THE REPUBLIC OF UGANDA

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF

KILEMBE MINES LTD

FOR THE FINANCIAL YEAR ENDED 30TH JUNE 2015

OFFICE OF THE AUDITOR GENERAL

UGANDA

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TABLE OF CONTENTS

LIST OF ACRONYMS ...................................................................................................... iii

REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF KILEMBE MINES

LTD FOR THE YEAR ENDED 30TH JUNE, 2015 ................................................................. iv

DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF

KILEMBE MINES LTD FOR THE YEAR ENDED 30TH JUNE, 2015 .......................................... 1

1.0 INTRODUCTION .................................................................................................. 1

2.0 BACKGROUND INFORMATION .............................................................................. 1

3.0 ENTITY FINANCING ............................................................................................ 2

4.0 OBJECTIVE OF KILEMBE MINES LIMITED .............................................................. 2

5.0 AUDIT OBJECTIVES ............................................................................................. 2

6.0 PROCEDURES PERFORMED .................................................................................. 2

7.0 FINDINGS........................................................................................................... 3

8.0 DETAILED AUDIT FINDINGS ................................................................................ 4

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LIST OF ACRONYMS

Acronym

GoU Government of Uganda

IAS International Accounting Standard

KML Kilembe Mines Ltd

Tibet Tibet – Hima Mining Company Limited

UGX Uganda Shillings

USD United States Dollar

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REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF

KILEMBE MINES LTD FOR THE YEAR ENDED 30TH JUNE, 2015

THE RT. HON. SPEAKER OF PARLIAMENT

I have audited the financial statements of Kilembe Mines Ltd for the year ended 30th June

2015. These financial statements comprise of the Statement of Financial Position, the

Statement of Financial Performance, and Cash flow Statement together with other

accompanying statements, notes and accounting policies.

Management Responsibility

Under Article 164 of the Constitution of the Republic of Uganda 1995 (as amended) and

Section 45 of the Public Finance Management Act, 2015, the Accounting Officer is

accountable to Parliament for the funds and resources of Kilembe Mines Ltd. The Accounting

Officer is also responsible for the preparation of financial statements in accordance with the

requirements of International Financial Reporting Standards and the Uganda Companies Act,

and for such internal control as management determines is necessary to enable the

preparation of financial statements that are free from material misstatement whether due to

fraud or error.

Auditor’s Responsibility

My responsibility as required by Article 163 of the Constitution of the Republic of Uganda

19995 (as amended) and Sections 13 and 19 of the National Audit Act, 2008 is to audit and

express an opinion on these statements based on my audit. I conducted the audit in

accordance with International Standards on Auditing. Those standards require that I comply

with the ethical requirements and plan and perform the audit to obtain reasonable

assurance whether the financial statements are free from material misstatement.

An audit involves performing audit procedures to obtain evidence about the amounts and

disclosures in the financial statements as well as evidence supporting compliance with

relevant laws and regulations. The procedures selected depend on the Auditor’s judgment

including the assessment of risks of material misstatement of financial statements whether

due to fraud or error. In making those risk assessments, the Auditor considers internal

control relevant to the entity’s preparation and fair presentation of financial statements in

order to design audit procedures that are appropriate in the circumstances but not for

purposes of expressing an opinion on the effectiveness of the entity’s internal control. An

audit also includes evaluating the appropriateness of accounting policies used and the

reasonableness of accounting estimates made by management as well as evaluating the

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overall presentation of the financial statements. I believe that the audit evidence I have

obtained is sufficient and appropriate to provide a basis for my opinion.

Part “A” of this report sets out my opinion on the financial statements. Part “B” which forms

an integral part of this report presents in detail all the significant audit findings made during

the audit which have been brought to the attention of management and form part of my

Annual Report to Parliament.

PART “A” Opinion

In my opinion, the financial statements of Kilembe Mines Ltd for the year ended 30th June

2015 are prepared, in all material respects in accordance with the International Financial

Reporting Standards and the Uganda Companies Act, Cap 110 of the Laws of Uganda, 2000.

Emphasis of Matter

Without qualifying my opinion, I draw attention to the following matters disclosed in the

financial statements.

Uncleared loan balance

Included in the Non-current liabilities, under Note 12, is an outstanding Loan from Ministry

of Finance (Privatisation Unit) amounting to UGX.4,700,000,000 inspite of the fact that the

Privatisation Unit received USD4.03m as upfront fee on the signing of the Concession which

could have been applied to offset this loan.

Impairment loss

As explained in note 3, Kilembe Mines Limited impaired its investments in Kasese

Cobalt Company Limited (KCCL) by UGX.11,085,885,120 after KCCL posted a negative total

equity of USD 40.9 million and having ceased its business operations. KML is likely to incur

more costs in settlement of outstanding liabilities from the venture.

John F.S. Muwanga

AUDITOR GENERAL

14th December, 2015

PART "B"

DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS

OF KILEMBE MINES LTD FOR THE YEAR ENDED 30TH JUNE, 2015

This Section outlines the detailed audit findings, management responses, and my

recommendations in respect thereof.

1.0 INTRODUCTION

Article 163 (3) of the Constitution of the Republic of Uganda, 1995 (as amended)

requires me to audit and report on the public accounts of Uganda and all public

offices including the courts, the central and local government administrations,

universities, and public institutions of the like nature and any public corporation or

other bodies or organizations established by an Act of Parliament. Accordingly, I

carried out the audit of the KML to enable me report to Parliament.

2.0 BACKGROUND INFORMATION

Kilembe Mines Limited (KML) was incorporated in 1950 under the Companies

Ordinance as a private company. In 1975, the Government of Uganda (GoU) bought

majority shares from the previous owners and it became wholly owned by GoU.

Following decline in the world market of copper prices the business became unviable,

the mining operations deteriorated substantially. KML stopped mining as a main

activity in 1982 and has since then been placed under care and maintenance.

The principal activity of the Company was the mining and the marketing of copper

and allied minerals; however after the drastic fall in prices in the late 70s and early

80s, mining operations ceased and the company diversified into various activities

such as generation and sale of hydroelectric power, sale of lime, foundry products,

rental of its buildings and sub-lease of its land, sale of transmission and fencing

poles.

The Government of Uganda (Principal shareholder in KML) in 2013 leased its assets

in form of a concession to Tibet – Hima Automobile Industry Limited (Tibet) that won

the bid for the conceded assets of KML and subsequently entered into a Concession

Agreement with the GOU which among other things requires the revival of mining

activities at Kilembe to the point of processing copper and manufacture of finished

copper products. Under the agreement, the core assets of KML, which include the

mine, the mine works, the hydro-power station and attendant land and buildings,

were conceded to Tibet for a period of 25-years effective April 2014.

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Therefore, KML’s new role as an asset-holding company is to track the investment

program of the concessionaire and (in so doing) to monitor the implementation of

the concession on behalf of GOU (by reporting on the key outputs).

3.0 ENTITY FINANCING

KML was financed by operating income of UGX 1,918,719,259 representing annual

decline of 31.5%.

4.0 OBJECTIVE OF KILEMBE MINES LIMITED

The objective of KML is to carry out monitoring and evaluation roles according to the

Concession Agreement between Government of Uganda and Concessionaire.

5.0 AUDIT OBJECTIVES

The audit was carried out in accordance with International Standards on Auditing and

accordingly included a review of the accounting records and agreed procedures as

was considered necessary. In conducting my reviews, special attention was paid to

establish:-

a. Whether the financial statements have been prepared in accordance with

consistently applied accounting Policies and fairly present the revenues and

expenditures for the period and of the financial position as at the end of the

period.

b. Whether all funds were utilized with due attention to economy and efficiency and

only for the purposes for which the funds were provided.

c. Whether goods and services financed have been procured in accordance with the

Government of Uganda Procurement regulations.

d. Whether management put in place sufficient internal control structure and the

internal controls worked as intended throughout the year.

e. Whether the management was in compliance with the Government of Uganda

financial regulations.

f. Whether all necessary supporting documents, records and accounts have been

kept in respect of all activities, and are in agreement with the financial

statements presented.

6.0 PROCEDURES PERFORMED

The following audit procedures were undertaken:-

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(a) Revenue

Obtained schedules of all revenues collected and reconciled the amounts to the

cashbooks and bank statements.

(b) Expenditure

The payment vouchers were examined for proper authorization, eligibility and

budgetary provision, accountability and support documentation.

(c) Internal Control system

Reviewed the internal control system and its operations to establish whether

sound controls were applied throughout the period audited.

(d) Procurement

Reviewed the procurement of goods and services by the entity during the

period under review and reconciled with the approved procurement plan.

(e) Fixed Asset Management

Reviewed the use and management of the entity assets during the period

under audit

(f) Financial Statements

Examined on a test basis, evidence supporting the amounts and disclosures in

the financial statements; assessed the accounting principles used and

significant estimates made by management; as well as evaluating the overall

financial statement presentation.

7.0 FINDINGS

7.1 Categorization of audit findings

The following system of profiling of the audit findings has been adopted to better

prioritise the implementation of audit recommendations.

N

o

Category Description

1 High significance Has a significant / material impact, has a high likelihood of

reoccurrence, and in the opinion of the Auditor General, it

requires urgent remedial action. It is a matter of high risk

or high stakeholder interest.

2 Moderate significance Has a moderate impact, has a likelihood of reoccurrence,

and in the opinion of the Auditor General, it requires

remedial action. It is a matter of medium risk or moderate

stakeholder interest.

3 Low significance Has a low impact, has a remote likelihood of reoccurrence,

and in the opinion of the Auditor General, may not require

much attention, though its remediation may add value to

the entity. It is a matter of low risk or low stakeholder

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interest.

7.2 Summary of audit finding according to the above profiling

No Title of findings Significance

1 Uncleared loan balance 4,700,000,000 High

2 Impairment loss of Investments

UGX.11,085,885,120

High

3 Vacant positions moderate

4 Lack of an investment Plan High

5 Non Payment of Concession Fee moderate

6 Absence of a Project Linkage Plan moderate

7 Monitoring of activities of Tibet Hima Mining

Company

moderate

8.0 DETAILED AUDIT FINDINGS

8.1 Uncleared loan balance

Included in the Non-current liabilities, under Note 12, is a Loan from Ministry of

Finance, Planning and Economic Development (Privatisation Unit) amounting to

UGX4,700,000,000 which has remained outstanding for a long time inspite of the fact

that the company’s role has changed and is now there to monitor the performance of

the concession only. With no clear income sources, it is highly unlikely that the loan

will be settled.

I advised management to liaise with MoFPED and have the loan settled through the

concession proceeds that are paid directly to Privatization Unit.

8.2 Impairment loss

As explained in note 3, Kilembe Mines Limited (KML) impaired its investments in

Kasese Cobalt Company Limited (KCCL) by UGX.11,085,885,120. This was after KCCL

posted a negative total equity of USD.40.9 million and had ceased its business

operations of cobalt processing. The investment has never economically been viable

and no dividends were ever paid by KCCL.

As at 31st December 2014, the major shareholder (75%) had an outstanding

Shareholder loan of USD.48.96m therefore KML is likely to incur more costs in

settlement of outstanding liabilities from the venture.

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I advised management to reconsider investment in UCCL in view of the declining

value of the Company.

8.3 Vacant positions

KML under the concession agreement between the GOU and Tibet has new roles that

include asset holding, tracking the investment program of the concessionaire and

monitor the implementation of the concession on behalf of GOU. As a result of its

new roles, restructuring was undertaken. In its new structure, the company is

required to have fourteen (14) full time employees. However, it was noted that 3

positions of key technical staff including a geologist, environmentalist and a mining

engineer had not been filled. As a result of these vacancies, management may not

undertake the roles set out in the concession agreement adequately.

Management acknowledged the need to fill the vacant posts but attributed it to lack

of funds.

8.4 Lack of an investment Plan

Section 3.2.7.2 of the concession agreement requires that the Concessionaire prior to

the procurement or acquisition of any one or group of conceded assets financed by

the concessionaire, submit to KML an investment plan consistent with the applicable

feasibility report, in a form to be agreed by KML and the Concessionaire indicating:

a) The proposed specifications of the assets to be procured or details of the

investment to be made.

b) The number of assets to be procured and amounts of other inputs required.

c) The proposed procurement methods, for information only; and

d) The estimated cost separated into the aggregated cost of items to be procured

and other costs to be incurred, for information only at this stage.

Contrary to the above, the Concessionaire had not provided KML with an investment

plan by the time of the audit despite procuring items worth USD3,796,121. None of

the procured items were agreed upon between the concessionaire and KML. This

violates the terms and conditions of the concession agreement, and also casts doubt

on whether the procured equipment would achieve the intended purpose.

Management explained that the submission date of the feasibility report was 30th

September 2015 and that although the investment plan has not been submitted, any

items so far procured by the Concessionaire before the investment plan is availed will

not be part of the Assets accounts to be maintained by KML.

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I advised management to ensure timelines are adhered to and that the concession

agreement is complied with.

8.5 Monitoring of activities of Tibet Hima Mining Company

I undertook an inspection around the mill at Kilembe and the following observations

were made:

a) Lack of Protective Gear

There were a number of workers who did not have protective gear as shown in

the photo below.

b) Cigarette packs in the mill

Good safety practices allow for the creation of smoking zones in locations far from

fire hazards. During the inspection of the mill, close to 3 cigarette packets were

observed in the mill. This presents a risk of fire. It was observed that there were no

smoking zones in the entire operation Area and as a result workers smoked from all

locations in the mill and left the cigarette packs on the floor

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Management explained that the issues of safety had always been brought to the

attention of the Concessionaire and although they had promised to comply, no

actions were taken.

I advised management to consider invoking section 24 of the agreement which

provides process of dealing with such continuous default and or non-compliance.

9.0 STATUS OF PRIOR YEAR AUDIT RECOMMENDATIONS

I reviewed the implementation of the previous year audit recommendations and the

following table summarizes the status of implementation and actions taken by

management;

Issue Recommendation Status

Biological

Assets-These

had not been

disclosed

I advised management to conduct

a valuation exercise for the

biological assets and adjust the

financial statements accordingly.

Not implemented

A note was made in the

financial statements

pending valuation of the

assets.

Trade Payables-

There was an

increment in the

trade payables

figure of 137%

I advised Management to settle the

obligations to avoid litigation.

Implemented

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I advised the company management to implement the outstanding audit

recommendation to ensure enhanced accountability and better stewardship of the

company resources.

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FINANCIAL STATEMENTS