FOX MARBLE HOLDINGS PLC ANNUAL REPORT & ACCOUNTS 2014 F OX M A R B L E H O L D I N G S P LC A N N UA L R E P O R T A N D A CCO U N T S 2 0 14 PAGE | 1 PAGE | 2 F OX M A R B L E H O L D I N G S P LC A N N UA L R E P O R T A N D A CCO U N T S 2 0 14 Index Index ........................................................................................................................................................ 1 Introduction .............................................................................................................................................. 2 Chairman’s statement ................................................................................................................................. 3 Strategic Report ......................................................................................................................................... 4 Directors ................................................................................................................................................. 13 Report of the Directors.............................................................................................................................. 15 Directors’ Remuneration Report ................................................................................................................. 19 Directors’ Responsibilities .......................................................................................................................... 22 Independent Auditors’ Report to the Members of Fox Marble Holdings plc ........................................................ 23 Consolidated Statement of Comprehensive Income ...................................................................................... 25 Consolidated Statement of Financial Position ............................................................................................... 26 Consolidated Statement of Cash Flows ........................................................................................................ 27 Consolidated Statement of Changes in Equity .............................................................................................. 28 Statement of Financial Position of the parent company ................................................................................. 29 Statement of Changes in Equity of the parent company ................................................................................ 30 Statement of Cash Flows of the parent company .......................................................................................... 31 Notes to the consolidated and parent company financial statements ............................................................... 32 Notice of Annual General Meeting ............................................................................................................... 52 F OX M A R B L E H O L D I N G S P LC A N N UA L R E P O R T A N D A CCO U N T S 2 0 14 PAGE | 3 Introduction Fox Marble Holdings plc is a marble company focused on the extraction and processing of dimensional stone from quarries in Kosovo and South East Europe. Established in 2011, Fox Marble has acquired the rights for over 300 million cubic metres of a range of premium quality marble. Fox Marble is the first UK quoted company investing and operating primarily in Kosovo, and the first to be producing and marketing high quality marble from Kosovo. Fox Marble’s long term goal is to expand its portfolio of quarries and production capacity, and to create a premium marble brand through which Kosovo and the region is established as a major centre of marble production. Operational Highlights • Over 14,000 tonnes of marble extracted during 2014. • Strategic relationships entered into with Marmi E Graniti D’Italia S.r.I (“MGI”), Banyan Stone Limited (“Banyan”) and Zhong Shengdestone Co.,Ltd (“ZSC”) during Q4 2014, complementing existing Pisani offtake and distribution agreement and Royalstone distribution agreement from 2013. • Sales agency agreement with ZSC signed in December 2014 with minimum quantity of 10,000 tonnes per annum. • December 2014 offtake agreement with Banyan provides for a minimum commitment of €1.5 million of block marble over the next 18 months. Prepayment of €250k received in February 2015. • Acquisition of a sub-lease over a new Sivec quarry in Prilep completed in August 2014 • Since the year end Fox Marble sold 900 sqm of polished slabs of Argento Grigio marble to St Georges plc the luxury homes division of Berkeley Homes plc. • Product continues to be sold via the Company’s office in Carrara and its distributors in London (Pisani) and New York (Royalstone). Confirmed or completed orders under the Pisani offtake agreement currently total over €250k. • Factory building purchased and shipped to the Fox Marble site in Kosovo under budget during 2014. Construction of the factory building is almost complete and the company will shortly begin transportation and installation of the processing machinery. • Order book as at 9 April 2015 of €2. 8 million of which €2.0 million is expected to be realised in 2015. Financial Summary • Revenue for the year of €0.15 million (2013 - €0.05 million) with much of the initial 2014 order book pushed into H1 2015. • Operating loss for the year of €2.12 million (2013: loss of €2.17 million), net loss of €2.33 million (2013: €2.57 million) due to costs incurred in bringing the quarries up to full production. • Net cash position at 31 December 2014 of €4.7 million (2013: €5.26 million). PAGE | 4 F OX M A R B L E H O L D I N G S P LC A N N UA L R E P O R T A N D A CCO U N T S 2 0 14 Chairman’s statement Dear Shareholder, Whilst sales in 2014 have been below our expectations at the start of the year, your Company nevertheless has made further positive progress. Our quarries are now producing significant quantities of marble, we have added additional quarries to our portfolio and our factory at Lipjan is nearing completion. Importantly, we are beginning to see momentum build in generating sales revenues with an increasing order book and the signing of a number of key agreements from which we will start to realise value in the coming year. Four quarries are now in operation at Cervenilla, Syrigane and Malesheva in Kosovo and Prilep in Macedonia. Over 14,000 tonnes of marble were extracted during 2014. The quality of marble from the Syrigane and Cervenilla quarries has been particularly encouraging and your Company has had notable success in the sale of Argento Grigio marble from Cervenilla into luxury developments in London. Marble extraction in 2015 is planned to exceed 25,000 tonnes. During the year we acquired the rights to a new Sivec quarry, Prilep Omega, next to our existing Sivec quarry. Sivec is a highly sought after marble and key for the development of Fox Marble’s portfolio. We have also secured the rights to a further site close to our Malesheva quarry and a possible second source of Bianco Illirico marble. This brings the total to five quarries under licence and a further four under operating agreements. The factory at Lipjan is nearing completion. This has been delayed by unexpected adverse weather. However the frame and roof are now in place and more rapid progress is expected as the weather improves. The factory will open up a number of new sales channels and particularly the local market for cut and polished tiles. It will also reduce our reliance on our cutting and polishing operations in Carrara, Italy, with consequent cost benefits. One of our key priorities for 2014 was sales and marketing. Sales for the year were €149,924, significantly below our expectations at the start of the year. This is largely due to the time it takes to build relationships and demonstrate that we can provide the consistent quality and quantities of marble our customers require. Encouragingly, as the year has progressed we have developed a growing number of relationships and have entered into a number of important agreements, including strategic offtake agreements with MGI and Banyan Stone. We have also entered into a sales agency agreement with ZSC, which will provide access to the very large Chinese market. To date we have confirmed orders for 2015 of €2.0 million and expect further progress over the next few months. The results for the year reflect ongoing costs incurred in developing our quarries, quarry operating expenses and overhead expenditure. Costs are being managed tightly, particularly in this period before we have established a large, stable and recurring level of sales. The loss for 2014 was €2.3million, marginally less than the 2013 loss of €2.6million. Net cash at the year-end was €4.7million of which €1.0 million is allocated for spend on the factory at Lipjan. Your Board is responsible for ensuring that the Company operates to high standards of corporate governance, ethical standards and integrity. Your non-executive directors bring a wealth of relevant experience and provide constructive and supportive challenge to the executive directors. Overall I believe your Board is working well. I would also like to thank all our employees who work so hard on our behalf for their ongoing support and loyalty. I believe 2015 will be a very important year. Our ambition is to become the leading supplier of premium marble from Kosovo and south east Europe. Building our sales revenues, whilst closely controlling our costs and cash flow, are critical to the achievement of that ambition. Andrew Allner Non-Executive Chairman 13 April 2015 F OX M A R B L E H O L D I N G S P LC A N N UA L R E P O R T A N D A CCO U N T S 2 0 14 PAGE | 5 Strategic Report Business Activities Quarry operations The Group currently has five quarries under licence and operating agreements in place with a further four quarries. Four of Fox Marble’s quarries are currently in operation at Cervenilla, Syrigane, Malesheva and Prilep. In total over 14,000 tonnes of marble have been extracted from these quarries in the year. Fox Marble has invested in further quarrying equipment in the year to ensure increased levels of production are met and the Company is able to fulfil demand. The Company has also procured two large chain saws to be deployed to the quarries to substantially increase production in 2015. The first of these was delivered in January 2015 to our Prilep quarry. Cervenilla This site was the first of ours to be opened in November 2012. The quarry is being exploited across three separate locations (Cervenilla A, B & C) from which red, light and darker grey marble is being produced in significant quantities, with over 6,500 tonnes quarried in 2014. The quarry is producing large compact blocks which have been sold both as blocks and processed into polished slabs for sale. Figure 1 Operations at Cervenilla Malesheva In July 2013 the Company acquired the rights to the Malesheva quarry in Kosovo from a local company. The licence to the quarry is for 20 years with an irrevocable option to extend the period by a further 20 years thereafter. The Company will pay a royalty of 20% on net revenue generated from the sale of block marble to the previous licence holder of the quarry. The quarry contains a mixture of cream and Bianco Illirico marble. Based on queries from distributors, the Company has found that demand for Bianco Illirico marble is strong, particularly in North American markets, and the Company believes that this marble could become the largest volume seller of its mid-priced marble range. This quarry is now open with operations expected to reach full levels of commercial production this year. Figure 2 Operations at Malesheva opening Illyric White bench PAGE | 6 F OX M A R B L E H O L D I N G S P LC A N N UA L R E P O R T A N D A CCO U N T S 2 0 14 Syrigane The quarry at Syrigane (formerly Suhogerll) is open across two benches. The site contains a variety of breccia and callacatta type marble and has been producing significant volumes of breccia marble in large compact blocks, with over 6,000 tonnes of marble quarried in 2014. Figure 3 Recently quarried block of Breccia Paridisea being cleaned Prilep The Company entered into an agreement to operate a quarry in Prilep, Macedonia in 2013. The agreement is for a period of 20 years with an irrevocable option to extend the period for a further 20 years thereafter. The Prilep quarry contains the highly desirable white Sivec marble, currently available from only one other quarry in the world. This type of marble has been used in a number of prestigious projects, including the construction of the Sheik Zayed Grand Mosque in Abu Dhabi. The demand for Sivec exceeds current world supply and once the quarry site reaches full levels of commercial production we anticipate rapid sales of this stone. Sivec marble prices begin from €500 per metric Figure 4 Chainsaw at the bench in Prilep tonne (unprocessed) representing the most expensive marble in the current Fox Marble portfolio. The Prilep quarry is controlled by a local partner who has appointed Fox Marble to operate the quarry on its behalf. Fox Marble will receive 25% of the gross revenue from the sale of all block marble from this quarry, without having to fund the cost of equipping or investing in the reopening of the quarry. Fox Marble will be responsible for the costs associated with extracting the marble from the quarry. This quarry is now open and producing, and operations are being ramped up to reach full levels of commercial production. Figure 5 Recently quarried blocks of Sivec Figure 6 A block of Sivec being rinsed F OX M A R B L E H O L D I N G S P LC A N N UA L R E P O R T A N D A CCO U N T S 2 0 14 PAGE | 7 In August 2014 the Company entered into a sub-lease arrangement with New World Holdings (Malta) Limited to acquire the rights to a second Sivec marble quarry - the Omega Sivec quarry at Prilep in Macedonia. This new quarry site is adjacent to the Company’s existing operations in Prilep. The consideration for the sub-lease was £1,000,000 and a subsequent 40 per cent. gross revenue royalty obligation. The sub-lease has an initial term of 20 years, which is extendable by the Company for a further 20 years. The sub-lease grants the Company the exclusive right to quarry, process, remove and sell marble from the quarry. The Company will pay for and provide all the equipment and staff required to operate this quarry. Fox Marble estimates that the quarry will require approximately £600,000 of capital expenditure investment to reach commercial production. Exploitation of this quarry is in the planning stages with a drilling programme being implemented. Other quarry sites The Company also holds exploitation licences for quarries at Antena, Verrezat and Peja and an operating agreement over a quarry at Drini. These sites are not currently being quarried, pending their further development. The Company has further identified a 300 hectare site close to the Company’s existing licence resource in Malesheva that the Directors believe contains a large deposit of Bianco Illirico which may provide the Company with a second source of this sought after marble. In order to continue to benefit from the significant interest in Bianco Illirico marble the Company has reserved the rights to this area by submitting applications for an exploration licence to the ICMM. As an existing licence holder in good standing the Company believes there will be no impediment to the grant of this licence. The formal award of the licence is pending the appointment of the new ICMM board in Kosovo. Reserve Licence area Country Status Marble Type Volume (million m3) Operational – commercial levels of Rosso Cait, Argento Cervenilla Kosovo blocks extracted Grigio, Flora 16.83(1) Rosso Cait, Argento Verrezat Kosovo Site opened – ready for extraction Grigio, Flora 32.51(1) Antena Kosovo Site not currently operational Black 97.24 (2) Peja Kosovo Site not currently operational Honey Onyx 42.10(1) & 101.17 (2) Drini Kosovo Site not currently operational Grey Emperador Not available Operational – commercial levels of Breccia Paridisea, Syrigane Kosovo blocks extracted Etruscan Dorato 36.62(2) Bianco Illirico, Malesheva Kosovo Operational Cremo Olta 4.75(3) Prilep alpha Macedonia Operational Sivec 0.2 (4) Prilep Macedonia Under development Sivec 0.2 (4) omega (1) Indicated resource – as indicated by the Competent Persons Report prepared by Dr Magne Martinsen of Golder Associates (2) Inferred resource – as indicated by the Competent Persons Report prepared by Dr Magne Martinsen of Golder Associates (3) 2005 US Aid report (4) Internal surveys performed by the Company PAGE | 8 F OX M A R B L E H O L D I N G S P LC A N N UA L R E P O R T A N D A CCO U N T S 2 0 14 Processing Factory A double skinned steel factory for the cutting and processing of blocks into polished tiles and slabs has been purchased and is being erected on a 10 hectare site the Company has acquired in Lipjan, close to Pristina airport. The Company’s factory has been under construction and, despite unexpected adverse weather conditions; the factory building is nearing completion and requires a further 5 days of work with uninterrupted good weather in Pristina at which time equipment will start to be shipped from Italy for installation in the building. The floor has been laid and work has commenced on completing the foundations for the gang saws and water channels. This long-awaited factory will open up a number of Figure 7 Factory under construction important new sales channels for the Company and provide a further boost to the economics, given the high margin derived from the cutting and polishing industry for marble. Figure 8 Polished slab of Rosso Cait from our Figure 9 Internal panelling on the factory Cervenilla quarry structure Figure 10 Polished slab of Argento Grigio from the Figure 8 Polished slab of Breccia Paridisea from Cervenilla quarry our Syrigane quarry