AVM.L Regulatory News (AVM)

Avocet Mining PLC2012 Full Year Results

2012 HIGHLIGHTS

·; Gold production from continuing operations of 135,189 oz. (2011: 166,744 oz.), in line with revised guidance

·; Total cash cost of US$1,000 per oz. (2011: US$693 per oz.)

·; Profit before tax and exceptional items from continuing operations US$18.3 million (2011: US$40.3 million)

·; Discussions ongoing with Macquarie and other financiers on the restructuring of Group finances

·; Major operational improvements delivered at Inata

·; Metallurgical testwork at Inata has established a better understanding of the orebody

·; Ongoing development at Souma successful with 38% increase in Mineral Resources to 0.78 million oz., and favourable results received from initial metallurgical testwork

·; Tri-K project feasibility study underway with Mineral Resource expanded to 3.22 million oz.

·; Group Mineral Resource expanded with a total of 8.7 million oz. across three main projects, Ore Reserve confirmed 0.92 million oz.

·; Executive and operational management teams restructured to focus on operational excellence

KEY FINANCIAL METRICS1

1 Financial metrics are from continuing operations only

Commenting on the results, David Cather, Chief Executive Officer, said:

"Avocet has come through a challenging year with a renewed focus on realising value from its suite of producing and development assets in the year ahead.

In 2012 we undertook major operational improvements, completed extensive metallurgical testwork and worked hard to increase our Mineral Resource base. These efforts will support our operational aspirations for 2013. We are considering options to address our hedge position, including funding from existing sources, equity and debt. This will be a significant step in our strategy of focussing on profitability over production.

During the year we also restructured our senior management team to reflect the renewed focus on delivering value from our assets. Our bolstered team at Inata remains committed to delivering operational efficiencies, reducing costs and increasing our understanding of the ore body. Inata remains a quality asset that will contribute strongly to the Company as we address the technical issues that the different ore types present.

Today we confirmed our Ore Reserve estimate 0.92 million ounces as at December 2012. This does not include Souma, which, subject to receiving the necessary licences, has the potential to increase Ore Reserves back to their previously announced level. Our exploration team delivered a major uplift in our Mineral Resource base to over 8.7 million ounces following a successful campaign targeting areas around the Inata licence area, Souma and Tri-K in Guinea.

We will now focus on progressing work at the promising Souma deposit situated 20km from Inata. Souma is a compelling part of our medium term growth strategy. Determining whether Souma will best be developed as a standalone mine or an extension to Inata is the next critical step.

In Guinea, the Tri-K project is progressing through feasibility study in anticipation of our application for a mining licence over this promising project.

Avocet's key focus areas for 2013 will be the ongoing restructuring of Group finances, continuing the work at Souma and progressing the feasibility study at the Tri-K project in Guinea. I am confident that the Company has a strong base to operate from, with 2013 representing a key turning point in our development."

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NOTES TO EDITORS

Avocet Mining is a gold mining and exploration company listed on the London Stock Exchange (ticker: AVM.L) and the Oslo Børs (ticker: AVM.OL). The Company's principal activities are gold mining and exploration in West Africa.

In Burkina Faso the Company owns 90% of the Inata Gold Mine. The deposit at Inata and its satellite deposits currently comprises a Mineral Resource of 4.71 million ounces and a Ore Reserve of 0.92 million ounces. The Inata Gold Mine poured its first gold in December 2009 and produced 135,189 ounces of gold in 2012.

Other assets in Burkina Faso include eight exploration permits surrounding the Inata Gold Mine in the broader Bélahouro region. The most advanced of these assets are at Souma, some 20 kilometres from the Inata Gold Mine, where Mineral Resources of 0.78 million ounces exist.

In Guinea, Avocet owns 22 exploration licences in the north east of the country. Exploration has been ongoing since 2005 and the project at Tri-K is the most advanced. Within the Tri-K project, the Koulékoun Prospect has a Mineral Resource of 2.29 million ounces and the Kodiéran Prospect comprises 0.93 million ounces.

CHAIRMAN'S STATEMENT

The last year has been testing for your Company, that entered 2012 for the first time as a purely West African gold mining company. The Inata Gold Mine performed well in 2011 and solid progress had been made with our development projects at Souma and at Tri-K. Expectations were that 2012 would build on these successes.

During the year we encountered a number of challenges, which required us to take stock of where we were as a company and how best to deliver returns to investors over the long term. I believe this evaluation has allowed us to understand our assets far better than before and that we are now poised to maximise their significant potential.

The Company's management team has changed to reflect the revised needs of the operations. In June of 2012, Brett Richards resigned as Chief Executive. Brett was succeeded by David Cather, a mining engineer with extensive operating experience, who was initially appointed as the Company's chief operating officer in April 2012. David has proven himself to be a solid operator over the last nine months and I am fully supportive of the changes he has implemented across the organisation as we focus on realising the value inherent in our suite of assets.

In Burkina Faso we undertook extensive geological and metallurgical test work on the Inata ore body. This testwork allowed us to evaluate the optimal processing methodologies that would not only deliver maximum recoveries but would identify the optimal risk-weighted return on any capital investment in the mine. The outcome of this was a decision not to build a second plant at Inata. Under the current economic circumstances, in which investors are quite rightly demanding a prudent approach to capital expenditure, we believe this to be the right decision. It now remains to be seen what new capital investment, if any, should be made in the Inata Mine to maximise returns over the life of mine.

Operational shortfalls in the first half of the year set the Inata Mine behind its target for earth moving and waste stripping. The result was that we were unable to attain our forecast production and in the middle of the year we advised the market that gold produced would be approximately 10 - 15% lower than initially guided. Whilst this shortfall was disappointing, management used the opportunity to evaluate all major operating practices at the mine. The result was a comprehensive implementation of optimal mining practices that were delivering measurable results by the fourth quarter of the year.

Our development project at Souma is becoming increasingly attractive both in terms of the size of the deposit as well as the metallurgy. Whether Souma proves to be an additional ore source for the Inata Mine or a standalone producing asset remains to be seen. We are however confident that it will be a significant source of production growth for our Burkina Faso operations in the medium term.

In Guinea we have advanced our Tri-K project towards a feasibility study. The deposit is now sizeable and has the potential to be developed into one of the first new gold mines under the new mining code. Progress from Government in clarifying the key terms of the new mining code has been limited but we remain confident that Government is supportive of the mining sector. We will continue to maintain dialogue with the Government throughout 2013 as we finalise the feasibility study.

The Ore Reserve to be announced on 7 March 2013 is significantly lower than the previous Ore Reserve, and has led us not only to recognise an impairment in respect of the Inata assets, but also to reconsider the structure of the Group finances including Inata's gold hedge. In this regard discussions continue with Macquarie Bank and other financiers. We anticipate these discussions will be concluded shortly. As set out more fully in note 2 to the financial statements, the Board has considered the implications of these circumstances and has concluded that in view of the constructive nature of these discussions that the business continues to be a going concern.

As well as the appointment of David Cather, there were other important changes to the Board of Directors during the year. In March 2012, Harald Arnet resigned after four years as a Director, and was replaced by Gordon Wylie, who has brought both technical knowledge (particularly in geology) and extensive experience in gold mining to the Board. In June 2012, Noël Harwerth, who also has considerable experience as a Non-executive Director, was appointed to the Board as Chair of the Remuneration Committee. Both appointments have strengthened the Board, as well as improving the balance of skills and experience.

While challenges remain, the Company has a portfolio of producing and growth assets in a prospective region. I am confident that the changes we implemented in 2012 and the commitment of our team will see Avocet deliver value during 2013.

RUSSELL EDEY

Chairman

Q&A with the ceo

1. Prior to your appointment as Avocet's CEO in July 2012, what experience did you have of the mining industry?

I initially joined Avocet in April 2012 as the Chief Operating Officer. Prior to that, I was the Chief Operating Officer of European Goldfields. When Brett Richards resigned in July 2012 the Board appointed me as Chief Executive as they believed I had both the operating experience as well as the management skills to drive the business forward.

After graduating from the Royal School of Mines, with a degree in mining engineering, I gained extensive project development and operational management experience in both open pit and underground mines over the course of 30 years.

My career included various senior roles at Anglo American, Lafarge SA and De Beers but I also spent five years consulting on a variety of smaller early stage projects principally for gold, copper and base metal projects in the DRC, Sierra Leone, Nicaragua, Philippines and Colombia.

2. Since your appointment in the middle of the year, what changes have you announced and how will they benefit Avocet?

My core focus since my appointment has been to improve the operating performance at the Inata Mine. Avocet encountered a number of operational challenges in early 2012 that forced us to revaluate basic operating practices and focus our efforts on dramatically improving these. As part of this process I appointed a new general manager for Inata, John McNair who has driven significant improvements at the mine.

A new, highly motivated team has been assembled at Inata to focus on improvements in productivity, as well as reducing costs and working capital. With the assistance of consultants Alexander Proudfoot we are embedding the necessary changes at a behavioural level across the organisation.

3. What about your stated intention to implement aggressive cost savings - how are these going to be delivered and over what time frame?

There are significant opportunities across the business to reduce costs. Many of these have been identified and changes implemented to realise them. We have successfully reduced our reagent consumption, reduced our reliance on external contractors and reduced the cost of our head office and support functions. Of our own volition, we have also implemented an aggressive programme to localise our workforce by incentivising Inata's ex-pat workforce to train up local replacements. This will deliver further cost savings in 2013. In addition, cash flow and working capital requirements are being more actively managed.

Due to the large fixed cost element of running a mine such as Inata, the greatest impact on unit costs will always be the production volumes achieved in any one period. So maximising operational performance to achieve targeted production is the most important cost saving initiative that we can and will continue to implement.

4. Will your efforts to improve operational performance at Inata deliver near term results and are these enough to secure a successful future for the operation?

During the second half of 2012 we implemented a programme to drive operational excellence at Inata. The programme has delivered results with a dramatic improvement in the efficiency with which tonnes are moved and mined. This is demonstrated in the 24% improvement in productivity of our mining fleet. The fleet increased its average earthmoving performance from 83,000 tpd (tonnes per day) in the first half of the year to 103,000 tpd in the last quarter. Similarly our overall equipment effectiveness has improved by over 4%. These improvements will have a measurable impact as they allow for additional processing of approximately 105,000 tpa (tonnes per annum) of ore which at Ore Reserve grade could potentially add 5,000 ounces of gold production.

Standard operating procedures have also been improved as has the induction and training of our operators through a state-of-the-art skills programme.

All these efforts are delivering results and will improve the returns that the Inata Mine delivers. However the reality remains that the Inata ore body is complex and ore at depth is more difficult to process than the oxide ore at surface. As a result recoveries have been and will continue to be lower than those achieved in 2012 and costs will be impacted as a result. The combination of these has resulted in a reduction in overall Ore Reserves. The challenge is now to determine how best to maximise returns from this smaller Ore Reserve at an appropriate level of capital expenditure.

5. You have also announced your intention to enhance the processing plant at Inata. How is this progressing?

The orebody at Inata is complex but through extensive testwork and with the assistance of consultants Lycopodium Minerals, we are developing a better understanding of likely throughput and recoveries from our existing plant. In order to be prudent in our capital expenditure we will not retrofit equipment to the current plant until there is a full understanding of the orebody and a high level of confidence regarding the predictability of any increases in recoveries over and above the base case on which the updated Ore Reserve estimate has been based. We expect to have this information during 2013.

6. You recently announced a downward re-estimation of the Ore Reserves at Inata. Why was this and what does it mean for the future of the mine?

We recently completed the process of re-estimating our Ore Reserves at Inata. This process was brought to the attention of shareholders in the third quarter of 2012 and a final Ore Reserve estimate of 0.92 million ounces as at December 2012 has been determined. The average Ore Reserve grade is 2.07 grammes per tonne Au. I view the Ore Reserve to be announced March 7 as conservative, because it does not include any benefit from potential plant enhancements that we are evaluating that could increase recovery and throughputs.

This downgrade reflects the fact that test work shows the orebody at Inata to be more complex than previously believed, and the impact of fresh and transitional ore on recoveries and throughput has adversely impacted the Ore Reserve by approximately 450,000 ounces. Mining depletion accounted for a drop of approximately 160,000 ounces and higher cost accounted for a reduction of about 50,000 ounces. For the Ore Reserves we have announced today, we have taken the decision to base the pit shells on a gold price of US$1,200 per ounce, compared with the previous Ore Reserve in which the pit shells were based on a gold price of US$1,400 per ounce. This is not a reflection of our view on gold price prospects, about which we remain positive, but is a more conservative parameter used in the estimation process. The effect is to maximise Inata's grades and near term cash generation over the coming years, by focusing on the highest grade, most amenable ore at Inata, and avoiding high cost waste stripping. The change in this parameter reduced the Ore Reserve by approximately 250,000 ounces.  

7. Is Resource development still an area of focus for growth in Avocet? Which deposits are presenting the biggest opportunities right now?

Our exploration geology team had a very successful year in 2012. Overall the Group Mineral Resources increased from 6.3 million ounces to 8.7 million ounces. This substantial Mineral Resource base in both Burkina Faso and in Guinea now needs to be developed and brought into production. As such our core focus for 2013 is improving the level of confidence we have in these Mineral Resources and converting them to Ore Reserves.

The project at Souma currently presents our greatest opportunity for growth. The Mineral Resource at Souma grew 38% in the year to 0.78 million ounces and there are several high grade zones in the emerging ore body. Whilst definitive test work remains to be undertaken, initial metallurgical test work indicates that gold mineralisation across all depths will yield high recoveries through standard recovery processing. Step out drilling will continue during 2013, but the bulk of the geological drilling at Souma will be infill in preparation for the commencement of a feasibility study later this year. The feasibility study will be submitted to the Government as a key step in securing a mining licence for Souma.

8. What are the greatest challenges Avocet faces and how are you addressing these?

Avocet faces two primary challenges in 2013. The most critical of these is how best to deliver value from the Inata Mine. We will continue to embed the operational improvements identified in the second half of 2012. In addition, we will evaluate whether plant enhancements to improve recoveries and throughout will add value, taking into account the associated capital expenditure. We continue to undertake metallurgical testwork at Inata and with the help of consultants Lycopodium are evaluating the additional value of any plant modifications.

The second challenge Avocet faces relates to the challenge of restructuring the Company's financing. Avocet is currently in advanced discussions with Macquarie Bank as well as other financiers and we anticipate that announcements in relation to the nature of this restructuring will be made soon.

INATA GOLD MINE REVIEW

The Inata Gold Mine in Burkina Faso is located in the Bélahouro district approximately 220 kilometres north-east of the capital, Ouagadougou. The Bélahouro district is on the eastern edge of the Birimian greenstone belt. Avocet holds licences over 1,660km2 within the Bélahouro district of which 26km2 is the Inata mining licence. The mine is owned by Société des Mines de Bélahouro SA (SMB) of which Avocet owns 90% and the government of Burkina Faso the remaining 10%. The licence extends to 2027.

Safety

During 2012 Inata had one lost time injury in the first quarter of the year. The mine's lost time injury frequency rate (LTIFR) for 2012 was 0.087.

Mineral Resource Development

During 2012, drilling within the mining licence focused on expanding the known mineralisation at Inata North, Minfo and Minfo East. A total of 42,530 metres of reverse circulation and diamond drilling were drilled focussing on the expansion of open pittable reserves in the southern section of the mine permit, including Inata South, Inata Far South, Minfo and Minfo East. This programme resulted in an increase after depletion of 22% of the Inata Mineral Resource to 4.21 million ounces by the end of the year compared with 2011, with Measured and Indicated Mineral Resources of 2.84 million ounces and Inferred Mineral Resources of 1.37 million ounces of gold.

An additional 81,640 metres of reverse circulation and diamond drilling were completed in the area surrounding the Inata mining lease, including the eastern extension of the mineralised Minfo Trend and the Pali prospect. This work resulted in a small oxide Inferred Mineral Resource of 0.15 million ounces of gold at Pali, immediately to the west of Minfo. In addition, a maiden resource at Filio, along strike to the east of Minfo and on an exploration licence adjacent to the mine licence area, of 0.14million ounces was announced in October 2012. This has subsequently grown to 0.17 million ounces and will add to oxide reserves once the mine permit extension is approved. Significant mineralisation was intersected at Ouzeni, further to the east of Filio where an Inferred Mineral Resource of 0.16 million ounces has been defined.

Ore Reserves

A re-estimation of Inata's Ore Reserves has now been completed, and is the subject of a separate announcement. Test work has shown that the orebody is more complex than previously thought, and while work is ongoing to gain a better understanding of both the metallurgy of the orebody, and the optimal processing methods, current indications are that the impact of fresh and transitional ore on recoveries and throughput is such that an average plant throughout of 1.8-1.9 mtpa (million tonnes per annum) at approximately 80% recovery is likely to be achieved over the life of mine. The overall throughput reflects a mix of hardness with oxide and shallower transitional ore achieving higher annual tonnages in the early years and fresh and deeper transitional being treated at much lower annual tonnages in later years. Similarly, the overall recovery reflects lower recoveries in fresh and highly pre-robbing ore as opposed to higher recoveries achieved to date in the oxide material.

These impacts combined with the higher cost levels have led to a reduction in the Ore Reserve to 0.92 million ounces as at 31 December 2012, based on pit shells optimised at US$1,200 per ounce. Using a US$1,400 per ounce gold price would have increased the Reserve by approximately 27%, however would have reduced cashflows in the earlier years due to increased stripping of waste.

The 31 December 2012 Ore Reserve figure is net of depletion during 2012 of approximately 160,000 ounces.

Operational Performance

Operational performance and production from Inata in 2012 was weaker than in 2011. A total of 135,189 ounces of gold were produced relative to 166,744 ounces in 2011 and initial guidance for 2012 of 150,000 - 160,000 ounces.

Production issues were encountered in the first quarter of the year when total mining tonnages were 10% lower than the preceding quarter due to availability issues with two of the excavators on site. These issues persisted into the second quarter when lower than planned availabilities from excavators continued to restrict the mine's waste stripping capacity. As a consequence there was limited access to areas of higher grades in the pit which in turn resulted in lower than expected head grades through the processing plant being achieved. Slightly lower recoveries (in part due to the lower grade processed and in part due to the presence of preg-robbing carbon) and lower processing rates than planned due to treatment of harder transitional and fresh ore exacerbated this production shortfall. As a result of these challenges, expected gold production was reduced from 160,000 ounces to between 135,000 and 140,000 ounces.

In the second half of 2012 several measures were introduced to improve mining capacity to allow a higher rate of waste stripping. These included the commissioning of additional rented excavators and dump trucks as well as the purchase of a new wheel loader. Avocet also engaged the services of leading mining consultants, Alexander Proudfoot, to assist SMB's operational management in realising material, measurable and sustainable business improvements across the Inata Mine. The initial focus was on increasing mining capacity.

The on-site management team was also strengthened in the second half of 2012, with the appointment of a new general manager, mine manager and a technical services manager. The new general manager, John McNair, is an engineer with over 30 years relevant experience.

During the third quarter, encouraging operational improvements were made as the new management team worked effectively with consultants Alexander Proudfoot. Mining operations achieved an increase of 17% in average daily volumes delivered by owner-operated equipment in the second half of the year over the first half. These were as a result of a programme of operating improvement initiatives implemented that included revised haul cycles, operator training programmes, improved supervisor monitoring, loading optimisation and a detailed revision of standard operating practices. By fourth quarter, daily production in excess of 110,000 tonnes was achieved on a number of days.

A total of 33,127,000 tonnes of material, primarily from Inata north, central and south, were mined in 2012 compared to 25,201,000 tonnes in 2011. This equates to a daily average of 91,000 tonnes per day versus an average of 69,000 tonnes per day in 2011.

Processing at the Inata Gold Mine is through a conventional carbon-in leach (CIL) plant combined with a gravity recovery circuit. Initially the plant was designed to process 2.25 mtpa, although in 2012 the plant processed 2.56 mtpa following de-bottlenecking work carried out in 2011. As part of the ongoing scheduled maintenance of the Inata plant, the Company intends to carry out maintenance on the SAG mill in the coming months. This proactive approach will require a plant shutdown which has been factored into the forecast 2013 production. Head grades decreased in 2012 to 1.95 g/t Au relative to 2.26 g/t Au in 2011 mainly due to limited access to high grade ore. Recoveries reduced from 91% in 2011 to 87% in 2012. This is partly attributable to the overall reduction in head grade but also due to the presence of preg-robbing carbon that is distributed in the deeper transitional and fresh ores that were mined in 2012.

As part of the process to deal more effectively with the preg-robbing carbon in the Inata ore body, extensive test work and modelling of organic carbon, sulphides and other indicator elements was undertaken in 2012. The metallurgical testwork involved the taking of 5,000 samples from across the ore body which were analysed for PRI (Preg Robbing Index), Quick Leach Test, sulphurs, carbon and a suite of other minerals. Analysis of this data has been used to generate block models of the various geological and metallurgical parameters across the ore body but further Engineering Cost Studies are underway to determine their economic viability.

The metallurgical testwork identified two main factors affecting gold recoveries namely: preg robbing by active carbonaceous material and fine grained gold locked up in sulphide ores. The testwork indicates that there is a significant proportion of the ore body (66%) which is regarded as having very low to no preg-robbing capacity, while less than 1% of the ore body is considered highly preg-robbing.

The testwork also indicates that alternative processing options could achieve acceptable recoveries for ore with low preg-robbing capacity, with only a minor drop in recoveries when treating the highly preg-robbing ore

The models will enable the definition of the metallurgical character of the oxide, transitional and fresh ores at Inata. This will allow mining and processing schedules to be optimised and will also form the basis of any plans to modify the existing Inata processing plant to improve overall recoveries. Multiple studies are currently being carried out to investigate various upgrades to the current Inata processing plant and the inclusion of other deposits in the Bélahouro region to the Ore Reserves.

Final gold production from the Inata Gold Mine for the year was 135,189 ounces, in line with revised guidance. Movements in gold in circuit, which reflect the timing of gold pours, resulted in 4,568 ounces being added to gold in circuit inventory over the course of 2012, compared with a reduction in inventory of 2,650 ounces in 2011.

souma REVIEW

The Souma deposit is located on an exploration licence approximately 20 kilometres east of the Inata Gold Mine. Avocet owns 100% of the exploration licence which extends to 2015.

Drilling recommenced along the Souma trend in 2012 with a focus on the two main high grade prospects at Dynamite and Miilam. These individual vein zones extend between 600 and 1,600 metres in length within an overall 10 kilometre long zone. Individual vein widths are up to 20 metres, although the Dynamite prospect comprises five main mineralised zones over a width of 125 metres and strike length of 650 metres.

As at the end of 2012, Mineral Resources at Souma had grown 38% to 0.78 million ounces.  Of this Mineral Resource, 24% is Measured and Indicated and the remaining Inferred. The average grade is currently 1.48 g/t Au.

The Mineral Resource increase is based on 75,500 metres of reverse circulation and diamond drilling undertaken in the preceding drill season. Drilling was conducted on 50 metre intervals, closing down to 25 metre intervals and, in high grade zones, has been conducted at 10 metre spacings in order to limit the extrapolation of higher grades.

Definitive test work is underway to facilitate a future feasibility study, but initial test work indicates that gold mineralisation, in both fresh and oxide, regardless of the degree of oxidation, will yield high recoveries through standard gravity recovery and CIL circuits.

Infill drilling at Souma continues and will increase the overall level of confidence in the Mineral Resources, whilst step out drilling is scheduled to target geochemical anomalies coincident with quartz vein zones. The Company's in-house geophysics team has developed a 3D geophysical survey technique that accurately models known veins. This will be used in conjunction with conventional techniques to prioritise the numerous drill targets and improve the accuracy and cost effectiveness of the step-out drill programme.

Given that it appears probable that a significant proportion of the Mineral Resource identified will convert to Ore Reserve, either on the basis of transporting the ore to the existing Inata plant, or with the construction of a new standalone plant at Souma, various baseline studies have been commenced which will form part of a feasibility study and the ultimate application for a Mining Licence.

Elsewhere in the Bélahouro permits, early results from the regional geochemical auger survey have been received. To date this programme is showing additional geochemical anomalies in the vicinity of Inata and Souma that represent additional drilling targets to be tested in 2013.

TRi-k REVIEW

In Guinea, Avocet owns twenty-two exploration licences in the north east of the country. Exploration has been ongoing since 2005 and the Tri-K project, where nineteen of these licences are located is the most advanced.

With the introduction of the new Mining Law in Guinea early in 2012, and following ongoing discussions on how this legislation will practically be implemented, Avocet elected to engage proactively the Guinean Government on the development of a mining operation in the Tri-K permits. This yielded positive results in the middle of the year with a one year extension to the expiring Koulékoun permit being granted to the third quarter of 2013. Avocet subsequently took a decision to progress Tri-K to an initial feasibility study within the extension period.

A dedicated in-house projects team, which was formed in 2012, conducted an initial economic assessment. This assessment indicated a potentially viable project on the basis of a phased development, commencing with a low capital heap leach operation. In the fourth quarter of 2012 consultants were identified to undertake the necessary environmental and social impact assessment in support of the feasibility study. Metallurgical test work and engineering studies for this purpose also commenced in the fourth quarter of 2012. A US$10 million budget was approved for the completion of the Feasibility Study, which includes US$4m for infill drilling and the upgrading of the Kodiéran Inferred Mineral Resource to support Ore Reserve estimation.

Given the limited timescale for the feasibility study, the Company's objective is to define sufficient oxide Ore Reserves that will enable the delineation of an initial low cost, low risk heap leach operation as a first phase to a larger, higher capital milling operation.

The Company completed the bulk of the initial exploration drilling programme in Guinea with 43,190 metres of reverse circulation and diamond drilling in 2012. The results have largely defined the scale of the Mineral Resources at Koulékoun and Kodiéran.

The drilling programme focussed on Kodiéran where the high degree of weathering of auriferous sheeted quartz vein sets has resulted in an upper 100-150 metre thick oxidised zone. Drilling to date has tested a strike length of 1,900 metres and width of 400 down to 240 metres depth. Within this volume, Kodiéran contains Indicated Mineral Resources of 0.25million ounces and Inferred Mineral Resources of 0.68 million ounces of gold. Approximately 36% of the total Resource is oxide.

Drilling was also completed across the north-east striking structure at Koulékoun to better define the mineralisation in this area. The updated Koulékoun resource now includes Indicated Mineral Resources of 1.4millionounces and Inferred Mineral Resources of 0.89 million ounces gold. Approximately 10% of the Koulékoun resource sits above a sub horizontal post-mineralisation dolerite dyke and is oxide with the remainder being fresh. The proportion of oxide in these resources is important, as a heap leach operation is best suited to the processing of softer weathered oxide material.

Arsenic geochemistry of termite mounds has proven to correlate extremely well with bedrock gold mineralisation as determined by scout drilling. Avocet has identified several prospects with the potential to add incremental resources in the vicinity of Koulékoun and Kodiéran and is extending the arsenic-in-termite-mound survey. The evaluation of these targets will follow infill drilling of the Mineral Resources in support of the Feasibility Study in 2013.

FINANCIAL REVIEW

Financial Highlights1

1 Prepared in accordance with International Financial Reporting Standards. The table, and following commentary, presents continuing operations unless otherwise stated. In 2011, the Group's Malaysian and Indonesian operations were presented as discontinued. Note 5 to the financial statements presents an analysis of the results of operations by segment, identifying continuing and discontinued operations.

2 2011 and 2012 results are from Continuing Operations only, and have excluded the impact of the Group's South East Asian assets in the year. This is felt to be a more like-for-like basis, and therefore more appropriate for comparison.

3 2011 Net cash generated by operations (before interest and tax) has been restated to include the reclassification of a US$39.8 million cash outflow in respect of a hedge buy-back in 2011.

Revenue

Group revenue for the year was US$204.1 million compared with US$213.4 million in 2011. The Group sold 136,856 ounces at an average realised price of US$1,491 per ounce during 2012, compared with 164,026 ounces sold at an average realised price of US$1,301 in 2011. Whilst 27,170 fewer ounces were sold in 2012, higher average realised prices partly reflected the restructure of Inata's hedge in July 2011. 76% of sales were made at spot prices during the year, compared with 54% of sales in 2011. The average spot gold price in 2012 was US$1,668 per ounce compared to US$1,573 per ounce in 2011.

Gross Profit and Unit Cash Costs

Group gross profit in 2012 was US$35.4 million compared with US$56.7 million in 2011. In addition to a reduction in revenue of US$9.3m as described above, this reflected a US$19.6 million increase in cash costs, lower depreciation charges and higher expensed exploration charges resulting from the Group's activities in Guinea and the Bélahouro region as well as positive movements in inventory in the income statement.

Unit cash costs at Inata increased from US$693 per ounce in 2011 to US$1,000 per ounce in 2012. Of this US$307 per ounce increase, approximately half was due to lower production levels, with lower grades and recoveries seen from the areas mined in the year, with the balance largely due to the combined effect of higher unit cost per tonne mined, and increased mining volumes.

The table below reconciles the Group's cost of sales to the cash cost per ounce in respect of continuing operations only (excluding the divested South East Asian operations).

Profit before Tax

The Group reported a loss before tax of US$117.0 million in the year ended 31 December 2012, compared with a profit of US$6.5 million in the year ended 31 December 2011.

In 2012 the Group recognised an exceptional impairment charge in respect of mining property of US$135.3 million. The impairment was triggered by the re-assessment of the future cash flows to be generated at Inata, following the downward revision to Mineral Reserves from 1.85 million ounces to 0.92 million ounces. Further information regarding the assumptions underlying the calculation of the impairment and the related sensitivities is provided in note 16.

The 2011 profit before tax from continuing operations included a number of exceptional items including a gain on disposal of shares held in Avion Gold Corporation of US$9.0 million, the US$39.8 million cost of restructuring Inata's hedge position in July 2011, and the US$3.1 million cost of listing on the Main Board of the London Stock Exchange.

Before exceptional items, profit before tax for the year ended December 2012 was US$18.3 million compared with US$40.3 million for the year ended December 2011.

Taxation

The Group reported a tax credit in the income statement of US$14.5 million in 2012, analysed as follows:

The tax credit in Burkina Faso represents the net effect of a deferred tax charge of US$9.2 million as a result of accelerated capital allowances on assets related to the construction of the Inata Mine, offset by a deferred tax credit of US$23.7 million related to the impairment of mining property.

The 2011 tax charge in Avocet Mining PLC reflects the write off of deferred tax assets following a re-assessment of recoverability, subsequent to the decision to sell the Group's assets in South East Asia, and withholding tax suffered on dividends received from a subsidiary.

The taxes in Malaysia and Indonesia in 2011 reflect the tax charges on profits generated in those countries prior to their sale.

EBITDA

EBITDA represents operating profit before depreciation/amortisation, interest and taxes, as well as excluding any exceptional items in the period. It is not defined by IFRS but is commonly used as an indicator of the underlying cash generation of the business.

EBITDA decreased to US$48.3 million in 2012 from US$100.3 million in 2011, a decrease of 52%. This reflected changes to gross profit as described above.

A reconciliation of Profit before tax and exceptionals to EBITDA is set out below (continuing operations only):

Cash Flow and Liquidity

A total cash outflow of US$50.3 million was reported for the year ended 31 December 2012. Net cash generated by operating activities totalled US$53.4 million, which funded investments in the form of exploration costs of US$31.8 million and capital expenditures of US$35.1 million. In addition, the final dividend of US$13.2 million, declared in respect of 2011, was paid during the year, along with loan repayments to Macquarie Bank Limited of US$24.0 million.

A summary of the movements in cash and debt is set out below:

Depreciation

The Group's depreciation charge reduced from US$39.0 million in the year ended 31 December 2011 to US$28.0 million in the year ended 31 December 2012. The majority of this related to the deprecation of assets at Inata, which are predominantly calculated on a unit of production basis against the life of mine plan as established at the beginning of each financial year.

Capital Expenditure

The Group's capital expenditure in the year was US$66.9 million analysed as follows:

Exploration activity in West Africa in 2012 was in line with the 2011 activity. In addition to the US$31.8 million of deferred exploration expenditure (US$31.9 million in 2011) shown in the cash flow statement within investing activities, a further US$4.6 million exploration support costs were expensed within other cost of sales during the year.

Capital expenditure on property, plant and equipment in West Africa totalled US$35.0 million. Significant investments in the year included the purchase of mining equipment and rebuilds (US$14.7 million), tailings storage facility extension works (US$8.1 million), plant capex (US$6.5 million), earthworks and other infrastructure (US$1.6 million), and enhancements to buildings and offices (US$2.9 million).

Mike Norris

Finance Director

Consolidated income statement

For the year ended 31 December 2012

(1) EBITDA represents earnings before exceptional items, finance items, depreciation and amortisation. EBITDA is not defined by IFRS but is commonly used as an indication of underlying cash generation.

Consolidated statement of comprehensive income

For the year ended 31 December 2012

Consolidated statement of financial position

At 31 December 2012

Consolidated statement of changes in equity

For the year ended 31 December 2012

Consolidated cash flow statement

For the year ended 31 December 2012

1Refer to note 1 for details

Notes

For the year ended 31 December 2012

1. Re-presentation of 2011 cash flow

The Group has recently concluded discussions with the Financial Reporting Council's (FRC) Conduct Committee in relation to the presentation of the US$39.8 million cash outflow in respect of the repurchase of 58,432 ounces of forward gold sales in July 2011. This transaction was part of an overall restructure of the Company's hedge book, as a result of which approximately 20% of the hedged ounces were bought back and the delivery profile of the remaining ounces extended by four years to June 2018.

The forward contract was required as a condition of the loan facility taken out by SMB for the construction of the Inata Mine, and was therefore an integral part of the Project Financing facility with Macquarie Bank Limited (MBL). Commercially the contract is viewed by management as an additional obligation in respect of obtaining financial resources. Accordingly, the repurchase of a portion of the forward contracts was presented as a financing cash flow in the 2011 financial statements because, in the directors' opinion, this ultimately represented a change in the composition of the Group's total obligations to MBL.

Following discussions with the FRC's Conduct Committee it has been concluded that the term "borrowings" in IAS 7 should not encompass the hedge obligations to Macquarie because, as a result of the "own use" exemption under IAS39.5 (note 26), the fair value of the forward contract obligation to Macquarie is not recognised in the statement of financial position, with the result that the payment made should have been presented as an operating cash flow in the 2011 consolidated statement of cash flows. Consequently, the 2011 comparatives in the 2012 cash flow statement have been restated to reflect the required presentational change.

The effect of the restatement is a reclassification of US$39.8 million cash outflow from Financing activities to Operating activities in the comparative period. As a result, 2011 Net cash generated by operating activities (continuing operations) has reduced from US$41.4 million to US$1.7 million. Correspondingly, Net cash used in financing activities (continuing operations) has decreased from an outflow of US$100.6 million to an outflow of US$60.8 million.

2. Basis of preparation and adoption of International Financial Reporting Standards (IFRS)

The Group financial statements consolidate those of the Company and of its subsidiary undertakings; the Group financial statements have been prepared in accordance with IFRS and International Financial Reporting Interpretations Committee (IFRIC) interpretations as adopted by the European Union at 31 December 2012.

Audit Information

The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in Section 435 of the Companies Act 2006. The consolidated statement of financial position at 31 December 2012 and the consolidated income statement, consolidated cash flow statement and other primary statements and associated notes (excluding note 36) for the year then ended have been extracted from the Group's statutory financial statements for the year ended 31 December 2012 (which have not yet been filed with Companies House) upon which the auditor's opinion is unqualified, except for an emphasis of matter paragraph regarding going concern which is further explained below, and does not include any statement under Section 498 (2) or (3) of the Companies Act 2006. The audited financial statements for the year ended 31 December 2011 have been filed with Companies House. The auditor's opinion was unqualified, and did not include any statement under Section 498 (2) or (3) of the Companies Act 2006.

Going concern

At 31 December 2012, the Group held cash and cash equivalents of US$54.9 million, of which US$46.9 million was held by Société des Mines de Bélahouro SA ("SMB"), the operating entity which owns the Inata gold mine. US$38.4 million of SMB's cash balance was restricted for use by SMB, of which US$37.0 million represents a minimum balance held with Macquarie Bank Limited ("MBL") and US$1.4 million (2011: $0.6 million) relates to amounts held on restricted deposit in Burkina Faso for the purposes of environmental rehabilitation work, as required by the terms of the Inata mining licence. The transfer out of SMB of funds above the restricted cash balance remains subject to the approval of Macquarie Bank Limited, under the terms of the facility agreement governing the loan and hedge obligations.

At 31 December 2012 Avocet had US$8.0 million of funds outside SMB, which was insufficient to continue corporate and exploration activities as currently planned, without some funds being transferred from SMB.

The Company will announce that the Ore Reserve at Inata has reduced to 0.92 million ounces of gold from the previous Ore Reserve of 1.85 million ounces.

The new Ore Reserve and the new Life of Mine Plan ("LoMP") no longer provide adequate coverage of SMB's current hedge position to the satisfaction of MBL. Avocet has therefore been in negotiations with MBL to restructure the hedge and debt positions to reflect this shorter mine life, however while negotiations are in progress, restrictions imposed by MBL on surplus SMB cash mean that Avocet is unable to access cash from SMB that it previously expected to be available for use elsewhere in the Group.

On 14 February 2013 the Company provided an update to the market regarding discussions with MBL with regard to the hedge agreements at Inata, and the restricted cash at SMB.

Since this time, MBL and the Company have held a number of discussions regarding options to ensure adequate liquidity for the Company and satisfactory adjustments to the hedge arrangements.

The directors have concluded that the combination of these circumstances represents a material uncertainty that may cast significant doubt upon the Company's ability to continue as a going concern and that, therefore, the possibility exists that the Company could be unable to continue to fund its corporate and exploration activities as currently envisaged. Nevertheless, after making enquiries and considering the uncertainties described above, the directors have a reasonable expectation that the Company's financing plans will yield sufficient funding to remain a going concern. For these reasons, they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

As negotiations evolve with financiers and advisers, the Company will make announcements as appropriate in due course. 

3. Judgements in applying accounting policies and sources of estimation uncertainty

Certain amounts included in the financial statements involve the use of judgement and/or estimation. These are based on management's best knowledge of the relevant facts and circumstances, having regard to prior experience. However, judgements and estimations regarding the future are a key source of uncertainty and actual results may differ from the amounts included in the financial statements. Information about judgements and estimation is contained in the accounting policies and/or other notes to the financial statements. The key areas are summarised below:

Mineral Resources and Ore Reserves

Quantification of Mineral Resources requires a judgement on the reasonable prospects for eventual economic extraction. Quantification of Ore Reserves requires a judgement on whether Mineral Resources are economically mineable. These judgements are based on assessment of mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors involved, in accordance with the Canadian National Instrument NI 43-101 and the Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, Institute of Geoscientists and Minerals Council of Australia ('JORC code'). These factors are a source of uncertainty and changes could result in an increase or decrease in Mineral Resources and Ore Reserves. This would in turn affect certain amounts in the financial statements such as depreciation and closure provisions, which are calculated on projected life of mine figures, and carrying values of mining property and plant which are tested for impairment by reference to future cash flows based on LoMP Ore Reserves. Certain relevant judgements are discussed in note 16 in respect of the impairment of mining assets.

Deferred exploration expenditure

The recoverability of exploration expenditure capitalised within intangible assets is assessed based on a judgement about the feasibility of the project and estimates of its future cash flows. Future gold prices, operating costs, capital expenditure and production are sources of estimation uncertainty. The Group periodically makes judgements as to whether its deferred exploration expenditure may have been impaired, based on internal and external indicators. Any impairment is based on estimates of future cash flows. In particular, the Group recognises that, if decides, or is compelled due to insufficient funding, to withdraw from exploration activity at a project, then the Company would need to assess whether an impairment is necessary based on the likely sale value of the property.

Carrying values of property, plant and equipment

The Group periodically makes judgements as to whether its property, plant and equipment may have been impaired, based on internal and external indicators. A detailed impairment assessment was undertaken at 31 December 2012, which was triggered by a reduction in the Inata Ore Reserve as a result of metallurgical test work and increasing costs.

The carrying value of assets was compared to the recoverable amount. The recoverable amount used in the impairment review was calculated on the Value in Use (VIU) basis, being the discounted cash flow of the Cash Generating Unit (CGU). A CGU is the smallest group of assets that generate cash inflows from continuing use. The Inata Mine has been identified as the CGU for the purposes of impairment testing.

Key assumptions used in the calculation of VIU involve judgment and estimation uncertainty, including: assessment of recoverable Mineral Resources and Ore Reserves, gold prices, operating costs, capital expenditure, and discount rates. Further information is provided on key assumptions, and the judgments made, in note 16.

Deferred stripping costs

The recoverability of deferred stripping costs is assessed based on the projected future cash flows of the project. The Company does not anticipate deferring any stripping costs from its current operations.

Functional currencies

Identification of functional currencies requires a judgement as to the currency of the primary economic environment in which the companies of the Group operate. This is based on analysis of the economic environments and cash flows of the subsidiaries of the Group.

Taxation and deferred tax

Within the Group there are entities with significant losses available to be carried forward against future taxable profits. The quantum of the losses or available deductions for which no deferred tax asset is recognised is set out in note 13. Estimates of future profitability are required when assessing whether a deferred tax asset may be recognised. The entities in which the losses and available deductions have arisen are principally non-revenue generating exploration companies, and corporate management functions. It is not expected that taxable profits will be generated in these entities in the foreseeable future, and therefore the directors do not consider it appropriate to recognise a deferred tax asset. Judgements made in estimating future profitability include forecasts of cashflows, and the timing of inter group recharges which are within the control of management.

In November 2012, following the completion of a tax audit in Burkina Faso covering the years 2009 to 2011, the Company received an assessment indicating tax payments were due in the amount of US$25.5 million. The Company has rejected this assessment on the basis that the assumptions on which the calculations have been based were inaccurate and fundamentally flawed. On the basis that management is confident in the robustness of their position, after taking advice from its professional tax advisers in Burkina Faso, no provision has been made in respect of this assessment which the Company is in the process of challenging.

Inventory valuations

Valuations of gold in stockpiles and in circuit require estimations of the amount of gold contained in, and recovery rates from, the various work in progress. These estimations are based on analysis of samples and prior experience. A judgement is also required about when stockpiles will be used and what gold price should be applied in calculating net realisable value; these are both sources of uncertainty.

Restoration, rehabilitation and environmental provisions

Such provisions require a judgement on likely future obligations, based on assessment of technical, legal and economic factors. The ultimate cost of environmental remediation is uncertain and cost estimates can vary in response to many factors, including changes to the relevant legal requirements, the emergence of new restoration techniques and changes to the life of mine.

Provisions and contingent liabilities

Judgements are made as to whether a past event has led to a liability that should be recognised in the financial statements or disclosed as a contingent liability. Quantifying any such liability often involves judgements and estimations. These judgements are based on a number of factors including the nature of the claim or dispute, the legal process and potential amount payable, legal advice received, previous experience and the probability of a loss being realised. Each of these factors is a source of estimation uncertainty.

Recoverability of VAT

Recoverability of the VAT receivable in Burkina Faso is assessed based on a judgement of the validity of the claim and, following review by management, the carrying value in the financial statements is considered to be fully recoverable.

Forward contracts for sale of non-financial items - own use exemption

The Group has entered into forward contracts for the delivery of gold at a fixed amount and price per quarter. The forward contracts are deemed to be outside of the scope of IAS 39, as exempted by IAS 39.5, on the basis that they are for own use, and gold produced will be physically delivered to meet the contractual requirement in future periods. Following the disposal on 24 June 2011 of the Company's two producing mines in South East Asia, the forward contracts were restructured to buy back approximately 20% of the forward contracts and extend the delivery profile of the remaining ounces outstanding, with the result that the hedged proportion of production from the Company's one remaining producing mine, Inata, was reduced from approximately 60% to approximately 20%. Management has reviewed the transaction and concluded that the contract remains outside the scope of IAS 39 on the basis that a one-off settlement, in response to the changing operational profile of the Group following the disposal of South East Asian assets, does not represent a practice of net settlement such that the contracts should be treated as financial instruments under IAS 39.

The original forward contract arrangement comprised a single contract containing a series of delivery obligations and corresponding rights to receive cash. As part of the restructure of the forward contracts, an element was settled for cash, however it is considered that this does not preclude the residual contract deliveries from being eligible for the own use exemption under IAS 39.5. It has been judged that the legal form of there being a single contract rather than the arrangement being structured as multiple contracts should not affect the accounting conclusion.

4. Accounting policies

Consolidation

The Group financial statements consolidate the results of the Company and its subsidiary undertakings using the acquisition accounting method. On acquisition of a subsidiary, all of the subsidiary's identifiable assets and liabilities which exist at the date of acquisition are recorded at their fair values reflecting their condition on that date. The results of subsidiary undertakings acquired are included from the date of acquisition. In the event of the sale of a subsidiary, the subsidiary results are consolidated up to the date of completion of the sale.

The cost of an acquisition is measured by the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition where the acquisition completed prior to accounting periods commencing 1 January 2010. For any acquisitions occurring after 1 January 2010, the costs of acquisition will be recognised in the income statement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired the difference is recognised directly in the income statement as a gain. Goodwill acquired at the time of the acquisition is reviewed annually to assess whether impairment of the carrying value is required.

Exchange differences arising from the translation of the net investment in foreign entities are taken to equity. All other transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated, unless the unrealised loss provides evidence of an impairment of the asset transferred.

Exceptional items

Exceptional items are those significant items which are separately disclosed by virtue of their size or incidence to enable a full understanding of the Group's financial performance. Transactions which may give rise to exceptional items include the impairment of property, plant and equipment and deferred exploration expenditure, the cost of restructuring forward contracts, and material profit or losses on disposals.

Segmental reporting

An operating segment is a component of the Group engaged in exploration or production activity that is regularly reviewed by the Chief Operating Decision Maker (CODM) for the purposes of allocating resources and assessing financial performance. The CODM is considered to be the Board of Directors and Executive Committee. The Group's operating segments are geographic by location of the Group's assets, as this is how they are reviewed for performance and resource allocation. In the prior year, this segmental information was presented for the UK and West Africa as continuing operations, and Malaysia and Indonesia combined as discontinued operations. The disposal of Avocet's assets in South East Asia enabled the strategic refocus of the Group, with the Inata operating mine and exploration projects in West Africa being the core focus. To reflect this change, management has reassessed the segments which should be reported under IFRS 8. In this report, operating segments for continuing operations are determined as the UK, West Africa mining operations (which includes exploration activity within the Inata Mine licence area), and West Africa exploration (which includes exploration projects in Burkina Faso, Guinea and Mali). Exploration projects are aggregated into the single reportable segment because the projects are managed by a single operating division and reported to the CODM on this basis. Discontinued operations for 2012 represent the disposal of one of the remaining assets in South East Asia that was subject to the agreement with J&Partners L.P. (note 6). Comparative periods have been represented on this basis to allow for a consistent comparison.

The Group does not report geographic segments by location of customer as its business is the production of gold which is traded as a commodity on a worldwide basis. Sales are made into the bullion market, where the location of the ultimate customer is unknown. During the year, 33,000 ounces of gold were sold into forward contracts with Macquarie Bank Limited, an international bank with a stock exchange listing in Australia.

Foreign currency translation

1. Functional and presentational currency

The functional currency of the entities within the Group is the US dollar, as the currency which most affects each company's revenue, costs and financing. The Group's presentation currency is also the US dollar.

2. Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation at reporting period end exchange rates of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement.

Revenue

Revenue is the fair value of the consideration receivable by the Group for the sale of gold bullion. Currently, all revenue is derived from the sale of gold produced by the Inata Gold Mine. Gold doré is produce at Inata and shipped to South Africa for refining into gold bullion, being gold of 99.99% purity. Revenue is recognised when the risks and rewards of ownership pass to the purchaser, which occurs when confirmation is received of the conclusion of a trading instruction to sell gold into the bullion market at spot prices or to sell at pre-determined prices as part of a forward contract.

Intangible assets

All directly attributable costs associated with mineral exploration including those incurred through joint venture projects are capitalised within non-current intangible assets pending determination of the project's feasibility. If an exploration project is deemed to be economically viable based on feasibility studies, the related expenditures are transferred to property, plant and equipment and amortised over the life of the mine on a unit of production basis. Where a project is abandoned or is considered to be no longer economically viable, the related costs are written off. The cost of ancillary services supporting the exploration activities are expensed when incurred.

Property, plant and equipment

Mining property and plant consists of mine development costs (including mineral properties, buildings, infrastructure, and an estimate of mine closure costs to be incurred at the end of the mine life), plant and machinery, and vehicles, fixtures and equipment.

Mining property and plant is initially recognised at the cost of acquisition, and subsequently stated at cost less accumulated depreciation and any impairment. The cost of acquisition is the purchase price and any directly attributable costs of acquisition or construction required to bring the asset to the location and condition necessary for the asset to be capable of operating in the manner intended by management.

Mining property and plant is depreciated over the shorter of the estimated useful life of the asset using the straight line method, or the life of mine using the unit of production method and life of mine (LOM) reserve ounces. Residual values and useful lives are reviewed on an annual basis and changes are accounted for over the remaining lives.

Exploration property, plant and equipment comprises vehicles and camp buildings specifically used in the Group's exploration programmes in the West Africa Exploration operating segment. Exploration property and plant is depreciated over 3-7 years on a straight line basis.

The following depreciation methods and asset life estimates are used for the components of mining property and plant:

Treasury shares

Treasury shares are held at cost, and are deducted from equity. Any gain or loss on the sale or transfer of treasury shares is recognised in the statement of changes in equity.

Own shares

Own shares are held in the EBT and SIP, and are recorded at cost, and deducted from equity. Any gain or loss on the sale or transfer of these shares is recognised in the statement of changes in equity.

Impairment of intangible assets and property, plant and equipment

The Group carries out a review at each balance sheet date to determine whether there is any indication that the above assets are impaired. Assets are assessed for indicators of impairment (and subsequently tested for impairment if an indicator exists) at the level of a CGU. A CGU unit is the smallest group of assets that generate cash inflows from continuing use. If an indication of impairment exists, the recoverable amount of the asset or CGU is estimated based on future cash flows, in order to determine the extent of impairment. Future cashflows are based on estimates of the life of mine Ore Reserves together with estimates of future gold prices and cash costs. Deferred exploration costs are tested for impairment at least annually.

The recoverable amount is the higher of fair value less cost to sell and value in use. An impairment is recognised immediately as an expense. Where there is a reversal of the conditions leading to an impairment, the impairment is reversed as income through the income statement.

Inventories

Inventories comprise consumables, work in progress and finished goods. Consumables are recognised at average cost and are subsequently held at the lower of cost less a provision for obsolescence, and net realisable value. Work in progress consists of ore in stockpiles and gold in process, and is valued at the lower of average production cost and net realisable value. Finished goods represent gold doré that is undergoing refining processes, or gold bullion awaiting sale. Finished goods are valued at the lower of average production cost and net realisable value. Net realisable value is the estimated selling price less the estimated cost of completion and any applicable selling expenses.

Financial assets

Financial assets are classified into the following specific categories which determine the basis of their carrying value in the statement of financial position and how changes in their fair value are accounted for: at fair value through profit and loss, available for sale financial assets, and loans and receivables. Financial assets are assigned to their different categories by management on initial recognition, depending on the purpose for which the investment was acquired.

Available for sale financial assets are included within non-current assets unless designated as held for sale in which case they are included within current assets. They are carried at fair value at inception and changes to the fair value are recognised in other comprehensive income; when sold the accumulated fair value adjustments recognised in other comprehensive income are reclassified through the income statement.

Trade and other receivables are measured on initial recognition at fair value and subsequently at amortised cost using the effective interest rates.

De-recognition of financial instruments occurs when the rights to receive cash flows from the investments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred. An assessment for impairment is undertaken at least annually at each balance sheet date whether or not there is objective evidence that a financial asset or a group of financial assets is impaired.

Cash and cash equivalents

Cash and cash equivalents are defined as cash on hand, demand deposits and short term highly liquid investments and are measured at cost which is deemed to be fair value as they have short term maturities.

Leases

Finance leases are recognised as those leases that transfer substantially all the risks and rewards of ownership. Assets held under finance leases are capitalised and the outstanding future lease obligations are shown in liabilities at the fair value of the lease, or if lower at the present value of the lease payments. They are depreciated over the term of the lease or their useful economic lives, whichever is the shorter. The interest element (finance charge) of lease payments is charged to the income statement on a constant basis over the period of the lease.

All other leases are regarded as operating leases and the payments made under them are charged to the income statement in the period on a straight line basis. The Company does not act as a lessor.

Financial liabilities

Financial liabilities include bank loans and overdrafts and trade and other payables. In the statement of financial position these items are included within Non-current liabilities and Current liabilities. Financial liabilities are recognised when the Group becomes a party to the contractual agreements giving rise to the liability. Interest related charges are recognised as an expense in Finance costs in the income statement unless they meet the criteria of being attributable to the funding of construction of a qualifying asset, in which case the finance costs are capitalised.

Trade and other payables and loans are recognised initially at their fair value and subsequently measured at amortised costs using the effective interest rate, less settlement payments.

At 30 June 2011, the Company had sold forward 299,401 ounces of gold. During July 2011, the Company bought back 58,432 ounces which reduced the hedged proportion of Inata's production. The remaining forward sales are deemed to be outside the scope of IAS 39 on the basis that they are for own use, and gold produced will be delivered into these contracts in future periods. Further information is provided in note 26.

Borrowing costs

Borrowing costs that are incurred in respect of the construction of a qualifying asset are capitalised where the construction of an asset takes a substantial period of time to be prepared for use. Other borrowing costs are expensed in the period in which they are incurred and reported in finance costs.

Income taxes

Current income tax liabilities comprise those obligations to fiscal authorities in the countries in which the Group carries out mining operations and where it generates its profits. They are calculated according to the tax rates and tax laws applicable to the financial period and the country to which they relate. All changes to current tax assets and liabilities are recognised as a component of the tax charge in the income statement.

Deferred income taxes are calculated using the liability method on temporary differences. This involves the comparison of the carrying amount of assets and liabilities in the consolidated financial statements with their respective tax bases. However, deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related transaction is a business combination or affects taxes or accounting profit.

Deferred tax liabilities are provided for in full; deferred tax assets are recognised when there is sufficient probability of utilisation. Deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date.

Pension obligations

The only defined benefit pension scheme operated by the Group relates to a former US subsidiary undertaking which is no longer part of the Group. Accordingly full provision has been made for outstanding post retirement benefits. The liability recognised in the statement of financial position is the present value of the defined benefit obligation (DBO) at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. The DBO is calculated annually by independent actuaries using the projected unit credit method or an accepted equivalent in the USA, and independent assumptions. The present value of the DBO is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability.

Actuarial gains and losses are not recognised as an expense unless they exceed 10% of the obligation. The amount exceeding this 10% corridor is charged or credited to the income statement. Actuarial gains and losses within 10% of the obligation are disclosed separately.

Provisions, contingent liabilities and contingent assets

Other provisions are recognised when the present obligations arising from legal or constructive commitment, resulting from past events, will probably lead to an outflow of economic resources from the Group which can be estimated reliably. Provisions are measured at the present value of the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the balance sheet date. All provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimates.

Restoration, rehabilitation and environmental costs

An obligation to incur restoration, rehabilitation and environmental costs arises when environmental disturbance is caused by the development or ongoing production of a mining property. Such costs arising from the decommissioning of plant and other site preparation work, discounted to their net present values, are provided for in full as soon as the obligation to incur such costs arises and can be quantified. On recognition of a full provision, an addition is made to property, plant and equipment of the same amount; this addition is then charged against profits on a unit of production basis over the life of the mine. Closure provisions are updated annually for changes in cost estimates as well as for changes to life of mine Ore Reserves, with the resulting adjustments made to both the provision balance and the net book value of the associated non-current asset.

Share based payments

The Group operates equity-settled share based compensation plans for remuneration of its employees, which may be settled in cash under certain circumstances.

All employee services received in exchange for the grant of any share based compensation are measured at their fair values. These are indirectly determined by reference to the share based award. Their value is appraised at the grant date and excludes the impact of any non-market vesting conditions.

All share based compensation is ultimately recognised as an expense in profit and loss with a corresponding credit to retained earnings, net of deferred tax where applicable. Where share based compensation is to be cash settled, such as certain share based bonus awards, the corresponding credit is made to accruals or cash. The Group has certain share option schemes that may be settled in cash at the absolute discretion of the Board. Currently, it is the expectation that the options will be settled in shares, when exercised.

If any equity-settled share based awards are ultimately settled in cash, then the amount of payment equal to the fair value of the equity instruments that would otherwise have been issued is accounted for as a repurchase of an equity interest and is deducted from equity. Any excess over this amount is recognised as an expense.

If vesting periods or other 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. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from previous estimates. No adjustment to the expense recognised in prior periods is made if fewer share options are ultimately exercised than originally granted.

Upon exercise of share options, the proceeds received, net of any directly attributable transaction costs, up to the nominal value of the shares issued, are allocated to share capital with any excess being recorded in share premium.

Non-current assets and liabilities classified as held for sale and discontinued operations

A discontinued operation is a component of the entity that either has been disposed of, or is classified as held for sale, and represents a separate major line of business or geographical area of operations; is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or is a subsidiary acquired exclusively with a view to resale.

The results from discontinued operations, including re-classification of prior year results, are presented separately in the income statement.

When the Group intends to sell a non-current asset or a group of assets (a disposal group), and if sale within 12 months is judged to be highly probable, the assets of the disposal group are classified as held for sale and presented separately in the statement of financial position. Liabilities are classified as held for sale and presented as such in the statement of financial position if they are directly associated with a disposal group.

Assets classified as held for sale are measured at the lower of their carrying amounts immediately prior to their classification as held for sale and their fair value less costs to sell. However, some held for sale assets such as financial assets or deferred tax assets, continue to be measured in accordance with the Group's accounting policy for those assets. No assets classified as held for sale are subject to depreciation or amortisation subsequent to their classification as held for sale.

5. Segmental reporting

(a) Expensed exploration and other cost of sales represents costs not directly related to production, including exploration expenditure not capitalised.

(b) Includes amounts in respect of the amortisation of closure provision at Inata.

(c) EBITDA represents earnings before exceptional items, finance items, tax, depreciation and amortisation.

5. Segmental reporting continued

(d) Includes impairments, depreciation and amortisation, share based payments, movement in provisions, taxation in the income statement and non-operating items in the income statement.

(e) Other cash movements include deferred consideration paid, cash flows from financing activities, and exchange losses.

5. Segmental reporting continued