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Sierra Rutile Limited

Financial results for the year ended 31 December 2012

London, UK, 25 April 2013: Sierra Rutile Limited ("Sierra Rutile" or the "Group") is pleased to announce its results for the year ended 31 December 2012 and has today published its Annual Report & Accounts on the Group's website at http://www.sierra-rutile.com/.

Financial Highlights:

·; US$107.8 million EBITDA1 (2011: US$0.1 million).

·; 226% increase in revenue to US$179.1 million (2011: US$55.0 million).

·; 9% reduction in rutile cash production costs2 at US$637/tonne (2011: US$701/tonne).

·; Profit for the year of US$83.5 million compared to a loss of US$28.0 million in 2011.

·; Government of Sierra Leone's ("GOSL") minority interest in Sierra Rutile's operating subsidiary eliminated through US$13.0 million payment for PAYE liabilities.

·; Strong balance sheet with current assets of US$92.2 million at 31 December 2012 (2011: US$54.2 million).

Operational Highlights:

·; 39% increase in rutile production to 94,493 tonnes (2011: 67,916 tonnes).

·; Lanti Dry Mining project completed on budget and on time.

·; Gangama Dry Mining pre-feasibility study and Sembehun Dredge scoping study completed. 

·; Agriculture project advanced, with the establishment of a management team and trial crop nurseries.

Commenting on the results, Sierra Rutile Chairman Jan Castro said:

"2012 has been a strong year of delivery with a step change increase in our rutile production and the completion of the Lanti Dry Mining project. Crucially, our improved operating performance has also translated into an improved financial performance with significant growth in revenue and EBITDA. Our performance this year reaffirms the efficacy of our strategy of focusing on long-term value creation by way of low-capex projects and efficiency improvements".

1 Earnings before interest, tax, depreciation and amortisation, excluding exceptional items and non-cash stock option expense.  

2 Cost of sales, less depreciation, less ilmenite by-product credit divided by rutile volume sold during the period. Ilmenite by-product credit equals the volume of ilmenite produced in proportion to the rutile sold during the period, multiplied by the average ilmenite price achieved during the period.  

For Further Information:

Chairman's statement

Last year I reported that 2011 had been a year of transition, marked by significant operational improvements in the Group and that we were beginning to see the benefit of higher production levels as a result of these actions. I am therefore delighted to be able to report that 2012 has been a year of delivery, a year in which our rutile production has seen a step change in volume, increasing by 39% to 94,493 tonnes. In addition, we also completed the Lanti Dry Mining project, which is now in the final stages of commissioning. Sierra Rutile is poised to produce 125,000 tonnes of rutile in 2013, an 84% increase in production from 2011.

Most importantly, these improvements in operating performance have translated into an improved financial performance. Revenues increased by 226% to US$179.1 million, with EBITDA of US$107.8 million in the year demonstrating a marked turnaround from the prior year's EBITDA of US$0.1 million.

Recognising the significant cash flow generating potential of the Group, the Board of Directors recently approved a new dividend policy with the aim of distributing at least 50% of free cash flows after capital expenditures, committed future expenditures and the repayment of any borrowings to shareholders. The first dividend payment will be considered once the timing of the Gangama Dry Mining project is determined.

Of course, 2012 was also a story of two halves in the titanium feedstock market, with demand significantly slowing in the latter part of the year. While there is evidence of the market improving, we firmly believe that our approach of focusing on long-term value creation, including targeted, low-capex growth projects and efficiency improvements is the best strategic approach for the Group and optimal in almost any market environment. We also remain very positive regarding the drivers of our markets in the medium and long-term.

As ever, Sierra Rutile's achievements would not have been possible without the dedication and talents of our employees, many of whom have been with the Group for a long time. It is truly fortunate, as we continue to improve our operations and implement our capacity expansion that we can draw upon such a deep and experienced pool of talent.

The health and safety of our workforce is paramount to the business. Our safety record for 2012 again showed marked year-on-year improvement, with a reduction in lost time injury frequency of 23% compared to 2011. Sierra Rutile remains committed to the health and safety of both our workforce as well as those that come into contact with our operations, whether through their work as subcontractors, as suppliers or as people from the local community.

Sierra Rutile recognises 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. We remain committed to pursuing initiatives and partnerships that improve the quality of the lives and employment opportunities of those residents in our local communities. Our medical facility treated over 22,000 people last year, and we offered 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 the Group, provides funding to projects such as school buildings, 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 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 six years, enabling us to return these lands to the local community for full use. I am glad to report that we managed to rehabilitate 141 hectares of disturbed land last year, 20 hectares above our target. During the year we also took significant steps to develop agricultural opportunities within Sierra Rutile land. With over 55,000 hectares of land in our mining concessions, and given the region's ample rainfall, fertile soil, and location near the equator, we believe that there is a compelling business case for an agribusiness that also provides substantial employment opportunities for the surrounding population.

We continue to believe that by combining our strong commitment to our workforce and local communities with our methodical approach to value creation, focused on sound planning and risk management, 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

If 2011 was a year of transition for Sierra Rutile, then 2012 has been a year of delivery. Our first objective was to continue delivering on production, which, as was the case in 2011, we succeeded in doing. This was a greater achievement than in 2011 as the 2012 target included a step change in production, driven by our renewed asset investments of recent years. While we were always confident that our investments would yield sustainable production increases, it remained an important milestone to prove this, and to prove it on the aggressive timeline. Particularly pleasing was the setting of new production records, which we achieved on both a monthly and quarterly basis during the year.

Our second objective was to deliver on our first expansion project, Lanti Dry Mining. This was the first major expansion of Sierra Rutile's production capabilities since the operation's restart and we were pleased to be able to deliver the project both on budget and on schedule, a schedule that we had actually reduced from our original estimates. Furthermore, we learned a significant amount about such projects, which I am confident, will prove invaluable as we execute further expansions in the future.

We also delivered on our objective to define the next stage of growth for Sierra Rutile, completing studies on a number of expansion possibilities. The Gangama Dry Mining project, on which a pre-feasibility study was conducted, combines low-capex, a short construction period and the optionality of phased implementation. This makes the project well suited to serving our increasing market. The feasibility study on the Gangama Dry Mining project is expected to be completed during second quarter of 2013. Additionally, a scoping study was completed on dredge mining of the Sembehun deposit. This study yielded strong economics and provides a good basis for a long-term increase in production beyond the current level.

Finally, we were able to advance our nascent agribusiness, African Lion Agriculture ("African Lion"), with a strong management team and the establishment of trial crop nurseries. Not only does African Lion provide us with the opportunity to further support social development and the creation of job opportunities, but it also represents a compelling business opportunity, given our land concessions, fertile soils and productive climate.

Finally, I would like to thank our employees, the local communities in which we operate, as well as the Government and people of Sierra Leone for their continued support. This ongoing support positions us well to enjoy many more years of the success that we have experienced during 2012.

John Bonoh Sisay

Chief Executive Officer

Finance review

Cash and Liquidity

As at 31 December 2012, the Group had a net cash balance of US$5.1 million (US$10.7 million as at 31 December 2011) and trade receivables of US$34.3 million liquidated within a month of year end (2011: US$8.1 million). At the year end, the Group was also carrying an inventory of 26,807 tonnes of rutile (14,064 tonnes as at 31 December 2011) and 4,291 tonnes of ilmenite, which has a balance sheet value of US$25.2 million (US$6.6 million as at 31 December 2011).

During the year the Group invested US$57.5 million in property, plant and equipment with US$23.0 million being spent on existing operations and US$34.5 million on expansion projects.

On 30 April 2012, the Group entered into an agreement with the GOSL to pay, in cash, PAYE taxes that had historically been satisfied through the issuance of shares in Sierra Rutile's operating subsidiary in Sierra Leone. As part of the agreement the shares held by the GOSL were transferred back to Sierra Rutile. The total cost of this agreement was US$13,123,000, which included payment in respect of PAYE liabilities that had not yet been settled by share issuances. Additionally, as part of the agreement, the GOSL also agreed to settle its payable to Sierra Rutile of US$727,000 previously recorded as a non-current receivable.

The net cash outflow for Sierra Rutile was therefore US$12,396,000. The non-controlling interest balance previously recognised of US$19,063,000 was also eliminated with the balance being recorded within retained loss in accordance with IAS27 "Consolidated Financial Statements".

Concurrent with this agreement, the Group also prepaid US$5,200,000 of PAYE taxes to the GOSL.

Turnover

The Group was able to benefit from its increased sales volume as well as a strong pricing environment in 2012 as the majority of sales were no longer made on long-term contracts.

Rutile, ilmenite and zircon and other concentrates sales of US$179.1 million in 2012 were 226% above the US$55.0 million achieved in 2011. In 2012, the Group sold 80,894 tonnes of rutile generating revenue of US$165.1 million (2011: 60,499 tonnes for US$40.1 million), 19,643 tonnes of ilmenite generating revenue of US$6.6 million (2011: 19,090 tonnes for US$4.0 million) and 28,232 tonnes of zircon and other concentrates generating revenue of $7.4 million (2011: 12,901 tonnes for $10.9 million). The major contribution to the increase in sales in 2012 over 2011 was the significantly stronger pricing obtained with an average realised price for rutile in 2012 of US$2,041/tonne (2011: US$662/tonne), combined with the increased volume of product sold.

Cost of Sales

Rutile cash production costs decreased 9% to US$637 per tonne (2011: US$701 per tonne) as a result of increased production and the impacts of fixed asset and maintenance investment during 2011 and 2012.

On an absolute basis, cost of sales were higher at US$78.3 million for the year from US$55.2 million in 2011 due to the greater volume of rutile sold, and impacted by:

·; increased production and shipping costs of US$49.6 million (2011: US$34.3 million) required to support increased production; and

·; increase in depreciation charge to US$15.9 million (2011: US$9.1 million) mainly due to additional depreciation on Land Plant Upgrade assets.

The Group remains committed to controlling costs and continue to focus on many cost reduction programs.

Finance review (continued)

Administrative and Marketing Expenses

Administrative expenses increased by US$0.7 million from US$12.8 million in 2011 to US$13.5 million in 2012 principally due to non-cash expenses related to the Group's stock option plan and costs relating to senior management bonuses.

Exceptional Items

The Group recorded an exceptional gain of US$0.2 million (2011: loss of US$13.1 million). The 2012 amounts relate to a release of a US$0.5 million tax provision provided in the prior year offset by a US$0.3 million loss related to a barge damaged during the year.

The 2011 amounts comprised 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 dredge which capsized in 2008, and the US$2.2 million carrying value of the partially constructed replacement dredge. In addition, a provision of US$0.7 million was raised for a potential tax exposure arising on the sale of Sierra Minerals Limited in 2008.

Borrowings

Net finance costs increased from US$1.8 million in 2011 to US$3.4 million in 2012. The increase was principally due to the appreciation of the Euro against the US Dollar and the impact this had on the Euro-denominated loan from the GOSL, which contributed to the net foreign exchange loss of US$0.6 million in 2012 (2011: gain of US$1.2 million).

The underlying interest expense decreased from US$3.0 million in 2011 to US$2.6 million in 2012 principally due to the full year impact of the principal repayment of US$17.1 million in 2011. The next repayment of principal on the loan from the GOSL of US$2.8 million is due in December 2013. Prior to this date only interest on the loan is payable. The final installment on the loan will be repaid in December 2016.

Business review

Group Overview

Sierra Rutile produces rutile, a high-quality feedstock for the global titanium dioxide pigment industry, a raw material for the production of titanium metal, and a raw material for high-quality welding applications. Sierra Rutile also produces and sells an ilmenite ore, a lower grade titanium dioxide ore and on a selective basis, produces and sells quantities of zircon and other concentrates and other tailings concentrate that contains a variety of minerals.

Sierra Rutile's mine, located in southwest 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 800 million tonnes (as at 31 August 2012).

Sierra Rutile currently operates a single bucket ladder dredge with a new dry mining project at Lanti is currently in the final stages of commissioning, with forecast production of 30,000 to 35,000 tonnes per annum. On 31 October 2012, the Group announced the next stage of its expansion strategy, Gangama Dry Mining, which is forecast on completion to have an average annual production rate of 83,400 tonnes of rutile, 46,000 tonnes of ilmenite and 9,500 tonnes of zircon and other concentrates over six years. The feasibility study into Gangama Dry Mining is scheduled for completion in the second quarter of 2013.

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:

·; developing the significant value contained in the Group's mineral deposits;

·; improving operational performance through the application of best practices;

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

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

Values:

Health and Safety: the health and safety of our workforce is the first and foremost consideration. Our approach to health and safety is based on the principle of accident avoidance for our employees, and we aim to implement a policy that is consistent with the best 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 Group pursues a number of initiatives and partnerships, including the Sierra Rutile Foundation, which are designed to improve the lives and opportunities of the people of Sierra Leone.

Environment: the Group 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 Group seeks to maximise production and operational efficiency at the Sierra Rutile mine. The expansion and optimisation of production will allow the Group to deliver 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.

Business review (continued)

Sierra Rutile Mine (continued)

The mine currently employs a bucket ladder dredge and conventional mineral processing methods to produce rutile and an ilmenite by-product. Further by-products are periodically produced, including a zircon concentrate and other mineral concentrates. During 2012, the Group completed the construction of a new production unit, Lanti Dry Mining, which will produce concentrate using conventional dry earthmoving techniques. This concentrate will then be processed in existing mineral processing facilities to produce rutile and ilmenite by-product. The Lanti Dry Mining project is currently in the commissioning stage. On 31 October 2012, the Group announced a significant additional expansion project, the dry mining of the Gangama deposit, on which a feasibility study is scheduled for completion in second quarter of 2013.

The mine is self-sufficient and generates its own power through its marine fuel oil ("MFO") power plant, operates its own port, maintains local road infrastructure, has its own clinic and generally provides and maintains its own infrastructure and ancillary services.

During 2012, the Group 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 tailings to identify potential extensions to the existing mineral resource. Geological drilling was also completed at the Gangama deposit in order to assist with the future dry mining design requirements. Additionally during the year the Group obtained three exploration licences for areas which are adjacent to the current mining licence area, the Semabu, Jagbwema and Gbangbaia deposits. Sierra Rutile will commence with a phased exploration programme and mineral resource evaluation across all three exploration licence areas during 2013.

Moving into 2013, the Group is accelerating the exploration programme which will concentrate exploration efforts on the existing mining licence area and the reconnaissance licence areas to optimise Sierra Rutile's dredge deployment strategy and longer-term dry mining plans, while at the same time improving existing mine planning and expanding the current ore reserve.

The mineral resource announced in 2011 identified the presence of potentially value-enhancing tailings in High Tension Tailings ("HTTs") produced as a by-product of the Group's ongoing mining activities. In March 2011, a further study of the HTTs confirmed the presence of tailings at grades of 2.2% in the tailings stream. 

Mineral Resources Estimate

The mining concession is one of the largest natural rutile deposits known in the world. In August 2012, the Group obtained an upgraded JORC-compliant Mineral Resource for the Sierra Rutile mine, which estimated that the total measured, indicated and inferred resources were over 800 million tonnes.

Mineral Resources are reported in accordance with the JORC Code 2004.

Business review (continued)

Key Project Pipeline

Lanti Dredge, Floating Treatment Plant, Mineral Separation Plant and associated infrastructure

Following a capital investment programme initiated in October 2010, operational improvements have driven significant production increases. Most recently, in June 2012, a major planned maintenance was completed, focused on upgrading key components of the dredge and equipment in the mineral separation plant, with the objective to increase both the throughput and efficiency of existing operations. These refurbishments included:

·; upgrades to the Lanti Dredge bucket ladder, including addition of auto-samplers;

·; replacement of product barges;

·; expansion of critical spare parts inventory; and

·; complete upgrade of the floating treatment plant, including, new rougher, mid and scavenger spirals, and de-sliming cyclones.

The record monthly production in July 2012, of 10,551 tonnes of rutile, was a direct result of the June 2012 enhancements and the cumulative result of the last twenty months' efforts. Substantial improvements in process recoveries have contributed to increased production, culminating in record annual production of 94,493 tonnes of rutile in 2012.

Lanti Dry Mining

In October 2011, the Group announced the commencement of the Lanti Dry Mining project, focusing on high-grade resources inaccessible to dredge mining. This project is forecast to add production of 30,000 to 35,000 tonnes per annum of rutile as well as ilmenite by-product. Construction of the Lanti Dry Mining plant was completed, on time and on budget, during the fourth quarter of 2012 and commissioning is well progressed. First ore was successfully processed through the concentrator and the concentrate was transferred for onward processing in the mineral separation plant. Production ramp-up is continuing.

Project update:

·; ore processing plant is in final stages of commissioning, on budget and ahead of time;

·; supervisors and operators are onsite and fully trained; and

·; heavy mineral concentrate is currently being produced.

Gangama Dry Mining

On 31 October 2012, the Group announced a pre-feasibility study into the dry mining of the Gangama deposit ("Gangama Dry Mining"). The pre-feasibility study reported an exceptional project with a pre-tax NPV1 of US$507 million, an impressive 238% pre-tax IRR and a payback period of just eight months. The project replicates, on a larger scale, the Lanti Dry Mining project that successfully entered commissioning in the fourth quarter of 2012. Gangama Dry Mining represents a much lower-risk and lower capital intensity option for increasing Sierra Rutile's production to the 200,000 tonnes per annum level. The Group has commenced detailed engineering work and project implementation plans on the project and a feasibility study is scheduled for completion in the second quarter of 2013.

The Gangama Dry Mining project will, upon completion, treat 1,000 tonnes per hour of ore. Both earth moving equipment and the concentrator are consistent with those used in Lanti Dry Mining operation. Production will target high-grade resources, resulting in forecast production of over 83,000 tonnes of rutile per annum.

Dry mining the Gangama deposit will provide access to a high-grade resource and given the relatively short construction period, low capital intensity and option to develop in stages, allows a flexible commencement and ramp-up scheduled that can be matched to developing market conditions for rutile.

1 Based on price and market conditions prevailing at the time of study as produced by TZ MINERALS INTERNATIONAL ("TZMI").

Business review (continued)

Sembehun Dredge

In October 2012 the Group also announced the Sembehun Dredge Mining project, following completion of a scoping study conducted by external consultants. The pre-feasibility study reported a pre-tax NPV1 of $347 million and forecast average annual production profile of 113,000 tonnes of rutile and 66,000 tonnes of ilmenite over a life of twenty-two years. The Sembehun Dredge represents the next step change in production for Sierra Rutile.

The Sembehun Dredge project would consist of a 1,875 tonnes per hour bucket ladder dredge and associated floating concentrator plant, a 50 tonne-per-hour mineral separation plant, an 18.6MW power plant, and all site infrastructure required to support an independent operation, accompanied by a new mineral separation plant and associated infrastructure to process concentrate from the Sembehun Dredge.

Agricultural Opportunities

Significant steps have been taken to explore the agricultural opportunities within Sierra Rutile land with the establishment of a wholly-owned subsidiary specifically for that purpose. During 2012 a leadership team was put in place and nursery plantations for prospective crops were developed.

With over 55,000 hectares of land in its mining concessions, and the region's ample rainfall, fertile soil, and location near the equator, Sierra Rutile believes that there is a compelling business case for an agribusiness that also provides substantial employment opportunities for the surrounding population.

Key Performance Indicators ("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, depreciation and amortisation excluding exceptional items and non-cash stock option expenses.1 Based on price and market conditions prevailing at the time of study as produced by TZ MINERALS INTERNATIONAL ("TZMI").

Corporate Social Responsibility

Environmental, Health and Safety ("EHS")

The year 2012 saw continued improvements in health and safety performance at Sierra Rutile, with the Group outperforming its target of a 20% reduction in lost time injury frequency by cutting lost time injury frequency by 23% compared to 2011.

We remain committed to continually improving our performance in this vital area. The Group 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 1,900 people a month in 2012, the majority of whom 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 clinic treated 3,300 employees and members of the local communities for malaria and 1,933 for typhoid. The Group is currently assessing the impact of its malaria and typhoid eradication intervention program in 2011 in which 5,000 mosquito nets and typhoid vaccines were distributed to employees and local communities.

Sierra Rutile continued its successful partnership with NGOs, the Mine Workers Union and the National AIDS Secretariat of Sierra Leone ("NAS") to address the prevention of HIV/AIDS. During the year the Group sponsored a study to assess the impact of its HIV/AIDS program; the study was undertaken by NAS with support from International Labour Organization, ILO/AIDS (Geneva) and the Opec Fund for International Development ("OFID"). The main objective of the study was to obtain estimates of HIV prevalence and key behavioral indicators relating to HIV transmission and prevention methods.

Community

Sierra Rutile is committed to being a positive force in the communities around the mine site as well as in Sierra Leone as a whole. The Group 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 Group's workforce and the desire to improve the lives of the local populace mean it is increasingly important to support education initiatives in the areas around the mine. During 2012, the Group continued to support the Sierra Rutile Technical Institute.

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 promote increased recruitment of local Sierra Leoneans and lower its reliance on expatriate workers. There are currently 12 staff and over 300 students enrolled in the Institute's various courses.

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 the Group is rehabilitating old wells and constructing new ones in order to provide a long-term solution for local villagers' water needs.

Corporate Social Responsibility (continued)

Sierra Rutile Foundation

The Group contributed US$150,000 to the Sierra Rutile Foundation in 2012 (2011: US$150,000), which was set up in 2006 to finance sustainable community development initiatives in the areas surrounding the Group'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. In 2012, the Foundation completed 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 Group itself also completed 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

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

Environment

The Group 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 dredge ponds and sandy tailings areas can impact the 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 Group's own projects, have all been successful, and the Group will continue to observe their growth rates to determine the best strategy going forward for land rehabilitation.

In 2011, the Group commissioned a third party to conduct a full survey of historically disturbed land. Following this analysis a plan was developed and is being implemented to rehabilitate all legacy disturbed areas over the next six years.

In 2012, Sierra Rutile rehabilitated 141.1 hectares of disturbed land comprising filling of sand tailings and 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 Group's aquaculture project for the rehabilitation of mined-out dredge ponds continued in 2012, with a total of 147,247 of tilapia and cat fish stocked. In 2013 the Group plans to rehabilitate some old fish breeding ponds and introduce over 180,000 fish into the dredge ponds.

Principal Risks

Principal Risks

The table below sets out the major strategic and operational risks which the Group faces and their potential impact on our future performance, and our strategy for managing them.

Principal Risks (continued)

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Directors

Directors

Jan Castro Non-Executive Chairman

Mr. Castro is the founder and Chief Executive Officer of Pala Investments Limited, 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 currently serves on the Boards of Alacer Gold (TSX: ASR), Nevada Copper (TSX:NCU), and Asian Mineral Resources (TSX-V:ASN) where he is the Chairman of the Board.

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 Government of Sierra Leone on mining-related issues.

Michael Barton Non-Executive Director

Mr. Barton is currently a Managing Director of Pala Investments Limited and 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), Elemental Minerals Ltd (ASX/TSX: ELM) and WDS Limited (ASX: WDS). 

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

Michael Brown Non-Executive Director

Mr. Brown is currently a Senior Vice President of Pala Investments Limited. He formerly served as the Chief Operating Officer of De Beers Consolidated Mines Ltd ("DBCM"), and Director of De Beers Group Services and De Beers Marine Limited. 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. He 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 Board of Asian Mineral Resources (TSX-V: ASN).

Directors (continued)

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

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

Through his career Dr. Entrekin has led and implemented many successful restructurings and turnarounds of mining and metals companies internationally.

Alex B. Kamara Non-Executive Director

Mr. Kamara has considerable experience in the mining industry and in mechanical and electrical engineering. He 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 to 2002. Mr. Kamara is a Sierra Leonean national and has been awarded the Order of Commander of the Rokel by the Government of Sierra Leone, a high civilian award in recognition of his contribution to engineering in Sierra Leone.

He is currently Chairman of Standard Chartered Bank (Sierra Leone) Limited and a Director of Cemmats Group, a Sierra Leonean company which has a number of contracts with Sierra Rutile.

Richard Lister Non-Executive Director

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. He 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 Group for the year ended

31 December 2012.

Results and dividend

The results of the Group are shown on page 31. The Directors have not declared a dividend during the year (2011: $nil).

On 4 April 2013, the Board approved a new dividend policy which will aim to distribute to shareholders at least 50% of cash flows after capital expenditure, committed future expenditures and the repayment of any borrowings. The declaration of any future dividends, and the frequency of them, will be subject to the Group's financial condition, future prospects and satisfactory solvency tests and other factors deemed by the Board to be relevant at the time.

Principal activities

The Group's principal activity is exploring for, producing and marketing industrial minerals, primarily rutile, in Sierra Leone. The Group owns the Sierra Rutile mine in Sierra Leone.

Business review

A detailed business review can be found on pages 7 to 10.

Post-balance sheet events

These are disclosed in Note 26.

Charitable contributions

During the year the Group made charitable donations of $150,000 (2011: US$ 150,000), principally to local communities in which the Group operates.

Health, Safety, Environment and Communities

The Group 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 Group and provides free healthcare for employees, their dependants and the local population.

Directors' Report (continued)

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

Mr. Alex Kamara (appointed 10 March 2008)

Mr. François Colette (resigned 26 June 2012)

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 31 December 2012 and 31 December 2011 are:

Directors' liability insurance and indemnity

The Group maintains liability insurance for the benefit of its Directors and officers which were made during the year and remain in force at the date of this report.

Supplier payment policy

The Group's policy is to agree terms of payment with its suppliers for each transaction, and to abide by the terms of payment. 

Share Capital

Details are set out in the notes to financial statements.

Substantial Shareholders

So far as the Directors are aware, the following shareholders had an interest in 3% or more of the voting capital of the Group as at 31 December 2012:

In September 2011, Pala Minerals Limited ("Pala"), a subsidiary of Pala Investments 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 majority interest in Sierra Rutile.

Directors' Report (continued)

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 2012, the Group had cash and cash equivalents of $5.8 million (excluding overdrafts) and total borrowings of $32.2 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 December 2014. 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 Group will be held at 3pm (British Summer Time) on Tuesday 9 July 2013 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 the auditor of the Group is to be proposed at the forthcoming AGM.

Approval

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

John Bonoh Sisay

Chief Executive Officer

24 April 2013

Corporate Governance

Sierra Rutile shares are listed on "AIM" (the Alternative Investment Market of the London Stock Exchange) and the Group is subject to and takes all appropriate steps to comply with the AIM Rules. The Board recognises the importance and value for the Group and its shareholders of good corporate governance. In this regard, the Directors intend, where practicable for a Group of Sierra Rutile's size and nature, to comply with the UK Corporate Governance Code.

The Group 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, and 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 Group or each Non-Executive Director concerned to impair the independence of the Group's Non-Executive Directors.

Board overview

The Board is responsible for establishing the Group's strategy and has ultimate responsibility for the management, direction and performance of the Group and its businesses. Authority for the execution of the approved strategies and objectives, and daily running of the business, is delegated to the Executive Directors and Senior Management of the Group. The Board regularly monitors financial and operational progress and risks of the Group.

Board composition

At the date of this report, the Group had seven directors, comprising one Executive Director and six Non-Executive Directors of which three are considered independent.

Re-election of Directors

Directors offer themselves up for re-election at regular intervals.

Relations with Shareholders

This annual report contains information about the activities of the Group. The Group communicates with shareholders and other interested parties through its website, direct information distributed to shareholders, and releases to the AIM.

At the AGM, shareholders elect the Directors and have the opportunity to express their views, ask questions about Group business and vote on items of business for resolution by shareholders.

Corporate Governance (continued)

Committees of the Board (continued)

By order of the Board

John Nagulendran

Company Secretary

24 April 2013

Directors' remuneration report

Introduction

This report has been approved by the Board.

Role of the remuneration committee

The remuneration committee 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 Group. The remuneration committee meets at least once a year.

Components of remuneration

There are three main elements of the remuneration package of the Executive Director and senior management.

·; Basic salary;

·; Performance-related bonuses; and

·; Share-based awards.

Directors' contracts

The Executive Director has an indefinite term contract. It is the Group's policy that the period of notice required for Executive Directors does not exceed 12 months.

Non-Executive Directors' fees

The fees for Non-Executive Directors are designed to ensure that the Group attracts and retains high calibre individuals. They are reviewed on an annual basis and account is taken of the level of fees paid by other companies of a similar size and complexity. Non-Executive Directors do not participate in any annual bonus plan or pension arrangements. The Group repays reasonable expenses that Non-Executive Directors incur in carrying out their duties as Directors.

Directors' remuneration report (continued)

Directors' Remuneration

Directors' remuneration for the years ended 31 December 2012 and 31 December 2011 is as follows:

1François Colette resigned on 26 June 2012

2No pension contributions have been made in the year

3 Wayne Malouf and Jean Lindberg Charles resigned on 21 February 2011.

Directors' remuneration report (continued)

Share Options

Directors and those who have served as directors during the year, hold the following options to subscribe for common shares as at 31 December 2012:

Directors Share Ownership Policy

The average share price for the year ended was 64.59 p (2011: 22.56 p).

Subsequent to the year end, the Board adopted a share ownership policy for Directors, whereby non-executive directors are expected to build up and hold at least two million shares in the Group (four million for the Chief Executive Officer and Chairman). Directors are expected to retain shares acquired pursuant to share incentive awards, but may sell sufficient shares as necessary to pay the exercise price, taxation and out of pocket expenses associated with the exercise of share incentive awards. There is no target date to achieve the share ownership and such number of shares.

On behalf of the Board

Michael Barton

Chairman of Remuneration Committee

24 April 2013

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 Group'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 Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group;

·; safeguarding the assets of the Group;

·; 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 Group'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 Bonoh Sisay Alex Kamara

24 April 2013 24 April 2013

Independent auditor's report to the members of Sierra Rutile Limited and its subsidiaries

We have audited the financial statements of Sierra Rutile Limited and its subsidiaries for the year ended 31 December 2012 which comprise the consolidated income statement, the 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 30. 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 Group's members, as a body, in accordance with AIM Rule 19. Our audit work has been undertaken so that we might state to the Group'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 Group and the Group'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 Group's affairs as at 31 December 2012 and of its profit 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

24 April 2013

The financial statements of Sierra Rutile Limited and its subsidiaries were approved by the Board of Directors on 24 April 2013.

Signed on behalf of the Board of Directors

John Bonoh Sisay Alex Kamara

24 April 2013 24 April 2013

Notes to the consolidated financial statements

Year ended 31 December 2012

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 AGM of shareholders of the Group.

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"). The financial statements have been prepared on the historical cost basis. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The principal accounting policies adopted are set out below.

(b) Going concern

The Board has considered the Group's cash flow forecasts for the period to the end of December 2014. 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

A number of amendments to accounting standards and new interpretations issued by the International Accounting Standards Board (IASB), were applicable from 1 January 2012. They have not had a material impact on the accounting policies, methods of computation or presentation by 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 European Union):

IFRS 9 'Financial Instruments-Classification and Measurement' (effective for periods beginning on or after 1 January 2014)

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.

Notes to the consolidated financial statements

Year ended 31 December 2012

2. Significant accounting policies (continued)

(d) Basis of consolidation

Subsidiaries are all 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-Group 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 the cost of restoring the site on which the assets are located. These costs are recognised as a liability.

Notes to the consolidated financial statements

Year ended 31 December 2012

2. Significant accounting policies (continued)

(f) Property, plant and equipment (continued)

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.

Notes to the consolidated financial statements

Year ended 31 December 2012

2. Significant accounting policies (continued)

(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.

Notes to the consolidated financial statements

Year ended 31 December 2012

2. Significant accounting policies (continued)

(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 entities 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.

At the balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing at that date.

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.

Notes to the consolidated financial statements

Year ended 31 December 2012

2. Significant accounting policies (continued)

(k) Financial instruments (continued)

 (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 stock piles of rutile, ilmenite, zircon and other concentrates and consumables. Rutile and consumables are measured at the lower of cost and net realisable value. In line with IAS 2 'Inventories' ilmenite and zircon and other concentrate by-products are measured at 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 consumable inventories is based on the weighted average method and comprises all costs of purchase and other costs incurred in bringing the inventories to their present location and condition. The cost of rutile is measured as all production costs and other attributable production overheads adjusted for the by-product sales of ilemnite and zircon and other concentrates 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 except for ilmenite and zircon and other concentrates which are stated at net realisable value, where cost is defined as follows:

Rutile - 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.

Notes to the consolidated financial statements

Year ended 31 December 2012

2. Significant accounting policies (continued)

(m) Taxation (continued)

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 Group 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 Group. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation in relation to this agreement.

 (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.

Notes to the consolidated financial statements

Year ended 31 December 2012

2. Significant accounting policies (continued)

(q) Provisions (continued)

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 consolidated income statement.

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 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 other concentrates and ilmenite is measured at the fair value of the consideration received or receivable, which is usually the invoice value of rutile, zircon and other concentrates 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$").

Notes to the consolidated financial statements

Year ended 31 December 2012

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 2012, 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.

Notes to the consolidated financial statements

Year ended 31 December 2012

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 concentrates and other revenue streams being considered 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 and other concentrates 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 year ended December 2012 revenues of US$65,209,000, US$30,863,000 and US$23,144,000 were generated from three customers (2011: Revenues of US$12,344,000, US$11,800,000, US$7,026,000 and US$10,900,000, were derived from four customers) all of whom accounted for more than 10% of the Group's total annual sales.

Segment assets

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

Notes to the consolidated financial statements

Year ended 31 December 2012

5. Expenses by nature

6. Employee benefit expense

In accordance with IAS 24 'Related Party Disclosures (Amended)', the compensation for key management is disclosed within note 27.

Notes to the consolidated financial statements

Year ended 31 December 2012

7. Exceptional items

The Group recorded an exceptional gain of US$0.2 million (2011: loss of US$13.1 million). The 2012 amounts relate to a release of a US$0.5 million tax provision provided in the prior year offset by a US$0.3 million loss related to a barge damaged during the year.

The 2011 amounts comprised 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 dredge which capsized in 2008, and the US$2.2 million carrying value of the partially constructed replacement dredge. Furthermore, a provision of US$0.7 million was raised for a potential tax exposure arising on the sale of Sierra Minerals Limited in 2008.

8. Net finance costs

Notes to the consolidated financial statements

Year ended 31 December 2012

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 profit/(loss) before tax as follows:

(b) Current tax liabilities

Notes to the consolidated financial statements

Year ended 31 December 2012

10. Basic and diluted earnings/(loss) per share

For year ended 31 December 2011, because there is a reduction in loss per share resulting from the assumption that the share options are exercised, the share options are considered anti-dilutive and are ignored in the computation of diluted EPS. As there are no other instruments that may have a potential dilutive effect, the basic and diluted loss per share is the same.

Notes to the consolidated financial statements

Year ended 31 December 2012

11. Intangible assets

1 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 the latest commodity price, growth forecasts 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. The cash flows are then discounted appropriately at the Group's weighted average cost of capital of 11% on a post-tax basis.

2 In 2012, the Group commissioned and incurred costs on a feasibility study into the Gangama and Sembehun mining options. All the costs incurred related to the technical feasibility of mining rutile via dredging or dry mining, and these have been capitalised as an intangible asset in line with IFRS 6, 'Exploration for and Evaluation of Mineral Resources'.

3 During 2011, in light of new analysis and after reviewing the work of third party legal counsel, the Group 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 was taken against the goodwill balance as the acquisition took place prior to the introduction of IFRS3 (2008) 'Business Combinations' (see note 29).

Notes to the consolidated financial statements

Year ended 31 December 2012

12. Property, plant and equipment