Financial Statements MMX Mineração E Metálicos S.A. (Publicly-Held Company)
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Financial Statements MMX Mineração e Metálicos S.A. (Publicly-held company) December 31, 2015 with Independent Auditor’s Report MMX Mineração e Metálicos S.A. Individual and consolidated financial statements December 31, 2015 Contents Independent auditor’s report on individual and consolidated financial statements ........................... 1 Audited financial statements Balance sheets .............................................................................................................................. 5 Statements of operations ............................................................................................................... 7 Statements of comprehensive income (loss) .................................................................................. 8 Statements of changes in equity .................................................................................................... 9 Cash flow statements .................................................................................................................... 10 Statements of value added ......................................................................................................... 12 Notes to individual and consolidated financial statements ............................................................ 13 1 A free translation from Portuguese into English of Independent Auditor’s Report on Individual and Consolidated Financial Statements prepared in Brazilian currency in accordance with accounting practices adopted in Brazil and International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board (IASB) Independent auditor’s report on financial statements issued with disclaimer of opinion The Shareholders, Board of Directors and Officers MMX Mineração e Metálicos S.A. Rio de Janeiro - RJ Introduction 1. We have audited the accompanying individual and consolidated financial statements of MMX Mineração e Metálicos S.A. (“Company”), identified as Company and Consolidated, respectively, which comprise the balance sheet as at December 31, 2015, and the related statements of operations, comprehensive income (loss), changes in equity and cash flows for the year then ended, and a summary of significant accounting practices and other explanatory information. Management’s responsibility for the financial statements 2. Management is responsible for the preparation and fair presentation of the individual and consolidated financial statements in accordance with accounting practices adopted in Brazil, and in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB), and for such internal control as management determines is necessary to enable the preparation of these financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s responsibility 3. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Brazilian and International Standards on Auditing. Because of the matters described in the “Basis for disclaimer of opinion” paragraph, we were unable to obtain sufficient and appropriate audit evidence to provide a basis for our audit opinion, therefore, this report is issued with a disclaimer of opinion. 1 Basis for disclaimer of opinion 4. As mentioned in Note 1, on October 16, 2014, the Company filed a petition for an in-court reorganization of its subsidiary MMX Sudeste Mineração S.A. (under in court reorganization process) with the District Court of Minas Gerais state capital - pursuant to Law No. 11101/05, which was accepted on October 22, 2014, in a decision handed down by the 1st Business Court of Belo Horizonte. On December 19, 2014, the Company presented its in-court reorganization plan itemizing the means for the reorganization to be used, demonstration of its economic feasibility, and economic-financial position and valuation reports of its assets and rights. The in-court reorganization plan was approved by the creditors on August 28, 2015 and by the Belo Horizonte 1st Business Court Judge on September 23, 2015. To date, the Company did not measure all possible effects from the in-court reorganization plan on these individual and consolidated financial statements, since they depend on future events, such as sale of assets, which may or not occur. 5. For the year ended December 31, 2015, the Company incurred individual and consolidated accumulated losses totaling R$6,054,478 thousand, the Company’s individual and consolidated current liabilities exceeded its individual and consolidated current assets by R$896,418 thousand and R$562,798 thousand, respectively, and incurred individual and consolidated negative equity totaling in R$734,155 thousand and R$734,161 thousand, respectively. To revert this situation, management plan, as disclosed in Note 1, depends on the successful completion of the in-court reorganization plan of its subsidiary MMX Sudeste Mineração S.A. as mentioned in prior paragraph, in addition to the need for partnerships with new investors to continue the projects that will remain in the subsidiary’s portfolio. These conditions indicate the existence of significant uncertainty, which cast doubt as to the Company’s and its subsidiaries ability to continue as a going concern. At December 31, 2015, the Company’s individual and consolidated assets and liabilities were classified and measured on the assumption that the Company will continue as a going concern. 2 6. The Company has significant weaknesses in internal controls related to the preparation of individual and consolidated financial statements, such that there is a reasonable possibility that a material misstatement on its individual and consolidated financial statements has not been prevented or detected on a timely basis. Such deficiencies include the lack of adequate controls for segregation of duties that ensure integrity and adequate reporting of information stated in the overall financial statements, reconciliations of all negotiations with suppliers and third parties due to the in-court reorganization plan that ensure the reliability of the provisions for obligations, analysis of the impact from its subsidiary’s in-court reorganization process on the financial statements, especially regarding the presentation and measurement of noncurrent assets available for sale, controls on manual accounting entries, analysis of potential impairment losses on inventory realization due to sale at amounts that are lower than cost amounts, controls and adequate supporting documentation of accrued vacation pay recorded in the year, and analysis for realization of receivables from related parties. 7. The significant uncertainties and the matters described in paragraphs 4 to 6 above did not allow us to conclude on how, when and for how much the assets will be realized and the liabilities will be settled. Future significant events, the outcome of which we cannot anticipate, may have a material impact on the Company’s operations. These impacts may significantly affect how and for how much these assets will be realized and these liabilities will be settled. We were also unable to conclude on how the assets will be realized and the liabilities will be settled, whether by means of the Company’s operations, or by means of sale of all or part of the assets. 8. Over 2015, the Company and its subsidiaries recorded adjustments arising from the rectification of errors relating to prior years not attributable to subsequent events, so that the income for the year ended December 31, 2015 was reduced by R$23,460 thousand in the consolidated financial statements and by R$23,178 thousand in the individual financial statements. According to CPC 23 - Accounting Policies, Changes in Accounting Estimates and Errors and IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors, these adjustments should have been made in prior years. Disclaimer of opinion on the individual and consolidated financial statements 9. In view of the relevance of the matters described in paragraphs 4 to 8, as part of the “Basis for disclaimer of opinion” section, we were unable to obtain sufficient appropriate audit evidence to provide a basis for our audit opinion on the individual and consolidated financial statements referred to above. Accordingly, we do not express an audit opinion on these individual and consolidated financial statements. 3 Other matters Statements of value added 10. We were also engaged to audit the individual and consolidated statements of value added (SVA) for the year ended December 31, 2015, prepared under the responsibility of management, the presentation of which is required by Brazilian Corporation Law for publicly- held companies, and as supplementary information under the IFRS, whereby no SVA presentation is required. These statements have been subject to the same audit procedures previously described. In view of the relevance of the matters described in paragraphs 4 to 8 included in the “Basis for disclaimer of opinion” section, we were unable to obtain sufficient appropriate audit evidence to provide a basis for our audit opinion. Accordingly, we do not express an audit opinion on the individual and consolidated financial statements referred to above. Belo Horizonte, March 30, 2016. ERNST & YOUNG Auditores Independentes S.S. CRC-2SP015199/F-6 Rogério Xavier Magalhães Accountant CRC-1MG080613/O-1 4 MANAGEMENT REPORT 1. Message from Management The Company’s