SRX.L Regulatory News (SRX)

Sierra Rutile Ltd

Financial results for the year ended 31 December 2011

London, UK, 10 May 2012: Sierra Rutile Limited ("Sierra Rutile" or the "Company") is pleased to announce its results for the year ended 31 December 2011 and has today published its Annual Report & Accounts on the Company's website at http://www.sierra-rutile.com/.

Key Highlights:

·; A successful year of transition and progress.

·; Revenue increased 25% to US$55.0 million in the year (2010: US$43.9 million).

·; EBITDA1 of US$0.1 million (2010: US$(0.8) million).

·; 2011 rutile production in line with guidance: 67,916 tonnes (2010: 68,198 tonnes).

·; 2011 ilmenite production of 15,946 tonnes (2010: 18,206).

·; 2011 zircon production above guidance: 8,496 tonnes of zircon concentrate (2010: 7,092 tonnes).

·; Strategic review delivered in 4Q11 on time and on budget, with multiple expansion options identified, including two fast-track projects that are already underway.

In addition, in a separate announcement, Sierra Rutile has today also provided an update on its production expansion plans. Highlights are:

·; Dry mining plant construction commenced. Project progressing on schedule and on budget, first production now expected this year;

·; Significant year-to-date cash generation allows dry mining project to be owner-mined. Project economics significantly superior than using contractors;

·; Mogbwemo tailings project expanded in scope to include additional dry mining processing, prolonging the project's life. Plant tenders currently under review;

·; New dredge feasibility study well underway with target completion date in early Q3 2012;

·; Further optimization potential identified at dry processing plant and other infrastructure will be evaluated in conjunction with increased throughput requirements from expansion projects' production; and

·; Sierra Rutile remains on track to achieve its target of producing rutile at a run rate in excess of 200,000 tonnes during 2014, upon completion of all expansion projects.

Commenting on the results, Sierra Rutile Chief Executive John Sisay said:

"The changes and investments the Company made in 2011 are already paying off. The existing operations are performing well and the expansion projects that have been put in place are on track. As a result, Sierra Rutile is well positioned to capitalise on the strong market opportunity in 2012. As the expansion projects come online in 2013 and beyond, I am confident of the long-term growth prospects for the business."

Commenting on the production expansion plans, he added:

"We remain very much on plan to achieve our medium term growth target of producing 200,000 tonnes of rutile a year. All our projects are well in process and on schedule, and we are particularly pleased that the strong cash generation of the business will enable us to self fund the dry mining project, thereby providing a stronger economic return in the future."

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Chairman's statement

For Sierra Rutile, 2011 was a transitional year marked by significant operational improvements and the completion of a strategic review outlining multiple expansion projects which should deliver exceptional growth over the coming years. As a result of this work, we are already seeing substantially higher production levels in 2012 at substantially higher levels, and as our expansion projects begin to come on-stream, production from our world-class asset is poised to soar.

In addition, the completion of all legacy sales contracts in 2011 has allowed Sierra Rutile to move to month-to-month sales in 2012. This, combined with a very strong rutile market, should ensure that our forecast robust production growth translates into substantial operating cash flow going forward.

These accomplishments were made possible by the dedication and talents of our employees, a number of whom have worked at Sierra Rutile for decades. It is truly fortunate as we move to implement our three expansion projects that we have such a deep and experienced pool of employees upon which to draw.

Of course, the health and safety of our workforce is our foremost consideration. In 2011, we significantly outperformed our target of a 25% reduction in lost time injuries by reducing lost time injuries by 67% compared to 2010. Moving forward, Sierra Rutile will continue to focus on the health and safety of not only our workforce, but also the health and safety of those that come into contact with our operations, whether through their work as subcontractors, as suppliers or as people from the local community.

We also recognise that our operations are intrinsically interlinked with the surrounding communities, and that it is essential that all stakeholders, not just shareholders, benefit from Sierra Rutile's success. Accordingly, we continue to pursue a number of initiatives and partnerships which are designed to improve the lives and employment opportunities of the people living in the communities around our operation. Our medical facility treated over 18,000 people last year, and we offer free health education, mosquito nets for the prevention of malaria and HIV testing. A local technical college, sponsored by Sierra Rutile, provides education to over 300 students. Additionally, the Sierra Rutile Foundation, funded by Sierra Rutile, funded projects such as school building, court house construction, the creation of a local radio station, grain storage construction, sanitation development, well drilling and the donation of generator sets to local health clinics.

Sierra Rutile is also committed to the preservation of the environment and to the continual rehabilitation of disturbed areas. In 2011, we completed a full survey of all disturbed lands from the past 45 years and developed a legacy mine disturbance remediation plan to be implemented over the next six years, enabling us to return these lands to the local community for full use.

Looking to the future, we are focused on accessing the full value of our world-class asset base. As highlighted by the strategic operations review we completed last year, Sierra Rutile has identified two fast-track projects which, if successful, will result in production increasing to approximately 130,000 tonnes in 2013 per annum and 170,000 tonnes per annum by 2014. Combined with the second large dredge feasibility study currently underway, these three projects are forecast to treble production over the next three years to over 200,000 tonnes per annum.

Additionally, subsequent to the year end, the Board has also approved a budget of up to US$4 million to be spent on mineral resource expansion projects. The expansion is targeting several promising pre-defined deposits for which prospecting licences have been obtained. As currently less than 20% of our license areas have been drilled, we believe that substantial upside remains in our resource.

By combining our strong commitment to our workforce and local communities with a methodical approach to value creation, focused on sound planning and risk management, we believe we are laying the foundation for the delivery of long-term value for all our stakeholders.

Jan Castro

Non-Executive Chairman

Chief Executive's statement

Overview

Our stated strategy in 2011 was operational readiness for 2012. This goal was met as we saw improved operational efficiencies in the final quarter of 2011. The expansion projects that were announced to the market as part of our strategic review are all on track. The Company is now positioned to benefit from the strong market in 2012 and will continue to benefit as the growth projects come on line in 2013 and beyond.

Strengthening our Quality Assets

Much was done in 2011 to improve the quality of our assets in terms of our understanding of our mineral resource, our plant and equipment, our relationship with the government, our growth projections and, most importantly, our people.

In February 2011 we released an updated Australasian Joint Ore Reserves Committee ("JORC")-compliant resource of 600 million tonnes, confirming Sierra Rutile's mine as one of the largest primary rutile deposits in the world. The mine has historically produced 30% of the world's rutile and has a mine life of over 70 years at 2011 production rates. We are also in the process of accelerating our exploration activities in the region and are confident of expanding our resource.

During the year the Company made significant investments in current operations; including upgrading our rougher spirals to increase recovery, investing in critical spares to reduce downtime and upgrading the bucket band to increase digging rates and availability. We also successfully completed a dredge move to the east side of the mining pond, an area where the existing dredge can continue to mine, without disruption until well into 2015. This upgrade of plant and equipment will continue in 2012 with the commissioning of more spiral banks and cyclones on the wet plant and magnets and plate separators in the dry mill, all of which will significantly improve recovery.

The early repayment of US$18 million of the loan from the Government of Sierra Leone ("GOSL") significantly improved our relationship with the Government. This has been a valuable, long-standing relationship, which I am glad to report is on a solid footing. In addition, this prepayment means that we now have no principal to repay on the loan until June 2013, freeing up our finances so that they can be used to fund the growth projects.

With the help of a group of consultants headed by the Snowden Group and including CPG Resources and Titan Salvage, we also successfully completed, on time and on budget, a study into the opportunity of expanding production from our existing mineral resource. We released the results of this study in October 2011. In short, we intend to implement three separate new projects to treble production from its current levels in three years.

We also invested heavily in the training of our people in 2011, sending 193 technical operators on training programs. We initiated a new recruitment drive to obtain and retain the best workers in Sierra Leone. We also introduced an ongoing appraisal programme to promote those employees that have shown their ability and identify weaknesses so that appropriate training and coaching can be given to help those employees that are underachieving.

As part of the strengthening of the management team I spoke of last year, Sierra Rutile amended its remuneration policies in order to align them more closely with the Company's performance through the implementation of a Key Performance Indicator ("KPI") driven bonus programme for all staff and to reward long-term commitment to Sierra Rutile through a revised share option scheme for senior executives.

Operations

In 2011 we met our guidance that 2011 production would be in line with 2010, by producing 67,916 tonnes of rutile (68,198 tonnes in 2010). The Company also produced 8,496 tonnes of zircon concentrate and 15,946 tonnes of ilmenite (2010: 7,092 tonnes of zircon concentrate and 18,206 tonnes of ilmenite). In the first half of the year, the Company commenced an operational reorganisation to increase long-term production. This included a planned dredge move to a new part of the current ore body and an associated pond-lowering exercise. The re-organisation had a significant short-term negative impact on production levels (1H11 rutile production was 27,149, 11% lower than 1H10 rutile production of 30,659 tonnes).

Due to this lower throughput of rutile in the first half of the year, the mineral separation plant had the capacity to re-process tailings resulting in additional zircon concentrate production with 4,788 tonnes of zircon concentrate produced in 1H11 compared with 2,786 tonnes in 1H10, which were sold into the already strong zircon market at over US$ 1,000 per tonne.

In the second half of the year, as a result of the investments we made in the existing operations and an ongoing process of strengthening the management team we were able to make up for the disrupted first half, hitting a production rate of 40,766 tonnes (2H10 rutile production 37,539 tonnes).

I am happy to report that this run rate has continued into 2012, with production of rutile in the first quarter of 2012 of 20,693 tonnes, 48% higher than the 13,977 tonnes achieved in the first quarter of 2011 and on track to hit our guidance for the full year of 80,000 tonnes (17% above the 68,198 tonnes produced in 2011).

Marketing

As previously reported, rutile prices increased significantly in 2011, but due to legacy contracts the Company was unable to benefit significantly from these during the year. Fortunately, however, these contracts have all been completed, leaving 2012 free of legacy pricing.

We believe rutile prices will remain strong for the foreseeable future. The market is being driven by increasing demand coupled with limited supply response and price elasticity. Given the limited risk of substitution and the time taken for new projects to come on-stream, we believe that rutile prices will remain on a positive trend in the future.

John Bonoh Sisay

Chief Executive Officer

Finance review

Cash and Liquidity

As at 31 December 2011, the Company had a cash balance of US$10.7 million (US$28.4 million as at 31 December 2010). During the year the Company invested US$5 million on critical stock items in order to improve dredge availability. The Company also invested US$15.3 million during the year on the purchase of property, plant and equipment US$11.8 million on existing operations and US$3.5 million on expansion projects. At the year end, the company was carrying an inventory of 14,064 tonnes of rutile (6,357 tonnes as at 31 December 2010) which, at the average Q1 2012 sales price of 2,530 US$/tonne, would be worth US$35.6 million.

On 23 February 2011, Sierra Rutile made a new placement of 113,660,925 common shares. The placing with institutional investors at a price of 10p per share raised £11,366,093 (US$18,501,000) before transaction costs amounting US$654,000.

Since the end of the year, solid production and strong pricing have enabled the Company to generate significant cash flows such that the cash balance as at 5 April 2012 was US$35.1 million after having spent US$10.4 million on capital expenditure which includes preliminary costs incurred on the feasibility study on the second large dredge.

In April 2012, Sierra Rutile entered into an agreement with the GOSL to pay, in cash, PAYE taxes that have historically been satisfied through the issuance of shares in Sierra Rutile's subsidiary Sierra Rutile Holdings Limited ("SRHL"). In all, Sierra Rutile will pay to the GOSL a total of over US$17 million, reflecting the cash value of the historical PAYE taxes, applicable interest thereon and the prepayment of PAYE taxes for the next two years. Subsequent to this agreement and the payments made, the GOSL will have no interest in SRHL and will earn no interest in SRHL going forwards.

Turnover

The Company was not able to benefit from the strong pricing environment in 2011 as the majority of sales were made on long-term contracts. By the end of 2011, there were no outstanding long-term contracts in place.

Rutile, zircon and ilmenite sales of US$55.0 million in 2011 were 25% above the US$43.9 million achieved in 2010. In 2011, the company sold 60,499 tonnes of rutile for US$40.1 million (2010 - 71,018 tonnes for US$38.5 million). The company also sold 19,090 tonnes of ilmenite for US$4.0 million (2010 - 21,193 tonnes for US$2.7 million). The major contribution to the increase in sales in 2011 over 2010 came from the sale of 12,901 tonnes of zircon for US$10.9 million in 2011 (2010 - 7,896 tonnes for US$2.7 million).

Cost of Sales

Costs of sale increased by US$6.6 million from US$48.6 million in 2010 to US$55.2 million in 2011, driven by:

·; increased maintenance and outsourcing of US$13.4 million, required as a result of under investment in prior years (2010: US$8.7 million);

·; a rise in fuel prices, which led to an increase in fuel costs from US$11.2 million in 2010 to US$14.4 million in 2011;

·; both of which were somewhat offset by cost savings in other areas.

The Company remains committed to controlling costs to offset fuel price increases and salary inflation and is in the process of developing new plans to reduce costs on a $/tonne basis.

Administrative and Marketing Expenses

Administrative expenses increased by US$6.4 million from US$6.4 million in 2010 to US$12.8 million in 2011 principally due to the US$3.5 million non-cash expense related to the Company's new stock option plan..

Exceptional Items

In 2011, the Company recorded an exceptional loss of US$13.1 million comprising three non-cash amounts.

Following a strategic review and incorporating the findings of a number of consultants including Snowden Group, CPG Resources and Titan Salvages, management wrote down the US$10.1 million carrying value of the capsized dredge, and the $2.2 million carrying value of the partially constructed dredge .

A provision of $0.7 million was also raised for a potential tax exposure arising on the sale of Sierra Minerals Limited in 2008.

Borrowings

Finance income/costs decreased from an income of US$0.3 million in 2010 to a cost of US$1.8 million in 2011. The increase in cost was as a result of a decrease in the effect of favourable foreign exchange movements between USD and Euro in both years on the Euro-denominated loan to the GOSL, which created a US$1.2 million gain in 2011 compared to a US$4.5 million gain in 2010.

The underlying interest expense reduced from US$4.0 million in 2010 to US$3.0 million in 2011 as a result of the principal repayment of US$17.0 million (Eur13.0 million) that was made against the loan to the GOSL earlier in March 2011.

The next repayment of principal on the loan to the GOSL of US$2.8million is due in June 2013. Prior to this date only interest on the loan is payable. The final installment on the loan will be repaid in December 2016.

Financial Outlook

In absolute terms, operating expenses are expected to increase 10% in 2012 vs 2011 as a result of the forecast production increasing 17% from 68,198 tonnes to 80,000 tonnes, with the cash cost per tonne expected to fall.

The 2012 capital expenditure budget for existing assets is US$14.6 million (this excludes expenditure on longer-term production expansion projects). Once essential catch-up maintenance is completed, Sierra Rutile estimates that its annual maintenance capital expenditure will reduce to a rate of approximately US$6-8 million per annum on existing assets.

Business review

Company Overview

Sierra Rutile produces titanium feedstock industrial minerals, primarily rutile as well as smaller quantities of zircon. Sierra Rutile's mine, located in the south west of Sierra Leone, is one of the largest natural rutile deposits in the world, with a JORC-Compliant Mineral Resource for measured, indicated and inferred resources for the Sierra Rutile mine of over 600 million tonnes (as at February 2011).

Sierra Rutile currently operates a single bucket-line dredge, and during 2011, announced the development of two near-term expansion projects, dry mining and dredge mining of Mogwbwemo tailings, as well as a feasibility study into a second large dredge.

Mission, Vision and Values

Mission:

We aim to deliver long-term shareholder value through the sustainable and efficient operation of the world-class Sierra Rutile mine.

Vision:

To create a national champion for Sierra Leone, recognised as a global leader in the mineral sands industry, by:

·; Realising the significant value contained in the Company's deposits by increasing production and expanding both reserve and resource bases;

·; Improving operational performance through the application of best practice management structures;

·; Working in partnership with local communities and the GOSL to ensure the Company maintains and builds upon its social license to operate; and

·; Increasing the company's portfolio through the addition other minerals assets within Sierra Leone or other mineral sands operations worldwide.

Values:

Health & Safety: The health and safety of our workforce is the Company's first and foremost consideration. Our approach to health and safety is based on the principle of recording zero harm for our employees, and we aim to implement a policy that is consistent with leading global standards.

Community: Sierra Rutile is committed to being a positive force not only in the communities around the minesite but Sierra Leone as a whole. The Company pursues a number of initiatives and partnerships, including the Sierra Rutile Foundation, which are designed to improve the lives and employment opportunities of the people of Sierra Leone.

Environment: The Company aims to minimise the environmental impact of its mining operations and is committed to the rehabilitation of land affected by current and historical mining activity.

Operations: The Company seeks to maximise production and operational efficiency at the Sierra Rutile mine. The expansion and optimisation of production will allow the Company to delivery long-term profitability and capitalise on the unique potential of the Sierra Rutile resource.

Sierra Rutile Mine

The Sierra Rutile mine is located in the south west of Sierra Leone near the Imperri Hills, some 30 km from the Atlantic Ocean, on low lying coastal plains about 135 km southeast of the capital Freetown. Sierra Rutile holds mining leases over a land area of 580 sq. km in which nineteen separate rutile deposits have been identified.

The mining concession is one of the largest natural rutile deposits known in the world. In February 2011, the Company announced an upgraded JORC-Compliant Mineral Resource for the Sierra Rutile mine, which estimated that total measured, indicated and inferred resources at Sierra Rutile were over 600 million tonnes.

Sierra Rutile Mine (continued)

The mine currently employs a bucket ladder dredge and conventional mineral processing methods to produce rutile, ilmenite and small amounts of zircon concentrate. As a result of a strategic growth review completed in 2011, the company has identified three expansion projects to add to the current mining operation. Dry mining and cutter suction dredging of historical Mogwbwemo tailings were approved for immediate development, and a feasibility study has commenced on an additional bucket ladder dredging system. All three expansion projects will feed into the existing mineral processing plant currently supplied by the existing bucket ladder dredge.

The mine is self-sufficient and generates its own power through its heavy fuel oil ("HFO") power plant commissioned in 2009, operates its own port, maintains local road infrastructure, has its own hospital and generally provides and maintains its own infrastructure and ancillary services.

During 2011, the Company continued with its resource expansion programme to extend the mine life of its operations. Drilling was completed across a number of areas of the deposit including stockpiles to identify potential extensions to the existing mineral resource. Geological drilling was also completed at the Gangama deposit in order to assist with future dredge design requirements. Additionally during the year the Company obtained two reconnaissance licences for potentially high grade areas which are adjacent to the current mining licence area.

Moving into 2012 the Company is accelerating the exploration programme which will concentrate exploration efforts on the existing mining licence area and the reconnaissance licence areas to optimise Sierra Ruitile's dredge deployment strategy, improve mine planning and expand the current ore reserve.

The updated mineral resource announced in 2011 also identified the presence of potentially value enhancing rare earths in High Tension Tailings ("HTTs") produced as a by-product of the Company's ongoing mining activities. In March 2011 a further study of the HTTs confirmed the presence of rare earths at grades of 2.2% in the tailings stream. The Company is in the process of evaluating the marketing opportunity for these rare earth containing minerals.

KPIs

*Gearing, is calculated as the ratio of debt to debt plus equity

** The asset turnover ratio, which measures the efficiency of a company's use of its assets in generating sales revenue and is calculated as the ratio of revenue to total assets

*** Earnings before interest tax and depreciation excluding exceptional items and non-cash stock option expenses

Social Responsibility

Environmental, Health & Safety ("EHS")

2011 saw a strong improvement in health safety performance at Sierra Rutile, with the Company outperforming its target of a 25% reduction in lost time injuries by cutting lost time injuries by 64% compared to 2010. The Company also achieved its target of no fatalities.

We remain committed to continually improving our performance in this vital area. During 2011 the Company formed a Subcommittee of the Board to oversee the health and safety policy. There are a number of areas where Sierra Rutile can improve its health and safety policies and as a result the Company is currently completing a comprehensive first aid training programme to cover all locations and shifts, conducting a formal baseline health and safety risk assessment and developing a formal system of health and safety standards, training, auditing and management accountability.

Occupational Health

The Sierra Rutile Clinic, which supports all ongoing initiatives, treated approximately 1,800 people a month in 2011, the majority of who are our employees and their families. We also run additional weekly clinics in local communities to provide basic and emergency public healthcare.

During the year the Company purchased 5,000 mosquito nets and 5,000 typhoid vaccines for distribution to the employees and local communities and treated 2,646 employees and members of the local communities for malaria and 1,477 for Typhoid.

Sierra Rutile continued its successful partnership with NGOs, the Mine Workers Union and the National AIDS Secretariat of Sierra Leone to address the prevention of HIV/AIDS in 2011, and we will continue to support them in the year ahead. The Chief Operating Officer and the Branch Secretary of the United Mine Workers Union signed the Revised Sierra Rutile HIV and AIDS Policy and Procedures. Our health personnel are trained to administer anti-retroviral drugs and conduct voluntary testing and counselling.

Community

Sierra Rutile is committed to being a positive force in not only the communities around the mine site but Sierra Leone as a whole. The Company pursues a number of initiatives and partnerships, including the Sierra Rutile Foundation, which are designed to improve the lives and employment opportunities of the people of Sierra Leone.

Training and recruiting the next generation of skilled employees is an important part of Sierra Rutile's long-term business strategy. Growing competition for skilled labour in Sierra Leone, the ageing nature of the Company's workforce and the need to help improve the lives of the local populace mean it is increasingly important to support education initiatives in the areas around the mine. During 2011, the Company continued to support the Sierra Rutile Technical Institute in partnership with a former shareholder and Africare.

The Institute teaches relevant technical and engineering skills to young people in the communities around the mine site. The Institute currently offers diploma level courses in civil, electrical, mechanical and automobile engineering and teaching certificate level courses in business studies and information technology. It is hoped that the Institute will significantly improve the long term employment prospects for the people living around the Sierra Rutile mine and allow the Company to increase recruitment of local Sierra Leoneans and lower its reliance on ex-patriot workers. There are currently 12 staff and over 300 students enrolled in the Institute's various courses.

Community (continued)

Access to clean water is one of the most important factors in ensuring the health and well-being of the communities around the mine site, and in 2011 the Company distributed over 63 million gallons of fresh clean treated drinking water to local villages. In addition to distributing clean water, the Company is also rehabilitating old wells and constructing new ones in order to provide a long-term solution for local villagers' water needs.

Sierra Rutile Foundation

The Company contributed US$150,000 to the Sierra Rutile Foundation in 2011, which was set up in 2006 to finance sustainable community development initiatives in the in the areas surrounding the Company's operations. The Foundation is managed by an independent board of trustees. In 2011, after consultation with representatives from chiefdoms in the area of the mine, the Foundation completed the construction of a number of development projects to support the local community, including: the construction of a resource centre and a radio station in the Imperri chiefdom and the construction of a clean waterwell with hand pump and sanitation facilities for the Jong, Upper and Lower Banta chiefdoms. Looking forwards to 2012 the Foundation has plans to undertake the following projects:

·; Barrays, water wells with hand pumps and latrines in Imperi and Jong Chiefdoms,

·; Jetty and waiting sheds in Upper Banta Chiefdom;

·; Construction of a bridge in Bagruwa Chiefdom;

·; Construction of a new primary school in Imperi Chiefdom;

·; Rehabilitation of the court administrative building in Lower Banta Chiefdom,;

·; Operational support to the JADA Technical Institute; and

·; Clearing and installation of radio station in Imperi Chiefdom.

The Company itself will also undertake the following projects in 2012:

·; Construction of seven houses;

·; Construction of five latrines and kitchens in Nyandehun Village;

·; Rehabilitation of police station in Imperi Chiefdom;

·; Rehabilitation of seven water wells;

·; Construction of six new water wells; and

·; Undertake an impact assessment study of the Sierra Rutile HIV/AIDS Program.

Environment

The Company aims to minimise the environmental impact of its mining operations and is committed to the rehabilitation of land affected by current and historical mining activity. The mining processes used at Sierra Rutile have a relatively limited impact on the environment and no large-scale mining pits are created. However, the creation of large dredge ponds and sandy tailings areas can impact relatively large areas of land and require the resettlement of communities.

The various types of trees that were planted in previous years on former mine works, as part of both the Darwin Initiative and the Company's own projects, have all been relatively successful, and the Company will continue to observe their growth rates to determine the best strategy going forward for land rehabilitation.

During the year, the Company commissioned a third party to conduct a full survey of historically disturbed land. Following this analysis a plan has been developed and is being implemented to rehabilitate all legacy disturbed areas over the next six years. In order to achieve this, in 2012 the company intends to increase the rate of rehabilitation to over 740 acres per year.

In 2011, Sierra Rutile rehabilitated 110 acres of disturbed land comprising 90 acres of sand tailings at Lanti and 20 acres of borrow pits, through the planting of various types of trees including cashew, guava, acacia, oil palm, mango, moringa and almond. It is intended that the trees will, in due course, provide the basis for local communities to develop agribusiness opportunities.

The Company's trial aquaculture project for the rehabilitation of mined out dredge ponds continued in 2011, and in two separate crops comprising a total of 5,132 brooders and 68,821 juvenile fish were stocked in 5 ponds. In 2012 the Company plans to introduce over 100,000 fish into the dredge ponds.

Principal Risks

Exploration and development risk

Mineral exploration and development involves a high degree of risk. Success in exploiting mineral resources and reserves is the result of a number of factors, including the level of geographical and technical expertise, the quality of land available for exploration and other factors. The economics of developing mineral properties are affected by many factors including the cost of operations, variations in grade, fluctuation in prices, fluctuation in exchange rates and others.

Operating risks

The activities of the Group are subject to all of the hazards and risks normally associated with exploration, development and operation of natural resource projects. These risks and uncertainties include environmental hazards, industrial accidents, labour disputes, mechanical failures of the dredges or other key plant or machinery, grade problems, periodic interruptions due to inclement or hazardous weather conditions and other acts of God. Should any of the risks affect the Group, it may significantly reduce production for prolonged periods and cause the cost of production to increase to a point where it would no longer be economic to continue operations.

Estimates of mineral reserves and resources

Mineral reserves and resources estimates for projects are based on the interpretation of geological data obtained from drill holes and other sampling techniques and feasibility studies which derive estimates of costs based upon anticipated tonnage and grades to be mined and processed. There are numerous uncertainties inherent in estimating ore reserves and assumptions that are valid at the time of estimation may change significantly when new information becomes available. Changes in the forecast prices of commodities, exchange rates, production costs or recovery rates may change the economic status of reserves and may, ultimately, result in the reserves being restated.

Insurance

Common to other mining companies, Sierra Rutile is subject to risk which could result in damage to or destruction of mineral properties and operating assets, personal injury or death, environmental damage, delays in extraction and possible legal liability.

Accordingly, Sierra Rutile may suffer losses, liabilities or damages against which it cannot insure or against which it may elect not to insure because it is too expensive relative to the perceived risk. Should such liabilities or damages arise, they could reduce or eliminate any future profitability, result in increased costs and the loss of the Group's assets and a decline in the value of the Company's securities.

Competition

The mining industry is competitive in all of its phases. The Group faces strong competition from other mining companies in connection with the acquisition of mineral properties, as well as for the recruitment and retention of qualified employees.

Larger companies, in particular, may have access to greater financial resources, operational experience and technical capabilities than the Group which may give them a competitive advantage.

Volatility of mineral prices

The future profitability of the Group will depend on the market price of rutile. Mineral prices fluctuate widely and are affected by numerous factors beyond the Group's control, including global supply and demand, political and economic conditions, advancements in mineral processing and currency exchange fluctuations. The effect of these factors on the price of rutile cannot accurately be predicted.

Political risk

The Group's properties are located in Sierra Leone and its operations may be affected to varying degrees by political and economic instability, crime, fluctuations in currency exchange rates and inflation. Whilst there can be no certainty about the future stability of the country, we note that there was a successful transfer of power following the national elections in August 2007.

Protection of assets and personnel

Unless the Government can provide the necessary degree of peace, order and security, the cost to, and the ability of, the Group to maintain effective security over its assets in Sierra Leone will be adversely affected. In 2009 the Group appointed a specialist security service to manage the Company's security needs. The primary focus of the team is on loss prevention, and the appointment of the specialist security service is showing a positive impact through a reduction in levels of theft.

Title to properties

The Company is satisfied that it has taken reasonable measures to ensure that proper title to the mining leases of Sierra Rutile has been obtained and that all grants of mineral rights for the Group's properties have been registered in the appropriate deeds offices. No assurance can be given; however, that any lease, license or permit held by the Group will not be challenged or impugned in the future.

Government regulation

The Group's mining operations are located in Sierra Leone and are subject to its laws and regulations governing expropriation of property, health and worker safety, employment standards, waste disposal, protection of the environment, mine development, land and water use, prospecting, mineral production, exports, taxes, the protection of endangered and protected species and other matters.

While the Group believes that it is in compliance with all material laws and regulations currently affecting its activities, future changes in applicable laws, regulations, agreements or changes in their enforcement or regulatory interpretation could result in changes in legal requirements or in the terms of existing permits and agreements applicable to the Group or its properties, which could have a material adverse impact on the Group's current operations or future development projects. Where required, obtaining necessary permits and licences can be a complex, time-consuming process and the Group cannot assure whether any necessary permits will be obtainable on acceptable terms, in a timely manner or at all.

Environmental regulation

Environmental and safety legislation (e.g. in relation to reclamation, disposal of waste products, protection of wildlife and otherwise relating to environmental protection) may change in a manner that may require stricter or additional standards than those now in effect, a heightened degree of responsibility for companies and their directors and employees and more stringent enforcement of existing laws and regulations. There may also be unforeseen environmental liabilities resulting from mining activities, which may be costly to remedy. If the Group is unable to fully remedy an environmental problem, it may be required to stop or suspend operations or enter into interim compliance measures pending completion of the required remedy. The potential exposure may be significant and could have a material adverse effect on the Group.

Rehabilitation

Costs associated with rehabilitating land disturbed during the mining process and addressing environmental, health and community issues are estimated and provided for based on the most current information available. Estimates may, however, be insufficient and/or further issues may be identified.

Energy cost and supply

The Group's operations are energy intensive and, as a result, the Group's costs and earnings could be adversely affected by rising energy costs or by supply disruptions.

Currency risk

While the Group's revenue and expenditures are principally in US dollars, a significant portion of the Group's expenses incurred in connection with the projects are in Sierra Leone's local currency, the Leone. In addition, the GOSL loan facility is in Euros and the November 2009 fund raising was in British Pounds. As a result, fluctuations in currency exchange rates could have a material adverse effect on the financial condition, results of operation or cash flow of the Group. The Group has not entered into any hedging arrangements with respect to foreign currencies.

Dependence on key personnel, contractors, experts and other advisers

The success of the operations of the Group is dependent to a significant extent on the efforts and abilities of its management, outside contractors, experts and other advisers. The Company has a small management team and the loss of a key individual could affect the Group's business. While the Company has entered into service agreements with certain of its key executives, the retention of their services cannot be guaranteed. Accordingly, the loss of any key executive or manager of the Group may have an adverse effect on the future of the Group's business.

Directors

Jan Castro Non-Executive Chairman

Mr. Castro is the founder and Chief Executive Officer of Pala Investments AG, the exclusive advisor to Pala Investments Holdings Ltd., an investment company dedicated to investing in, and creating value across, the mining sector. Pala seeks to assist companies in which it has long-term shareholdings by providing strategic advice and innovative financing solutions.

Prior to founding Pala in July 2006, Mr. Castro was Senior Vice President of Investments and Corporate Affairs for Mechel OAO, a NYSE-listed company and one of Russia's largest mining and metals companies listed on the New York Stock Exchange. Mr. Castro serves on the Boards of Alacer Gold (TSX:ASR), Nevada Copper (TSX:NCU), Gemcom Software International Inc., and Asian Mineral Resources (TSX-V:ASN).

Mr. Castro was nominated to the Board as a representative of Pala Investment Holdings Limited.

John Bonoh Sisay Chief Executive

Mr. Sisay has accumulated considerable experience within the African mining sector having worked in over ten African countries. Mr. Sisay started his career as a graduate trainee at the Central Selling Organization (CSO) of De Beers Consolidated Mines, Ltd. After working at De Beers, Mr. Sisay joined America Minerals Fields, now part of First Quantum, working on new acquisitions for the company, particularly in the Democratic Republic of Congo. Additionally, he has served as President of the Sierra Leone Chamber of Mines and as a Non-Executive Director for Diamond Fields International and Vimetco S.L.

Mr. Sisay joined Sierra Rutile in 2001. He periodically serves as an advisor to the GOSL on mining-related issues.

Michael Barton Non-Executive Director

Mr. Barton is currently Senior Vice President of Pala Investments AG, the exclusive advisor to Pala Investments Holdings Limited. Whilst at Pala Investments AG, he has been involved in many of Pala's largest transactions, including Pala's investments in Anatolia Minerals Development Corporation, Avoca Resources Limited, Dumas Contracting Limited and Norcast Wear Solutions. Previously, Mr. Barton was Vice President at Hatch Corporate Finance, a company specialising in providing corporate finance advisory services to the metals and mining industry. He currently serves on the boards of Peninsula Energy Ltd (ASX:PEN), WDS Limited (ASX:WDS) and Elemental Minerals Limited (ASX:ELM; TSX:ELM).

Mr Barton is a qualified chartered accountant and a member of the Securities and Investment Institute.

Mr. Barton was nominated to the Board as a representative of Pala Investment Holdings Limited.

Michael Brown Non-Executive Director

Mr. Brown is currently Senior Vice President of Pala Investments AG. Mr. Brown formerly served as the Chief Operating Officer and a Director of De Beers Consolidated Mines Ltd ("DBCM"), the South African mining operation of the De Beers Group. Mr. Brown worked at De Beers from 1990, holding a number of senior positions, including Head of Strategic Business Development at DBCM, General Manager of the Finsch Mine and Mine Manager at NAMDEB.

Mr. Brown has managed a number of significant projects at De Beers including the restructuring of DBCM in 2009 in response to the global financial crisis, the construction and early delivery of the R1.3 billion Voorspoed mine and the design and implementation of a new business model for DBCM. Mr. Brown has over 25 years' experience working across the African mining sector, having graduated from the University of the Witwatersrand with a B.Sc. in Mining Engineering. Mr. Brown is a registered Professional Engineer (Pr. Eng) with the South African Council of Professional Engineers and a member of the South African Institute of Mining and Metallurgy. Mr Brown currently serves on the Boards of Asian Mineral Resources (TSX-V: ASN).

Mr. Brown was nominated to the Board as a representative of Pala Investment Holdings Limited.

François Colette Non-Executive Director

Mr. Colette has more than 25 years' experience in mining in Africa, having worked for Gécamines as Technical Manager for the West Group and AMFI-Adastra as Congo country manager. While at AMFI-Adastra he was in charge of their copper, cobalt and zinc projects, including Kolwezi Tailings. Between 1990 and 1996, Mr Colette worked mostly as a consultant to Sofremines (France) in relation to a number of copper, cobalt, zinc and gold projects in Romania, Russia, Kazakhstan, Zaire, and Cuba. Mr. Colette has informed the Board that he will not be standing for re-election at the next Annual General Meeting (AGM).

Dr. Charles Entrekin Ph.D. Non-Executive Director

Charles Entrekin has over 35 years of experience in the mining and metals sector, acting both as an executive officer level and as a consultant. He currently acts as an international consultant for numerous metal producers and financial houses and is also currently a director of Melior Resources, Inc..

Previous executive positions include President and Chief Operating Officer of Titanium Metals Corporation, a NYSE listed producer of primary titanium and its alloys, as well as President and Chief Executive Officer of Timminco Ltd., a TSX-listed magnesium, silicon and aluminium company. Through his career Dr. Entrekin has led and implemented many successful restructurings and turnarounds of mining and metals companies in both North America and internationally.

Dr. Entrekin holds a B.Sc. from Lehigh University and a MBA from the University of Delaware in addition to a M.Sc. and Ph.D from Drexel University.

Alex B. Kamara Non-Executive Director

Mr. Kamara has considerable experience in the mining industry and in mechanical and electrical engineering.

Mr. Kamara was Head of Engineering at Sierra Rutile from 1982 to 1995, and head of the management team at the Sierra Leonean National Power Authority from 2000-2002. Mr. Kamara is a Sierra Leonean national and has been awarded the Order of Commander of the Rokel by the GOSL, a high civilian award in recognition of his contribution to engineering in Sierra Leone.

Mr. Kamara is the Chairman of Standard Chartered Bank Sierra Leone Limited and a Non-Executive Director of Cemmats Group, a Sierra Leonean company which has a number of contracts with Sierra Rutile. Mr. Kamara was appointed as a Non-Executive Director in March 2008.

Richard Lister Non-Executive Director

On 20 March 2012, Mr. Lister was appointed to the Board. Mr. Lister has over 40 years of experience in the industrial minerals and mining sectors. Currently acting as a consultant to various mining companies, Mr. Lister previously was President and CEO, as well as Vice-Chairman, of Zemex Corporation, a significant North American industrial minerals company. Mr. Lister also served as Vice-Chairman of Dundee Bancorp, a major Canadian wealth management company, and Chairman, President and CEO of Campbell Resources, a Canadian Resource company with base metal, industrial mineral, coal, and oil and gas assets in Canada, the U.S., and Mexico. Mr. Lister currently serves as a director of Labrador Iron Mines Holdings (TSX: LIM).

Directors' Report

The Directors submit their report and the audited financial statements of the Company for the year ended

31 December 2011.

Results and dividend

The results of the Company are shown on page 23. The Directors have not declared a dividend during the year (2010: $nil).

Principal activities and review of the business

The Company's principal activity is exploring for, producing and marketing industrial minerals, primarily rutile, in Sierra Leone, West Africa. The Company owns the Sierra Rutile mine in Sierra Leone. A detailed business review can be found on pages 7 to 13.

Health, Safety, Environment and Communities

The Company has agreed to take on the same performance obligations as members of the International Council on Mining & Metals and seeks continual improvement in non-financial performance so as to enhance shareholder value.

Employee Policies and Involvement

Our operations aim to record zero accidents causing harm to any individual through the following standards:

·; We provide adequate control of health and safety risks and regular monitoring to assess the appropriateness of these risks over time;

·; We provide appropriate training, equipment and maintenance to prevent accidents;

·; We consult with employees at all levels to ensure that their instruction, supervision and levels of competency are appropriate to their position;

·; We review and report on health and safety at our operations as part of internal management practice and external communications; and

·; The Sierra Rutile mine site has a fully staffed and equipped clinic which is funded by the Company and provides free healthcare for employees, their dependents and the local population.

Corporate Governance

The Directors intend, where practicable for a company of Sierra Rutile's size and nature, to comply with the UK Corporate Governance Code.

Board composition

At 31 December 2011, the Board comprised of one Executive Director and six Non-Executive Directors of which Mr. Collette, Dr. Entrekin and Mr. Kamara are considered independent. Subsequent to year-end, the Group has appointed Mr. Lister to the Board, and he is also considered independent.

Remuneration Committee

The remuneration committee, which is chaired by Mr. Barton, and includes Mr. Kamara, Mr. Lister and Mr. Collette (all Non-Executive Directors), determines the terms and conditions of service, including the remuneration and grant of options to Directors (both Executive and Non-Executive) and others under the Share Option Scheme and any other future share option schemes and arrangements adopted by the Company. The remuneration committee meets at least once a year.

The Directors have established audit and remuneration committees. The Company has departed from certain aspects of the guidelines set out in the UK Corporate Governance Code and the Corporate Governance Guidelines for AIM companies published by the QCA in that the Non-Executive Directors have been granted options. However, the options are not subject to performance criteria. In the opinion of the Directors, these options are not considered to be material enough to either the Company or each Non-Executive Director concerned to impair the independence of the Company's Non-Executive Directors.

Directors' Remuneration

1Wayne Malouf resigned on 21 February 2011

2Jean Lindberg Charles resigned on 21 February 2011

3No pension contributions have been made in the year

Audit Committee

The audit committee, which is chaired by Dr. Entrekin, and includes Mr. Barton, Mr Lister and Mr. Colette, (all Non-Executive Directors), has primary responsibility for monitoring the quality of internal controls, for ensuring that the financial performance of the Company is properly measured and reported on and for reviewing reports from the Company's auditor relating to the Company's accounting and internal controls. The audit committee meets at least three times a year. The Company has adopted a code for Directors' dealings appropriate for a company with shares admitted to trading on AIM and will take all reasonable steps to ensure compliance by the Directors and any relevant employees.

Governance Committee

The governance committee, which is chaired by Dr. Entrekin, and includes Jan Castro and Mr. Colette, has primary responsibility for keeping the Board informed of current best practices in corporate governance; reviewing corporate governance trends for their applicability to the Company; and updating the Company's corporate governance principles and governance practices.

Strategic Review Committee

The strategic review committee, which is chaired by Mr. Brown, and includes Mr. Kamara and Dr. Entrekin, has primary responsibility in overseeing the assessment and implantation of the findings of the Strategic Review.

Health and Safety Committee

The Health and Safety committee, which is chaired by Mr. Brown, and includes Mr. Sisay, Mr. Kamara and Dr. Entrekin, has primary responsibility in overseeing the development and implementation of policies and procedures to ensure the health and safety of the company's workforce and those that come into contact with the mine.

Directors and their interests

The names of the Directors who held office during the year and after the year end are listed below.

Mr. Jan Castro (appointed 30 September 2010 and became Non-Executive Chairman 21 February 2011)

Mr. Wayne Malouf (appointed Executive Chairman 10 August 2010 became Non-Executive Chairman 1 January 2011, resigned 21 February 2011)

Mr. John Bonoh Sisay (appointed 10 March 2008 and became CEO on 3 February 2009)

Mr. Jean Lindberg Charles (resigned 21 February 2011)

Mr. Alex Kamara (appointed 10 March 2008)

Mr. François Colette (appointed 11 May 2009)

Mr. Michael Barton (appointed 30 September 2010)

Mr. Michael Brown (appointed 14 October 2010)

Dr. Charles Entrekin (appointed 10 December 2010)

Mr. Richard Lister (appointed 20 March 2012)

The Directors who held shares as at December 31, 2011 are:

Directors and those who have served as directors during the year, hold the following options to subscribe for common shares as at 31 December 2011.

Share Capital

Details are set out in the notes to financial statements.

Substantial Shareholders

So far as the Directors are aware, the following shareholders (consistent with the position at 31 December 2011) had an interest in 3% or more of the voting capital of the Company as at 3 April 2012:

In September 2011, Pala Minerals Limited, a subsidiary of Pala Investment Holdings Limited, made a mandatory offer for the shares in Sierra Rutile Limited it did not already own. The offer closed in November 2011, following which Pala held a 54.75% interest in Sierra Rutile.

Going Concern

The financial position of the Group, its cash flows, liquidity position and borrowing facilities are set out in the Finance Review on page 5. At 31 December 2011, the Group had cash of $10.7 million and medium and long-term borrowings of $30.7 million. Details on the Group's borrowings are set out in Note 19 to the financial statements.

The Board has considered the Group's cash flow forecasts for the period to the end of June 2013. The Board is satisfied that the Group's forecasts and projections, taking account of reasonably possible changes in trading performance show that the Group will be able to operate with the level of its current facilities for the foreseeable future. Accordingly, the Board continues to adopt the going concern basis in preparing the financial statements.

Annual General Meeting

The AGM of the Company will be held at 10 am (British Summer Time) on 26 June 2012 at 90 High Holborn, London, WC1V 6XX. The notice convening the meeting is being sent to shareholders with this report. Resolutions relating to the meeting are set out in the Notice of Meeting.

Proxy Voting

Proxy cards will be distributed to shareholders with the Notice of the AGM.

Auditor

Each of the persons who is a Director at the date of the approval of this Annual Report confirms that:

·; So far as the Director is aware, there is no relevant audit information of which the Group's auditor is unaware; and

·; The Director has taken all the steps that he/she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information and to establish that the Group's auditor is aware of that information.

A resolution for the appointment of auditors of the Company is to be proposed at the forthcoming annual general meeting.

Approval

This report was approved by the Board of Directors of the Company and signed on its behalf by:

John Sisay

Chief Executive Officer

10 May 2012

Statement of directors' responsibilities

The directors are responsible for preparing the Annual Report and the financial statements in accordance with International Financial Reporting Standards as adopted by the European Union.

In preparing these financial statements, International Accounting Standard 1 requires that directors:

·; properly select and apply accounting policies;

·; present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

·; provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and

·; make an assessment of the company's ability to continue as a going concern.

The directors are responsible for:

·; keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company;

·; safeguarding the assets of the company;

·; such internal control as they determine necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error; and

·; taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement

We confirm that to the best of our knowledge:

·; the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position, and profit or loss of the Group; and

·; the management report, which is incorporated into the Directors' Report, includes a fair review of the development and performance of the business and the position of the Group together with a description of the principal risks and uncertainties that it faces.

By order of the board

John Sisay Alex Kamara

Independent auditor's report to the members ofSierra Rutile Ltd and its subsidiaries

We have audited the financial statements of Sierra Rutile Ltd for the year ended 31 December 2011 which comprise consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of cash flows, the consolidated statement of changes in equity and the related notes 1 to 29. The financial reporting framework that has been applied in their preparation is International Financial Reporting Standards (IFRSs) as adopted by the European Union.

This report is made solely to the Company's members, as a body, in accordance with AIM Rule 19. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an independent auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor

As explained more fully in the Statement of Directors' Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statements

In our opinion the Group financial statements:

·; give a true and fair view of the state of the company's affairs as at 31 December 2011 and of its loss for the year then ended; and

·; have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

Deloitte LLP

Chartered Accountants

London, United Kingdom

10 May 2012

The financial statements of Sierra Rutile Ltd and its subsidiaries were approved by the Board of Directors on 10 May 2012.

Signed on behalf of the Board of Directors

John Bonoh Sisay Alex Kamara

Notes to the consolidated financial statements

Year ended 31 December 2011

1. General information

Sierra Rutile Limited ("Sierra Rutile") is a public limited liability company incorporated and domiciled in the British Virgin Islands. The address of its registered office is at P.O. Box 4301, Trinity Chambers, Road Town, Tortola, British Virgin Islands. 

These financial statements will be submitted for consideration and approval at the forthcoming Annual Meeting of shareholders of the Company.

2. Significant accounting policies

The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

(a) Basis of preparation

The financial statements of Sierra Rutile have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRS). Where necessary, comparative figures have been amended to conform with a change in presentation in the current year. The financial statements are prepared under the historical cost convention, except that available-for-sale investments are stated at their fair value.

(b) Going concern

The Board has considered the Group's cash flow forecasts for the period to the end of June 2013. The Board is satisfied that the Group's forecasts and projections, taking account of reasonably possible changes in trading performance show that the Group will be able to operate with the level of its current facilities for the foreseeable future. Accordingly, the Board continues to adopt the going concern basis in preparing the financial statements (see page 22 of the Directors' Report).

(c) New and revised International Financial Reporting Standards

Adoption of new and revised International Financial Reporting Standards

At the end of the reporting period 2011, the Group has adopted IAS 24 (Revised) 'Related Party Disclosures' retrospectively with no impact on the Group's results in the current or prior year.

There are no other standards or interpretations which apply for the first time in the year ended 31 December 2011 which have a material impact on the Group.

New IFRS accounting standards and interpretations not yet adopted

At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not been adopted by the EU):

IFRS 9 'Financial Instruments' (effective for periods beginning on or after 1 January 2015)

IFRS 10 'Consolidated Financial Statements' (effective for periods beginning on or after 1 January 2013)

IFRS 11 'Joint Arrangements' (effective for periods beginning on or after 1 January 2013)

IFRS 12 'Disclosure of Interest in Other Entities' (effective for periods beginning on or after 1 January 2013)

IFRS 13 'Fair Value Measurement' (effective for periods beginning on or after 1 January 2013)

IAS 27 (reissued) 'Separate Financial Statements' (effective for periods beginning on or after 1 January 2013)

IAS 28 (reissued) 'Investments in Associates and Joint Ventures' (effective for periods beginning on or after 1 January 2013)

IFRIC 20 'Stripping costs in the Production Phase of a Surface Mine' (effective for periods beginning on or after 1 January 2013)

The Directors anticipate that the adoption of these standards and Interpretations in future periods will have no material impact on the financial statements of the Group.

(d) Basis of consolidation

Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

(e) Business combinations and goodwill arising thereon

The acquisition method of accounting is used to account for business combinations by the Group. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognises any non-controlling interests in the acquiree either at fair value or at the non-controlling interests' proportionate share of the acquiree's net assets. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interests' share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance.

The excess of the consideration transferred, the amount of any non-controlling interests in the acquiree and the acquisition-date fair value of any previous equity interest in the acquiree over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of comprehensive income. 

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

Transactions with non-controlling interests

The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

(f) Property, plant and equipment

Property, plant and equipment are stated at historical cost less accumulated depreciation and impairment losses. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads and costs directly attributable to bringing the assets to a working condition for its intended use. Cost also includes environmental costs and the cost of restoring the site on which the assets are located. These costs are recognised as a liability.

Depreciation is provided on a straight-line basis over the estimated useful lives of the assets.

Where an item of property, plant and equipment comprises major components with different useful lives, the components are accounted for as separate items of property, plant and equipment.

Subsequent expenditure relating to an item of property, plant or equipment is capitalised when it is probable that the future economic benefits from the use of the asset will increase by more than the expenditure incurred. All other subsequent expenditure is recognised as an expense in the period in which it is incurred.

Deposit and dam development, exploration, evaluation, mine development expenditure and deferred project expenditure

In respect of deposit and dam development, minerals, exploration, evaluation and deferred project, expenditure is charged to the statement of comprehensive income as incurred except where:

− it is expected that the expenditure will be recouped by future exploitation or sale; or

− substantial exploration and evaluation activities have identified a mineral resource but these activities have not reached a stage which permits a reasonable assessment of the existence of commercially recoverable reserves in which case the expenditure is capitalised.

Expenditure relating to both deposit and dam development and mine development are accumulated separately for each identifiable area of interest. Such expenditure comprises related direct costs and an appropriate portion of related overhead expenditure. 

Expenditure is carried forward when incurred in areas where economic mineralisation is indicated, but activities have not yet reached a stage which permits reasonable assessment of the existence of economically recoverable reserves, and active and significant operations in relation to the area are continuing. Each such project is regularly reviewed. If the project is abandoned or it is considered unlikely that the project will proceed to development, accumulated costs to that point are written off immediately.

Each area of interest is limited to a size related to a known or probable mineral resource capable of supporting a mining operation. Projects are advanced to development status when it is expected that accumulated and future expenditure can be recouped through project development or sale.

Amortisation and depreciation

Amortisation of deferred project expenditure is based on the estimated useful life of the asset to which the expenditure relates. Depreciation is provided on a straight-line basis at rates calculated to write off the cost of fixed assets to their residual value over their estimated useful lives as follows:

Infrastructure - twenty to forty years

Plant, machinery and equipment - three to twenty years

Vehicles - three to five years

Mineral rights - Based on the estimated life of reserves

Exploration, evaluation and mine development - Based on the estimated life on proven and expenditure, and expenditure on mineral rights probable reserves

Changes in estimates are accounted for over the estimated remaining economic life of the remaining commercial reserves of each project as applicable.

(g) Mining development cost

Mine development cost includes costs relating to the acquisition and development of mineral properties and are capitalised until such time as commercial levels of production are reached or the mineral properties are abandoned. Mine development costs are depreciated from the time that Sierra Rutile enters commercial production. Proceeds received from the sale of rutile and ilmenite sand prior to the commercial production date is offset against the capitalised mine development costs.

Commercial production is defined as the stage at which the mine assets are available for use. This entails that the Group maintains a consistent level of production from the mining operations. This is determined by reference to various factors including forecast production levels and the generation of positive cash flows on a monthly and reasonably sustainable basis.

(h) Intangible assets

Acquired computer software licences are capitalised on the basis of costs incurred to acquire and bring to use the specific software and are amortised over their estimated useful lives estimated to be five years.

(i) Impairment of tangible and intangible assets

At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs

Recoverable amount is the higher of fair value less costs to sell and value in use. 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 for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately in the consolidated statement of comprehensive income.

Goodwill arising on business combinations is allocated to the Group of cash generating units ("CGUs") that are expected to benefit from the synergies of the combination and represents the lowest level at which goodwill is monitored by the Group's Board of Directors for internal management purposes. The recoverable amount of the CGUs or group of CGUs to which goodwill has been allocated is tested for impairment annually on a consistent date during each financial year, or when events or changes in circumstances indicate that it may be impaired. Any impairment is recognised immediately in the statement of comprehensive income. Impairments of goodwill are not subsequently reversed.

(j) Foreign currencies

(i) Functional and presentation currency

Items included in the financial statements of each of the Group's entities are measured using United States Dollars, the currency of the primary economic environment in which the entity operates ("functional currency"). The consolidated financial statements are presented in United States Dollars, which is the Group's presentational currency. All financial information presented in United States Dollars has been rounded up to the nearest thousand.

(ii) Transactions and balances

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

Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rate at the date of the transaction

Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date the fair value was determined. 

(k) Financial instruments

(i) Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of provision is recognised in the statement of comprehensive income.

 (ii) Trade payables

Trade payables are stated at fair value and subsequently measured at amortised cost using the effective interest method.

(iii) Borrowings

Borrowings are recognised initially at fair value being their issue proceeds net of transaction costs incurred.

Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the statement of comprehensive income over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the end of the reporting period.

(iv) Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the statement of financial position.

 (v) Share capital

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

(l) Inventories

Inventories comprise of stock piles of rutile, ilmenite and zircon and other consumables and are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses. The cost of inventories is based on the weighted average method and comprises all cost of purchase and other production overheads attributable to the production of the rutile and ilmenite based on normal operating capacity and other costs incurred in bringing the inventories to their present location and condition. Obsolete, redundant and slow moving consumable stocks are identified on a regular basis and are written down to their estimated net realisable values.

Inventories are stated at the lower of cost or net realisable value where cost is defined as follows:

Titanium bearing minerals and zircon - Production cost and attributable overheads

Concentrates - Production cost

Stockpiles - Production cost

Materials - Average cost

Fuel and sundry expenses - Purchase cost

Goods-in-transit - Invoice cost excluding freight

 (m) Taxation

The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the period. Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

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

The carrying amount of any deferred tax asset is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised based on tax laws and rates that have been enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

 (n) Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are capitalised until such time as the assets are substantially ready for their intended use or sale. Other borrowing costs are expensed in profit or loss in the period in which they are incurred.

(o) Retirement benefit obligations

Short-term employee benefits

The cost of all short-term employee benefits is recognised in the statement of comprehensive income during the period in which the employees render the related service.

Long-term employee benefits

The Group does not operate any retirement benefit plan for its employees. For employees of the Sierra Leone based subsidiary, the Company makes a contribution of 10% of the employees' basic salary to the National Social Security and Insurance Trust for payment of pension to staff on retirement. These employees also contribute 5% of their basic salary to the Trust. The Sierra Leone based subsidiary also provides for end-of-term benefits based on the provisions contained in the Collective Bargaining Agreements; these benefits are paid to employees falling under this category when they leave the Company.

 (p) Share options scheme

The Group issues equity-settled share-based payments to certain employees and directors. Equity-settled share-based payments are measured at fair value (excluding the effect of non market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest and adjusted for the effect of non market-based vesting conditions The fair value is determined at grant date by use of a Black Scholes model and taking account of market based vesting conditions.

(q) Provisions

Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events and it is probable that an outflow of resources, that can be reliably estimated, will be required to settle the obligation.

Provisions for restructuring costs are recognised when the Group has a detailed formal plan for restructuring which has been notified to affected parties and comprise lease termination penalties and employee termination payments. Provisions are not recognised for future operating losses.

Provision for restoration and rehabilitation

In accordance with the Group's environmental policy and applicable legal requirements, a provision for site restoration and rehabilitation in respect of disturbed and contaminated land, and the related expense, is recognised when the land is contaminated or disturbed. Changes in estimates of the site restoration and rehabilitation provision are recognised as an expense in the statement of comprehensive income.

Costs of reclamation and rehabilitation are assessed on a regular basis and estimated costs are provided over the life of the Mine. The expenditure and provisions include costs of labour, materials, and equipment required to rehabilitate disturbed areas, cost of reclamation, plant and infrastructure closure and subsequent environmental monitoring. The estimates are not discounted and are based on current costs, legislature and community requirements and technology. Expenditure relating to ongoing rehabilitation and restoration programmes is charged against the provisions made.

(r) Revenue recognition

Revenue from the sale of rutile, zircon and ilmenite is measured at the fair value of the consideration received or receivable, which is usually the invoice value of rutile, zircon and ilmenite and excludes sales and value added taxes. 

A sale is recognised when the significant risks and rewards of ownership have passed, and when revenue can be measured reliably. This is generally when title and any insurance risk have passed to the customer, and the goods have been delivered to a contractually agreed location.

(s) Exceptional items

Exceptional items are events or transactions which, by virtue of their size or nature, have been disclosed in order to improve a reader's understanding of the financial statement.

(t) Presentation currency

The financial statements are presented in thousands of United States Dollars (US$).

3. Critical Accounting estimates and judgements

Estimates and judgements are continuously evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

(a) Estimated impairment of goodwill

The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 2(e). These calculations require the use of estimates (note 11).

Directors necessarily apply their judgement in estimating the probability, timing and value of underlying cash flows and in selecting appropriate discount rates and useful economic lives to be applied within the valuation calculation. Such estimates and forecasts include commodity prices, foreign exchange rates, capital expenditure, future commissioning dates, production targets, operating costs and timelines of the granting of licences and permits.

(b) Asset lives and residual values

Plant and equipment are depreciated over their useful lives taking into account residual values, where appropriate. The actual lives of the assets and residual values are assessed annually and may vary depending on a number of factors. In reassessing asset lives, factors such as technological innovation, product life cycles and maintenance programmes are taken into account. Residual value assessments consider issues such as future market conditions, the remaining life of the asset and projected disposal values. Consideration is also given to the extent of current profits and losses on the disposal of similar assets.

(c) Valuation of share-based payments

In order to value options granted, the Group has made judgements as to the volatility of its ordinary shares, the probable life of the options granted and the time to exercise of those options. During the year-ended 31 December 2011, the Group has used the Black-Scholes methodology for valuing share-based payments.

(d) Restoration, rehabilitation and environmental costs

Costs for restoration of site damage, rehabilitation and environmental costs are estimated using the work of external consultants or internal experts. Management uses it judgement and experience to provide for these estimated costs over the life of the mine.

(e) Contingent liabilities

On an ongoing basis the Group is party to various legal disputes, the outcomes of which cannot be assessed with a high degree of certainty. A liability is recognised where, based on the Group's legal views and advice, it is considered probable that an outflow of resources will be required to settle a present obligation that can be measured reliably. Disclosure of contingent liabilities is made in note 29, unless the possibility of loss arising is considered remote.

4. Segment information

IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the Chief Operating Decision Maker of the Group to allocate resources to the segments to assess their performance.

The strategy of the Group is to produce, refine and sell rutile. Information reported to the Board is on an integrated basis, which is how decisions over resource allocation are made. The Group itself has only one product being rutile, with ilmenite, zircon and other revenue streams being by-products of the integrated rutile production process.

As such, the Group considers there to be one operating segment being the production, refining and sale of rutile.

Segment revenue

Revenue represents the invoiced amount in respect of sales of rutile, ilmenite and zircon extracted during the period excluding sales discount and consists of the following:

Geographical information

Segment revenue is derived from sales to external customers domiciled in various geographical regions. Details of segment revenue by location of customers are as follows:

No customers are currently located in Sierra Leone.

For the period ended December 2011 revenues of US$12,344,000, US$11,800,000, US$7,026,000 and US$10,900,000 were generated from four customers (2010: Revenues of US$14,320,000, US$12,051,000 and US$6,607,000 were derived from three customers) all of whom accounted for more than 10% of our total annual sales.

Segment assets

All of the Group's assets are in Sierra Leone.

5. Expenses by nature

6. Employee benefit expense

7. Exceptional items

In 2011, the Company recorded an exceptional loss of US$13.1 million.

Following a strategic review and incorporating the findings of a number of consultants including Snowden Group, CPG Resources and Titan Salvages, management wrote down fully the US$10,126,000 carrying value of the capsized dredge, and the US$2,235,000 carrying value of the partially constructed dredge (see note 12).

A provision of US$707,000 was also raised for a potential tax exposure arising on the sale of Sierra Minerals Limited in 2008.

8. Finance (costs)/income

9. Income taxes

Under the provisions of an agreement reached with GOSL in June 2003, the Group's operations in Sierra Leone are not subject to standard Sierra Leone corporate income tax until 1 January 2015. Instead, up to that time, the operations are subject to a minimum tax charged at 0.5% of the turnover of the business.

From 1 January 2015, the taxation of the Group's operations in Sierra Leone will revert to the provisions of the Sierra Rutile Agreement (Ratification) Act 2002, under which tax will be charged at an amount not less than 3.5% of turnover and not more than the standard Sierra Leone corporate income tax rate (up to a maximum rate of 37.5%) on taxable profits. The standard corporate income tax rate in Sierra Leone enacted at the balance sheet date was 30% - this rate has therefore been used as the basis for measuring deferred tax assets and liabilities that are expected to be realised or settled after 31 December 2014.

Based on the above, the income tax expense can be reconciled to the Group's loss before tax as follows:

(b) Current tax liabilities

10. Basic and diluted loss per share

As stated in note 22, share options granted to directors and selected employees and vesting after the end of the reporting period, will potentially affect the earnings per share (EPS). Because there is a reduction in loss per share resulting from the assumption that the share options are exercised, the latter are anti-dilutive and are ignored in the computation of diluted EPS. As there are no other instruments that may have a potential dilutive effect, basic and diluted loss per share is the same.

11. Intangible assets

(c) For the purposes of goodwill impairment testing the recoverable amount of the Group is determined based on a fair value less costs to sell basis. Expected cash flows are inherently uncertain and are determined on the basis of latest prices and growth forecasts for commodity prices and exchange rates consistent with external sources of information, the latest mine plan using the Group's most recent production and unit cost assumptions and an asset life of 20 years, discounted appropriately at the Group's weighted average cost of capital.

(d) During 2011, in light of new analysis and after reviewing the work of third party legal counsel the Group has reversed a contingent consideration liability of US$3,855,000 previously recognised in relation to the original acquisition of the Sierra Rutile assets in 2001. The release of this liability has been taken against the goodwill balance as the acquisition took place prior to the introduction of IFRS3 (2008) 'Business Combinations' (see note 29).

12. Property, plant and equipment

(c) Expenditure capitalised in respect of the construction in progress amounted to US$1,147,000 (2010: US$327,000). Depreciation has not been charged where the assets are presently not in the condition necessary to operate in the manner intended by management.

(d) Following technical and economic evaluation, capital expenditure spent on Dredge D2 (US$10,126,000) and Dredge D3 (US$2,235,000) has been fully impaired, creating an exceptional loss of US$12,361,000 (see note 7).

13. Subsidiaries

(a) The list of the Company's significant subsidiaries is as follows:

(b) With the exception of Sierra Rutile Limited, all the subsidiaries are incorporated in the British Virgin Islands (BVI) where there is no legal requirement for the preparation and filing of audited accounts. Sierra Rutile Limited, the parent company, is quoted on the AIM market of the London Stock Exchange which requires the publication of annual audited financial statements prepared in compliance with IFRS.

14. Non-current receivables

(a) This represents an amount loaned to Government of Sierra Leone (GOSL) to settle existing obligations to the International Finance Corporation. The loan is unsecured and payment was due at the end of 1995; however Sierra Rutile remains confident of its recoverability based on ongoing communication with the GOSL. Due to the uncertainty over the timing of the recovery of this amount, it is considered a non-current receivable.

15. Deferred income tax

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled, based on tax rates that have been enacted or substantively enacted by the balance sheet date. For deferred tax assets and liabilities relating to the Group's operations in Sierra Leone that are expected to be realised or settled after 31 December 2014, the standard Sierra Leone corporate income tax rate of 30%, as enacted at 31 December 2011, has therefore been used.

The following are the major deferred tax assets and liabilities recognised by the Group and movements thereon during the current and prior reporting period.

On the basis that there is a legally enforceable right in Sierra Leone to offset an entity's current tax assets and liabilities and that the deferred tax assets and liabilities relate to income taxes levied by the same tax authority on the same entity, the deferred tax assets and liabilities are offset as follows.

At the end of the reporting period, the Group had unused tax losses of US$527,376,000 (2010:US$505,697,000) available for offset against future profits, of which US$14,170,000 (2010: US$10,333,000) were recognised as a deferred tax asset. No deferred tax asset has been recognised in respect of the remaining losses of US$513,206,000 (2010: US$495,364,000) due to the unpredictability of future profit streams. These losses have no expiry date.

Due to the Group's retained loss position, there are no temporary differences associated with investments in the Group's subsidiaries.

16. Inventories

(b) The cost of inventories recognised as expense and included in cost of sales amounted to US$32,712,000 (2010: US$43,431,000).

(c) The year under review, stock of consumables impaired was US$726,000 (2010: US$2,924,000).

17. Trade and other receivables

(i) The carrying amount of trade and other receivables approximates their value.

As of 31 December 2011, trade receivables impaired was US$67,000 (2010: US$nil). The amount of the provision was US$67,000 as of December 31, 2011 (2010: US$nil).

As of 31 December 2011, none of trade receivables was past due but not impaired (2010: US$nil). 

The carrying amount of the Group's trade and other receivables are denominated in the following currency:

In 2010, a provision of US$350,000 was made against prepayments. The other classes within trade and other receivables do not contain impaired assets.

The maximum exposure to credit risk at the end of the reporting period is the fair value of each class of receivable mentioned above.

18. Trade and other payables

Included in other payables and accrued expenses is an amount of US$2,778,000 (2010: US$1,007,000) relating to remaining shares to be transferred to the GOSL (see note 23).

The carrying amounts of trade and other payables approximate their fair value.

19. Borrowings

The GOSL borrowing is subject to interest of 8% per annum and is repayable semi-annually commencing in 2013. The Group does not have any undertaking, nor is it contractually bound to create, any lien on or with respect to any of its rights or revenues.

The carrying amounts of non-current borrowings are not materially different from their fair value.

20. Retirement benefit obligations

Sierra Rutile has two post service benefit plans in place for staff who work for Sierra Rutile Limited (the subsidiary incorporated in Sierra Leone). Both plans are unfunded and under both plans a lump sum amount falls due to employees on cessation of service which is dependent on final salary and length of service.

The discount rate is the yield at the reporting date on Bank of Sierra Leone bond that matures in one year's time.

The Directors consider that no further disclosure is required given the limited significance of these post service benefit plans to the overall performance and financial position of the Group.

21. Provision for liabilities and charges

Rehabilitation

Cost of reclamation and rehabilitation are assessed on a regular basis and estimated costs are provided over the life of the Mine. The expenditure and provisions include costs of labour, materials and equipment required to rehabilitate disturbed areas, cost of reclamation, plant and infrastructure closure and subsequent environmental monitoring. The estimates are not discounted as they are based on current costs, legislature and community requirements and technology. Expenditure relating to ongoing rehabilitation and restoration programmes is charged against the provisions made. After review, the provision was reduced during the year.

No provision is made for the dismantling and decommissioning of the Group's plant and equipment, as management believes that it has neither a legal nor constructive obligation to undertake this work. 

22. Share Capital

(i) The total authorised number of ordinary shares is unlimited (2010: 500,000,000 shares) with no par value. All issued shares are fully paid and are admitted on the AIM market of the London Stock Exchange.

(ii) On 23 February 2011, Sierra Rutile made a new placement of 113,660,925 common shares. The placing with institutional investors at a price of 10p per share raised £11,366,093 (US$18,501,000) before transaction costs amounting US$654,000.

(b) Share options

Share options were granted to directors and to selected employees. The exercise price of the granted option was determined by the Board before such grant. According to section 2.3 of the ''Rules of SRX Unapproved Share Option Scheme'', the price should not be less than the highest of the :

·; Nominal value of the shares which is US$ nil;

·; Average of the middle market quotations of the shares as derived from the Official list for the 30 dealing days immediately preceding the Grant date; and

·; Middle market quotation of the shares as derived from the Official list on the Grant date.

Exercise of the option is not subject to performance-related conditions but is conditional to the continued employment of option holders with Sierra Rutile.

 (i) Fair value of share options granted in the year

The following share options were granted in the year :

All options will vest quarterly in four equal portions, subject to continued employment with Sierra Rutile and will expire on the third anniversary of grant.

The fair value of options granted during the period determined using the Black-Scholes valuation model ranges between 6.18p and 14.30p. The significant inputs into the model were:

(ii) Movements in share options during the year

The following table reconciles the share options outstanding at the beginning and end of the year.