Petro Matad Regulatory News (MATD)

30 June 2014

Petro Matad Limited

Preliminary results for year ended 31 December 2013

Petro Matad Limited ("Petro Matad" or "the Company"), the AIM quoted Mongolian oil explorer, announces its audited results for the year ended 31 December 2013.

Operational Highlights

· Drill ready prospects identified following acquisition of 220 kms of new 2D seismic.

· In Block IV, seismic confirmed a three way dip closure on the downthrown side of a major strike slip fault with possible recoverable reserves of 60 to 100 million barrels oil.

· In Block V, seismic confirmed two new fault traps in the deepest part of the sub-basin. Possible recoverable reserves of 22 to 24 million barrels oil.

· Discussions with potential partners continue. Early drilling planned if farmout concluded.

About Petro Matad Limited

Petro Matad is the parent company of a group focussed on oil exploration, as well as future development and production in Mongolia. The Group holds the sole operatorship of three Production Sharing Contracts with the Government of Mongolia. Block XX has an area of 10,340km² in the far eastern part of the country. Blocks, IV and V are located in central Mongolia. Block IV covers approximately 29,000km² and Block V approximately 21,150km².

Petro Matad Limited is incorporated in the Isle of Man under company number 1483V. Its registered office is at Victory House, Prospect Hill, Douglas, Isle of Man, IM1 1EQ.

Further Information:

Petro Matad Limited

George Watkins, Chairman

+976 11 331099

NOMAD and Broker

Westhouse Securities Limited

Richard Baty

+44 (0)20 7601 6100

Directors' Statement

2013 has been another challenging year for Petro Matad. As we reported in last year's annual statement, the first half of 2013 was taken up with major fundraising and farmout initiatives. The second half of the year has focussed on taking forward the technical evaluation of the Company's acreage.

While the fundraising story that we had to tell a year ago was generally well received and did indeed bring forward some offers of funding, these were not considered to be a sufficient quantum to proceed. However, the feedback was extremely valuable in highlighting the principal investor concern that Petro Matad did not have a pipeline of drill ready prospects to provide momentum and maintain investor interest.

Therefore, one of our objectives for 2013 has been to remedy this situation and confirm some prospects that are ready for the drill. This was not as simple a task as it should have been because, although Petro Matad has some 60,000 square kilometres under licence, in the first years of those licences through 2012, Petro Matad focussed its exploration efforts in one corner of Block XX and only pursued limited exploration elsewhere. This resulted in seismic coverage over most of Blocks IV and V and the southern half of Block XX being extremely sparse.

In 2013, when we were seeking areas over which to shoot detailed seismic to firm up drilling prospects, we found that this lack of regional seismic meant that we had few areas to choose from. In the event, we took a calculated risk to shoot additional seismic over a lead that was seen on only one line in Block IV. The 65 kms of new seismic that we acquired in Block IV confirmed a three way dip closure on the downthrown side of a major strike slip fault with possible recoverable reserves of 60 to 100 million barrels oil. A smaller, but a well imaged, more robust four way dip closure with possible reserves of about 6 million barrels can also be mapped within this overall fault prospect.

In Block V, we had already identified a large faulted anticlinal area on existing seismic so this feature became the focus of our attention. Unfortunately, the 155 kilometres of new seismic across this feature does not confirm closure within the basin but shows the anticline continuing to rise towards the northeast boundary fault that forms the basin margin. There is a closure against this basin margin but the relatively shallow depth of this closure makes it relatively high risk.

However, this 2013 seismic does confirm two new fault traps in the deepest part of the sub-basin in Block V. One is a tilted fault block, interpreted as a rotated (low angle) normal fault. The second is a closure in the footwall of a reverse fault. Both these leads have robust closures. They also lie within the present-day Syn-Rift source kitchen so migration and timing are considered low risk. Although both prospects are relatively modest with possible recoverable reserves of 22 to 24 million barrels oil, either location would be an excellent candidate for testing the potential of this Tugrug sub-basin in terms of reservoir quality and source potential.

It is worth noting that there are no oil exploration wells and only limited seismic coverage in Central - Western Mongolia so these are the first drillable prospects identified in this frontier area. Both can be considered as locations for possible basin opener wells that will advance significantly knowledge of and confidence in the hydrocarbon potential of the area.

Further details on these prospects can be found in the Investor Section of the Company's website.

The fact that additional seismic was able to translate a one line lead into a drillable prospect gives us confidence that there are many other similar prospect areas within the Company's acreage. However, our licence area is so extensive that to acquire sufficient seismic coverage would be very expensive. We are therefore looking at other technical alternatives to high grade our acreage. One such technique is airborne full tensor gravity gradiometry (FTG) which has been used successfully in other onshore rift basin areas, such as Africa.

The objectives for a combined FTG and high resolution aeromagnetic (HRAM) survey would be to produce a preliminary map of the subsurface structures, basement architecture and sediment thickness in the frontier areas of Blocks IV, V and XX where there is currently little or no seismic. As this is an airborne survey it is able to cover a much larger area faster and more cheaply than conventional seismic. The results of the FTG survey can then be used to guide the structural interpretation where there is limited seismic coverage and target where best to acquire follow-on seismic data for prospect definition.

In parallel with this technical activity, we have been seeking a farm-in partner to fund the next phase of exploration in these licences. This has been a very challenging endeavour as we have found that most companies had very limited knowledge of the geology of Mongolia. Some did not initially appreciate the size of the acreage involved and the scale of the opportunity that this represents and how the approach to exploration has to reflect this size and scale. For example, at approximately 60,000 sq kms, the rift basin acreage that Petro Matad has under licence in Mongolia is comparable in size with the entire licence area held by Tullow Oil across the Kenya rift basins.

Potential partners also had concerns about the Mongolian investment climate and the proposal to rewrite the Petroleum Law. All this at a time when the economic climate globally has been leading exploration and production companies either to sell poor performing assets or to choose to focus their investment on existing production or development of already discovered reserves rather than on frontier exploration.

We found that it was not enough to present what we knew structurally and stratigraphically about our three licence areas. We had to show Mongolian hydrocarbon potential in a regional context and by analogy to the producing basins across the border in China. In particular, companies have required detailed reservoir and source rock data as well as evidence of specific drillable prospects.

This is why, in late 2013, in addition to the detailed seismic over lead areas in Blocks IV and V, we also conducted field work (the third such campaign that Petro Matad has conducted) to collect outcrop rock samples for analysis of both source rock and reservoir quality.

We also changed our approach to the presentation of these data. At the Appex conference in London in March 2014, we gave a presentation that promoted the overall hydrocarbon potential in Mongolia rather than simply talking about Petro Matad's acreage. This proved worthwhile in that it has resulted in a number of new companies requesting access to the Petro Matad data room. It has also rekindled technical interest in companies with whom we have been talking previously.

In addition to the technical presentations, we have had to re-assure companies about the investment climate in Mongolia. Adoption by the Mongolian government of the new Law on Investments in November 2013 has helped as it removed the limitations imposed previously by the law on foreign investments. We have also been able to point to the new draft Petroleum Law that includes provision for extension of the initial licence term from 5 to 8 years as recognition by the Mongolian Government of the size and scale of opportunity, the general lack of regional seismic and the longer time frame that this implies for the exploration effort.

At the time of writing, the new Petroleum Law is still going through the Parliamentary process and is expected to be passed into law shortly. This will certainly be beneficial to Mongolia and to Petro Matad as companies have been clear in their statements to us that they see adoption of an acceptable Petroleum Law as an essential pre-condition to any decision to invest in Mongolia.

Throughout these activities, Petro Matad is fortunate to have a supportive shareholder in Petrovis Matad Inc. who agreed to an equity injection of $5 million into the Company in June 2013. It was this injection of new funds that allowed the Company to undertake seismic and geological field operations during the 2013 field season, and to be able to pursue a farmout with vigour and enthusiasm. Although several companies have shown a high level of interest, to date, no agreements have been reached. The Board recognises that finalising a farmout agreement could yet take some time.

With this is mind, the Directors of Petro Matad have agreed a number of measures to preserve cash resources and maximise the funds available for these operational and farmout activities. In particular, the Non-Executive Directors have agreed unanimously that they will forgo their usual Director fees for a period of six months and will receive conditional share awards in lieu of a cash fee.

In addition, the Executive Directors and certain employees at their own volition have also opted to trade a portion of their salary to participate in the same conditional share award programme. The European Bank for Reconstruction and Development (EBRD) representative Director, Mary Ellen Collins, will be forgoing fees even though no conditional share awards are being issued to her or the EBRD.

The conditional share awards have been issued under the Company's existing long term equity plan. The conditional share awards will vest on 1 October 2014 and participants have a maximum of one year to exercise these awards for an exercise price of 1 US dollar cent per Petro Matad ordinary share. An aggregate of 5,229,255 conditional share awards have been awarded, of which 3,675,536 conditional share awards have been issued to the Company's Directors.

The Petro Matad Board has also implemented a number of structural changes to the operational structure of the Company, with resources being focused on a core team to support the technical studies associated with the farm-out effort, maintain relations with government and maintain the financial and administrative governance of the Company.

Although there can be no guarantee that a farm-out deal will be forthcoming, the Board believes that these actions display significant confidence in the Company's prospects and its future.

In concluding, the Board would like to express their great appreciation for our staff, both technical and non-technical, who have worked with enthusiasm and diligence through what continues to be an uncertain time for the Company. There is no doubt that, without their efforts, the Company would not have been able to make the progress that it has over the last year. The Board would like to express a special thanks to Ridvan Karpuz who was Petro Matad's Exploration Director from August 2012 through December 2013. It is Ridvan's technical capability combined with his unbounded energy, enthusiasm and leadership that has enabled Petro Matad to put together the detailed and comprehensive exploration understanding that has impressed potential farmin partners. We are fortunate that Ridvan continues to be associated with the Company as a Non-Executive Director.

Statement of Profit or Loss and Other Comprehensive Income

For the year ended 31 December 2013

Statement of Financial Position

As at 31 December 2013

Statement of Cash Flows

For the year ended 31 December 2013

Statement of Changes in Equity

For the year ended 31 December 2013

Notes to the Consolidated Financial Statements

For the year ended 31 December 2013

1. Corporate information

The financial report of Petro Matad Limited (the "Company") for the year ended 31 December 2013 was authorised for issue in accordance with a resolution of the Directors on 26 June 2014.

This financial report presents the consolidated results and financial position of Petro Matad Limited and its subsidiaries (together, the "Group").

Petro Matad Limited, a company incorporated in the Isle of Man on 30 August 2007 has five wholly owned subsidiaries, including Capcorp Mongolia LLC and Petro Matad LLC (both incorporated in Mongolia), Central Asian Petroleum Corporation Limited ("Capcorp") and Petromatad Invest Limited (both incorporated in the Cayman Islands), and Petro Matad Services Limited (incorporated in the Isle of Man). Its majority shareholder is Petrovis Matad Inc.

Petrovis Matad Inc is a major shareholder of the Company, currently holding approximately 33% of the shareholding.

2. Summary of significant accounting policies

(a) Basis of preparation

This financial report complies with International Financial Reporting Standards ("IFRS") as adopted by the European Union as issued by the International Accounting Standards Board ('IASB').

This financial report has been prepared on a historical cost basis, except where otherwise stated. Historical cost is generally based on the fair values of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique.

In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

· Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

· Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

· Level 3 inputs are unobservable inputs for the asset or liability.

For the purpose of preparing the consolidated financial statements, the Company is a for-profit entity.

(b) Statement of compliance

This general purpose financial report has been prepared in accordance with the requirements of all applicable IFRS as adopted by the European Union and Interpretations and other authoritative pronouncements of the IASB.

(c) Going concern note

The consolidated entity has incurred a net loss after income tax of $7.498 million (2012: Loss of $12.155 million) and experienced net cash outflows from operating activities of $6.141 million (2012: $10.991 million) for the year ended 31 December 2013 and has cash and cash equivalents of $3.308 million as at 31 December 2013 (2013: $4.588 million). In addition and as outlined in Note 16(b) the consolidated entity was required to meet minimum exploration commitments in the next 12 months on its PSCs of approximately $22.758 million from 31 December 2013, with further commitments thereafter as disclosed in Note 16(b).

These conditions indicate a material uncertainty that may cast significant doubt over the consolidated entity ability to continue as a going concern.

The ability of the consolidated entity to continue as going concern is principally dependent upon further varying and/or deferring Blocks IV and V commitment expenditure and / or securing a farm-out agreement to fund minimum exploration commitments.

Subsequent to year end, the company has undertaken the following:

i) The company has been in discussions with Petroleum Authority of Mongolia ('PAM') on extending PSC Blocks IV and V initial exploration period. An application for a 2 year extension was made, but PAM will only process this application in the unlikely event that the new Petroleum Law is not passed. The company has received approval from the relevant authorities to defer payments due under the PSCs until July 2015. 

ii) A new Petroleum Law is expected to be formally approved during its second Parliamentary reading, expected in early July 2014. A key provision of the new law is the change in the initial PSC exploration term from five to eight years. PAM has stated in writing that upon passage of the law, Blocks IV and V will be granted an eight year term (extendable by a further 2 two year options), in place of the current five-year initial term. In this event, we expect that the five year expenditure commitment that currently exists will be phased into the new eight year period. A work program rephasing the commitment over an eight year period has been completed and will be presented to PAM upon final passage of the Petroleum law as expected.

iii) The Company has been engaged in discussions for possible farm-out of its interest in these blocks to potential investors, which would take on part or all of the amount of the exploration spend on these blocks as part of their farm-out.

In the absence of a farm-out being concluded, the Company will engage PAM in discussions to reschedule current PSC term expenditure commitments. The Company has not formally initiated such discussions with PAM and does not intend to do so until the results of the current farm-out process are known.

The directors have prepared a cash flow forecast, which indicates that the consolidated entity will have sufficient cash flows to meet their working capital requirements (excluding minimum exploration commitments) for the 12 month period from the date of signing the financial report.

The directors are satisfied that they will achieve resolution of the matters set out above and therefore the going concern basis of preparation is appropriate. The financial report has therefore been prepared on the going concern basis, which assumes continuity of normal business activities and the realisation of assets and the settlement of liabilities in the ordinary course of business.

Should the consolidated entity be unable to achieve the matters referred to above, there is a material uncertainty whether the consolidated entity will be able to continue as a going concern and, therefore, whether it will realise its assets and discharge its liabilities in the normal course of business and at amounts stated in the financial report.

The financial report does not include adjustments relating to the recoverability and classification of recorded asset amounts, or to the amounts and classification of liabilities that might be necessary should the consolidated entity not continue as a going concern.

(d) Application of new and revised Accounting Standards

Standards and Interpretations adopted in the current year

The consolidated entity has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board that are relevant to their operations and are effective for the current financial reporting period beginning 1 January 2013.

The following new and revised Standards and Interpretations have been adopted in the current period:

· IFRS 13 "Fair Value Measurement" ("IFRS 13"). This Standard establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The Standard defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. The scope of IFRS 13 is broad; it applies to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures amount fair value measurements, except in specified circumstances. In general, the disclosure requirements in IFRS 13 are more extensive than those required in the previous standards. For example, quantitative and qualitative disclosures based on the three-level fair value hierarchy currently required for financial instruments only under IFRS 7 "Financial Instruments: Disclosures" are extended by IFRS 13 to cover all assets and liabilities within its scope.

· IAS 19 "Employee Benefits" (as revised in 2011). This Standard changes the accounting for defined benefit plans and termination benefits. The most significant change relates to the accounting for changes in defined benefit obligations and plan assets. The amendments require the recognition of changes in defined benefit obligations and in the fair value of plan assets when they occur, and hence eliminate the 'corridor approach' permitted under the previous version of IAS 19 and accelerate the recognition of past service costs. All actuarial gains and losses are recognised immediately through other comprehensive income in order for the net pension asset or liability recognised in the consolidated statement of financial position to reflect the full value of the plan deficit or surplus. Furthermore, the interest cost and expected return on plan assets used in the previous version of IAS 19 are replaced with 'net interest' amount under IAS 19 (as revised in 2011), which is calculated by applying the discount rate to the net defined benefit liability or asset. Additionally, IAS (as revised in 2011) introduces certain changes in the presentation of the defined benefit cost including more extensive disclosures.

· Amendments to IFRS 7 - 'Disclosures - Offsetting Financial Assets and Financial Liabilities'. The amendments require entities to disclose information about rights to offset and related arrangements for financial instruments under an unenforceable master netting agreement or similar agreement.

· Amendments to IAS 1 "Presentation of Items of Other Comprehensive Income" ("IAS 1"). The amendments introduce new terminology, whose use is not mandatory, for the statement of profit or loss or other comprehensive income. The amendments to IAS 1 require items of other comprehensive income to be grouped into two categories in the other comprehensive income section: (a) items that will not be reclassified subsequently to profit or loss and (b) items that may be reclassified subsequently to profit or loss when specific conditions are met. Income tax on items of other comprehensive income is required to be allocated on the same basis - the amendments do not change the option to present items of other comprehensive income either before tax or net of tax.

· Amendments to IFRS's "Annual Improvements to IFRS's 2009-2011 Cycle"

· IFRIC 20 "Stripping Costs in the Production Phase of a Surface Mine". This standard applies to waste removal costs that are incurred in surface mining activity during the production phase of the mine ('production stripping costs'). Under the Interpretation, the costs from this waste removal activity ('stripping') which provide improved access to ore is recognised as a non-current asset ('stripping activity asset') when certain criteria are met, whereas the costs of normal on-going operational stripping activities are accounted for in accordance with IAS 2 "Inventories". The stripping activity asset is accounted for as an addition to, or as an enhancement of, an existing asset and classified as tangible or intangible according to the nature of the existing asset of which it forms part.

The adoption of these Standards and Interpretations did not have a material effect on the consolidated entity, other than amendments to disclosures in the financial report.

Standards and Interpretations in issue not yet adopted

At the date of authorisation of the financial statements, following International Financial Reporting Standards and Interpretations have recently been issued or amended but are not yet effective and have not been adopted by the consolidated entity for the year ended 31 December 2013:

The impact of these recently issued or amended standards and interpretations are currently being assessed by the consolidated entity and impact is not expected to be material.

(e) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company and its subsidiaries. Control is achieved when the Company:

· has power over the investee;

· is exposed, or has rights, to variable returns from its involvement with the investee; and

· has the ability to use its power to affect its returns.

The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

The financial statements of the subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist.

A change in the ownership interest of a subsidiary that does not result in a loss of control is accounted for as an equity transaction.

All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered.

(f) Foreign currency translation

Functional and presentation currency

Both the functional and presentation currency of Petro Matad Limited is United States Dollars ("USD"). The Cayman Island subsidiaries functional currency is USD. The Mongolian subsidiaries' functional currency is Mongolian Tugrugs ("MNT") which is then translated to the presentation currency, USD.

Transactions and balances

Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the reporting date.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Exchange differences are recognised in profit or loss in the period in which they arise except for:

· Exchange differences on transactions entered into to hedge certain foreign currency risks; and

· Exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognised initially in other comprehensive income and reclassified from equity to profit or loss on disposal or partial disposal on the net investment.

Translation of subsidiaries' functional currency to presentation currency

The results of the Mongolian subsidiaries are translated into USD (presentation currency) as at the date of each transaction. Assets and liabilities are translated at exchange rates prevailing at the reporting date.

Exchange differences resulting from the translation are recognised in other comprehensive income and accumulated in the foreign currency translation reserve in equity.

On consolidation, exchange differences arising from the translation of the net investment in Mongolian subsidiaries are recognised in other comprehensive income and accumulated in the foreign currency translation reserve. If a Mongolian subsidiary was sold, the proportionate share of exchange difference would be transferred out of equity and recognised in profit and loss.

(g) Cash and cash equivalents

Cash and short-term deposits in the statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less.

For the purposes of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts.

(h) Trade and other receivables

Trade receivables, which generally have 30-60 day terms, are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less an allowance for impairment.

Collectability of trade receivables is reviewed on an ongoing basis. An impairment provision is recognised when there is objective evidence that the Group will not be able to collect the receivable. Objective evidence of impairment includes financial difficulties of the debtor, default payments or debts more than 60 days overdue. The amount of the impairment loss is the amount by which the receivable carrying value exceeds the present value of the estimated future cash flows, discounted at the original effective interest rate.

(i) Plant and equipment

Plant and equipment is stated at historical cost less accumulated depreciation and any impairment in value.

Depreciation is calculated on a straight-line basis over the estimated useful life of the asset and is currently estimated to be an average of 6.5 years.

The assets' residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each financial year end.

Derecognition

An item of property, plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal.

(j) Exploration and evaluation expenditure

Exploration and evaluation expenditure incurred by the Group is expensed separately for each area of interest. The Group's policy is to expense all exploration and evaluation costs funded out of its own resources.

(k) Exploration and evaluation assets

Exploration and evaluation assets arising out of business combinations are capitalised as part of deferred exploration and evaluation assets. Subsequent to acquisition exploration expenditure is expensed in accordance with the Company's accounting policy.

(l) Impairment of tangible and intangible assets other than goodwill

At each reporting date, the Group assesses whether there is any indication that tangible and intangible asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount for each asset or cash generating unit to determine the extent of the impairment loss (if any). Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount.

Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset's value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the assets (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of impairment loss is treated as a revaluation increase.

Impairment review for deferred exploration and evaluation assets are carried out on a project-by-project basis, which each project representing a single cash generating unit. An impairment review is undertaken when indicators of impairment arise, typically when one of the following circumstances apply:

· Unexpected geological occurrences that render the resource uneconomic;

· Title to asset is compromised;

· Variations in prices that render the project uneconomic; or

· Variations in the currency of operation.

(m) Trade and other payables

Trade and other payables are initially recognised at fair value. After initial recognition, trade and other payables are carried at amortised cost and due to their short term nature are not discounted. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition.

(n) Interest-bearing loans and borrowings

All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing.

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement.

Gains and losses are recognised in the profit and loss when the liabilities are derecognised.

The component parts of compound financial instruments are classified as financial liabilities and equity in accordance with the substance of the contractual arrangement. The fair value of the liability portion of a convertible note is determined using a market interest rate for an equivalent non-convertible note. The remainder of the proceeds is allocated to the conversion option. If the conversion option meets the definition of an equity instrument, this amount is recognised and included in shareholders' equity and is not subsequently remeasured.

(o) 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 an outflow of resources embodying economic benefits 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 end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. If the effect of the time-value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.

(p) Leases

Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments.

Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit and loss.

Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term.

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same bases as the lease income.

Operating lease payments are recognised as an expense in profit or loss on a straight-line basis over the lease term.

(q) Contributed equity

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares orOptions are shown in equity as a deduction, net of tax, from the proceeds.

(r) Revenue

Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific criteria must also be met before revenue is recognised:

Interest revenue

Revenue is recognised on an accrual basis using the effective interest method.

(s) Share-based payment transactions

The Group provides to certain key management personnel share-based payments, whereby they render services in exchange for rights over shares ("equity-settled transactions").

The cost of these equity-settled transactions is measured by reference to the fair value at the date at which they are granted. The fair value is determined by use of the Black Scholes model.

In determining the fair value of the equity-settled transactions, vesting conditions that are not market conditions are not taken into account.

The cost of equity-settled transactions is recognised as an expense on a straight-line basis, together with a corresponding increase in equity, over the period in which they vest.

The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects:

· the extent to which the vesting period has expired; and

· the number of awards that, in the opinion of the Directors of the Group, will ultimately vest.

This opinion is formed based on the best available information at the reporting date. The impact of the revision of original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to equity reserves.

Where the terms of an equity-settled award are modified, as a minimum, an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification.

Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph.

(t) Income tax

Current tax

Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the year. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by the reporting date.Current tax for current and prior years is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).

Deferred tax

Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities and the corresponding tax base of those items.

In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) that affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the consolidated Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

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

Current and deferred tax for the year

Current and deferred tax is recognised as an expense or income in the profit or loss, except when it relates to items credited or debited directly to equity/other comprehensive income, in which case the deferred tax is also recognised directly in equity/other comprehensive income, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill.

(u) Earnings per share

Basic earnings per share is calculated as net profit attributable to owners of the parent, adjusted to exclude any costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus element.

Diluted earnings per share is calculated as net profit attributable to owners of the parent, adjusted for:

· Costs of servicing equity (other than dividends);

· The after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and

· Other non-discretionary changes in revenues or expenses during the year that would result from the dilution of potential ordinary shares, divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element.

(v) Significant accounting judgments, estimates and assumptions

In applying the Group's accounting policies management continually evaluates judgments, estimates and assumptions based on experience and other factors, including expectations of future events that may have an impact on the Group. All judgments, estimates and assumptions made are believed to be reasonable based on the most current set of circumstances available to management. Actual results may differ from the judgments, estimates and assumptions.

Any revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both the current and future periods.

The following are the most critical estimates and judgments made by management in applying the accounting policies and have the most significant effect on the amounts recognised in the financial statements.

Share-based payments

The Group measures the cost of equity-settled transactions with Directors and employees at the fair value of the equity instruments at the date at which they are granted. The fair value is determined using a Black Scholes model. One of the inputs into the valuation model is volatility of the underlying share price which is estimated on the 4.5 year history of the share price and has been estimated in a range from 78% to 220% depending on the date of the grant.

Recovery of the exploration and evaluation assets

The ultimate recoupment of the exploration and evaluation assets is dependent upon successful development and commercial exploitation or alternatively the sale of the respective areas of interest at an amount at least equal to book value. At the point that it is determined that any capitalised exploration and evaluation expenditure is not recoverable, it is written off.

Going Concern

The Group assesses the going concern of the Group on a regular basis, reviewing their cash flow requirements, commitments and status of PSC requirements and funding arrangements. Refer to Note 2 (c) for further details.

3. Loss per share

The following reflects the loss and share data used in the total operations basic and diluted loss per share computations:

Share Options and Conditional Share Awards could potentially dilute basic loss per share in the future, however they have been excluded from the calculation of diluted loss per share because they are anti-dilutive for both years presented.

4. Commitments and contingencies

(a) Operating lease commitments

Operating leases relate to premises used by the Group in its operations, generally with terms between 2 and 5 years. Some of the operating leases contain options to extend for further periods and an adjustment to bring the lease payments into line with market rates prevailing at that time. The leases do not contain an option to purchase the leased property.

The Group has committed to office, warehouse and camp container leases in Mongolia in the amounts of $122,000 for 2013.

(b) Exploration expenditure commitments

Petromatad Invest Limited and Capcorp have minimum spending obligations, under the terms of their PSCs on Blocks IV, V and XX with PAM.

The amounts set out below do not include general and administrative expenses.

Prior year expenditure over and above minimum exploration work obligations may be used to reduce the following year's obligation. As Block XX expenditure in prior years has significantly exceeded minimum PSC commitments, the Company has the option to reduce its spending in Block XX until financial year 2016.

Due to the prior focus on Block XX, cumulative expenditures on Blocks IV and V are currently below the cumulative minimum PSC commitment by $15.6 million as at 31 December 2013. Arrangements have been concluded with the relevant authorities on 18 June 2014, which has deferred payments that are currently due under the PSCs to July 2015.

The work programme planned for the three blocks in 2014 has been largely defined and is planned to include two new exploration wells, for which drill ready prospects have been identified. However, the full extent of the work programme will be dependent on the level of capital raised and farm-out negotiations which are currently in progress. In event that the Company is unable to complete a successful farm-out or agree a moratorium with PAM for Blocks IV and V, the Company would have an obligation to repay the underspent amount of its minimum obligation commitments at the end of the PSC contract period.

Petromatad Invest Limited and Capcorp can voluntarily relinquish their rights under the PSCs, if the minimum work obligations are completed.

(c) Contingencies

There are no contingencies outstanding at the year end.

5. Events after the reporting date

The Directors of Petro Matad have agreed a number of measures to preserve cash resources. In particular, the Non-Executive Directors have agreed unanimously that for the six month period, April-September 2014, they will forgo their usual director fees and in lieu of a cash fee will receive conditional share awards. In addition, the Executive Directors and certain employees at their own volition have also opted to sacrifice a portion of their salary to participate in the same conditional share award programme.

The conditional share awards have been issued under the Company's existing Group's Plan on 23 April 2014. The conditional share awards will vest on 1 October 2014 and participants have a maximum of one year to exercise these awards for an exercise price of $0.01 per Petro Matad ordinary share. An aggregate of 5,229,255 conditional share awards have been awarded and the table below sets out the 3,675,536 conditional share awards that have been issued to the Company's D irectors.

The Petro Matad Board has also implemented a number of structural changes to the operational structure of the Company, with resources being focused on a core team to support the technical studies associated with the farm-out effort, maintain relations with government and maintain the financial and administrative governance of the Company. The Company continues to enjoy the support of its largest shareholder in these efforts which are expected to result in significant reductions in monthly running costs.

On 18 June 2014, as agreed with the relevant authorities any payments due under the PSC's for Blocks IV and V prior to mid-2015 will not be payable until July 2015.

6. Timetable and distribution of accounts

The Company's statutory annual report and accounts will be dispatched electronically to shareholders today and will be posted to shareholders who have elected to receive hard copies of the Annual Report in the next few days. Additional copies of the Annual Report and Accounts may be requested directly from the Company and an electronic copy will be available on the Company's website www.petromatad.com.

7. Annual General Meeting ("AGM")

A notice of the Company's AGM to be at Petrovis Building, Amar Street 8, Sukhbaatar District, Ulaanbaatar, Mongolia will be distributed in due course.