital item that we placed on hold during the year. One such example occurred in the Matanagata ore body, in Smith section.  Our new footwall development was undertaken at the required elevation as defined in the Mineral Resource model.  The ore body was identified a high grade ore body.  Ore was exposed in 3 crosscuts at the location as expected.  Raises were initiated, including the ore passes and truck chutes as required. 

However the exposed ore body did not reconcile to the Mineral Resource model and was not at a mineable grade. The development was halted for further investigation, and follow up underground drilling initiated. 

It was discovered that the ore body we developed was a split of the main ore body and not the main Matanagata ore body.  The main ore body was in fact 18 meters above this split.  The area in question has been developed to the correct elevation and has commenced mining.  However this example shows the fraught nature of blind developing at Vatukoula and shows how vital resource drilling is.

Development of the Vatukoula Gold Mine

Despite the lack of funds VGM still managed to carry out some additional capital development. We continued the development on the new lower levels at Philip Shaft, and the clearing of the lower levels at Smith Shaft.  The key area for mining will be the lower levels at Philip, between 18 and 20 level.  We are clearing the shaft above 20 level.  Once cleared we will install new shaft furniture, including tipping points.  This will become a major production level as planned in our 7 year mine plan.  This area is considered a high grade area and will account for a significant portion of the gold produced at Vatukoula in that 7 year plan.  Development in the lower levels is undertaken cautiously, due to the potential of hot water.  The amount of water is not significant - but the heat can make the operating conditions difficult.  Our program is to either seal the area, or to drain the water and remove - so removing the heat from the area.  We have found that once ore mining operations commence - the draining technique works best.  

For the Philip Shaft sections, comprising Prince, Prince William, Cayzer Prince and all of the associated ore bodies access to the 20 level station at Philip Shaft was a vital first step.  We have completed the development to the 20 level station, and started some of the development required on both 19 and 20 levels.  The decline from 18 to 20 level will become one of the key access routes for the long term profitability at Vatukoula for a long future.  We have exposed the original 20 level station, and we are cleaning out the spillage in the shaft between 18 and 20 levels.  This has been very difficult with the limited equipment available to us, and has been completed when we have equipment available only. 20 level in the Philip Shaft will become a major production centre.  This station will service all of the new mining of the high grade ore bodies at levels between 18 level down to 23 level, as detailed in our 7 year plan. 

Sustainable Power

A major expenditure at the Vatukoula Gold Mine is the cost of power generation.  Diesel fuel is imported and used to generate power at the mine.  This has costed up to F$0.70 per kilo watt.  The major uses for power are pumping, hoisting and mill processing.  Numerous opportunities exist for the reduction of power use at the Vatukoula Gold Mine, but the biggest factor would be the reduction in the cost of power.  We have investigated a number of options, however the use of biomass appears to be the most practical. 

The FSC has designed a 40MW power biomass project at the nearby Rurawai Sugar plant, specifically designed to provide Vatukoula with the power required.  However, at this time the FSC has not initiated construction.

We are fully aware that a power source, which is not at the behest of the international hydrocarbon price is essential for the long term profitability of VGM.  Investigations toward possible solutions have been placed as a major priority.

Health & Safety

I would also like to thank the health and safety department for their diligent work over the past year.  We have seen a major improvement in our accident statistics.  One accident is one too many - and the focus of safety for all employees by all employees is one that we strive to achieve.

Financing

I would like to thank our largest shareholders for the support given to the Group at a very critical time.  Although we had a positive independent engineers report confirming that our development plans and the production targets were achievable, we were unable to secure a suitable financial package to provide for our plans. Zhongrun stepped into the breach, and on behalf of all of the employees, their families and the communities that surround the Vatukoula Gold Mine I give my heartfelt thanks.  Zhongrun now owns over two thirds of VGM, but without their investment the future would have been distressed. 

Post Balance Sheet Events

Subsequent to year-end VGM completed the first tranche of the US$ 40 million financing with the issue of 188,897,000 new ordinary shares at a subscription of 6.89 pence per share, raising approximately £13 million. The second tranche was due for completion at the end of January 2014 and we have subsequently agreed with Zhongrun that they will deliver these funds by the end of February 2014.

On the 3rd of February 2014 we appointed Xuexin (Kevin) Zhu as General Manager of the Vatukoula Gold Mine. Xuexin is a professional mining engineer and PMI certified Project Management Professional with over twenty years' experience in corporate management, mine planning, engineering design, construction and operation management of open pit and underground precious and base metal mines.

The Board would like thank the outgoing General Manager, David Whittle, for his efforts and the progress that has been made at the Vatukoula Gold Mine. Under difficult financial circumstances David Whittle has improved many key operating and safety measures which will stand us in good stead going forward. In particular his focus on the development of the higher grade Cayzer prince ore-body forms part of the building blocks to increase production in the coming years.

Outlook

2013 was a difficult year for VGM in terms of achieving our targets that we set out at the beginning of the year. With limited financing we were not able to hit our production targets.

Looking forward, the investment by Zhongrun allows us to make the necessary adjustments and positions the Company to increase production in 2014. The mine has a number of world class ore bodies, any one of which could be a mine by itself.  The mine is very shallow in international mining standards.  Deeper drilling has shown the continuation of ore bodies at depths of double our current deepest mining depth and exploration at Vatukoula has identified some very high grades.  Recent re-examination of the central Caldera has identified some indications of porphyry ore bodies and exploration will be undertaken in these areas over the coming year.

It is the development that we have achieved in the year that will assist in opening high-grade areas that will sustain production in the longer term. Over the coming first half year ending February 2014 this increase in capital development will continue to negatively impact our gold production. Subsequent to this, production from the Cayzer Prince ore body will come on stream and production should increase to targeted production levels.

In conclusion, I would like to thank all of the operating staff at the Vatukoula Gold Mine for their commitment, enthusiasm and enormous effort in what has been a challenging year in the development of the business.  I would also like to thank the Board for their support, advice and commitment throughout the year.

David Karl Paxton

Chief Executive Officer

Vatukoula Gold Mines plc. ("VGM" or "Group") explores, discovers, and develops gold mining operations. The Group is primarily focused on its operations on the Pacific Island of Viti Levu, Fiji.

VGM is the owner of the longest producing gold mine in Fiji. Operating for over 75 years, the mine has produced in excess of seven million ounces of gold. VGM acquired the mine in 2008 and aims to reach a sustainable and profitable production level. We are currently in our next phase of expansion at the mine, increasing our production from the current base of approximately 40,000 ounces per annum. The mine currently has 4.1 million ounces of Mineral Resources and 750,000 ounces of Mineral Reserves.

The Vatukoula Gold Mine is located in the northern part of Fiji's main island, approximately ten kilometres inland from the coast and within the Tavua Basin. The mine is located at the foot of the hills that make up the Tavua Volcanic Crater.

The mine operates within three Special Mining Leases which cover a total area of 1,255 hectares. In addition VGM has the right to explore areas outside the current mining leases via Special Prospecting Licenses that cover over 19,000 hectares of the surrounding Tavua Volcano.

The Vatukoula Gold Mine is currently both an open pit and underground operation, however in the medium-term it will become predominantly an underground mine. Underground production is sourced from four mining areas; Smith Shaft, Philip Shaft, R1 Cayzer Shaft and Emperor Decline. The Smith and Philip Shafts, and the Emperor Decline serve as the main accesses to the underground workings for personnel and materials, and are used for ore and waste haulage.

Once the ore is hauled to the surface it is crushed, enriched and refined at our on-site treatment plant, to produce gold doré. Gold doré produced at the mine is typically 80% gold, 19% silver and 1% base metals such as copper and iron. The gold doré is sold to the Perth Mint in Australia.

VGM has onsite workshops, assay labs and produces its own power via diesel generators.

Vatukoula Gold Mines plc. is a UK public company with its headquarters in London. We are listed on the AIM market of the London Stock Exchange under the symbol VGM. The Group reports in Pounds Sterling (£) in accordance with IFRS as adopted by the European Union.

This annual report contains 'forward-looking information', which may include, but is not limited to, statements with respect to the future financial and operating performance of VGM, its subsidiaries, investment assets and affiliated companies, its mining projects, the future price of gold, the estimation of mineral resources, the realisation of mineral resource estimates, costs of production, capital and exploration expenditures, costs and timing of the development of new deposits, costs and timing of the development of new ore zones, costs and timing of future exploration, requirements for additional capital, governmental regulation of mining operations and exploration operations, timing and receipt of approvals, licenses, and conversions under The Republic of Fiji and other applicable mineral legislation, environmental risks, title disputes or claims, limitations of insurance coverage and the timing and possible outcome of pending litigation and regulatory matters.

Often, but not always, forward-looking statements can be identified by the use of words such as 'plans', 'expects', 'is expected', 'budget', 'scheduled', 'estimates', 'forecasts', 'intends', 'anticipates' or 'believes', or variations (including negative variations) of such words and phrases, or state that certain actions, events or results 'may', 'could', 'would', 'might' or 'will' be taken, occur or be achieved.  Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of VGM and/or its subsidiaries, investment assets and/or its affiliated companies to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

Such factors include, among others, general business, economic, competitive, political and social uncertainties; the actual results of current exploration activities; conclusions of economic evaluations and studies; fluctuations in the value of UK Pounds Sterling relative to the United States Dollar, Fijian Dollar, Australian Dollar and other foreign currencies; changes in project parameters as plans continue to be refined; future prices of gold; possible variations of ore grade or recovery rates; failure of plant, equipment or processes to operate as anticipated; accidents, labour disputes and other risks of the mining industry; political instability, adverse weather conditions, insurrection or war; delays in obtaining governmental approvals or financing or in the completion of development or construction activities.

Although VGM has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may well be other factors that cause actions, events or results to differ from those currently anticipated, estimated or intended.

Forward-looking statements contained herein are made as of the date of this annual report and VGM disclaims any obligation to update any forward-looking statements, whether as a result of new information, future events or results or otherwise.  There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.  Accordingly, readers should not place undue reliance on forward-looking statements due to the inherent uncertainty therein. Nothing in this annual report should be construed as a profit forecast.

Operational Review

Due to the delay in our required financing, operations were severely hampered with most key operational metrics reducing over the period. Total gold produced was 39,858 ounces, a 25% decrease on last year's figure.

Operating results	Year ended 31 August 2013	Year ended 31 August 2012	% Variance
Underground Mining
Total Underground Tonnes Mined (Ore, Waste)	397,995	477,089	(17%)
Operating Development Metres	13,644	15,644	(13%)
Strike Drive Development Metres	1,682	4,034	(58%)
Capital Development metres	4,498	4,975	(10%)
Total Development metres	19,823	24,653	(20%)
Underground Operations Plant
Underground Operations Ore delivered (tonnes)	240,156	304,042	(21%)
Underground Operations head grade (grams / tonne)	5.00	5.12	(2%)
Surface Operations Plant
Surface Operations delivered (tonnes)	189,047	176,357	7%
Surface Operations head grade (grams / tonne)	2.39	2.07	16%
Total (Sulphide + Oxide)
Ore processed (tonnes)	428,978	479,524	(11%)
Average ore head grade (grams / tonne)	3.81	4.24

Underground Production

Total tonnes of ore, waste and capital mined for 2013 decreased by 17% to 397,995 tonnes compared to 2012. The lower tonnages were driven by decreases in strike drive development, which decreased from 4,034 metres to 1,682 metres representing a 58% decrease over the twelve months ending 31st August 2013.

The ore delivered from underground for 2013 was 240,156 tonnes, a 21% decrease compared to the same period last year. This reduction in ore delivered was due in part to lower strike drive development during the year, which is typically delivered as ore.

The average underground grade for the twelve months was 5.00 grams per tonne, which was marginally lower than the same period last year (5.12 grams per tonne). We had forecast higher grades in this year, however lack of available finance prevented VGM accessing the higher grade deposits of the Philip Shaft.

Underground operations remain focused on infrastructure development which should enable the mine to produce at our long-term projected rate.

Surface Production

Production from surface oxides and sulphide waste piles for the twelve months delivered 189,047 tonnes at a grade of 2.39 grams per tonne. The surface production predominantly came from historic waste dumps which are generally of a higher grade compared to the oxide material, but does lower the overall recovery in the oxide circuit given that the material has not been completely oxidised.

Vatukoula Treatment Plant ("VTP")

During the year, the VTP processed 428,978 tonnes of ore which was an 11% reduction compared to the same period last year (479,524 tonnes).

The average grade decreased from 4.24 grams of gold per tonne in the year ending August 2012, to 3.81 grams of gold per tonne in the year ending August 2013. This was driven by lower grades delivered from underground operations.

Recoveries for the year were 75.6%. This was lower than the comparable period last year (78.6%) as a result of the sulphide nature of the material delivered from the surface mining at the waste dump.

Cash Costs

As a result of decreases in unit mining, cash cost per ounce of gold shipped decreased to US$1,606. Overall cash cost per tonne mined and milled also decreased to US$148 (2012: US$179). Further detail on the main drivers that led to these increases are contained within the Financial Review.

Employees

At the year-end we employed 1,425 individuals as either full-time employees or as casual labour. Of our workforce 803 are involved in direct mining operations, and a further 365 are involved in engineering support services and 77 are involved in the processing of ore. The remainder are involved in administration, finance, information technology, supply, security, and operational health and safety.

Other Activity

Financial Review

Financial Review

The purpose of this review is to provide a detailed analysis of the Group's consolidated 2013 results and the main factors affecting the financial performance. The Financial Review should be read in conjunction with the financial statements and associated notes.

Year ended 31 August 2013

During the period under review the Group's financial results were adversely affected by both the decrease in gold price and more importantly lower production levels. As a result the Group posted a loss of £15.7 million.

Revenue

Revenue for the year of £39.1 million was 29% lower than the prior year period of £54.9 million. The Group's year-on-year sales volume decreased by 13,099 ounces, which adversely reduced revenue by some £13.0 million. In addition to this the reduction in gold price from US$1,643 per ounce in the previous year to US$1,537 per ounce during the period under review reduced revenue by some £2.2 million.

Commodity Prices

Gold prices have a significant impact on the Group's revenue, net profits and its ability to generate cash flows. In 2013 the price of Gold reached US$1,784 in October 2012 and traded as low as US$1,192 per ounce in June 2013.Our average realised gold price was US$1,537 per ounce.

Cost of Sales and Operating Expenses before Underlying Operating Loss

(£'000)	Year ended 31 August 2013	Year ended 31 August 2012
Cost of Sales & Operating Expenses
Underground Mining	(21,868)	(32,924)
Surface Mining	(1,644)	(2,762)
Processing	(9,081)	(10,281)
Overheads	(6,571)	(5,917)
Gold Duty	(1,150)	(1,660)
Administrative expenses	(2,341)	(2,762)
Foreign exchange gains/ (loss)	(1,707)	1,334
Depreciation and amortisation	(7,328)	(6,551)

Cost of Sales and Operating Expenses decreased to £51.7 million in 2013 from £61.5 million in 2012. A 34% decrease in underground mining costs decreased the cost of sales and operating expenses by £11.1 million. Removing the effect of the reduced tonnes mined and processed the reduction in costs on a like for like basis is £1.5 million. The £1.5 million is explained by the following variances:

·     a net decrease in unit mining costs which represented a £5 million reduction in costs,

·     a net decrease in unit milling costs which represented a £0.1 million reduction in costs,

·     a £0.2 million increase in overhead and administrative costs,

·     decreases in the value of gold shipped which reduced the gold duty paid by £0.5 million,

·     higher amortization and depreciation charges of £0.8 million, and

·     an increase in unrealised foreign exchange losses on intercompany loans of £3 million.

As outlined above the variance in unit mining costs represented the key driver to the decrease in costs compared to the previous year. The mining costs totalled £23.5 million for the year. This represents a decrease of £12.2 million from the prior year period (£35.7 million). Taking into account the decrease in the ore mined and processed which reduced the costs by £7.2 million, the decrease in costs can be mainly attributed to:

·     a decrease in unit mining costs of £7.2 million which can be mainly attributable to changes in accounting estimates in which the allocation of development related overheads between operating expenditure and capitalised mine properties and development was calculated on a per tonne basis. Previously, this allocation was calculated on a per metre basis.

·     a £1.4 million increase in labour costs. This is a result of increased labour and an implementation of a bonus system

·     a £0.5 million increase in engineering higher maintenance costs on heavy vehicles,

·     a £2.6 million increase in power and pumping costs mainly due to higher fuel costs experienced during the year.

·     a £1 million decrease in mining costs which is attributable to the higher portion of waste dump material mined which has a lower mining cost

·     expensing the gold in circuit drawn down in the period, which decreased compared to the previous year and decreased costs by £1.1 million

(£'000)	Year ended 31 August 2013	Year ended 31 August 2012
Mining
Variable  Direct Mining Costs	8,712	11,865
Total Mining Labour Costs	3,939	3,311
Engineering Costs	555	7,779
Other Mining Costs	11,273	11,325
Gold stock movement	143	1,405
Total mining expenses	23,512	35,686

Depreciation and amortisation was £7.3 million for the year. This represents an increase of 12% from the prior year (£6.2 million). This increase is due to the higher capital investment base employed in late 2011 and in 2012 as a result of the accelerated development programme, capital equipment replacement programme and the rate of depreciation when compared to older capital development and equipment.

During the year we carried out an impairment review on some of the previously capitalised exploration and evaluation costs which resulted in an impairment charge of £3.3 million during the period under review.

Cash Costs

Cash costs for the year ending 31 August 2013 were US$1,606 per ounce sold (2012: US$1,627 per ounce). This decrease in cash costs can mainly be attributed to the lower unit costs per tonne of ore mined, the effect of this would have reduced the cash costs per ounce to US$1,410. However decreases in recovery rates and lower grades increase the cash cost to US$1,606.

The table below provides reconciliation between cost of sales, operating expenses and cash costs to calculate the cash cost per ounce sold.

	Year ended 31 August 2013	Year ended 31 August 2012
Mining (£'000)	(23,512)	(35,686)
Processing (£'000)	(9,081)	(10,281)
Overheads (£'000)	(6,571)	(5,917)
Gold Duty (£'000)	(1,150)	(1,660)
Mine administrative costs (£'000)	(525)	(829)
Total cash costs of production	(40,839)	(54,373)
GB£ / US$ foreign exchange rate	0.644	0.635
Gold Sold (Oz)	39,517	52,616
Tonnes mined and milled	428,978	479,524
Cash cost per ounce sold (US$/Oz)	1,606	1,627

Administrative Costs

Administrative expenses totalled £2.3 million for the year ended August 2013 which was a 15% decrease in costs from the prior year of £2.8 million. The administrative expenses are those costs associated with maintaining the London office and the administrative expenses in Fiji not directly attributable to operating activities. Costs include salaries, office rent, regulatory, audit, legal fees and investor related expenses.

Exploration and Evaluation Costs

Given the constrained cash flow during the year we substantially reduced exploration and evaluation costs to £1.1 million this year compared to £4.2 million in 2012. All the exploration and evaluation costs were capitalised as an Intangible Asset in accordance with the requirements of IFRS 6 Exploration for and Evaluation of Mineral Assets. Exploration costs to the amount £3,264,000 (2012: Nil) relate to specific areas which have not led to the discovery of commercially viable quantities of mineral resources, and the directors has decided to discontinue such activities in those specific areas. These costs have been impaired.

Taxation and Other Expenses

During the year the Group had a tax credit of £1.2 million (2012: £1.1 million). This tax credit arises as a result of the utilisation of the deferred tax liability.

Other expenses amounted to £1 million in 2013 down from £1.5 million in the previous year. This decrease was primarily due to a reduction in provision against prepayments of more than one year which reduced to £0.3 million.

EBITDA

EBITDA for the year ended 31 August 2013 was a loss of £8.9 million compared to a loss of £1.5 million in the prior year. This decrease was driven by decreases in production and lower average gold prices achieved during the years; this decrease was partly offset by lower mining costs.

Reconciliation between net profit for the period and EBITDA is presented below.

£('000)	Year ended 31 August 2013	Year ended 31 August 2012
Loss for the period	(15,664)	(7,070)
Less income tax credit	(1,189)	(1,075)
Plus depreciation and amortisation expense	7,328	6,551
Less finance income	(8)	(65)
Plus finance expense	556	111
EBITDA	(8,977)	(1,548)

Basic Loss per Share

Basic loss per share for the year ended 31 August 2013 was 12.74 pence compared to basic loss per share of 7.81 pence for the year ended 31 August 2012. This decrease was driven by the net loss for the year.

Cash Flow

Net cash used in operating activities was £0.1 million for the year, a decrease of £6.3 million on the prior year. The net operating loss before changes in working capital was £2.5 million compared to a net operating loss of £0.1 million in the previous year. This reduction was due to lower EBITDA. Changes in working capital generated £2.4 million (2012 generated £6.4 million) this cash was generated primarily from the Group decreasing its receivables.

Cash flow used in investing activities equated to £13.8 million for the year which represents a 14% decrease from the prior year of £16.1 million. Of the £13.8 million used in investing activities, £2.2 million (2012: £7.2 million) was used in the purchase of plant and equipment and £11.7 million (2012: £9.1 million) was used in underground development and exploration activities. This increase is primarily attributable to changes in accounting estimates in which the allocation of development related overheads between operating expenditure and capitalised mine properties and development was calculated on a per tonne basis. Previously, this allocation was calculated on a per metre basis.

Cash provided by financing activities for the year ended 31 August 2013 was £12.2 million (2012: £5.3 million). The large majority (£12.4 million) of this relates to equity issues completed during the year. At 31 August 2013 the Group had cash and cash equivalents of £0.6 million (2012: £2.4 million).

In November 2013, and subsequent to the year end, the Group completed the first tranche of the US$40 million dollar financing via the placing of 188,897,000 new ordinary shares at 6.89 pence per share raising approximately £13 million

Zhongrun have informed the Group that it remains willing and will be able to complete the subscription for the secured loan notes. However as a result of administrative delays Zhongrun and the Group have agreed an extension of the time for payment until the end of February 2014.

Financial Position

Intangible assets decreased from £36.8 million in 2012 to £32.8 million in 2013. The decrease is primarily attributable to the impairment charge incurred during the period of £3.3 million. The net book value of property, plant equipment and mine properties and development was £43.5 million (2012: £37.2 million). The main capital expenditure drivers being those outlined in the cash flow used in investing in activities section above, which were offset by amortisation and depreciation charges of £7.3 million (2012: £6.6 million).

Total assets decreased from £90.7 million in 2012 to £86.5 million in 2013.  The decrease was for the large part due to a 39% decrease in current assets, which was driven by decreases in trade and other receivables and inventories.

During the year the Group reached a settlement agreement with FIRCA in relation to the £4 million taxation assessment against the Group. In the settlement the parties agreed that the Group had made advance tax payments million against this assessment and FRICA agreed to refund the Group £0.8 million.

Total current liabilities for the year ended 31 August 2013 were £11.2 million, a decrease of £1.1 million from the balance of £12.3 million in 2012. This decrease is primarily driven by the decrease in trade payables as we reversed the trend of extending creditor terms in the previous year. Non-current liabilities decreased to £10.3 million from £10.4 million in the previous year. This decrease is the net result of an increase in employee related and mine rehabilitation provisions, and a decrease in the Deferred Tax Liability.

Non-IFRS Measures:The Group has identified certain measures in this report that are not measures as defined under IFRS. Non-IFRS financial measures disclosed by the directors and management are provided to shareholders as additional information in order to provide them with an alternative method of assessing the Group's financial condition and operating results. These measures are not in accordance with, or a substitute for IFRS, and may be different from or inconsistent with non-IFRS measures used by other companies. These measures are explained below.

Average realised gold priceis a non-IFRS financial measure and is calculated by dividing the total revenue for the year by the total ounces sold during the year and converting the GB£ value to US$ at the average foreign exchange rate over the year.

EBITDAis a non-IFRS measure. The Group calculates EBITDA as (loss)/profit for the period excluding:

·      Income tax credits or expense

·      Finance expense

·      Finance income

·      Depreciation and amortisation charges; and

·      Goodwill impairment charges

EBITDA is intended to provide additional information to investors and analysts. It does not have a standard definition under IFRS and other companies may calculate EBITDA differently. Refer to the financial review section for a reconciliation of profit to EBITDA.  EBITDA should not be considered a substitute or in isolation for measures of performance as prepared in accordance with IFRS, as it excludes the impact of cash costs of financing activities and taxes and the changes of working capital balances,

Cash cost per ounce sold / per tonne mined and milledare non-IFRS financial measures. Cash costs include all costs associated with mining and processing the unit of measure, inclusive of all costs absorbed into inventory, as well as royalties, production taxes and mine overheads/administrative costs. The cash costs exclude foreign exchange gains, depreciation and amortisation expenses, impairment charges, inventory obsolesces, rehabilitation charges, doubtful debts and share based payments. These cash costs are aggregated and divided by either ounces of gold shipped or the tonnes mined and milled to reach the relevant non-IFRS financial measure.

Operating cash flow per shareis a non-IFRS financial measure and is calculated by dividing the Net cash (used) / generated in operating activities by the weighted average number of Ordinary Shares in issue.

Reserves and Resources

Mineral Resource Statement

The Vatukoula Gold Mine Mineral Resource estimate is classified and reported in Table 1 below, in accordance with the 2004 JORC Code1.

Table 1  VGM Mineral Resources at 31 August 2013

Mineral Resource	Measured			Indicated			Inferred
	Tonnes (Mt)	Grade (g/t Au)	Contained Gold (Moz)	Tonnes (Mt)	Grade (g/t Au)	Contained Gold (Moz)	Tonnes (Mt)	Grade (g/t Au)	Contained Gold (Moz)
Underground	3.1	12.6	1.3	3.6	10.3	1.2	4.0	9.7	1.3
Waikatakata	-	-	-	-	-	-	5.1	0.9	0.1
Tailings	4.5	1.5	0.2	0.7	1.3	0.03	-	-	-
Total	7.6	6.1	1.5	4.3	8.8	1.2	9.1	4.6	1.4

Note: Values are rounded and may not add correctly in this table.

The 2013 Mineral Resource estimate is compared to the 2012 Mineral Resource in Table 2.

Table 2  Comparison with 2012 Mineral Resource

Classification	2013			2012
	Tonnes (Mt)	Grade (g/t Au)	Contained Gold (Moz)	Tonnes (Mt)	Grade (g/t Au)	Contained Gold (Moz)
Measured Resource	7.6	6.1	1.5	7.7	6.2	1.5
Indicated Resource	4.3	8.8	1.2	4.4	8.9	1.2
Inferred Resource	9.1	4.6	1.4	9.1	4.8	1.4
Total Mineral Resource	21.1	6.0	4.1	21.2	6.2	4.2

Changes in the Mineral Resources between 2012 and 2013 were the result of reductions due to depletion of the models between mining face positions at 1 September 2012 and 31 August 2013 - 75,000 ounces gold

Underground Mineral Resource

AMC Consultants Pty Ltd ("AMC") completed a Mineral Resource estimate for VGM using geological and assay data available at 18 May 2012. The data supplied by VGM allowed AMC to generate a constrained grade model and estimate a Mineral Resource. AMC estimated the Mineral Resources using the end of August 2013 surveyed face positions.

The VGM Mineral Resource estimate is classified into Measured, Indicated, and Inferred Mineral Resources based on the current drillhole spacing, quality of the drilling information and confidence in the geological controls on the gold mineralisation and grade continuity. The Mineral Resource estimate includes Measured and Indicated Mineral Resources that will convert to Ore Reserves on application of modifying factors.

The information in this statement of underground Mineral Resources is based on information compiled by Mr John Tyrrell, who is a Member of the Australasian Institute of Mining and Metallurgy and a full-time employee of AMC Consultants Pty Ltd. Mr Tyrrell has sufficient relevant experience to be a Competent Person as defined by the JORC Code. Mr Tyrrell consents to the inclusion of this information in the form and context in which it appears. Mineral Resources listed as being prepared by AMC were estimated under the direct supervision of Mr Tyrrell.

The following notes highlight assumptions used to generate the Underground VGM Mineral Resource estimate:

·     An intercept width times gold grade cut-off of 4 metre grams per tonne ("m.g/t Au") and a gold grade cut-off of 2 g/t were applied to the resource models to obtain the estimated Mineral Resources.

·     The Mineral Resource models were depleted for mining to 31 August 2013, using surveyed mine outlines at 31 August 2013.

·     The Mineral Resource models use geological and assay data available at 18 May 2012.

·     Samples are prepared and analysed by fire assay using a 25 gram charge at the on-site Vatukoula laboratory.

·     The mineralised envelope was defined using geological logging and assay information from diamond drillholes using a nominal lower gold cut-off grade of 1 m.g/t Au.

·     Extrapolation of the interpreted mineralised zone was limited to 50 m between section lines and 25 m at the end of each section.

·     In situ density data were available from drillhole sampling. Densities were assigned to each of the modelled mineralised structures based on the average results from all available samples.

·     The estimation method used 3D wireframe and block modelling projected to a 2D plane, with ordinary kriging interpolation. A grade variable (the product of the intercept width and grade) was estimated using modelled semi-variograms and geostatistical analysis to determine kriging search parameters. The intercept width was estimated separately and the grade back-calculated.

·     Grade times thickness (AUMET) capping was applied in calculating the grade times thickness variable.

Waikatakata Mineral Resource

The information for the Waikatakata Mineral Resource is based on information compiled by Mrs Rachael Birch, who is a Member of the Australasian Institute of Mining and Metallurgy and a full-time employee of AMC Consultants Pty Ltd. Mrs Birch has sufficient relevant experience to be a Competent Person as defined by the JORC Code. Mrs Birch consents to the inclusion of this information in the form and context in which it appears. The Waikatakata Mineral Resource was first reported in 2012 and has not changed since.

The following notes highlights assumptions used to generate the Waikatakata Mineral Resource estimate:

·           The Waikatakata Mineral Resource estimate was completed in October 2011 using 11 diamond drillholes and 133 reverse circulation drillholes for a total drilled length of 4,338 m. A twin drillhole programme was completed in 2011. Four twin diamond drillholes were drilled into the broader Waikatakata area

·           The Mineral Resource estimate is based on the interpretation of mineralised zones using a nominal lower gold cut-off grade of 0.3 g/t Au. The interpretation was constrained within the contact breccia, andesite, and tuff units and between 8,400 m E and 9,500 m E

·           All twin drill core samples were prepared and assayed at the VGM site laboratory. All samples were analysed for gold by fire assay on a 50 g charge with AAS finish

·           Drillhole samples were composited to a dominant length of 1 m. Residual composites (less than 1 m) were retained for estimation

·           A global bulk density value of 2.5 t/m3 was assigned to the model

·           Estimation of gold was completed using ordinary kriging with estimation parameters derived from modelled semi-variograms

Tailings Mineral Resource

The Tailings Mineral Resource is an estimate developed by CSA Group Limited (CSA). In March 2008, CSA compiled an independent Competent Persons Report (CSA CPR), on behalf of River Diamonds, for inclusion in the application for readmission to trading on the Alternative Investment Market (AIM) of the London Stock Exchange.

The CSA CPR reported the 2006 Mineral Resources, including the Tailings Mineral Resource, according to the JORC Code. No further estimates or data is available at the time of this report. AMC cannot verify the estimate and allocates a low reliability to the estimate.

The Tailings Mineral Resource is approximately 10% of the total Measured and Indicated Mineral Resources at VGM. AMC believes that the Tailings Mineral Resource may provide an opportunity to improve the output of the operation, but also believes the relevance of the Tailings Mineral Resource is low. VGM plans to review the tailings resource, in conjunction with the results of exploration programs currently under way, to determine the preferred means to extract the contained gold. VGM production plans do not include the Tailings Mineral Resource pending this review and conversion of Mineral Resources to Ore Reserves.

Ore Reserve Statement

Classification	2013			2012
	Tonnes (Mt)	Grade (g/t Au)	Contained Gold (Moz)	Tonnes (Mt)	Grade (g/t Au)	Contained Gold (Moz)
Proved Ore Reserve	0.64	8.14	0.17	0.7	8.22	0.19
Probable Ore Reserve	2.37	7.66	0.58	2.5	7.57	0.61
Total Ore Reserve	3.01	7.768	0.75	3.2	7.71	0.79

Note: Values are rounded and may not add correctly in this table.

The Ore Reserve statement is based on mine design information prepared in 2012 under the supervision of Mr David Lee, who is a fulltime employee of AMC. The 2012 mining models were depleted with 31 August 2013 face positions to estimate the new Ore Reserve. The depletions were carried out by Mr Kevin Oborne, who is a full-time employee of VGMPLC, and reviewed by Mr Lee. Mr Oborne is a Member and Mr Lee is a Fellow of the Australasian Institute of Mining and Metallurgy. Mr Lee has sufficient relevant experience to be a Competent Person as defined by the JORC Code.

AMC is not aware of any significant changes to the operation since the independent reviews were conducted. AMC believes at this time that additional work is required to improve operational efficiency at VGM, but this is not likelyto impede economic extraction of the Ore Reserves.

Financial Information

	Notes	2013	2012
		£'000	£'000
Turnover	4	39,080	54,925
Cost of sales		(40,314)	(53,544)
Gross (loss) / profit		(1,234)	1,381
Operating expenses
Administrative expenses		(2,341)	(2,762)
Foreign exchange (loss) / gain		(1,707)	1,334
Depreciation and amortisation expense		(7,328)	(6,551)
Underlying operating loss		(12,610)	(6,598)
Impairment charge		(3,264)	-
Inventory obsolescence write back		18	47
Gain on disposal of assets		32	27
Provision for mine rehabilitation		-	45
Doubtful debt expense		(296)	(993)
Share based payments expense		(185)	(627)
Operating loss		(16,305)	(8,099)
Interest receivable and other income		8	65
Interest payable and similar charges		(556)	(111)
Net loss before taxation		(16,853)	(8,145)
Taxation	5	1,189	1,075
Loss for the period		(15,664)	(7,070)
Attributable to:
Owners of the Parent		(15,664)	(7,070)
Other comprehensive (expenses) and income
Currency translation differences		(46)	440
Total comprehensive loss		(15,710)	(6,630)

All activities relate to continuing operations. The notes form an integral part of this audited financial information.

Consolidated Statement of Financial Position

As at 31 August 2013

	Notes	2013	2012
		£'000	£'000
Assets
Non-current assets
Intangible assets	7	32,758	36,841
Property, plant and equipment	8	23,604	25,713
Mine properties and development	9	19,913	11,515
Total non-current assets		76,275	74,069
Current assets
Inventories		6,558	7,771
Trade and other receivables		3,008	6,383
Cash and cash equivalents		617	2,437
Total current assets		10,183	16,591
Total assets		86,458	90,660
Current liabilities
Trade and other payables		8,404	10,053
Provisions	11	1,261	1,073
Borrowings		62	-
Vatukoula Social Assistance Trust Fund	12	1,127	1,189
Convertible loan		347	-
Total current liabilities		11,201	12,315
Non-current Liabilities
Provisions	11	4,751	3,320
Convertible loan		-	317
Vatukoula Social Assistance Trust Fund	12	15	15
Deferred tax liability		5,569	6,758
Total non-current liabilities		10,335	10,410
Shareholders' Equity
Share capital	10	7,768	4,828
Share premium account		91,139	81,659
Merger reserve		2,167	2,167
Foreign exchange reserve		1,068	1,022
Other reserves		3,067	2,882
Accumulated losses		(40,287)	(24,623)
Total shareholders' equity		64,922	67,935

The notes form an integral part of this audited financial information.

Consolidated Statement of Changes in Shareholders' Equity

As at 31 August 2013

	Ordinary share capital	Share premium	Merger reserve	Foreign exchange reserve	Share based payment reserve	Equity component of convertible loan note	Accumulated losses	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000

	Ordinary share capital	Share premium	Merger reserve	Foreign exchange reserve	Share based payment reserve	Equity component of convertible loan note	Accumulated losses	Total
	£'000	£'000	£'000	£'000			£'000	£'000
Balance at 1 September 2011	4,378	76,709	2,167	582	2,313	45	(17,656)	68,538
Profit  for the year	-	-	-	-	-	-	(7,070)	(7,070)
Other comprehensive income
- Currency translation differences	-	-	-	440	-	-	-	440
Total comprehensive income	-	-	-	440	-	-	(7,070)	(6,630)
Issue of shares	450	4,950	-	-	-	-	-	5,400
Share option expired	-	-	-	-	(103)	-	103	-
Share based payments	-	-	-	-	627	-	-	627
Balance at 31 Aug 2012	4,828	81,659	2,167	1,022	2,837	45	(24,623)	67,935

Share premium:The share premium reserve represents the consideration that has been received in excess of the nominal value of shares on issue of new ordinary share capital

Merger reserve:The merger reserve represents shares that have been issued at a premium to their nominal value on acquisition of another company

Foreign exchange reserve:The foreign exchange reserve represents the exchange gains or losses resulting from the translating foreign currency amounts to the reporting currency during the consolidation of the accounts of the Group companies

Share based payment reserve:The share-based payment reserve represents cumulative amounts charged to the Statement of Comprehensive Income in respect of share based payment arrangements, where it has not yet been settled by means of an award of shares

Equity component of convertible loan note:The equity component of the convertible loan notes represents the remaining equity component of convertible notes which has not yet been converted in shares

Accumulated losses:The accumulated losses represent profits and losses retained in previous and current period

Consolidated Statement of Cash Flows

For the year ended 31 August 2013

	Notes	2013	2012
		£'000	£'000
Cash flows from operating activities
Operating loss for the period:		(16,305)	(8,099)
Adjustments for:
Share based payments expense		185	627
Depreciation and amortisation expense		7,328	6,551
Impairment charge		3,264	-
Gain on disposal of assets		(32)	(27)
Inventory obsolescence write back		(18)	(47)
Foreign exchange losses / (gains)		2,513	(429)
Doubtful debt expense		296	993
Provision for mine rehabilitation		-	(45)
Movements in  employment provisions		279	411
Net operating loss before changes in working capital		(2,490)	(65)
Payment to Vatukoula Social Assistance Trust Fund		(103)	(397)
Decrease in inventories		837	492
Decrease in receivables		2,888	561
(Decrease) / increase in accounts payable		(1,204)	5,666
Net cash (used) / generated in operating activities		(72)	6,257
Cash flows from investing activities
Exploration for and evaluation of mineral resources	7	(1,085)	(4,164)
Purchase of property, plant and equipment		(2,177)	(7,245)
Payments for mine properties and development	9	(10,624)	(4,952)
Proceeds from disposals of property plant and equipment		29	233
Interest received		8	65
Net cash used in investing activities		(13,849)	(16,063)
Cash flows before financing		(13,921)	(9,806)
Cash flows from financing activities
Proceeds from issuance of shares	10	12,420	5,400
Interest paid		(308)	(88)
Proceeds / (repayment) of borrowings		62	(5)
Net cash provided by financing activities		12,174	5,307
Net decrease in cash and cash equivalents		(1,747)	(4,499)
Cash and cash equivalents at beginning of the period		2,437	6,892
Effect of foreign exchange on cash and cash equivalents		(73)	44
Cash and cash equivalents at end of the period

The notes form an integral part of this audited financial information.

1.         General information

Vatukoula Gold Mines plc. is registered in England and Wales under number 5059077. The Company is governed by its articles of association and the principal statute governing the Company is the Companies Act 2006.  The Company's registered office is situated at Level 5, 2 More London Riverside, London, SE1 2AR. The Company is listed on the AIM market of the London Stock Exchange.

The condensed consolidated financial information for the year ended 31 August 2013 was approved for issue by the Board of Directors of the Company on the 3 February 2014. The condensed consolidated financial information does not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. The condensed consolidated financial information is audited.

.

2.         Basis of preparation

The consolidated financial statements of Vatukoula Gold Mines plc. and all its subsidiaries (the 'Group') have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

The consolidated financial statements have been prepared on a historical cost basis.  The consolidated financial statements are presented in Pounds Sterling (GBP) and all values are rounded to the nearest thousand (£'000) except when otherwise indicated.

The principal accounting policies adopted by the Group and Company in the preparation of the financial statements are set out below.

The Board has reviewed the accounting policies set out in the financial statements and considers them to be most appropriate to the Group's business.

These financial statements are presented in Pounds Sterling.  Group revenues are in US Dollars. Given that the Fijian dollar is not widely used as a reporting currency and that the parent company is listed in the United Kingdom it is deemed appropriate for the presentation currency of the Group to be in Pound Sterling. 

Statement of Compliance with IFRS

The Group's and Company's financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS and interpretations) as adopted by the European Union.

3.         Summary of significant accounting policies

(a)        Basis of consolidation

The consolidated financial information incorporates the financial statements of the Company and its subsidiaries (the "Group").  Control is achieved where the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

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.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used in line with those used by the Group.

(b)        Going concern

The Group's business activities, together with factors likely to affect its future development, performance and position are set out in the Business Review section of this report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the financial review.

In assessing the Group's going concern the Directors have taken into account the above factors, including the financial position of the Group and in particular its cash position, the current gold price and market expectation for the same over the medium term, and the Group's capital expenditure and financing plans.

The Group's forecasts and projections, taking account of reasonable possible changes in gold price, mining costs and the concentration of the gold in the ore delivered to the mill show that the Group should be able to operate using its current cash position and financing facilities.  The directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

Subsequent to the year end the Group completed the first tranche of the US$40 million dollar financing via the placing of 188,897,000 new ordinary shares at 6.89 pence per share. Included in the Group's forecasts and projections is the completion and drawdown of the US$20 million secured loan notes agreed with Zhongrun.

Zhongrun have informed the Group that it remains willing and will be able to complete the subscription for the secured loan notes. However as a result of administrative delays Zhongrun and the Group have agreed an extension of the time for payment until the end of February 2014.

(c)        Business combinations

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group.  The cost of the acquisition is measured as the aggregate of the fair values, at the date of exchange, of the assets given, liabilities incurred or assumed and equity instruments issued by the Group in exchange for control of the acquiree.  Acquisition costs incurred are expensed and included in administrative expenses.  The acquiree's identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 "Business Combinations" are recognised at their fair value at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 "Non Current Assets Held for Sale and Discontinued Operations", which are recognised and measured at fair value less costs to sell.

Where there is a difference between the Group's interest in the net fair value of the acquiree's identifiable assets, liabilitiesand contingent liabilities and the cost of the business combination, any excess cost is recognised in the statement of financial position as goodwill and any excess net fair value is recognised immediately in the profit or loss as negative goodwill on acquisition of subsidiary. The non-controlling interest in the acquiree is initially measured as the non-controlling interest proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

(d)        Significant accounting judgements, estimates and assumptions

Judgments

In the process of applying the Group's accounting policies, management has made the following judgments, apart from those involving estimations and assumptions, which have the most significant effect on the amounts recognised in the consolidated financial statements:

I.        Mineral Resources and Reserves

Quantification of mineral resources requires a judgement on the reasonable prospects for eventual economic extraction. Quantification of ore reserves requires a judgement on whether mineral resources are economically mineable. These judgements are based on the assessment of mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors involved, in accordance with the Australasian Code for Reporting Exploration Results, Mineral Resources and Ore Reserves. These factors are a source of uncertainty and changes could result in an increase or decrease in mineral resources and ore reserves. This would in turn affect certain amounts in the financial statements such as amortisation, rehabilitation provisions which are calculated on a projected life of mine figures.

II.       Provisions and Contingent Liabilities

Judgements are made as to whether a past event has led to a liability that should be recognised in the financial statements or disclosed as a contingent liability. Quantifying any such liability often involves judgements and estimations. These judgements are based on a number of factors including the nature of the claim or dispute, the legal process and potential amount payable, legal advice received, previous experience and the probability of a loss being realised. Several of these factors are a source of estimation uncertainty.

III.      Inventory Valuations

Valuations of gold stockpiles, gold in circuit and gold within the fine ore bin requires estimations of the amount contained in, and the recovery rates from, the various work in progress gold circuits. These estimations are based on analysis of samples and prior experience. A judgement is also applied when the gold in circuit will be recovered and what gold price should be applied in calculating the net realisable value; these are both sources of uncertainty.

IV.     Income taxes

The Group is subject to income taxes in the United Kingdom, Fiji and Brazil. Significant judgement is required in determining the worldwide provision for income taxes.  There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business.  Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred tax provisions in the period in which such determination is made.

Estimates and Assumptions

The preparation of financial statements requires the application of estimates and assumptions on future events, which affects assets and liabilities at the reporting date and income and expenditure for the period. The estimates and underlying assumptions are reviewed on an ongoing basis.  Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are:

V.      Share-based payment transactions

The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted.  The fair value is determined using the Black-Scholes model. The Black-Scholes model is particularly sensitive to expected volatility. Therefore any change in the methodology of the calculation of volatility will impact the amount expensed as share based payments on the statement of comprehensive income.

The value expensed in the statement of comprehensive income is £185,000 (2012: £627,000).

VI.     Intangible assets (see note 7)

Amortisation

Intangible assets (other than goodwill) are amortised over their useful lives.  Useful lives are based on management's estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness.  Due to the long lives of assets, changes to the estimates used can result in significant variances in the carrying value.

The Group assesses the impairment of intangible assets subject to amortisation or depreciation whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  Factors considered important that could trigger an impairment review include the following:

-               significant underperformance relative to historical or projected future operating results;

-               significant changes in the manner of the use of the acquired assets or the strategy for the overall business; and

-               significant negative industry or economic trends.

The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent in the application of the Group's accounting estimates in relation to intangible assets affect the amounts reported in the financial statements, especially the estimates of the expected useful economic lives and the carrying values of those assets.  If business conditions were different, or if different assumptions were used in the application of this and other accounting estimates, it is likely that materially different amounts could be reported in the Group's financial statements. In particular it would affect, the value of the intangible asset and rehabilitation provisions.

The carrying value at the reporting date of the intangible assets is £32,758,000 (2012: £36,841,000).

VII.    Mine Rehabilitation Provisions

The Mine Rehabilitation provision requires a judgement on likely future obligations, based on assessment of technical, legal and economic factors. The ultimate cost of environmental remediation is uncertain and cost estimates can vary in response to many factors, including changes in the relevant legal requirements, the emergence of new restoration techniques and changes to the life of mine. Changes to any of these costs will affect amounts in the financial statements, such as the mine asset and the provision for mine rehabilitation.

The carrying value at the reporting date of the mine rehabilitation provision is £4,660,000 (2012: £3,247,000).

VIII.   Allowance for doubtful debts

Each receivable balance is assessed to determine recoverability.  Provisions are made for those debtors where evidence indicates that recoverability is doubtful.  Amounts are written off when they are deemed irrecoverable.  Any changes to estimates made in relation to debtors recoverability may result in materially different amounts being reported by the Group's financial statements. In particular any changes will affect trade and other receivable as well as the statement of comprehensive income.

The carrying value at the reporting date of the provision for doubtful debts is £520,000 (2012:  £3,913,000).

(e)           Revenue recognition

Revenue is recognised when persuasive evidence exists that all of the following criteria are met:

·      the significant risks and rewards of ownership of the product have been transferred to the buyer;

·      neither continuing managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold has been retained;

·      the amount of revenue can be measured reliably;

·      it is probable that the economic benefits associated with the sale will flow to the Group; and

·      the costs incurred or to be incurred in respect of the sale can be measured reliably.

Gold doré sales

The transfer of risks and rewards for the sale of the gold doré is assessed as taking place when the physical possession is passed to the customer upon collection of the gold doré from the mining premises.  The customer does not have any right of return subsequent to the physical transfer, and accordingly at this point revenue is recognised.

Finance revenue

Interest revenue is recognised as interest accrues using the effective interest rate method.  This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset.

(f)            Turnover and Segmental Analysis

The reportable segments identified make up all of the Group's external revenue, which is derived primarily from the sale of gold. The reportable segments are an aggregation of the operating segments within the Group as prescribed by IFRS 8. The reportable segments are based on the Group's management structures and the consequent reporting to the Chief Operating Decision Maker, the Board of Directors. Our sector results are attributable to unallocated head office corporate costs, gold production & exploration costs, and other costs. These reportable segments also correspond to geographical locations such that each reportable segment is in a separate geographic location, i.e.; unattributed head office costs - UK, gold mining - Fiji, other activities - Brazil.

Income and expenses included in profit or loss for the year are allocated directly or indirectly to the reportable segments. Expenses allocated as either directly or indirectly attributable comprise: cost of sales, gold duty and administrative expenses.

Non-current segment assets comprise the non-current assets used directly for segment operations, including intangible assets, property, plant and equipment and mine properties and development.

Current segment assets comprise the current assets used directly for segment operations, including inventories, trade receivables, other receivables and pre-payments.

Inter-company balances comprise transactions between operating segments making up the reportable segments. These balances are eliminated to arrive at the figures in the consolidated accounts.

(g)           The Company's investments in subsidiaries

In its separate financial statements the Company recognises its investments in subsidiaries at cost, less any provision for impairment. Differences arising from changes in fair values of intercompany loans receivable at below market rates of interest are treated as an increase in the investment in the subsidiary.

(h)           Foreign currency

The consolidated financial statements are presented in Pounds Sterling ("£"), which is the parent company's functional currency and the Group's presentation currency.  Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency.  The assets and liabilities of these subsidiaries are translated into the presentation currency of Vatukoula Gold Mines plc. at the rate of exchange ruling at the reporting date and their Statements of Comprehensive Income are translated at the average exchange rate for the year.  The exchange differences arising on the translation are taken directly to a separate component of equity.

All other differences arising on translation are included in the profit or loss except for exchange differences arising on non-monetary assets and liabilities where the changes in fair values are recognised directly in equity.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.

Exchange differences recognised in profit or loss of Group entities' separate financial statements on the translation of long-term monetary items forming part of the Group's net investment in the overseas operation concerned are reclassified to the foreign exchange reserve.  On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the Statements of Comprehensive Income as part of the profit or loss.

(i)            Goodwill on acquisition

Goodwill arising on the acquisition of a subsidiary or jointly controlled entity represents the excess of the cost of acquisition over the Group's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary or jointly controlled entity recognised at the date of acquisition.  Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill is allocated to each of the Group's cash-generating units expected to benefit from synergies of the combination.  Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired.  If the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit.  An impairment loss recognised for goodwill is not reversed in subsequent periods.

(j)            Inventories

Ore stock, consisting of stocks on which further processing is required to convert them to trading stocks, and gold doré is valued at the lower of cost and net realisable value.  Cost is calculated using a weighted average cost model, where inventories are valued at the weighted average cost of the closing inventory.  Net realisable value is estimated selling price less the estimated costs necessary to make the sale.

Other inventories include:

(i)         Stores, comprising plant spares and consumable stores are valued on the basis of weighted average cost after providing for obsolescence.

(ii)        Work in progress is valued on the basis of first in first out and includes direct costs, depreciation and amortisation.

(iii)       Insurance spares are stated at the lower of cost and net realisable value. Insurance spares are critical spare parts to equipment, that although may not be required on a regular basis are kept in inventory because, should a particular piece of equipment fail it would materially adversely affect production.

Gold in circuit

Gold in circuit is valued at the lower of cost and net realisable value.  Cost comprises direct material, labour and transportation expenditure incurred in getting inventories to their existing location and condition, together with an appropriate portion of fixed and variable overhead expenditure based on weighted average costs incurred during the period in which such inventories were produced.  Net realisable value is the amount anticipated to be realised from the sale of inventory in the normal course of business less any anticipated costs to be incurred prior to its sale.

(k)           Intangible assets

Acquired intangible assets, which consist of mining rights and intangible computer software, are valued at cost less accumulated amortisation. 

Amortisation for both types of intangibles is calculated using the units of production method which is calculated over the life span of the mine.  As at 31 August 2013, the estimated remaining life span of the mine is 7 years. This is the entire period over which the mine is currently being amortised.

The Group applies the full cost method of accounting for exploration and evaluation costs, having regard to the requirements of IFRS 6 'Exploration for and Evaluation of Mineral Resources'. All costs associated with mining development and investment are capitalised on a project by project basis pending determination of the feasibility of the project. Such expenditure comprises appropriate technical and administrative expenses but not general overheads.

Such exploration and evaluation costs are capitalised provided that the Group's rights to tenure are current and one of the following conditions is met:

(i)         such costs are expected to be recouped through successful development and exploitation of the area of interest or alternatively by its sale; or

(ii)        the activities have not reached a stage which permits a reasonable assessment of whether or not economically recoverable resources exist; or

(iii)     active and significant operations in relation to the area are continuing.

When an area of interest is abandoned or the directors decide that it is not commercial, any exploration and evaluation costs previously capitalised in respect of that area are written off to profit or loss.  Amortisation does not take place until production commences in these areas.  Once production commences, amortisation is calculated on the unit of production method, over the remaining life of the mine.

Impairment assessments are carried out regularly by the directors. Exploration and evaluation assets are assessed for impairment when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Such indicators include the point at which a determination is made as to whether or not commercial reserves exist.

The recoverability of capitalised mining costs and mining interests is dependent upon the discovery of economically recoverable reserves, the ability of the Company to obtain necessary financing to complete the development of reserves and future profitable production or proceeds from the disposition of recoverable reserves.

The assets' residual value and useful lives are reviewed and adjusted if appropriate, at each reporting date.  An asset's carrying value is written down immediately to its recoverable value if the asset's carrying amount is greater than its listed recoverable amount.

(l)         Tangible assets

(i)         Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses.  Cost is the fair value of consideration given to acquire the asset at the time of its acquisition or construction and includes the direct cost of bringing the asset to the location and condition necessary for operation and the estimated future cost of closure and rehabilitation of the facility. Depreciation is provided on all tangible assets to write down the cost less estimated residual value of each asset over its useful economic life on a units of production method or straight line basis. The estimated useful lives are as follows:

Freehold land                                                                   Not depreciated

Plant and machinery                                                        Over 3 - 10 years

Mine Asset                                                                       Life of mine basis

Motor vehicles                                                                 Over 3 years

Fixtures, fittings and equipment                                      Over 4 years

Work in progress                                                             Not depreciated

The depreciation charge for each period is recognised in the Statement of Comprehensive Income.

Assets in the course of construction are capitalised in the Work in Progress account. The cost comprises its purchase price and any costs directly attributable to bringing it into working condition for its intended use, at which point it is transferred to property, plant and equipment and depreciation commences.

Subsequent expenditure relating to an item of property, plant and equipment is capitalised when it is probable that future economic benefits from the use of the asset will be increased.  All other subsequent expenditure is recognised as an expense in the period in which it is incurred.

Repairs and maintenance which neither materially add to the value of assets nor appreciably prolong their useful lives are charged against income.

The gain or loss arising from the de-recognition of any items of property, plant and equipment is included in the profit or loss when the item is de-recognised.  The gain or loss arising from the de-recognition of an item of property, plant and equipment is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.

(ii)        Mine properties and development ("MPD")

This represents the accumulated exploration, evaluation, development and acquisition expenditure in relation to areas of interest in which economically recoverable reserves exist.

Development costs that can be capitalised fall into the following categories:

·     Initial Capital Development

This includes, but is not restricted to the following:

o     Shaft sinking

o     Station (plant) development & underground workshops

o     Pump station and dams

o     Ore and waste pass systems

·     Primary Capital Development

This is the development carried out on each level in the exploration and exploitation of a mining area or orebody. It includes, but is not restricted to the following:

o     Cross cuts, haulages and drives to the orebody

o     Initial rises on the orebody to effect the first holdings to facilitate production

o     Main airways

·     Secondary Capital Development

This is the development carried out within an area in which the primary development has been completed and which is critical to the continued operation of the mine or mining area. It includes, but is not restricted to the following:

o     Airways, crosscuts and drives

o     Pump stations

(l)         Tangible assets (continued)

The capitalised value of mine properties is depreciated on a life of mine basis. The life of mine has been calculated on a units of production method based on economically recoverable reserves and resources. The depreciation for the period is calculated using the following:

Delivered gold ounces during the period	X	Net book value at the
Total estimated delivered ounces over the Life of Mine		beginning of the period plus costs capitalised during the period

The net carrying value of mine assets is reviewed regularly and, to the extent to which this amount exceeds its recoverable amount (based on the higher of estimated future net cash flows and the mine's asset's current realisable value) that excess is fully provided against in the financial year in which this is determined.

(m)      Provision for mine rehabilitation

A provision for rehabilitation is initially recognised at the present value of expected future cash flows when there exists a constructive obligation for the entity to undertake rehabilitation at the mine site.  When provisions for closure and rehabilitation are initially recognised, the corresponding cost is capitalised as an asset, representing part of the cost of acquiring the future economic benefits of the operation.The capitalised cost of closure and rehabilitation activities is recognised in property, plant and equipment and depreciated accordingly. The increase in the provision for rehabilitation relating to the unwinding of the discount on the provision to the date of settlement of the provision and the depreciation of the rehabilitation asset are recorded within profit or loss.

(n)        Impairment of intangible and tangible assets excluding goodwill

The Group assesses at each reporting date whether there is an indication that an asset may be impaired.  If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset's recoverable amount.  An asset's recoverable amount is the higher of the asset's or cash-generating unit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets and the asset's value in use cannot be estimated to be close to its fair value.  In such cases the asset is tested for impairment as part of the cash-generating unit to which it belongs.  When the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset or cash-generating unit is considered impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risk specific to the asset.  Impairment losses of continuing operations are recognised in those expense categories consistent with the function of the impaired asset unless the asset is carried at a revalued amount (in which case the impairment is treated as a revaluation decrease).

An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased.  If such indication exists, the recoverable amount is estimated, a previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised.  If that is the case the carrying amount of the asset is increased to its recoverable amount.  That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years.  Such reversal is recognised in profit or loss unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase.  After such a reversal the depreciation charge is adjusted in future periods to allocate the asset's revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

(o)        Financial instruments

Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the instruments and on a trade date basis.  A financial asset is derecognised when the Group's contractual rights to future cash flows from the financial asset expire or when the Group transfers the contractual rights to future cash flows to a third party.  A financial liability is derecognised only when the liability is extinguished.

a.         Trade and other receivables and other assets

Trade and other receivables and other assets are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method.  Appropriate allowances for estimated irrecoverable amounts are recognised in the statement of comprehensive income when there is objective evidence that the asset is impaired.

b.         Cash and cash equivalents

For purposes of the consolidated statement of financial position and consolidated statement of cash flows, the Group considers all highly liquid investments which are readily convertible into known amounts of cash and have a maturity of three months or less when acquired to be cash equivalents. Cash and cash equivalents comprise cash at bank and in hand, and short term deposits with an original maturity of threemonths or less, all of which are available for use by the Group unless otherwise stated. 

c.          Investments

Investments included as financial assets are valued at fair value and are held as available for sale.  When available for sale assets are considered to be impaired, cumulative gains or losses previously recognised in equity are reclassified to the profit or loss in the period.

d.         Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.  An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.  The Group's financial liabilities include trade and other payables, bank loans, other borrowings, convertible loans and obligations under finance leases.  All financial liabilities, are recognised initially at their fair value plus transaction costs that are directly attributable to the acquisition or issue of the financial liability and subsequently measured at amortised cost, using the effective interest method, unless the effect of discounting would be insignificant, in which case they are stated at cost.

e.         Other financial liabilities

Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs.  Other financial liabilities are subsequently measured at amortised cost using the effective interest method.

f.           Bank borrowings

Interest-bearing bank loans and overdrafts are recorded at the proceeds received net of direct issue costs.  Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis to the Statement of Comprehensive Income using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

g.         Trade payables, provisions and other payables

Trade payables are not interest-bearing and are stated at cost.  Other payables which are interest-bearing are measured at fair value.  Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligations, and a reliable estimate of the amount can be made.  Provisions are measured at fair value.  Provision has been made in the financial statements for benefits accruing in respect of sick leave, annual leave, and long service leave.

h.         Compound financial instruments

Compound financial instruments issued by the Group comprise convertible loan notes that can be converted to share capital at the option of the holder, and the number of shares to be issued does not vary with changes in their fair value.

The liability component of a compound financial instrument is recognised initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts.

Subsequent to initial recognition, the liability component of a financial instrument is measured at amortised cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition except on conversion or expiry.

(p)        Financing costs and interest income

Financing costs comprise interest payable on borrowings and finance lease payments and interest income which is calculated using the effective interest rate method.

(q)        Impairment of financial assets

At each reporting date, the Group assesses whether there is objective evidence that financial assets, other than those at fair value through profit or loss, are impaired.  The impairment loss of financial assets carried at amortised cost is measured as the difference between the assets' carrying amounts and the present value of estimated future cash flows discounted at the financial asset's original effective interest rates.

(r)        Share Capital

Ordinary shares are recorded at nominal value and proceeds received in excess of nominal value of shares issued, if any, are accounted for as share premium.  Both ordinary shares and share premium are classified as equity.  Costs incurred directly relating to the issue of shares are accounted for as a deduction from share premium, otherwise they are charged to the Statement of Comprehensive Income.

(s)        Taxation

Tax on profit or loss for the period comprises current and deferred tax.  Tax is recognised in the Statement of Comprehensive Income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred tax is provided on temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.  The following temporary differences are not provided for: the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future.  The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.

(t)         Share-based payments

The Company operates a share option scheme for granting share options, for the purpose of providing incentives and rewards to eligible employees of the Group.  The cost of share options granted is measured by reference to the fair value at the date at which they are granted.

Non-market performance and service conditions are included in the assumptions about the number of options expected to vest. The total expense is recognised over the vesting period, which is the period over which all the specified vesting conditions are to be satisfied.

At the end of each reporting period, the Group revises its estimates of the number of options that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to the original estimate, if any, in the statement of comprehensive income with a corresponding adjustment to equity.

When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transactions costs are credited to share capital (nominal value) and share premium.

(u)        Contingent liabilities and contingent assets

A contingent liability is a possible obligation that arises from past events and whose existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group.  It can also be a present obligation arising from past events that is not recognised because it is not probable that an outflow of economic resources will be required or the amount of obligation cannot be measured reliably.

A contingent liability is not recognised but is disclosed in the notes to the accounts.  When a change in the probability of an outflow occurs so that the outflow is probable, it will then be recognised as a provision.

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain events not wholly within the control of the Group.

Contingent assets are not recognised but are disclosed in the notes to the accounts when an inflow of economic benefits is probable.  When an inflow is virtually certain, an asset is recognised.

(v)        Leased assets

Operating lease:Operating lease payments are recognised as an operating expense in profit or loss on a straight-line basis over the lease term.

Finance lease:Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the commencement of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in profit or loss.

(w)       Employee benefits

a.      Short-term benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed in profit or loss as the related service is provided.

b.      Long-term employee benefits

Obligations in respect of long-term employee benefits such as long service leave is the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value.

c.      Termination benefits

Termination benefits are recognised as an expense when the Group is demonstrably committed, without realistic probability of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy.  Termination benefits for voluntary redundancies are recognised as an expense if the Company has made an offer encouraging voluntary redundancy, it is probable that the offer will be accepted, and the number of acceptances can be measured reliably. Benefits falling due in more than 12 months of the reporting date are discounted to their present value.

4.         Turnover and Segmental Analysis

All turnover in the Group in the current and prior year is derived from the sales to one customer, which is included in the Gold mining segment.  Other activities relate to a restoration obligation in Brazil.

	Unattributed
2013	Head Office	Gold	Other
	Costs	Mining	Activity	Total
	£'000	£'000	£'000	£'000
Turnover	-	39,080	-	39,080
Mining	-	(23,512)	-	(23,512)
Processing	-	(9,081)	-	(9,081)
Gold duty	-	(1,150)	-	(1,150)
Overheads	-	(6,571)	-	(6,571)
Cost of sales	-	(40,314)	-	(40,314)
Gross Loss	-	(1,234)	-	(1,234)
Administrative expenses	(1,664)	(525)	(152)	(2,341)
Foreign exchange gains	-	(1,707)	-	(1,707)
Depreciation and amortisation	(1,590)	(5,721)	(17)	(7,328)
Underlying operating loss	(3,254)	(9,187)	(169)	(12,610)
Inventory obsolescence	-	18	-	18
Gain on disposal of assets	-	32		32
Impairment charge	-	(3,264)	-	(3,264)
Provision for doubtful debt	-	(296)	-	(296)
Share based payments	(28)	(157)	-	(185)
Operating loss	(3,282)	(12,854)	(169)	(16,305)
Interest receivable and other income	3	5	-	8
Interest payable and similar charges	(48)	(508)	-	(556)
Net loss before taxation	(3,327)	(13,357)	(169)	(16,853)
Taxation	1,189	-	-	1,189
Loss for the period	(2,138)	(13,357)	(169)	(15,664)
Other Segment Items
Additions to intangible assets	-	1,085	-	1,085

	Unattributed
2012	Head Office	Gold	Other
	Costs	Mining	Activity	Total
	£'000	£'000	£'000	£'000
Turnover	-	54,925	-	54,925
Mining	-	(35,686)	-	(35,686)
Processing	-	(10,281)	-	(10,281)
Gold duty	-	(1,660)	-	(1,660)
Overheads	-	(5,917)	-	(5,917)
Cost of sales	-	(53,544)	-	(53,544)
Gross profit	-	1,381	-	1,381
Administrative expenses	(1,769)	(829)	(164)	(2,762)
Foreign exchange gains	-	1,334	-	1,334
Depreciation and amortisation expense	(1,971)	(4,560)	(20)	(6,551)
Underlying operating loss	(3,740)	(2,674)	(184)	(6,598)
Inventory obsolescence write back / (provision)	-	47	-	47
Gain on disposal of assets	-	27		27
Rehabilitation charge	-	45	-	45
Provision for doubtful debt write back	-	(993)	-	(993)
Share based payments expense	(360)	(267)	-	(627)
Operating loss	(4,100)	(3,815)	(184)	(8,099)
Interest receivable and other income	53	12	-	65
Interest payable and similar charges	(51)	(54)	(6)	(111)
Net loss before taxation	(4,098)	(3,857)	(190)	(8,145)
Taxation	1,075	-	-	1,075
Loss for the period	(3,023)	(3,857)	(190)	(7,070)
Other Segment Items
Additions to intangible assets	-	4,164	-	4,164
Additions to  property, plant, and equipment	-	7,245	-	7,245
Additions to mine properties and development	-	4,952	-	4,952

5.         Taxation

The deferred taxation credit arises on the release of the deferred tax liability.

The Finance Act 2013, which was substantively enacted on 2 July 2013, has reduced the main corporation tax rate to 23% from 1 April 2013, 21% from 1 April 2014 and 20% from 1 April 2015. This reduction has been taken into account when calculating deferred tax assets and liabilities. The changes are not expected to have a material cash impact on the company.

The Group has estimated tax benefits in respect of tax losses of £2,953,000 (2012: £1,704,000) of which £2,162,000 will fully expire within 4 years and other net deferred tax benefits in respect of temporary differences of £1,159,000 (2012: 1,764,000) which have not been recognised as a deferred tax asset.

6.         Loss per share

a.         Basic

The calculation of consolidated loss per share is based on the following loss and number of shares:

				2013		2012
				£'000		£'000
Loss after tax				(15,664)		(7,070)
				2013		2012
				Number		Number
Basic weighted average ordinary shares in issue during the period				122,958,339		90,509,159
				2013		2012
				Pence		Pence
Basic loss per share				(12.74)		(7.81)

Basic loss per share is calculated by dividing the loss for the year from continuing operations of the Group by the weighted average number of ordinary shares in issue during the year. 

Outstanding share options could potentially dilute basic earnings per share by 8,407,112 shares in future periods, but were not included in the calculation of basic earnings per share because they are antidilutive for the year ended 31 August 2013.

Subsequent to year end the Group issued a total of 188,897,000 ordinary shares (note 13).  These share issues would have significantly changed the number of ordinary shares outstanding as at 31 August 2013, if the share issues had occurred before 31 August 2013.

b.         Diluted

All potential shares were anti-dilutive as the Group was in a loss making position. As a result diluted loss per share for the years ended 31 August 2013 and 31 August 2012 is disclosed as the same value as basic loss per share.  The diluted weighted average ordinary shares in issue during the period were 122,958,339 (2012: 90,509,159).

Subsequent to the year end, the company issued an additional 20,000,000 new ordinary shares in a private placing.

7.         Intangible assets

	Mining		Computer		Exploration
	Rights		Software		expenditure		Total
Group	£'000		£'000		£'000		£'000
Cost
As at 1 September 2012	38,721		551		6,933		46,205
Additions	-		-		1,085		1,085
Exchange difference	-		(29)		(410)		(439)
As at 31 August 2013	38,721		522		7,608		46,851
Amortisation
As at 1 September 2012	9,284		80		-		9,364
Current charge	1,590		30		-		1,620
Impairment charge	-		-		3,264		3,264
Exchange difference	-		(6)		(149)		(155)
As at 31 August 2013	10,874		104		3,115		14,093
Carrying value as at 31 August 2013	27,847		418		4,493		32,758
	Mining		Computer		Exploration
	Rights		Software		expenditure		Total
Group	£'000		£'000		£'000		£'000
Cost
As at 1 September 2011	38,414		243		2,769		41,426
Additions	-		-		4,164		4,164
Disposals	-		-		(111)		(111)
Transferred from tangible assets	307		299		-		606
Exchange difference	-		9		111		120
As at 31 August 2012	38,721		551		6,933		46,205

The Mining rights represent the mining rights acquired on the acquisition of the Vatukoula Gold Mine in April 2008. The amortisation of the Mining Rights is calculated on a unit of production basis, based on forecast production and the total Mineral Reserves.  At the current production, reserves and gold price, the economic useful life is expected to be 7 years. This rate will vary from year to year and is dependent on the mineral reserves which are reassessed every year.   Amortisation is included in depreciation and amortisation in the Statement of Comprehensive Income.

The directors believe that there have been no indicators of impairment for the mining rights for the year ended 31 August 2013 (and 31 August 2012).

A deferred tax liability of £10,757,000 arose in 2008 in respect of the intangible assets recognised on the acquisition in the prior periods. The deferred tax liability is in respect of future taxable profits potentially generated from the exploration of the mining rights.

The Exploration expenditure is an internally generated intangible asset, and represents costs associated with the exploration and evaluation of mineral deposits on our mining and special prospecting licenses and are capitalised in accordance with IFRS 6.  At the current production, reserves and gold price, the economic useful life is expected to be 7 years. This rate will vary from year to year and is dependent on the mineral reserves which are reassessed every year.   Amortisation is included in depreciation and amortisation in the Statement of Comprehensive Income.

Exploration costs to the amount £3,264,000 (2012: Nil) relate to specific areas which have not led to the discovery of commercially viable quantities of mineral resources, and the Group has decided to discontinue such activities in those specific areas. These costs have been impaired.  The assets impacted by the impairment are allocated to the Gold Mining segment (note 4).        

The Computer Software expenditure represents the costs associated with the purchase of specialised mining and inventory software.

8.         Property, plant and equipment

	Freehold and leasehold land	Work in progress	Plant and machinery	Motor vehicles	Mine assets	Fixtures fittings and equipment	Total
Group	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Cost
As at 1 September 2012	1,024	2,572	33,466	341	1,998	145	39,546
Additions	-	2,216	-	26	-	-	2,242
Transferred on completion	-	(3,109)	3,109	-	-	-	-
Disposals	-	-	(169)	-	-	-	(169)
Changes in estimates	-	-	-	-	1,439	-	1,493
Exchange difference	(49)	(88)	(2,737)	(20)	(169)	(2)	(3,065)
As at 31 August 2013	975	1,591	33,669	347	3,268	143	39,993
Accumulated depreciation
As at 1 September 2012	13	-	13,021	238	463	98	13,833
Charge for the period	17	-	4,436	3	66	1	4,523
Disposals	-	-	(169)	-	-	-	(169)
Exchange difference	(1)	-	(1,759)	(9)	(27)	(2)	(1,798)
As at 31 August 2013	29	-	15,529	232	502	97	16,389
Net book value
At 31 August 2013	946	1,591	18,140	115	2,766	46	23,604
At 31 August 2012	1,011	2,572	20,445	103	1,535	47	25,713

	Freehold and leasehold land	Work in progress	Plant and machinery	Motor vehicles	Mine assets	Fixtures fittings and equipment	Total
Group	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Cost
As at 1 September 2011	1,165	201	28,087	370	2,869	148	32,840
Additions	-	7,245	-	-	-	-	7,245
Transferred on completion	90	(4,607)	4,517	-	-	-	-
Disposals	-	-	(122)	-	-	-	(122)
Changes in estimates	-	-	-	-	(932)	-	(932)
Transferred to intangible	(250)	(299)	-	-	-	-	(549)
Exchange difference	19	32	984	(29)	61	(3)	1,064
As at 31 August 2012	1,024	2,572	33,466	341	1,998	145	39,546
Accumulated depreciation
As at 1 September 2011	-	-	8,643	251	315	98	9,307
Charge for the period	13	-	3,835	2	139	2	3,991
Disposals	-	-	(27)	-	-	-	(27)
Impairment	-	-	-	-	-	-	-
Exchange difference	-	-	570	(15)	9	(2)	562
As at 31 August 2012	13	-	13,021	238	463	98	13,833
Net book value
At 31 August 2012	1,011	2,572	20,445	103	1,535	47	25,713
At 31 August 2011	1,165

9.         Mine properties and development

				2013		2012
				£'000		£'000
Cost
Balance as at 1 September				13,865		8,695
Additions				10,624		4,952
Foreign exchange difference				(1,217)		218
Balance at end of period				23,272		13,865
Depreciation
Balance as at 1 September				2,350		1,740
Current charge				1,185		566
Foreign exchange difference				(176)		44
Balance at end of period				3,359		2,350
Carrying value
Balance at end of period				19,913		11,515

10.       Share capital

(a)        Share capital

		Group and Company
(a) Share Capital
		2013	2012
		£'000	£'000

(b)        Share issues during the year

Issue value per Share

Par value per Share

11.       Provisions

			Group
			2013

Employee related provisions include a provision for unpaid annual leave based on Fijian labour legislation, and a provision for legally required workers compensation relating to work injuries.  Based on current estimates, these are expected to realise in approximately 10 years.

The provision for mine rehabilitation represents the current mine closure plan. The present value of the estimated cost is capitalised as a mine asset, as part of property, plant and equipment. Over time the discounted liability will be increased for the change in the present value based on the discount rates that reflect the current market assessments and the risks specific to the liability. The capitalised mine asset is expected to be expensed over the life of mine which is currently 7 years (2012: 7 years). The life of mine is dependent on the economic viability of extracting the contained Mineral Resources and may vary on a year by year basis dependant on the mining / processing costs and the price of gold. In addition the quantum of the provision may vary on a year by year basis dependant on the costs associated with executing the Mine Rehabilitation Plan.

Long service leave is a contractual obligation for additional leave days earned by employees with 10 years or more service.  Based on current estimates, these are expected to realise by the end of the life of mine.

12.       Vatukoula Social Assistance Trust Fund 

				Group
				2013		2012
				£'000		£'000
Current
Vatukoula Social Assistance Trust Fund				1,127		1,189
				1,127		1,189
Non Current:
Vatukoula Social Assistance Trust Fund				15		15
				15		15

The Vatukoula Social Assistance Trust Fund ("VSATF") was established for the purpose of social assistance for the employees made redundant by the previous mine operator and the local mining community in accordance with the Trust Deed dated 18 December 2009.

The VSATF is part of the Vatukoula Trust Deed, a binding contract between the Company's wholly owned subsidiary and the Fijian Ministry of Lands and Mineral Resources.  A total of F$6million is payable of which the Group paid F$1.5 million on 10 March 2010 and F$1.125 million on 31 December 2011.  The remaining F$3.375 million has been allocated to Current and Non Current Liabilities as follows:

	F$'000		£'000
Current:
Redundancy payment due within 1 year	3,325		1,127
	3,325		1,127
Non Current:
Instalments according to Trust Deed due more than 1 year	50		17
	50		17
	3,375		1,144

13.       Post balance sheet events

On 21 October 2013, the Company completed the first tranche of a placing with Zhongrun whereby Zhongrun has subscribed for 90,000,000 new ordinary shares in the Company at a price of £0.69 per share, to raise £6.2 million.

On 5 November 2013, the Company completed the second tranche of the placing with Zhongrun whereby Zhongrun has subscribed for 98,897,000 new ordinary shares in the Company at a price of £0.69 per share, to raise £6.8 million.  As a result of this placing, Zhongrun's total holding increased to approximately 66% of the enlarged share capital of the Company.

In January 2014 the company agreed with Zhongrun to extend the time for payment by Zhongrun of the US20million loan note to 28 February 2014.  Zhongrun formally acknowledged and represented that it is willing and will be able to make full payment of the USD20million loan note.