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Central Asia Metals PLC Proposed acquisition of -57-

22 Sep 2017 6:01 am

Development costs relating to specific properties are capitalized once management determines a property will be developed. A development decision is made based upon consideration of project economics, including future metal prices, reserves and resources, and estimated operating and capital costs. Capitalization of costs incurred and proceeds received during the development phase ceases when the property is capable of operating at levels intended by management and is considered commercially viable. Costs incurred during the production phase to increase future output by providing access to additional reserves, are deferred and depreciated on a units-of-production basis over the component of the reserves to which they relate. Expenditure other than that on land, buildings, plant, equipment and capital work in progress is capitalised under "Mining Properties" together with any amount transferred from "Exploration and evaluation" expenditures. Ore reserves may be declared for an undeveloped mining project before its commercial viability has been fully determined.

Development costs incurred after the commencement of production are capitalised to the extent they are expected to give rise to a future economic benefit. The cost of mineral properties also includes the estimated close-down and restoration costs associated with the asset.

Interest on borrowings related to qualifying assets for construction or development projects is capitalised, at the rate payable on project-specific debt if applicable or at the Lynx Group's cost of borrowing, until the project becomes commercially viable.
   2.7       Depreciation 

Property, plant and equipment is depreciated over their useful life, or over the remaining life of the operation if shorter, to residual value. No depreciation is recorded until the assets are substantially complete and ready for productive use. The major asset categories are depreciated as follows:

Mineral Properties, including capitalised financing costs, are depreciated on a Unit of Production basis (UoP), in proportion to the volume of ore extracted in the year compared with total proven and probable reserves at the beginning of the year. Assets within operations for which production is not expected to fluctuate significantly from one year to another or which have a physical life shorter than the related mine are depreciated on a Straight-Line basis. This pertains to all asset classes (as well as "Mineral Properties"), including:
   --           Buildings and mining infrastructure 
   --           Machinery, Plant and other equipment 

Depreciation calculated on a straight-line basis is as follows for major asset categories:
  equipment.........................................................................................       20% - 37.5% 
 Furniture and 
  fittings.....................................................................................            20% - 37.5% 
                                                                                                           2.5% - 
 Mining Infrastructure and buildings................................................................        10% 
  vehicles.............................................................................................    25% - 37.5% 

Land is not depreciated.

Development costs expenditures are not depreciated. Depreciation on equipment utilized in the development of assets, including underground mine development, is depreciated and recapitalized as development costs attributable to the related asset.

The depreciation of property, plant and equipment shall start after expiration of the month of the start-up in the year in which the utilisation of the property, plant and equipment started.
   2.8       Exploration and development expenditure 

Exploration and evaluation expenditure comprises costs that are directly attributable to:
   --           researching and analysing existing exploration data; 
   --           conducting geological studies, exploratory drilling and sampling; 
   --           examining and testing extraction and treatment methods; and/or 
   --           compiling pre-feasibility and feasibility studies. 

Evaluation expenditure relates to a detailed assessment of deposits or other projects that have been identified as having economic potential. Exploration and evaluation costs are expensed in the period incurred.
   2.9       Intangible assets 

Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortization and accumulated impairment losses. Intangible assets include the cost of acquiring exploration licences. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses.

An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset measured as the difference between the net disposal proceeds and the carrying amount of the asset are recognized in profit or loss when the asset is derecognized. Where an impairment subsequently reverses, the carrying amount is increased to the revised estimate of recoverable amount, but so that the increased carrying amount does not exceed the carrying value that would have been determined if no impairment had been previously been recognized. A reversal is recognized in the income statement immediately.

Mining rights represents the lump sum payments made to the Government for the approval of the acquisition transaction in relation to the transfer of the ownership (concession right) from the previous owner under the Law on mineral resources. Intangible mining rights are depreciated on a straight line basis over the life of mine.
   2.10     Impairment of property plant and equipment 

At each reporting date, under IAS 36 the Lynx Group reviews the carrying amounts of its mineral properties, and property, plant and equipment to determine whether there is any indication that those assets are impaired. If such an indication exists, the recoverable amount of the asset is estimated in order to determine the extent of any impairment. Where the asset does not generate cash flows that are independent from other assets, the Lynx Group estimates the recoverable amount of the CGU to which the asset belongs.

Internal and external factors are considered in assessing whether indicators of impairment are present. Significant assumptions regarding commodity prices, operating costs, capital expenditures and discount rates are used in determining whether there are any indicators of impairment. These assumptions are reviewed regularly by senior management and compared, where applicable, to observable market data.

Recoverable amount is the higher of fair value less costs of disposal and value in use (VIU). Fair value less costs of disposal is determined as the amount that would be obtained from the sale of the asset in an arm's length transaction between knowledgeable and willing parties. For mining assets this would generally be determined based on the present value of the estimated future cash flows arising from the continued development, use or eventual disposal of the asset. In assessing these cash flows and discounting them to present value, assumptions used are those that an independent market participant would consider appropriate. In assessing VIU, 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 risks specific to the asset for which estimates of future cash flows have not been adjusted. If the recoverable amount of an asset or CGU is estimated to be less than its carrying amount, the carrying amount of the asset or CGU is reduced to its recoverable amount. An impairment loss is recognised in the income statement.

Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment been recognised for the asset or CGU. A reversal of an impairment loss is recognised in the income statement.
   2.11     Inventories 

Inventories comprise of raw materials (mined ore and other), work-in-progress (crushed ore), finished products (concentrate), spare parts and other materials and are carried at lower of cost and net realizable value.

The cost of inventories comprises all costs of purchase, production and other production overheads attributable to the production of finished goods (such as electricity, salaries, transport costs, fuel costs, food, beverages, and other) and other costs incurred in bringing the inventories to their present location and condition as follows:
 Raw materials           Mining costs incurred 
 Spare parts and other   Purchase cost on a weighted 
  materials               average basis 
 Finished goods, work    Cost of direct materials 
  in progress             and labour and a proportion 
                          of production overheads, 
                          based on normal operating 

Obsolete, redundant and slow-moving inventories are identified and written down to their net realizable value as required.

Stockpiles comprise coarse ore that has been extracted from the mine and is available for further processing. Stockpiles are measured by estimating the number of tonnes added and removed from the stockpile. Stockpile tonnages are verified by periodic surveys, and valued based on procurement or mining costs incurred up to the point of stockpiling the ore.

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