Falcon Gold Zimbabwe Limited (FALG.zw) 2018 Annual Report

We have extracted below the Chairman’s Statement from the 2018 annual report of Falcon Gold Zimbabwe Limited (FALG.zw), listed on the Zimbabwe Stock Exchange:

OVERVIEW

As stated in our March 2018 interim results, it was noted that as early as 2018 there was a continued deviation from agreed operational plans, budgets and targets, and a critical review of control processes and the effectiveness of the management team were undertaken within the Group. As a result of this review, various changes were made to management, the control  structure and internal reporting. Shortly after these changes were made, on 15 January 2018, workers at Golden Quarry Mine went on strike, and remained on strike until 13 March 2018. While any strike is potentially crippling to a mining company, regrettably, the striking employees refused to allow management and key support staff access to the site that was required to keep water pumping and to maintain the operations in a relatively operationally-ready state. As a result, the operations of both Golden Quarry and Camperdown Mines were severely flooded and critical equipment was damaged, both on surface and underground.

Mining operations resumed on 16 March 2018, with management and those employees returning to work having to start the long and difficult process of dewatering the mine shafts and making the surface facilities operational again. With no operating cash flow, and a single operating mine, the startup of the mine complex was slow, costly and laborious. The Camperdown shaft was finally pumped dry by 22 April 2018 and operations then recommenced. The Golden Quarry Mine was finally pumped dry on 6 June 2018 and ore hoisting commenced on 13 June 2018. The Golden Quarry plant was started in early April 2018 and has been operating at a reduced throughput due to damage sustained to equipment during the strike. As such there was very low gold production in the second quarter of 2018. All of these factors significantly impacted the Group’s operating results for the year ended 30 September 2018, and will continue to impact the Group for the foreseeable future.

The toll treatment at Dalny Mine had been a significant source of revenue for the Group, but that revenue source ended with the sale of Dalny Mine to RioZim Limited, effective 19 May 2017. The proceeds from the sale of Dalny Mine, which generated a gain of US$4 058 373 for the year ended 30 September 2017, supported the Group in completing the various projects described above, and it is anticipated that the increased throughput planned at the mines has the potential to see these operations achieve, over time, self-sustaining profitability and cash flows. Subsequent to fiscal year end 2018, there was a catastrophic engineering failure of the Main Operating Mill at Golden Quarry Mine, which has adversely affected production and cashflows. Management has undertaken a full impact assessment and is evaluating various options to deal with the situation, including either repair, refurbish or outright replacement of the Mill. Notwithstanding the Mill failure, to date the funding required to execute the 2019 financial budget has not been provided and discussions with the company’s parent company are ongoing.

OUTLOOK

As has been reported over the years, there have been no major positive improvements to the operational macro environment, with the tax regime remaining unfavourable. There was some relief in power costs with the tariff reduction from US12.8c/Kwh to an average of US8.6c/Kwh during the latter part of fiscal 2018. However, the unstable power supply situation remains a major threat to the operational viability of the mines. Engagement with the parent company regarding capital requirements is continuing. Once these discussions are concluded, it is hoped that as soon as the required funding is provided, critical repairs to major equipment will be undertaken and creditor issues resolved, which will then allow Golden Quarry Mine to be re-opened.

GOING CONCERN

The Group sustained losses attributable to the shareholders of the Group during the year ended 30 September 2018 amounting to $4 850 681 (2017: $684 074). The Group had a net working capital deficit at 30 September 2018 of $6 748 056 (2017: $4 387 934) and negative equity of $17 161 298(2017: $12 310 617). The Group continues to incur losses. The Group generated revenues from two sources: the mill at the Golden Quarry Mine and the sand processing plant at Wanderer Mine (which has assisted the Group’s cash flows). Certain upgrade projects were undertaken at the Golden Quarry Mine Complex in the prior year which did not impact production as anticipated due to employee strikes and machinery breakdowns. Post year-end, the Group suffered a catastrophic break down of the main operating mill at Golden Quarry Mine, which resulted in ceasing gold production. In addition, the power supply had been cut off due to non- payment of utility bills. This resulted in the full impairment of the Golden Quarry cash generating unit. In addition, it rendered the 2019 forecasts inappropriate.

These conditions give rise to material uncertainty which may cast significant doubt about the Group’s ability to continue as a going concern and, therefore, it may be unable to realise its assets and discharge its liabilities in the normal course of business.

In the continuing environment of gold prices and toll fees being approximately equal to the Group’s cost of production before depreciation and other non-cash costs, the Group continues to experience financial distress. This matter is being addressed by the introduction of a number of cost containment measures, reduction in marginal grade areas mined, and efficiency enhancement initiatives. In addition, the Group is continuing efforts to restructure operations and reduce costs.

Due to the serious liquidity problems, the continued absence of significant investor appetite for Zimbabwe, and the lack of operating profits, management of the Group is, of necessity, operating the Group with a determined focus on addressing short-term issues as they arise, but there can be no assurances that the Group will be able to continue to conduct operations should existing circumstances persist. The majority of factors affecting the Group’s operations are external factors outside of its control. As such, there is significant pressure on the Group’s efforts to survive. Accordingly, and as stated previously, should the Group be forced to consider shutting down its remaining mining operations, either temporarily or permanently, and/or liquidating its assets in a formal or informal arrangement, then the Group may be unable to continue realising value from its assets and discharging its liabilities in the normal course of business. We obtained a letter of support from the ultimate holding company New Dawn Mining Corp., which states that they will not demand repayment of loans in the 12 months after year end and will extend principle repayments due for another year. Management is exploring options for an additional $2.5 million of funding to enable repair of the mill and resuscitation of mining operations, but have not finalised the funding source or structure.

The consolidated financial statements have been prepared on the basis of accounting policies applicable to a going concern. This basis presumes that funds will be available to finance future operations and that the realisation of assets and settlement of liabilities, contingent obligations and commitments will occur in the ordinary course of business. These consolidated financial statements do not include any adjustments that might result were it determined to be inappropriate to use the going concern basis of accounting.

CHAIRMAN
I R SAUNDERS

FINANCIAL DIRECTOR
Q NKOMO