Consolidated Cash Flow Statement
For the Year Ended 31 December 2022		2022	2021
	Note	US$'000	US$'000
Cash flows from operating activities
Operating (loss)/profit		(538)	7,788
Depreciation and amortisation	6	11,474	7,115
(Profit)/loss on disposal of property, plant and equipment	6	(12)	4
Non-cash expenses	20	66	87
Change in provisions		(2,125)	75
Unrealised foreign exchange gains	6	(3,455)	(1,475)
Share-based payments	6	373	1,251
Decrease/(increase) in inventories		5,838	(6,507)
Decrease/(increase) in trade and other receivables		17,969	(15,915)
(Decrease)/increase in trade and other payables		(20,915)	15,920
Increase/(decrease) in contract liabilities	26	974	(3,250)
Cash generated in operations		9,649	5,093
Income taxes paid		(2,505)	(1,806)
Net cash generated in operations		7,144	3,287
Investing activities
Purchase of property, plant & equipment	17	(7,746)	(9,117)
Purchase of intangible assets	16	(11)	(152)
Exploration and evaluation costs	15	(2,385)	(6,212)
Proceeds from sale of property, plant & equipment		19	1
Interest received		28	17
Net cash used in investing activities		(10,095)	(15,463)
Financing activities
Proceeds from issue of share capital	22	-	29,983
Share issue costs paid		-	(431)
Repayments of principal portion of lease liabilities	28	(709)	(674)
Finance costs paid for modifications of other loans	24	-	(104)
Repayments of principal amount of loan	29	(9,500)	(9,800)
Payments of interest	29	(1,633)	(2,295)
Proceeds from loans	29	6,000	-
Net cash (used in)/from financing activities		(5,842)	16,679
Net change in cash and cash equivalents		(8,793)	4,503
Cash and cash equivalents at beginning of the year		11,134	6,928
Effect of changes in foreign exchange rates		(1,725)	(297)
Cash and cash equivalents at end of the year	21	616	11,134

 

 

Notes to the Consolidated Financial Statements

1. General information and group structure

 

Chaarat Gold Holdings Limited (the "Company") (registration number 1420336) was incorporated in the British Virgin Islands (BVI) and is the ultimate holding company for the companies set out below (the "Group"). The Company's shares are admitted to trading on the Alternative Investment Market of the London Stock Exchange (AIM:CGH).

The registered address of the Company is: Palm Grove House, PO Box 438, Road Town, Tortola, British Virgin Islands, VG1110.

As at 31 December 2022 the Group consisted of the following companies all of which are wholly owned:

Group company	Country of incorporation	Principal activity
Chaarat Gold Holdings Limited	BVI	Ultimate holding company
Zaav Holdings Limited	BVI	Holding company
Chon-tash Holdings Limited	BVI	Holding company
At-Bashi Holdings Limited	BVI	Holding company
Akshirak Holdings Limited	BVI	Holding company
Goldex Asia Holdings Limited	BVI	Holding company
Chon-tash Mining LLC*	Kyrgyz Republic	Exploration
At-Bashi Mining LLC*	Kyrgyz Republic	Exploration
Akshirak Mining LLC*	Kyrgyz Republic	Exploration
Goldex Asia LLC*	Kyrgyz Republic	Exploration
Chaarat Zaav CJSC*	Kyrgyz Republic	Exploration
Chaarat Gold International Limited	Cyprus	Holding company
Chaarat Gold Services Limited Chaarat Kapan CJSC*	England and Wales Armenia	Services company Production company

*Companies owned indirectly by the Company.

 

2. Going concern 

 

As at 31 May 2023 the Group had approximately US$0.5 million of cash and cash equivalents and US$47.5 million of debt (excluding lease liabilities, contract liabilities and warrants) comprising the following:

·      US$31.1 million (USD$31.7 million at maturity) convertible loan notes including accrued interest to 31 May 2023 (Note 25)

·      US$16.4 million other loans outstanding (Ameriabank US$13.2, other borrowings US$1.2 million  and corporate Working Capital Facility US$2.0 million), including accrued interest to 31 May 2023 (Note 29)

Kyrgyz Republic and corporate activities

In order to achieve the planned (though as yet uncommitted) capital developments of assets in the Kyrgyz Republic and to sustain future corporate activities, future financing will need to be raised.

Kapan

The Board has based the cash flow forecasts for Kapan on the most recent forecasts which show that Kapan is expected to generate sufficient revenue to cover its operating costs and principal and interest payments.

 

 

Convertible Loan Notes

By 31 July 2023, the convertible loan notes are due to be redeemed by conversion into equity at approximately £0.30 per ordinary share, at the holder's option, or will be repaid in cash for a total of US$31.7 million (which includes accrued interest).

Conclusion (including material uncertainty)

The convertible loan notes will need to be refinanced with cash or alternative funding, to the extent that loan note holders do not choose to convert to equity, prior to 31 July 2023. To proceed with the development in Kyrgyz Republic and to sustain corporate activities, further financing will also be required.  A number of workstreams including but not limited to the non-binding letter of intent referred to in note 35 for the potential equity investment of US$250 million are underway to secure financing for the Company for these purposes.  The directors consider there is a reasonable expectation that sufficient funding will be raised and therefore have continued to adopt the going concern basis. 

However, there are currently no binding agreements in place in respect of any additional funding and there is no guarantee that any course of funding will proceed. Therefore, this indicates the existence of a material uncertainty which may cast significant doubt over the Group's ability to continue as a going concern and, therefore, it may be unable to realise its assets and discharge its liabilities in the normal course of business.

Should the project funding not be available for the Kyrgyz Republic development projects or should other strategic options including potential monetisation of the assets not prove to be viable, there may be a material impairment of the US$82 million carrying value of the related assets. The financial statements do not include the adjustments that would result if the Group were unable to continue as a going concern.

 

3. Accounting policies

 

The significant accounting policies which have been consistently applied in the preparation of these consolidated financial statements are summarised below:

Basis of preparation

The consolidated financial information has been prepared in accordance with United Kingdom adopted International Accounting Standards and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and on a historical cost basis with exception to fair value gain on warrants that are carried at FVTPL.

New standards, interpretations and amendments adopted by the Group

Adoption of new and revised Standards

In the current year, the Company has adopted all new and revised IFRS standards that became effective as of 1 January 2022, the changes being:

i.      Amendments to IFRS 9 Financial Instruments, IFRS 1 First-time Adoption of International Financial Reporting Standards and IFRS 16 Leases, resulting from Annual Improvements to IFRS Standards 2018-2020, effective for annual periods beginning on or after 1 January 2022. 

ii.     Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets resulting the costs to include when assessing whether a contract is onerous, effective for annual periods beginning on or after 1 January 2022.

iii.    Reference to the Conceptual Framework (Amendments to IFRS 3 Business Combinations), effective for annual periods beginning on or after 1 January 2022. The amendments update an outdated reference to the Conceptual Framework in IFRS 3 without significantly changing the requirements in the standard.           

These amendments did not have a material impact on the Company. It is expected that where applicable, these standards and amendments will be adopted on each respective effective date.

Revised standards not yet effective

At the date of the authorisation of these consolidated financial statements, the following revised IFRS standards, which are applicable to the Company, were issued but not yet effective:

i.      Amendments to IAS 1 Presentation of Financial Statements regarding the classification of liabilities as current and non-current, effective for annual periods beginning on or after 1 January 2023;

ii.     IFRS 17 Insurance Contracts, effective for annual period beginning on or after 1 January 2023 with earlier application permitted;

iii.    Amendments to IAS 1 and IFRS Practice Statement 2 requiring that an entity discloses its material accounting policies, instead of its significant accounting policies, effective for annual period beginning on or after 1 January 2023 with earlier application permitted;

iv.    Amendments to IAS 8 replacing the definition of a change in accounting estimates with a definition of accounting estimates, effective for annual period beginning on or after 1 January 2023 with earlier application permitted;

v.     Amendments to IAS 12 clarifying that the initial recognition exemption does not apply to transactions in which equal amounts of deductible and taxable temporary differences arise on initial recognition, effective for annual period beginning on or after 1 January 2023 with earlier application permitted; and

vi.    Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures regarding the sale or contribution of assets between an investor and its associate or joint venture, the effective date of the amendments has yet to be set. However, earlier application of the amendments is permitted.

No significant changes to presentation or disclosures within these financial statements are expected following the adoption of these amendments.

 

Basis of consolidation

 

The consolidated financial statements of the Group include the financial statements of the Company and its subsidiaries, from the date that control effectively commenced until the date that control effectively ceased. Control is achieved where the Company 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.

Income and expenses of subsidiaries acquired or disposed of during the period are included in the consolidated income statement from the effective date of acquisition and up to the effective date of disposal, as appropriate.

When the Group loses control of a subsidiary, the gain or loss on disposal recognised in the income statement is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), less liabilities of the subsidiary and any non-controlling interests.

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

All intra-group balances, transactions and any unrealised profits or losses arising from intra-group transactions are eliminated on consolidation.

Business Combinations

IFRS 3 Business Combinations applies to a transaction or other event that meets the definition of a business combination. When acquiring new entities or assets, the Group applies judgement to assess whether the assets acquired and liabilities assumed constitute an integrated set of activities, whether the integrated set is capable of being conducted and managed as a business by a market participant, and thus whether the transaction constitutes a business combination, using the guidance provided in the standard. Acquisitions of businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in the consolidated income statement as incurred. Transaction costs incurred in connection with the business combination are expensed. Provisional fair values are finalised within 12 months of the acquisition date.

Where applicable, the consideration for the acquisition may include an asset or liability resulting from a contingent consideration arrangement. Contingent consideration is measured at its acquisition date fair value and included as part of the consideration transferred in a business combination. Subsequent changes in such fair values are adjusted against the cost of acquisition retrospectively with the corresponding adjustment against the fair value of the assets and liabilities acquired. Measurement period adjustments are adjustments that arise from additional information obtained during the measurement period about facts and circumstances that existed at the acquisition date. The measurement period may not exceed one year from the effective date of the acquisition. The subsequent accounting for contingent consideration that does not qualify for as a measurement period adjustment is based on how the contingent consideration is classified. Contingent consideration that is classified as equity is not subsequently remeasured. Contingent consideration that is classified as an asset or liability is remeasured at subsequent reporting dates in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets or IFRS 9 Financial Instruments with the corresponding amount being recognised in profit or loss.

The identifiable assets acquired, and the liabilities assumed are recognised at their fair value at the acquisition date, except that:

• Deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits, respectively;
• Liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 Share-based Payment at the acquisition date; and
• 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 are measured in accordance with that Standard.

Revenue recognition

Revenue is recognised in a manner that depicts the pattern of the transfer of goods and services to customers. The amount recognised reflects the amount to which the Group expects to be entitled in exchange for those goods and services. Sales contracts are evaluated to determine the performance obligations, the transaction price and the point at which there is transfer of control. The transactional price is the amount of consideration due in exchange for transferring the promised goods or services to the customer and is allocated against the performance obligations and recognised in accordance with whether control is recognised over a defined period or a specific point in time.

Performance obligation and timing of revenue recognition

The revenue arises from extraction of complex ore as well as ore purchased from third parties and production of copper and zinc concentrates to wholesale customers. Though in all contracts the total transaction value mainly depends on the market prices of the metals based on the preliminarily estimated contents in the concentrates, those separate materials are not distinct but represent a bundle of materials. As there are no other significant promises, each contract contains one performance obligation to which the total transaction value is allocated.

The control passes to the customers and the revenue is recognized either on a Cost, Insurance and Freight "CIF" basis meaning that control passes to the buyer when the concentrate is loaded on the vessel in the port of shipment (e.g., port of Poti, Georgia) or on the Ex Works basis meaning that control passes to the buyer at the point the concentrate is loaded on the truck at the Kapan mine. In respect of freight revenues, these are recognised over time.

Determining the transaction price

Consideration is variable and depends on the fluctuations of metal prices for the quotation period (usually one or three months) and the changes in estimated metal contents and price deductions.

At the date the concentrate is loaded on the truck at the Kapan mine or the vessels at the specified port the provisional invoice is issued based on the estimates of the amount of consideration.

Sales are based on provisional 1-3 1-3-month commodity forward prices on the London Metal Exchange (LME) and as such, contain an embedded derivative which is marked-to-market at each month end using the forward price for the month of price finalisation. The estimated transaction price is updated for the quotational period (usually one or three months) and any changes in the estimates of the metal content. The change is recognised as an increase in revenue, or as a reduction of revenue, in the period in which the estimated transaction price is finalised.

Final prices of copper and zinc concentrates are determined at the contract settlement date based on the LME commodity market prices at that date and final adjustments for weighting, sampling, or moisture determination changes.

Third-party revenue

In addition to own concentrates, the Group also processes third party ore into concentrate and sells it to customers. The revenue from these sales is recognised in accordance with the revenue recognition principles above.

Where the group does not purchase the third party ore for sale but provides a processing service the processing fee is recognised as revenue over the processing period.

Advance payments from customers

The Group receives advance payments from its customers which represent prepayments for the future transfer of concentrate. These are either classified as contract liabilities or financial liabilities under IFRS 15 or IFRS 9, respectively, depending on the terms of the customer agreements and how the prepayments are settled. If settled in cash, they are classified as financial liabilities and if offset against final invoices, they are classified as contract liabilities. The contract liabilities are unwound, and revenue is recognised when shipments take place and control passes to the customers. The advance payments accrue interest which is separately recognised from revenue in the Consolidated Income Statement.

Royalties

Under Armenian law a royalty is payable to the state, the base of which is driven by the revenue earned from the supply of concentrates. Royalty expense is calculated on an accruals basis at rates set by the government and included in cost of sales.

Interest

Interest is recognised using the effective interest method which calculates the amortised cost of a financial asset or liability and allocates the interest income or payments over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial asset or liability to the gross carrying amount of the financial asset or liability.

Taxation

The income tax expense includes the current tax and deferred tax charge recognised in the income statement.

The current tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate. The Group is not subject to corporate tax in the British Virgin Islands, therefore as at 31 December 2022 the Group's operations in this region have an effective tax rate of 0%. Companies engaged in the production and sale of gold in the Kyrgyz Republic pay a revenue-based tax on the sales of gold rather than tax on profit. The remaining Group's operations are subject to income tax at a rate of 18% in Armenia, 19% in the United Kingdom and 12.5% in Cyprus (Note 13). Non-profit based taxes are included within administrative expenses and Kapan's royalty taxes are included within cost of sales.

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Probable taxable profits are based on evidence of historical profitability and taxable profit forecasts limited by reference to the criteria set out in IAS 12 Income Taxes. Such assets and liabilities are not recognised if the temporary differences arise from the initial recognition of goodwill or of an asset or liability in a transaction (other than a business combination) that affects neither taxable profit nor accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries,  except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each reporting date and is adjusted to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax is charged or credited to other comprehensive income or equity in which case the related deferred tax is also recognised directly in other comprehensive income or equity.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis with that taxation authority.

Non-current Assets

Intangible Assets

Exploration and evaluation costs

During the initial stage of a project, exploration costs are expensed in the income statement as incurred.

Exploration expenditure incurred in relation to those projects where such expenditure is considered likely to be recoverable through future extraction activity or sale or where the exploration activities have not reached a stage that permits a reasonable assessment of the existence of reserves, are capitalised and recorded on the balance sheet within exploration and evaluation assets for mining projects at the exploration stage. Capitalised evaluation and exploration costs are classified as intangible assets.

Exploration and evaluation expenditure comprise costs directly attributable to:

·      Researching and analysing existing exploration data;

·      Conducting geological studies, exploratory drilling, and sampling;

·      Examining and testing extraction and treatment methods;

·      Compiling pre-feasibility and feasibility studies; and

·      Costs incurred in acquiring mineral rights, the entry premiums paid to gain access to areas of interest and amounts payable to third parties to acquire interests in existing projects.

Exploration and evaluation assets are subsequently valued at cost less impairment. In circumstances where a project is abandoned, the cumulative capitalised costs related to the project are written off in the period when such decision is made.

Exploration and evaluation assets are not depreciated. These assets are transferred to mine development costs within property, plant and equipment when a decision is taken to proceed with the development of the project which is when a bankable feasibility study is obtained, and project finance is in place.

Other intangible assets (excluding goodwill)

Intangible assets acquired by the Group are measured on initial recognition at cost or at fair value when acquired as part of a business combination. Following initial recognition, intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses. Intangible assets are amortised over the estimated useful lives using the straight-line-basis and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

Other intangible assets comprise computer software and other intangible assets, which are initially capitalised at cost. Amortisation is provided on a straight-line basis over a period of 1 to 10 years.

Property, plant and equipment

Property, plant and equipment is stated at cost, excluding the costs of day-to-day servicing, less any subsequent accumulated depreciation and impairment losses. The historical cost of property, plant and equipment comprises its purchase price, including import duties and non-refundable purchase taxes and any directly attributable costs of bringing the assets to their working condition and location for their intended use. Depreciation of these assets commences when the assets are ready for their intended use.

Depreciation is charged on each part of an item of property, plant and equipment so as to write off the cost or valuation of assets over their estimated useful lives, using the straight-line method. Depreciation is charged to the income statement, unless it is considered to relate to the construction of another asset, in which case it is capitalised as part of the cost of that asset. Land and assets in the course of construction are not depreciated. The estimated useful lives are as follows:

·      Land and buildings                                           5 to 20 years

·      Mining Properties                                            Mining properties that are used in production are   

                                                                                                           depreciated under the unit of production basis, and  
                                                                                                           other physical assets depreciated over their useful
                                                                                                           lives which are 5 to 20 years

·      Fixtures and fittings                                          2 to 20 years         

·      Motor vehicles                                                2 to 7 years

·      Right-of-use assets                                           5 to 20 years

 

 

Residual values, remaining useful lives and depreciation methods are reviewed annually and adjusted if appropriate.

Expenses incurred in respect of the maintenance and repair of property, plant and equipment are charged against income when incurred. Refurbishments and improvements expenditure, where the benefit enhances the capabilities or extends the useful life of an asset, is capitalised as part of the appropriate asset.  

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognised.

Mining properties

Mining properties include the cost of acquiring and developing mining assets and mineral rights. Mining properties, which include development structures, are depreciated to their residual values using the unit-of-production method based on proven and probable ore reserves according to the JORC Code, which is the basis on which the Group's mine plans are prepared. Changes in proven and probable reserves are dealt with prospectively. Depreciation is charged on new mining ventures from the date that the mining asset is capable of commercial production.

Mineral rights for the assets not ready for production are included within Exploration and evaluation costs. When a production phase is started, mineral rights are transferred into Mining assets and are depreciated as described above.

Assets under construction

Assets under construction are measured at cost less any recognised impairment. Depreciation commences when the assets are ready for their intended use.

Assets under construction include costs incurred for the development of tangible assets that will form part of a category of property, plant and equipment which is not yet complete. Once the project ready for use capitalisation will cease (other than for large development programmes), the asset will be reclassified to the respective property, plant and equipment category it relates to from assets under construction, and depreciation will commence.

Estimated ore reserves

Estimated proven and probable ore reserves reflect the economically recoverable quantities which can be legally recovered in the future from known mineral deposits. The Group's reserves are estimated in accordance with JORC Code.

Impairment of exploration and evaluation assets

 

All capitalised exploration and evaluation assets and other intangible assets are monitored for indications of impairment. Where a potential impairment is indicated, assessment is made for the group of assets representing a cash generating unit ("CGU"). Indicators of impairment include:

·      the period for which the entity has the right to explore in the specific area has expired during the period or will expire in the near future, and is not expected to be renewed;

·      substantive expenditure on further exploration of mineral resources in the specific area is nether budgeted nor planned;

·      exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area; and

·      sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.

 

If any indication of impairment exists, the recoverable amount of the asset is estimated, being the higher of fair value less costs to sell and value in use. 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. Such impairment losses are recognised in profit or loss for the year.

Impairment of property, plant and equipment

An impairment review of property, plant and equipment is carried out when there is an indication that those assets have suffered an impairment loss or there are impairment reversal indicators. If any such indication exists, the carrying amount of the asset is compared to the estimate recoverable amount of the asset in order to determine the extent of the impairment loss or reversal (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit ("CGU") to which the asset belongs.

Recoverable amount is the higher of fair value less costs of disposal and value in use. The carrying amounts of all cash-generating units are assessed against their recoverable amounts determined on a fair value less costs of disposal  calculation. Fair value is based on the applicable Discounted Cash Flow ("DCF") method using post-tax cash flows and post -tax discount rate, this is considered to give a materially similar result to a basis that uses pre-tax cash flows and pre-tax discount rate. The DCF method is attributable to the development of proved and probable reserves.

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 as an expense immediately in the consolidated 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 only to the extent that the increased carrying amount does not exceed the original carrying amount that would have been determined had no impairment loss been recognised in prior periods. Impairment loss may be subsequently reversed if there has been significant change in estimates used to determine the asset's recoverable amount since the last impairment loss was recognised.

A reversal of impairment loss is recognised in the consolidated income statement immediately.

Leases

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognised a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less), leases of low value assets and leases for the purposes of mining and exploration activities, which qualify for an exemption under IFRS 16 which the Group has applied. For these leases, the Group recognises the lease payments as operating expenses on a straight-line basis over the term of the lease.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate.

The lease liability is presented as a separate line in the consolidated statement of financial position. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability and by reducing the carrying amount to reflect the lease payments made. Interest is charged over the term of the lease at an even rate over the carrying amount of the liability. The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses and are presented as a separate line in the consolidated financial statements.

Right-of-use assets are depreciated over shorter period lease term and useful life of the underlying asset.  Where ownership of the underlying asset transfers to the entity at the end of the lease depreciation is charged over the useful life of the underlying asset. The Group applies IAS 36 to determine whether the right-of use asset is impaired and accounts for any identifiable impairment loss as described above.

When the Group revises its estimate of the term of any lease, it adjusts the carrying amount of the lease liability to reflect the payments to make over the revised term, which are discounted at a revised discount rate.  The discount rate on commencement is only applied to changes in estimates of payments. An equivalent adjustment is made to the carrying value of the right-of-use asset, with the revised carrying amount being amortised over the remaining (revised) lease term. Any gain or loss relating to the partial or full termination of any lease is recognised in profit or loss.

Inventories

Copper and zinc concentrates

Inventories including metals in concentrate and in process are stated at the lower of production cost or net realisable value.

Cost of finished goods and work in progress are determined on the first-in-first-out (FIFO) method. The cost comprises raw material, direct labour, other direct costs, and related production overheads (based on normal operating capacity), excluding borrowing costs.

Consumables and spare parts

Consumables and spare parts are stated at the lower of cost or net realisable value. Costs are determined on the first-in-first-out (FIFO) method.

The Company's policy is to write-down to nil the items that have not been utilised for more than two years. This is done on a quarterly basis.

Inventory items used in the production process are recognised as cost of sales when the related sale of concentrate takes place. This includes the cost of purchased ore and consumables and spare parts.

Cost of purchased ore

The Group purchases ore from third parties which is processed and sold to Kapan's customers. The amount expensed in cost of sales is equal to the price paid to third parties in line with the purchase agreements.

Cost of purchased concentrate

The Group processes third party ore into concentrate and then purchases the concentrate to sell to Kapan's customers. The substance and accounting for these transactions is that of an ore purchase agreement with the amount expensed in cost of sales equal to the price paid to third parties in line with the purchase agreements, which is net of a processing fee charged by Kapan.

Cash and cash equivalents

Cash includes petty cash and cash held in current bank accounts. Cash equivalents include short-term investments that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

Equity

Equity comprises the following:

·      ''Share capital'' represents the nominal value of equity shares.

·      ''Share premium'' represents the excess over nominal value of the fair value of consideration received for equity shares, net of transactions costs directly related to the share issue.

·      "Own shares reserve" represents the nominal value of equity shares that have been repurchased by the company.

·      "Convertible loan note reserve" represents the equity component of convertible loan notes issued by the Company.

·      "Merger reserve'' represents the difference between the issued share capital and share premium of the Company and its former subsidiary Chaarat Gold Limited arising as a result of the reverse acquisition.

·      "Share option reserve" represents the equity component of share options issued.

·      ''Translation reserve'' represents the differences arising from translation of investments in foreign operations.

·      ''Accumulated losses'' includes all current and prior period results as disclosed in the income statement or other comprehensive statement.

Functional and presentational currency

The functional currency for each entity in the Group is determined as the currency of the primary economic environment in which it operates. The functional currency of the Group's entities located in the Kyrgyz Republic, Cyprus and BVI is US Dollars (US$) as the current exploration and evaluation expenditure is currently primarily in USD. The functional currency of the subsidiary located and operating in Armenia is the Armenian Dram (AMD). The functional currency of the parent company Chaarat Gold Holdings Limited is the US Dollar.

The Group has chosen to present its consolidated financial statements in US Dollars (US$), as management believe it is a more comparable presentation currency for international users of consolidated financial statements of the Group as it is a common presentation currency in the mining industry. The translation of the financial statements of the Group entities from their functional currencies to the presentation currency is performed as follows:

• All assets and liabilities are translated at closing exchange rates at each reporting period end date;
• All income and expenses are translated at the average exchange rates for the periods presented, except for significant transactions that are translated at rates on the date of such transactions;
• Resulting exchange differences are recognised in other comprehensive income and presented as movements relating to the effect of translation to the Group's presentation currency within the Translation reserve in equity; and
• In the consolidated statement of cash flows, cash balances at the beginning and end of each reporting period presented are translated using exchange rates prevalent at those respective dates. All cash flows in the period are translated at the average exchange rates for the period presented, except for significant transactions that are translated at rates on the date of the transaction.

The amounts reported are rounded to the nearest thousand, unless overwise stated.

Foreign currency transactions

Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they operate (the ''functional currency'') are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the balance sheet date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are similarly recognised immediately in the income statement.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

On the disposal of a foreign operation (i.e. a disposal of the Group's entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation, a disposal involving loss of joint control over a jointly controlled entity that includes a foreign operation, or a disposal involving loss of significant influence over an associate that includes a foreign operation), all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of the Company are reclassified to profit or loss. In the case of a partial disposal that does not result in the Group losing control over a subsidiary that includes a foreign operation, the proportionate share of accumulated exchange differences reattributed to non-controlling interests and are not recognised in the consolidated income statement. For all other partial disposals (i.e. reductions in the Group's ownership interest in associates or jointly controlled entities that do not result in the Group losing significant influence or joint control), the proportionate share of the accumulated exchange differences is reclassified to the consolidated income statement.

Share-based payments

The Company operates equity-settled share-based remuneration plans for directors and some employees. The Company awards share options to certain Company directors and employees to acquire shares of the Company.

All goods and services received in exchange for the grant of any share-based payment are measured at their fair values. Where employees are rewarded using share-based payments, the fair values of employees' services are determined indirectly by reference to the fair value of the instrument granted to the employee.

The fair value is appraised at the grant date and excludes the impact of non-market vesting conditions. Fair value of restricted stock units is measured by reference to the share price at the date of grant. Fair value of options is measured by use of the Black Scholes model. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.

All equity-settled share-based payments are ultimately recognised as an expense in the income statement with a corresponding credit to ''other reserves''.

If vesting periods or other non-market vesting conditions apply, the expense is allocated over the vesting period, based on the best available estimate of the number of share options expected to vest. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. Any cumulative adjustment prior to vesting is recognised in the current period. No adjustment is made to any expense recognised in prior periods if the number of share options ultimately exercised are different to that estimated on vesting.

Upon exercise of share options and through settlement of the issue of new shares, the proceeds received net of attributable transaction costs are credited to share capital and, where appropriate, share premium.

After the vesting date, no subsequent adjustments are made to total equity. In the year when the share options lapse the total accumulated charge to the share-based payment reserve is transferred to retained earnings.

When the terms and conditions of equity-settled share-based payments at the time they were granted are subsequently modified, the fair value of the share-based payment under the original terms and conditions (the "original fair value") and under the modified terms and conditions (the "modified fair value") are both determined at the date of the modification. Any excess of the modified fair value over the original fair value is recognised over the remaining vesting period in addition to the grant date fair value of the original share-based payment. The share-based payment expense is not adjusted if the modified fair value is less than the original fair value.

In certain instances, the Company issues shares to satisfy outstanding financial liabilities. The measurement of these equity-settled share-based payment transactions is outlined below. Shares are also issued to satisfy obligations under warrant agreements whereby the estimated fair value of the warrants issued is measured by use of the Black Scholes model as detailed in Note 30.

The Company operates an Employee Benefit Trust ("the Trust") and has de facto control of the shares held by the Trust and bears their benefits and risks. The Trust is consolidated into the group accounts with a debit to equity for the cost of shares acquired. Administrative expenses are charged as they accrue.

Exchange of financial liabilities for equity

When equity instruments are issued to extinguish all or part of a financial liability, the Group measures them at the fair value of the equity instruments issued, unless that fair value cannot be reliably measured. The difference between the carrying amount of the financial liability (or part of a financial liability) extinguished, and the consideration paid, is recognised in profit or loss. The equity instruments are recognised initially and measured at the date the financial liability (or part of that liability) is extinguished. This does not include transactions with a creditor who is also a direct or indirect shareholder and is acting in its capacity as a direct or indirect shareholder, in accordance with IFRIC 19.

Retirement and Other Benefit Obligations

The Group offers defined contribution pension arrangements in the United Kingdom as well as under the State pension system of the Kyrgyz Republic, which requires current contributions by the employer, calculated as a percentage of current gross salary payments. Such expense is charged in the period the related salaries are earned. The Group does not have any obligations in respect of post-retirement or other significant compensation benefits.

Financial Instruments

Financial assets and financial liabilities are recognised when a Group entity becomes a party to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.

Financial assets

All recognised financial assets are measured subsequently in their entirety at either amortised cost or fair value, depending on the classification of the financial assets. Financial assets are classified as either financial assets at amortised cost, at fair value through other comprehensive income (FVTOCI) or at fair value through profit or loss (FVTPL) depending upon the business model for managing the financial assets and the nature of the contractual cash flow characteristics of the financial asset.

Trade receivables without provisional pricing that do not contain provisional price features, loans and other receivables are held to collect the contractual cash flows and therefore are carried at amortised cost adjusted for any loss allowance. The loss allowance is calculated in accordance with the impairment of financial assets policy described below.

Trade receivables arising from sales of copper and zinc concentrates with provisional pricing features are exposed to future movements in market prices and have contractual cash flow characteristics that are not solely payments of principal and interest and are therefore measured at fair value through profit or loss and do not fall under the expected credit losses model (ECL) described below.

Impairment of financial assets

The Group recognises a loss allowance for expected credit losses on investments in debt instruments that are measured at amortised cost, trade and other receivables and contract assets, except for trade accounts receivable with provisional pricing. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument.

The Group always recognises lifetime ECL for trade receivables and other receivables. The expected credit losses on these financial assets are estimated using a provision matrix based on the Group's historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions, and assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of money where appropriate.

For all other financial instruments, the Group recognises lifetime ECL when there has been a significant increase in credit risk since initial recognition. However, if the credit risk on the financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to 12-month ECL.

Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of a financial instrument. In contrast, 12-month ECL represents the portion of lifetime ECL that is expected to result from default events on a financial instrument that are possible within 12 months after the reporting date.

The Group writes off a financial asset when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery, e.g., when the debtor has been placed under liquidation or has entered into bankruptcy proceedings, or in the case of trade receivables, when the amounts are over two years past due, whichever occurs sooner. Financial assets written off may still be subject to enforcement activities under the Group's recovery procedures, taking into account legal advice where appropriate. Any recoveries made are recognised in profit or loss.

Derivative financial instruments

Derivatives embedded in the Group's sale contracts are accounted for at fair value with gains or losses reported in the statement of comprehensive income. These embedded derivatives are not separated from the sale contracts and therefore any gains or losses are included in the lines of sale of concentrates in the year.

Derecognition of financial assets

The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

Financial liabilities

The Group's financial liabilities consist of financial liabilities measured subsequently at amortised cost using the effective interest rate method (including trade payables, other loans, and borrowings) and financial liabilities at fair value through profit or loss.

Warrant financial liability

The Group's warrant financial liability relates to warrants to purchase ordinary shares. The warrants are recognised initially at their fair value using the Black-Scholes model and subsequently remeasured at each reporting date with the corresponding fair value gains or losses recognised through profit or loss.

Convertible loan notes

The convertible loan notes are compound financial instruments that can be converted to ordinary shares at the option of the holder.

The liability component of convertible loan notes is initially recognised at the fair value of a similar liability that does not have an equity conversion option. The equity component is initially recognised at the difference between the fair value of the convertible loan note 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.

The modification of a standard loan is considered substantial where a conversion option is added. Upon modification, the original liability is extinguished, new liability and equity components are recognised at the fair values with a difference attributed to profit or loss.

Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortised cost using the effective interest method. The equity component of a convertible loan note is not remeasured.

Interest related to the financial liability is recognised in profit and loss. On conversion at maturity, the financial liability is reclassified to equity and no gain or loss is recognised. When conversion option is not exercised, the equity element is transferred to accumulated losses.

Derecognition of financial liabilities

A financial liability is removed from the balance sheet when it is extinguished, being when the obligation is discharged, cancelled, or expired.  On extinguishment of a financial liability, any difference between the carrying amount of the liability and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss. 

A modification or exchange of a financial liability is either accounted for as an extinguishment of the original financial liability or a renegotiation of the original financial liability. An extinguishment or substantial modification of a financial liability results in de-recognition of the original financial liability and any unamortised transaction costs associated with the original financial liability are immediately expensed to the profit and loss account. Where the change in the terms of the modified financial liability is not substantial, it is accounted for as a modification of the original liability. With the modified financial liability measured at amortised cost using the original effective interest rate when appropriate. Part of the assessment includes consideration whether the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability.

If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction, or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation.

All other borrowing costs are recognised in the consolidated income statement in the period in which they are incurred.

Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

Contingent liability

Contingent liabilities are recognised when the Group has a probable obligation that may arise from an event that has not yet occurred. A contingent liability which is not probable is not recognised in the Group's financial statements however disclosure within the notes to the financial statements will be included unless the possibility of payment is remote.

Provision for environmental obligations

An obligation to incur environmental restoration, rehabilitation and decommissioning costs arises when disturbance is caused by the development or ongoing production of mining assets. Such costs arising from the decommissioning of plant and other site preparation work, discounted to their net present value using a risk-free rate applicable to the future cash flows, are provided for and capitalised at the start of each project, as soon as the obligation to incur such costs arises. These decommissioning costs are recognised in the consolidated income statement over the life of the operation, through the depreciation of the asset in the cost of sales line and the unwinding of the discount on the provision in the finance costs line.

Changes in the measurement of a liability relating to the decommissioning of plant or other costs for restoration of subsequent site damage which is created on an ongoing basis during production are provided for at their net present values and recognised in the consolidated income statement as extraction progresses . If a decrease in the liability exceeds the carrying amount of the asset, the excess is recognised immediately as a reduction in the consolidated income statement.

The provision for closure cost obligations is remeasured at the end of each reporting period for changes in estimates and circumstances. Changes in estimates and circumstances include changes in legal or regulatory requirements, increased obligations arising from additional mining and exploration activities, changes to cost estimates and changes in risk free interest rate.

Value Added Tax

Output value added tax (VAT) related to sales generated in Armenia is payable to tax authorities on the delivery of goods and services to customers. The standard rate of VAT on domestic sales of goods and services and the importation of goods is 20%. Input VAT is recoverable against output VAT upon receipt of the VAT invoice. VAT related to sales and purchases is recognised in the statement of financial position on a gross basis and disclosed separately as an asset and liability. The VAT assets and liabilities are short term and will be settled within 12 months and are therefore not discounted.

Under the Kyrgyz Republic Tax Code, the supply and export of metal-containing ores, concentrates, alloys, and refined metals are considered to be a VAT exempt supply and therefore all VAT is expensed as incurred.

Critical accounting judgements and key sources of estimation uncertainty

In the course of preparing the financial statements, management necessarily makes judgements and estimates that can have significant impact on those financial statements. The determination of estimates requires judgements which are based on historical experience, current and expected economic conditions, and all other available information.

Estimated and underlying assumptions are reviewed on an ongoing basis, with revisions recognised in the period in which the estimates are revised and in the future periods affected. The judgements involving a higher degree of estimation or complexity are set out below.

Critical accounting judgements

The following are the critical accounting judgements (apart from judgements involving estimation which are dealt with separately below), made in the process of applying the Group's accounting policies during the year that have the most significant effect on the amounts recognized in the financial statements.

Recoverability of exploration and evaluation assets

Exploration and evaluation assets include mineral rights and exploration costs, including geophysical, topographical, geological, and similar types of costs. Exploration and evaluation costs are capitalised if management concludes that future economic benefits are likely to be realised and determines that economically viable extraction operation can be established as a result of exploration activities and internal assessment of mineral resources.

According to IFRS 6 Exploration for and evaluation of mineral resources, the potential indicators of impairment include: management's plans to discontinue the exploration activities, lack of further substantial exploration expenditure planned, expiry of exploration licences in the period or in the nearest future, or existence of other data indicating the expenditure capitalised is not recoverable. At the end of each reporting period, management assesses whether such indicators exist for the exploration and evaluation assets capitalised, which requires significant judgement.

At 31 December 2022, the capitalised costs of the exploration and evaluation assets amounted to US$69.2 million, details of which are set out in Note 15.

The assets relate to the Chaarat Gold Project in the Kyrgyz Republic, which comprises two distinct mineralised zones: Tulkubash and Kyzyltash, which will be developed separately. Both zones are located on a single mining licence and are therefore not capable of being independently sold.

At 31 December 2022, management does not consider there to be any indications of impairment in respect of the assets included in the Chaarat Gold Project CGU. Management has budgeted the costs for further development of these assets however their recoverability is dependent on future funding. 

As set out in the Going concern conclusion per Note 2, a material uncertainty exists in relation to the Group's ability to obtain the additional funding needed to develop the Kyrgyz Republic development projects as there are currently no binding agreements in place in respect of any additional funding and there is no guarantee that any course of funding will proceed. Should that funding not be available there would be an indication of impairment which could result in a material provision against the carrying value of the related exploration and evaluation assets and assets under construction.

Costs capitalised to exploration and evaluation assets

The costs capitalised to exploration and evaluation assets in 2022 was US$2.9 million (2021: US$5.7 million). Judgement is applied in the determination of the type of costs that are capitalised to exploration and evaluation assets as described in the accounting policy note above. Payroll costs that are directly attributable to exploration and evaluation related activities are capitalised.

Costs capitalised to property, plant and equipment (mining properties)

The costs capitalised to mining properties in 2022 was US$12.3 million (2021: US$7.9 million). Judgement is applied in the determination of the type of costs that are capitalised to mining properties as described in the accounting policy note above.

Functional currency of Kapan

The functional currency of the subsidiary located and operating in Armenia is the Armenian Dram (AMD), as this is the currency of the primary economic environment in which it operates.

Treatment of royalty expense

Royalties paid in Armenia of US$4.5 million (2021: US$5.7 million) are included in cost of sales as they are calculated on the basis of revenue earned from the supply of concentrates.  The royalty rate is calculated on fixed rate plus a variable component based on measure of profitability. The royalty rate is levied on revenue as a production based component. As the royalty expense is not a charge on profit or loss before tax, management does not consider it to be an income tax expense within the scope of IAS 12 Income Taxes.

Accounting for the concentrate purchase agreement

The Group has a contractual arrangement under which third party ore is received, processed, purchased and sold to the customer.

The Group is deemed principal as opposed to agent as the substance of this arrangement is considered to be an ore purchase agreement such that inventory recognition occurs from that point and the processing fee recoverable is deducted from the cost of the material purchased.

Key sources of estimation uncertainty

The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.

Ore reserves

An ore reserve estimate is an estimate of the amount of product that can be economically and legally extracted from the Group's properties. Ore reserve estimates are used by the Group in the calculation of depreciation of mining assets using the units-of-production method; impairment charges and in forecasting the timing of the payment of decommissioning and land restoration costs. Also, for the purpose of impairment review and the assessment of the timing of the payment of decommissioning and land restoration costs, management may take into account mineral resources in addition to ore reserves where there is a high degree of confidence that such resources will be extracted.

In order to calculate ore reserves, estimates and assumptions are required about geological, technical, and economic factors, including quantities, grades, production techniques, recovery rates, production costs, transport costs, commodity demand, commodity prices, discount rates and exchange rates. Estimating the quantity and/or grade of ore reserves requires the size, shape, and depth of ore bodies to be determined by analysing geological data such as the logging and assaying of drill samples. This process may require complex and difficult geological judgements and calculations to interpret the data.

Ore reserve estimates may change from period to period as additional geological data becomes available during the course of operations or if there are changes in any of the aforementioned assumptions. Such changes in estimated reserves may affect the Group's financial results and financial position in a number of ways, including the following:

• Assets' carrying values due to changes in estimated future cash flows;

• Depreciation charged in the consolidated income statement where such charges are determined by using the units-of-production method;

• Provisions for decommissioning and land restoration costs where changes in estimated reserves affect expectations about the timing of the payment of such costs; and

• Carrying value of deferred tax assets and liabilities where changes in estimated reserves affect the carrying value of the relevant assets and liabilities.

Inventory impairment policy and estimate

For concentrate and ore stockpiles the net realisable value represents the estimated selling price for that product based on forward metal prices according to the applicable contract terms, less the estimated costs to complete production and selling costs, including royalty. Production cost is determined as the sum of the applicable expenditures incurred directly or indirectly in bringing inventories to their existing condition and location. The estimated costs to complete and selling costs are obtained from the current production budgets, approved for the reporting year. The carrying value of inventory at 31 December 2022 was US$9.9 million (2021: US$16.2 million) and the inventory write-down provision to net realisable value amounted to US$1.9 million as at 31 December 2022 (2021: US$1.9 million), relating mainly to consumables and spare parts.

Provision for environmental obligations

A provision for the costs to restore working areas on the Kapan mine, including decommissioning of plant and securing of the tailings dam, requires estimates and assumptions to be made. These include estimates and assumptions around the relevant environmental and regulatory requirements, inflation, the magnitude of the possible disturbance and the timing, extent, and costs of the required decommissioning activities.

In calculating the provision, cost estimates of the future potential cash outflows based on current assessments of the expected decommissioning activities and timing thereof, are prepared. These forecasts are then discounted to their present value using a discount rate as disclosed in Note 23. The works and technical studies are continuing and as the actual future costs can differ from the estimates due to changes in regulations, technology, costs and timing, the provision including the estimates and assumptions contained therein are regularly reviewed by management. The current estimate reviewed by management is based on a new estimate completed in 2021. The provision at 31 December 2022 is US$11.7 million (2021: US$10.5 million). A 25% increase or decrease in the potential cash flows would increase or decrease the provision by US$2.9million. The basis of the provision recognised is an assumed mine closure date of 2027 with rehabilitation being primarily completed in the subsequent year. An acceleration or deferral of this expenditure by one year would increase/decrease the provision by US$1.3 million.

 

Legal claim provisions

As disclosed in Note 31, legal claim provisions totalling US$2.2 million have been recognised as the Group has a present obligation as a result of a past event, it is probable that an outflow of resources will be required to settle the disputes, a reliable estimate can be made of the amount of the obligation however there is uncertainty around the timing of payments to be made.

 

4. Revenue

 

The revenue recognised from contracts with customers consisted of the following:

	2022	2021
	US$'000	US$'000
Copper concentrate	72,725	77,134
Zinc concentrate	16,670	13,114
3rd party ore processing fees	1,468	-
Zinc concentrate freight	1,483	2,186
Total	92,346	92,434

 

The Group's sales of copper and zinc concentrate are based on provisional 1-3 month commodity forward prices and as such, contain an embedded derivative which is marked-to-market at each month end.

 

The Group's sales are to internationally well-established commodity traders under standard offtake terms.

 

Copper concentrate sales are made on an Ex Works basis meaning that control passes to the buyer when the concentrate is loaded on the truck at the Kapan mine. Zinc concentrate sales were made on a cost, insurance, and freight ("CIF") basis meaning that control passes to the buyer when the concentrate is loaded on the vessel in the port of shipment (e.g., port of Poti, Georgia).

 

In addition to the Group's own concentrates, it processes third party ore into concentrate and sells it to customers. Of the US$92.4 million generated from concentrate sales in 2022, US$76.6 million relates to own concentrate sales and US$15.7 million relates to third-party concentrate sales (2021: US$72.8 million and US$19.6 million).

 

In 2022, the Group has continued to recognise contract liabilities in relation to its contracts with customers for prepayments received for the future transfer of concentrates, as set out in Note 26.

 

 

5. Cost of sales

	2022		2021
	US$'000		US$'000
Depreciation and amortisation	10,816	5,941
Employee benefit expenses	11,504		8,817
Materials	18,130		12,973
Services	19,322		14,616
Royalties	4,543		5,665
Energy and fuel	6,710		4,103
Cost of purchased ore and concentrate*	9,911		16,143
Short-term lease charges	1,234		951
Other	66		49
Total	82,236		69,258

 

*In both 2021 and 2022, the Group processed third party ore into concentrate for a fee. The Group purchases the processed concentrate and sells it to customers, resulting in third-party revenue, which is recognised in addition to own ore revenue, as disclosed in note 4. The amount expensed in cost of sales is equal to the price paid to the third party, which is net of the processing fee charged by the Group on the basis the substance of these arrangements is that of an ore purchase agreement.

 

 

 

 

6. Operating profit

The operating profit is stated after charging/(crediting):

 

	2022	2021
	US$'000	US$'000
Depreciation of property, plant and equipment	11,415	6,841
Amortisation of intangible assets	252	274
Short-term/low value lease charges	1,395	1,083
Share based payment charges	373	1,251
Loss on the sale of fixed assets	(12)	4
(Gain)/loss on foreign exchange	(3,455)	(1,475)
Fees payable to Group auditors for the audit of the Group financial statements	186	234
Fees payable to associated firms of the auditor for the audit of subsidiaries	63	83
Change in legal provision	535	75
Selling expenses	2,196	2,444

7. Selling expenses

 

Selling expenses consisted of the following:

	2022	2021
	US$'000	US$'000
Transportation expenses	1,483	1,099
Sampling and inspection	132	125
Staff costs	208	246
Customs clearance	49	675
Utilities	36	30
Depreciation and amortisation	8	6
Material	263	77
Services	16	27
Other	1	159
Total	2,196	2,444

 

8. Administrative expenses

 

The administrative expenses consisted of the following:

	2022	2021
	US$'000	US$'000
Readmission and acquisition costs	81	242
Legal and compliance	71	422
Regulatory	280	359
Investor relations	241	363
Salaries	5,862	6,383
Corporate support	1,383	3,787
Travel and subsistence	161	159
Share-based payment charges	373	1,251
Total	8,452	12,966

9. Segmental analysis

Operating segments are identified based on internal reports about components of the Group that are regularly reviewed by the Board, in order to allocate resources to the segments and to assess their performance.

Based on the proportion of revenue and profit within the Group's operations and on the differences in principal activities, the Board considers there to be two operating segments:

·    Exploration for mineral deposits in the Kyrgyz Republic with support provided from the British Virgin Islands ('Kyrgyz Republic')

·    Exploration and production of copper and zinc concentrates at Kapan in Armenia ('Armenia')

	Kyrgyz Republic		Armenia		Corporate	Total
31 December 2022	US$'000		US$'000		US$'000	US$'000
Revenue
Sales to external customers	-		92,436		-	92,346
Total segment revenue	-		92,436		-	92,346
Operating profit/(loss)	(2,033)		6,504		(5,008)	(538)
Finance income	-		28		-	28
Finance costs	-		(3,136)		(3,578)	(6,714)
Fair value gain on warrant	-		-		367	367
Profit/(loss) before income tax	(2,033)		3,396		(8,219)	(6,856)
Income tax charge	-		(1,721)		-	(1,721)
Profit/(loss) after income tax	(2,033)		1,675		(8,219)	(8,577)
Assets
Segment assets - non-current	82,399		48,306		-	130,705
Segment assets - current	154		26,791		484	27,430
Total assets	82,553		75,097		484	158,134
Liabilities
Segment liabilities	2,308		53,380		29,838	85,526
Total liabilities	2,308		53,380		29,838	85,526

 

 

	Kyrgyz Republic		Armenia		Corporate	Total
31 December 2021	US$'000		US$'000		US$'000	US$'000
Revenue
Sales to external customers	-		92,434		-	92,434
Total segment revenue	-		92,434		-	92,434
Operating profit/(loss)	(2,299)		17,448		(7,361)	7,788
Finance income	-		17		6	23
Finance costs	-		(3,043)		(4,853)	(7,896)
Fair value gain on warrant	-		-		434	434
Loss before income tax	(2,299)		14,422		(11,774)	349
Income tax charge	-		(3,937)		-	(3,937)
Loss after income tax	(2,299)		10,485		(11,774)	(3,588)
Assets
Segment assets - non-current	78,562		41,173		-	119,735
Segment assets - current	277		43,797		7,749	51,823
Total assets	78,839		84,970		7,749	171,558
Liabilities
Segment liabilities	2,253		65,753		26,675	94,682
Total liabilities	2,253		65,753		26,675	94,682

 

 

10. Staff numbers and costs

	2022	2021
	Number	Number
Management and administration	135	167
Exploration and evaluation	50	54
Production and service	947	948
Total	1,132	1,169
The aggregate payroll costs of these persons were as follows:	US$'000	US$'000
Staff wages and salaries	19,310	17,725
Employee share-based payment charges	-	966
Directors' remuneration as detailed in the Remuneration Report
Wages and salaries	1,202	880
Termination benefits	-	575
Share-based payment charges	373	285
Total	20,886	20,431

The share-based payment charge in 2022 relates to the fair value charge attributed to share options issued to the Chief Executive Officer which vested immediately in January 2022.

The staff wages and salaries include amounts capitalised to exploration and evaluation assets of US$2.9 million (2021: US$3.1 million).

 

11. Directors' remuneration

 

The costs of certain Directors' services were charged to the Company via consultancy companies, as separately detailed below and in the related party transactions Note 32, rather than directly as short-term employment costs. These arrangements are in place purely for administrative convenience and are not methods to mitigate, reduce or remove liabilities to taxation in the respective Director's country of residence. Details of Directors' remuneration are provided in the Remuneration Report.

Total remuneration	2022	2021
	US$'000	US$'000
Salary and fees paid directly	1,152	830
Salary and fees paid via related party consultancy companies	50	50
Termination benefits	-	575
Share-based payment charges	373	285
Total	1,575	1,740

The share-based payment charge in 2022 relates to the fair value charge attributed to share options issued to the Chief Executive Office which vested immediately in January 2022.

The share-based payment charge in 2021 relates to the fair value charge attributed to tranche 3 RSUs which vested in April 2021.

12. Finance costs

		2022	2021
		US$'000	US$'000
Interest on convertible loan notes	25	3,899	3,793
Interest on other loans	29	1,605	2,184
Interest on lease liabilities	28	123	128
Interest on contract liabilities	26	117	204
Unwinding of discount - provision for environmental obligations	23	1,291	705
Financing costs	25	(321)	867
Other		-	15
Total		6,714	7,896

 

The interest on other loans of US$1.6 million includes interest on borrowings of US$1.3 million, interest on other borrowings of US$0.2 million and interest on the working capital facility of US$0.1 million.   No finance costs have been capitalised.

 

The financing credit of US$0.3 million, a non-cash credit, relates to non-substantial modification of the convertible loan notes as disclosed in Note 25. In 2021, the financing costs of US$0.9 million related to the amortisation of the Labro Facility commitment fee.

 

 

13. Taxation

 

The Group is not subject to corporate tax in the British Virgin Islands. Companies engaged in the production and sale of gold in the Kyrgyz Republic pay a revenue-based tax on the sales of gold rather than tax on profit. Accordingly, the Group has an effective rate of tax on profit of 0% in these jurisdictions. In the remaining jurisdictions in which the Group operates, being Armenia, Cyprus and the United Kingdom, profits are subject to corporate income tax at a rate of 18%, 12.5% and 19%, respectively.

Within Armenia, the rate of corporate income tax is 18% for resident companies (with a worldwide tax base) for 2022. The tax period of corporate income tax is one calendar year (1 January - 31 December). Advance payments of corporate income tax are required to be made quarterly by the 20^th day of the third month of each quarter. The advance payment is equal to 20% of the corporate income tax reported in the previous tax year. The balance of tax due must be paid by 20 April of the year following the reporting year. Corporate income tax is determined based on rules and principles of accounting defined by the law or other legal acts.

Within the Kyrgyz Republic, a fixed royalty is payable on the sale of gold. In 2022, the fixed royalty percentage remained at 8%, comprising a royalty of 5% and a contribution to local infrastructure of 3% (2021: 8%, 5% and 3%). However, due to the Stabilisation Agreement that was signed in 2019 which entitled the Company's local subsidiary, Chaarat Zaav, to benefit from any future changes in direct taxes during the 10 years from the date of the agreement, the fixed royalty percentage is capped at 7%. A further percentage rate of tax is based on the average monthly international gold price, being 1% if the gold price is below US$1,300 per ounce and up to 20% when the gold price exceeds US$2,501 per ounce. The maximum royalty payable when the gold price is above US$2,501 per ounce is therefore 27%. However, as the Group's assets in the Kyrgyz Republic are at an exploration stage, the Group has no royalty payable in respect of these assets for the years ended 31 December 2022 or 31 December 2021.

Further, under the Article 301 of the Tax Code of the Kyrgyz Republic, an entity is subject to a taxation in payment of the right to use subsoil, including for the purpose of developing a mineral deposit. The tax base for calculating this is the amount of geological reserves and forecast resources taken into account by the State Balance of deposits of mineral resources of the Kyrgyz Republic.

At the balance sheet date, the Group has received no tax claims and the Directors believe that the Group is in compliance with the tax laws affecting its operations and therefore there are no further uncertain tax positions which require disclosure in accordance with IFRIC 23.

The Group has recognised deferred tax assets which relate to temporary differences arising at the Kapan mine in Armenia, as detailed in Note 18.

 

Analysis of tax charge for the year

		2022	2021
		US$'000	US$'000
Armenian tax		947	2,269
Current tax		947	2,269
Origination and reversal of temporary differences		774	1,668
Deferred tax	18	774	1,668
Income tax expense		1,721	3,937

 

Reconciliation of tax charge for the year

				2022	2021
				US$'000	US$'000
Profit/(loss) before tax				(6,856)	349
Tax calculated at applicable corporation tax rate:
Armenian corporation tax at 18% (2020:18%)				1,234	63
Tax effects of:
Items non-deductible/(non-taxable) for tax purposes				(1,110)	(439)
Different tax rates applied in overseas jurisdictions				(1,539)	(2,188)
Current tax losses not recognised				(306)	(345)
Write-down of previously recognised deferred tax assets				-	(1,028)
Income tax expense				(1,721)	(3,937)

 

 

Tax losses

		2022	2021
		US$'000	US$'000
Unused tax losses for which no deferred tax asset has been recognized
United Kingdom		201	278
Tax benefit at 25%		50	53

 

Deferred tax assets are only recognised to the extent that it is probable that taxable profits will be available against which unused tax losses and unused tax credits can be utilised.

 

14. Loss per share

 

Loss per share is calculated by reference to the loss for the year of US$8.6 million (2021: loss of US$3.6 million) and the weighted average number of ordinary shares in issue during the year of 689,655,467 (2021: 673,320,329).

At 31 December 2022, 8,920,341 (2021: 8,920,341) warrants, 44,170,931 (2021: 49,692,252) share options and convertible loan notes have been excluded from the diluted weighted average number of ordinary shares calculation because their effect would have been anti-dilutive.

15. Exploration and evaluation costs

 

	Tulkubash		Kyzyltash			Total
	US$'000		US$'000			US$'000
At 1 January 2021	52,157		9,202			61,359
Additions	4,775		899			5,674
Reclassification to property, plant & equipment	(728)		-			(728)
At 31 December 2021	56,204		10,101			66,305
Additions	2,592		285			2,877
Reclassification to property, plant & equipment	-		-			-
At 31 December 2022	58,796		10,386			69,182

Exploration and evaluation assets comprise costs associated with exploration for, and evaluation of, mineral resources together with costs to maintain mining and exploration licences for mining properties that are considered by the Directors to meet the requirements for capitalisation under the Group's accounting policies as disclosed in Note 3. As at 31 December 2022, management does not consider there to be any impairment in respect of these assets.

In 2021, the Company entered into an investment agreement ("The Investment Agreement") with Çiftay which supersedes the previous agreement that was signed in September 2019. Çiftay and the Company decided to replace the previous agreement with the Investment Agreement, in order to simplify the structure of the partnership and further align the interests of both parties. Under the Investment Agreement, Chaarat retains 100% ownership of the Tulkubash and Kyzyltash projects with Çiftay becoming a strategic investor at the Company level, through the issuance of new ordinary shares. In July 2021, the Company issued 2.8 million new ordinary shares to Çiftay with a fair value of US$0.8 million in settlement of accrued expenses relating to Tulkubash construction activities. Further shares issues will only take place once certain terms of the agreement are triggered by securing project finance.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16. Intangible assets

																	Computer Software	Other intangible assets		Total
																	US$'000	US$'000		US$'000
Cost
At 1 January 2021																	1,451	281		1,732
Prior year reclassification from PPE																	18	-		18
Additions																	152	-		152
Reclass from PPE to IA																	18	-		18
Effect of translation to presentation currency																	120	26		146
At 31 December 2021																	1,741	307		2,048
Additions																	67	-		67
Effect of translation to presentation currency																	348	66		414
At 31 December 2022																	2,156	374	2,530
Accumulated amortisation
At 1 January 2021																	491	20		511
Charge for the year																	246	28		274
Effect of translation to presentation currency																	45	5		50
At 31 December 2021																	782	53		835
Charge for the year																	221	31		252
Effect of translation to presentation currency																	169	14		183
At 31 December 2022																	1,172	98		1,270
Net book value
At 31 December 2022																	984	276		1,260
At 31 December 2021																	959	254		1,213
At 1 January 2021																	960	261		1,221