SHAPING OUR FUTURE ANNUAL REPORT 2014 PANAUST LIMITED POSTAL ADDRESS ABN 17 011 065 160 PO Box 2297 Fortitude Valley Business Centre QLD 4006 DIRECTORS STOCK EXCHANGE LISTING Garry Hounsell (Chairman) PanAust Limited Shares are listed on the Fred Hess (Managing Director) Australian Securities Exchange (ASX) Nerolie Withnall ASX Code: PNA Geoff Handley Geoff Billard AUDITORS Zezhong Li PricewaterhouseCoopers John Crofts Riverside Centre 123 Eagle Street Ken Pickering Brisbane QLD 4000 Annabelle Chaplain Qian Deng BANKERS (appointed Alternate Director 28 January 2015) ANZ Banking Group Limited Gary Stafford 324 Queen Street (resigned as Managing Director 11 November 2014) Brisbane QLD 4000 JOINT COMPANY SECRETARIES SHARE REGISTER Paul Scarr Computershare Investor Services Pty Limited George Piggott (appointed 28 January 2015) 117 Victoria Street West End QLD 4101 Telephone: 1300 850 505 REGISTERED OFFICE Telephone outside Australia: +61 3 9415 4000 Level 1, 15 James Street Fortitude Valley QLD 4006 ANNUAL GENERAL MEETING Brisbane, Australia The 2015 Annual General Meeting of Telephone: +61 7 3117 2000 PanAust Limited will be held at 10am on Facsimile: +61 7 3846 4899 Friday 22 May In the Sky Room at the Website: www.panaust.com.au Brisbane Convention and Exhibition Centre Email: [email protected] Corner Merivale and Glenelg Streets South Bank QLD 4101 (enter via Grey Street and go to the Sky Level) Cover image: an aerial view of PanAust’s Phu Kham Copper-Gold Operation in Laos PanAust Limited ABN 17 011 065 160 Annual report - 31 December 2014 Contents Page Directors' report 1 Corporate governance statement 52 Financial report 58 Independent auditorʼs report to the members 120 Shareholder information 122 PanAust Limited Directors' report 31 December 2014 Directors' report Your Directors present their report on the consolidated entity of PanAust Limited (referred to hereafter as the 'Company', 'Group' or 'PanAust') consisting of PanAust Limited and the entities it controlled at the end of, or during, the year ended 31 December 2014 (the "reporting period"). Principal activities PanAust Limited is an Australian-based mining company. The principal activities of the Group during the financial year were: a. Production and sale of copper-gold concentrate from the Phu Kham Copper-Gold Operation, Laos; b. Production and sale of gold-silver doré from the Ban Houayxai Gold-Silver Operation, Laos; and c. Exploration and evaluation of projects in Laos, Papua New Guinea (PNG) and Chile. Significant changes in the state of affairs Significant changes in the state of affairs of the Group during the financial year and to the date of this report related to the acquisition of a majority interest in the Frieda River Copper-Gold Project, Managing Director succession, the implementation of a business efficiency review, and the recognition of impairments. Further details are as follows: • On 25 August 2014, PanAust acquired an 80% interest in the Frieda River Copper-Gold Project in PNG from Glencore plc with joint venture partner Highlands Pacific Limited (Highlands Pacific) holding the remaining 20%. The Government of PNG has a right to acquire, at cost, up to a 30% interest in the Project which, if exercised in full, would reduce PanAustʼs holding to 55% and Highlands Pacific to 15%. Initial consideration of US$25 million was paid to Glencore on 25 August 2014 together with approximately US$4 million to reimburse costs incurred by Glencore since the date of the share sale and purchase agreement (31 October 2013). A further US$50 million (indexed for inflation) must be paid on 31 December 2015. • Also on 25 August 2014, PanAust exercised its option under a Share Placement Agreement with Highlands Pacific to acquire approximately 64.5 million fully paid ordinary shares in Highlands Pacific taking PanAustʼs total holding in Highlands at that time to approximately 14% (128,865,980 shares) of the issued capital. The share placement was completed on 1 September 2014. The Share Placement Agreement related to PanAustʼs agreement with Glencore plc to acquire Glencoreʼs interest in the Frieda River Project. • On 6 March 2014 a succession process commenced for the position of Managing Director. On 11 November 2014, Mr Gary Stafford resigned. Mr Stafford had served as Managing Director of the Company since 1996. On 11 November 2014, Dr Fred Hess was appointed Managing Director of the Company. Dr Hess had previously held the position of EGM, Project Development & Operational Improvement. • In late 2014 PanAust implemented a business efficiency review aimed at ensuring the business remains competitive throughout the commodity price cycle. On 14 January 2014, PanAust announced organisational changes as part of the review that resulted in a reduction in the workforce across the Group of 182 people (approximately 5% of the workforce). The changes are expected to result in an annual operating cost reduction of approximately US$15.5 million. One-off charges relating to redundancy payments totalling approximately US$4.2 million will be paid to employees during the March quarter 2015. • In the context of prevailing copper, gold and silver prices, the Company has reviewed the carrying values of all exploration, pre-development and operating assets. The outcome is the recognition of pre-tax impairment charges totalling US$264.7 million. Details are as follows: . Ban Houayxai, Laos: US$67.9 million impairment (pre-tax) has been recognised against the written down value of the operating asset. Mine properties: US$9.9 million impairment relating to capitalised costs. 1 1 PANAUST ANNUAL REPORT 2014 | SHAPING OUR FUTURE PanAust Limited Directors' report 31 December 2014 . KTL copper-gold deposit, Laos: US$27.6 million impairment has been recognised against the capitalised exploration and evaluation costs. Inca de Oro / Carmen, South America: US$132.3 million impairment has been recognised against the pre-development asset and goodwill on acquisition. Exploration projects, Laos: US$27.1 million impairment has been recognised for exploration projects that have been discontinued. Dividends On 20 February 2014, the PanAust Board of Directors declared an unfranked dividend of A$0.03 per share in respect of the year ended 31 December 2013. The final dividend was paid on 4 April 2014. A total of 1,187,942 ordinary shares were issued at a price of A$1.61 per share under the Dividend Reinvestment Plan (DRP). On 21 August 2014, the PanAust Board of Directors declared an interim unfranked dividend of A$0.03 per share in respect of the half-year ended 30 June 2014. The interim dividend was paid on 3 October 2014. A total of 1,018,842 ordinary shares were issued at a price of A$2.18 per share under the DRP. Subsequent to year end, no final dividend was declared. Operating and Financial Review Introduction The Operating and Financial Review is divided into the following sections: • Business strategy and prospects for future financial years; • Operating and financial position; • Review of operations and results by segment; and • Risks to financial prospects. Business strategy and prospects for future financial years PanAust is a mid-capitalisation copper and gold producer in Laos with pre-development opportunities in Laos, PNG and Chile. The Lao producing assets are the Phu Kham Copper-Gold and the Ban Houayxai Gold-Silver Operations. PanAustʼs business model is focussed on the production and sale of copper and gold and the delivery of production goals and sustainable growth. While copper forms the core product focus, gold plays an important role in providing a measure of commodity diversity. The strategic focus of the Company is on maximising returns from its producing assets while advancing pre- development projects that offer potential to sustain and grow the business in the long-term. Any project that progresses to the development stage is required to demonstrate compelling investment returns under conservatively realistic economic parameters. Phu Kham is reaping the benefit of increased production levels and lower unit operating costs as a result of two phases of expansion. Implementation of the expansions at Phu Kham enabled the operation to increase production rates in 2013 and 2014 when lower copper and gold head grades were scheduled to be mined. Copper grades started to rise again during the second half of 2014 and are expected to continue to increase year on year through to 2018 and 2019 when peak grades are scheduled, providing copper in concentrate production of approximately 90,000t. Gold grade is expected to peak in 2015 before reverting back to around the Ore Reserve average. 2 SHAPING OUR FUTURE | PANAUST ANNUAL REPORT 2014 2 PanAust Limited Directors' report 31 December 2014 Operating and financial review (continued) Business strategy and prospects for future financial years (continued) In 2015 copper production from Phu Kham is expected to rise to between 73,000t and 76,000t at an average C1 cost of between US$1.45/lb and US$1.50/lb copper after precious metal credits from 80,000oz to 83,000oz of gold and 500,000oz to 550,000oz of silver. The all in sustaining cost is expected to fall to between US$1.95/lb and US$2.00/lb copper. Peak life of mine material movements in the open pit are scheduled to continue in 2015 with nearly 56 million tonnes expected to be mined ‐(waste to ore ratio 1.9 to 1, similar to 2014). No deferred waste adjustment is scheduled to be‐ capitalised‐ for the year. The mill processing throughput is expected to rise to 19.5Mt of ore due to higher operating time and processing rates. The strip ratio is expected to decline from 2016 onwards and, together with increasing copper production from higher grades, will benefit cash flow. In 2015 gold production at Ban Houayxai is expected to remain steady at between 95,000oz and 100,000oz at an average C1 cost between US$650/oz and US$700/oz gold after credits from between 800,000oz and 850,000oz of silver.