Gujarat NRE Coking Coke Ltd (Australian Subsidiary of Gujarat NRE Coke Ltd, India) (31-3-2013)
From Summary of Accounting Policies
Going Concern
As at the reporting date the Consolidated Entity had a net loss for the period of INR4,744 million (March 2012: Net Profit of INR605 million). Included in the loss are impairment charges of INR5,189 million (refer note below on critical accounting estimate and judgment for further breakdown). The Net cash from operation for the year was INR2,405 million (March 2012 INR4,289 million). The Consolidated Entity has a net current asset deficiency of INR25,266 million (March 2012: INR5,040 million), which includes the current portion of borrowings of INR5,021 million (March 2012: INR2,267 million) and the balance INR14,362 million (March 2012: Nil) have be reclassified as Current liabilities in accordance with AASB101 on account of breach of financial covenants.
The Directors believe this in itself is not a cause of concern considering the nature of business where there are no raw materials, WIP or finished goods until such time as they are mined. Further-more once the coal is mined it is transported to nearby port for export, as such inventory holding is expected to be low. In addition to the above the current liabilities includes installments of loan payable in next 12 months and the creditors mainly comprises of capex creditors as the company continues to be in brown field expansion.
The following events in the current financial year have led to the current performance:
• Significant changes with the adverse effect on the entity have taken place during the period (i.e. a considerable decline in the prices of coking coal)
• Delays in production at both the mines
• Reduced production on account of delay in approvals
• Due to above reasons there was cash flow restraints with payment terms being of certain creditors being extended against normal terms of payment.
Notwithstanding the loss for the year and the Consolidated Entity’s deficiency in net current assets, the financial report has been prepared on the going concern basis.
The directors consider the entity to be a going concern on the basis of the following:
• An anticipated increase in production levels to around 2.3 million tonnes for the coming financial year based on detailed mine plans;
• NRE Wongawilli colliery has all the necessary approvals in place to continue mining upto 2015-2016, the company is in the process of lodging further applications to extend this for another 5-15 years.
• NRE No.1 currently has approval to extract coal from LW 5 upto September 2013 and anticipates receiving long-term approval to extract coal in December 2013.
• The necessary approvals, as described above, for Wongawilli and NRE 1 will be obtained to continue production through the 2014 FY and beyond;
• Increased revenue due to both mines being in production and the anticipated future profit-able position.
• The Company has agreed a term sheet for the introduction approximately A$66 million in new capital to the Company through a placement at 20 cents per share to Jindal Steel & Power Group (“Jindal”) subject to shareholders’ approval. As part of placement Jindal will receive 328.5 million ne shares as well as around 328.5 million unlisted transferable options which shall be exercisable for nil consideration within a period of 5 years from the date of issue of the option. In addition, the Company will make an offer to shareholders not associated with Jindal and Gujarat on a pro-rata basis one new share for every four shares held on the record date plus one attaching unlisted transferable option for every one share subscribed. The ordinary shares will be issued at the price of 20 cents per new shares and each option shall be exercisable for nil consideration within a period of 5 years from the date of issue of the option, subject to shareholders’ approval.
• Suppliers will be brought back into their credit terms and the Consolidated Entity will have ongoing support from its suppliers and creditors;
• The Company is also in an advance discussion with its existing bankers for further borrowing the $200 million:
o $140 million of the same shall held the Company in freeing up the funds utilized for capex incurred (from its own sources) in FY13 and H1FY14 which is proposed to be utilized to prepay the scheduled princi-pal repayments falling due in FY14 & FY15 under the Axis Bank syndicated facilities. The Company has received sanction for $66 million from some of the lenders; and
o $60 million would be used to part-financing the capex for Project in H1FY14 and meet-ing expenses in relation to this facility. The Company has received sanction for $10 mil-lion from one of the banks.
Sanctions from the remaining banks are expected to be in place in the next few weeks.
• The entity has prepared cash flow forecasts covering a period of more than 12 months from the date of approval of these financial statements. These indicate that the entity will meet its liabilities as they fall due.
• The entity continues to develop the two mines to secure production into the future.
In order to complete these projects the entity will have to continue to be able to sources funding by way of debt or equity. The di-rects are in the process of exploring funding opportunities and are confident of being able to secure sufficient funds to complete both mines.
Based on the above, the Directors consider the entity to be a going concern and able to meet its debts and obligations as they fall due.
Notwithstanding the above, if one or more of the planned measures doe not eventuate or are not resolved in the Entity’s favour, then in the opinion of the Directors, there will be significant uncertainty regarding the ability of the Entity to continue as a going concern and pay its debts and obligations as and when they become due and payable.
If the Entity is unable to continue as a going concern, it may be required to realise its assets and extinguish its liabilities other than in the normal course of business at amounts different from those states in the financial report.
No adjustments have been made to the financial report relating to the recoverability and classification of the recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Entity not continue as a going concern.
Trade and Other Receivables
Trade receivables are recognised at original invoice amounts less an allowance and impairment for uncollectible amounts. Collectability of trade receivables is assessed on an ongoing basis. Debts which are known to be uncollectible are written off. An allowance is made for doubtful debts where there is objective evidence (such as significant financial difficulties on the part of the counterparty of default or significant delay in payment) that the group will not be able to collect all amounts due according the original terms.
Impairment of Assets
At each reporting date, the Group reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, is compared to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed to profit or loss.
The Details of impairments that have been recog-nised during the financial year is as under:
1.Impairment of Land & Building in Gujarat NRE
Properties Pty Ltd. $5.50 million
2. Impairment of Investments $11.58 million
3. Impairment of Cethana $5.25 million
4. Impairment of Mining Assets $61.46 million
Impairment of Mining Assets – $61.46 Million
The Company undertook review of the carrying value of its assets to assess for impairment, if any, as there were the following indicators:
• the carrying amount of the net assets of the entity is more than its market capitalisation
• significant changes with an adverse effect on the entity have taken place during the period (i.e. a considerable decline in the prices of coking coal)
• Delays in production due to outstanding ap-provals
• Cash flow restraints.
The Company accordingly appointed Geos Mining (Geos) to carry out an independent valuation of the assets. Geos provided the valuation of the assets in the range of $398 million to $995 million with preferred value being $810 million. The preferred value was not considered appropriate due to the following factors:
1. The mine plan of the Company has been made by its executives who have a considerable experience of coal mining in the region and the mine plans have been duly assessed an independent technical review undertaken independently by Runge Pincock Minarco (Minarco). However the preferred value arrived by Geos was based on, amongst other assumption, on achieving 95% of the optimal Bulli mine plan.
2. Also Geos have considered the recommendation of Edwards Global Services as the High case for coking coal prices. There are coking coal price forecasts which were higher than those of Edwards. It was believed that the coking coal prices recommended by Edwards Global Services are in between the range of forecast and closer to higher long term prices forecast in the market and it was considered appropriate to adopt these prices for the valuation exercise.
The Company’s business operation i.e. coal mining, coal preparation and export of coal from two coal mines has been assessed as a single cash generating unit (CGU) considering the following justifications:
a) Mines are located in the same regional area.
b) Both the mines have only one product line, coal.
c) The performance of the cash inflow of one mine gets directly affected by the performance of the other mine.
d) The revenue from each mine is not independent of each other.
e) The management monitors the operations collectively and that the revenue from one mine is directly affected by the quantity exported by other mine.
Based on the assessment undertaken by the Company the preferred valuation of the CGU based on value in use has been arrived at $995 million considering the undernoted assumptions:
a) The company has done a valuation using a discount rate of 8.5% (based on WACC).
b) Long Term coking coal price of $197.
c) Long Term US$: AUS$ long-term exchange rate of 0.85.
d) Life of each mine should have in excess of 25 years.
e) The permitted rates of extraction will be up to 3.2 Mtpa for both mines, in line with current plans.
The Carrying value of the mining assets of the Company is $1,056.46 million & based on the above factors and assessments undertaken by the Company, the preferred valuation of the assets (CGU) has been arrived at $995 million, and an impairment of $61.46 million has been recognized in the books.
Impairment of Property Held in Gujarat NRE Properties Pty Ltd – $5.50 million
The Company owns a property located at Cliff Road, Wollongong, the carrying value of which was $9.25 million as at 31st March 2013. An independent valuation of said property was carried out and the property was valued at $3.75 million resulting in an impairment of $5.50 million. This impairment was on account of general downtrend in the real-estate market.
Impairment of Investment: – $11.58 million
The Company made investments in mutual funds anticipating better returns. However, the value of those investments have significantly diminished due to economic and financial crisis and impaired accordingly.
Impairment of Cethana Project: – $5.25 million
As a result of limited expenditure being incurred on the tenements over the past two years, the Board considered it was prudent to obtain a valuation of the Cethana project tenements. The Cethana project was valued using two approaches: attributable value of exploration expenditure and comparable market valuations, these resulted in a preferred valuation of $1.20 million for 100% of the project. Our share in JV, being 30% of the Cethana project has thereby been reduced to $0.36 million from a carrying value of $5.61 million. An impairment of $5.25 million has been recognised in profit and loss.
From Independent Auditor’s Report (dated 15th August 2013)
Basis for Disclaimer of Opinion
We have been unable to obtain sufficient appropriate audit evidence on the books and records and the basis of accounting of the consolidated entity. Specifically, we have been unable to satisfy ourselves on the following areas:
i. Valuation and impairment of assets – the consolidated entity obtained an independent valuation of its mining assets and mining licences. The independent valuation was based on certain assumptions which may no longer be valid. The directors have not obtained an updated independent valuation to determine the extent of the impairment to the carrying value of the mining assets and mining leases. We have been unable to obtain supporting evidence, based on updated assumptions, which would provide sufficient appropriate audit evidence as to the carrying value of the mining assets and mining leases.
ii. Going concern – the financial report has been prepared on a going concern basis, however the directors have not provided an update of their assessment of the consolidated entity’s ability to pay their debts as and when they fall due. The consolidated entity has reported a loss before income tax of $112,182,825 (including an impairment charge of $83,792,190) for the year ended 31st March 2013 and a working capital deficiency of $407,998,443. At the year end, the consolidated entity is in breach of loan covenants, has significant creditors in arrears and has been unable to provide evidence to support the full amount of the replacement loan facility which is required to pay existing facilities. As discussed in Note 1(c), the consolidated entity is in the process of renegotiating financing and has announced a share placement to the market, subject to shareholder approval, for additional equity funding.
We have been unable to obtain alternative evidence which would provide sufficient appropriate audit evidence as to whether the consolidated entity may be able to obtain such financing, and hence remove significant doubt of its ability to continue as a going concern for a period of 12 months from the date of this auditor’s report.
iii. Deferred Tax Assets – included in non-current assets are Deferred Tax Assets of $87,302,944. In accordance with AASB112 “Income Taxes”, the recognition of deferred tax assets when an entity has incurred tax losses requires convincing other evidence that sufficient taxable profit will be available against which the unutilised tax losses can be utilised by the Group. The directors have not provided sufficient appropriate audit evidence of the Group’s ability to recover these losses.
iv. Recoverability of Trade Receivable – included in Trade Receivables is an amount of $27,795,628 due from the consolidated entity’s ultimate parent company. We were unable to obtain sufficient appropriate audit evidence to determine the recoverability of this receivable. Consequently, we were unable to determine whether any adjustment to this receivable was necessary.
v. Completeness of Contingent Liabilities and Sub-sequent Events disclosures – we were unable to obtain sufficient appropriate audit evidence to determine the completeness of the contingent liabilities and subsequent events disclosures. Consequently, we were unable to determine whether any additional disclosures are required to the relevant notes.
vi. To the date of the directors approving the financial statements, we were not provided with sufficient appropriate audit evidence, or time, to finalise our procedures pertaining to various disclosures and transactions contained within the financial report. This constitutes a limitation of scope.
As a result of these matters, we were unable to determine whether any adjustments might have been found necessary in respect of the elements making up the consolidated statement of financial position, consolidated statement of profit and loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows, and related notes and disclosures thereto.
Disclaimer of Opinion
Because of the significance of the matters described in the Basis for Disclaimer of Opinion paragraphs, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on the financial report.
From Independent Auditors’ Report on Consolidated Financial Statements of Holding Company, Gujarat NRE Coke Ltd, India (dated 30th May 2013)
Other Matter
We have relied on the unaudited financial statements of all the Australian subsidiaries as referred in not no. 31 of the Consolidated Financial Statement, whose financial statements reflect total assets of Rs. 8.532.55 Crore as at 31st March, 2013 and total revenue of Rs. 1,394.86 Crore and net Cash outflows of Rs. 5.61 Crore for the year ended 31st March, 2013. These unaudited financial statements has been approved by the Management Committee of the respective subsidiaries and have been furnished to us by the management, and our report in so far as it relates to the amounts included in respect of these subsidiaries are based solely on such Management approved financial statements.
