Afarak : AGM Document

Report pursuant to Chapter 7 Section 9 of the Limited Liability Companies Act to the General Meeting of Afarak Group Plc

Subject matter and objectives of the audit

This audit report is intended only for use by Afarak Group Plc and its shareholders.

We have conducted a special audit of Afarak Group Plc on the basis of the following stated in decision ESAVI/11657/2018 of the Regional State Administrative Agency of Southern Finland (hereinafter referred to as the "RSAA's decision"):

"By its decision, the Regional State Administrative Agency orders audit firm Idman Vilén Grant Thornton Oy, with Authorised Public Accountant Jussi Savio as principal auditor, subject to their agreement, to conduct a special audit of Afarak Group Plc's administration and accounts for the financial periods 1 January to 31 December 2015, 1 January to 31 December 2016 and 1 January to 31 December 2017 and for the period from 1 January to 30 April 2018 in order to clarify the business and legal transactions conducted by Danko Koncar with his probable immediate circle. The Regional State Administrative Agency rejects the application in other respects. The order can be enforced before it has become final."

Based on the RSAA's above-mentioned decision and our risk assessment measures:

• - The key objective of the audit was to clarify the business and legal transactions conducted by Danko Koncar with his probable immediate circle.

• - The audit focused on the ore trade of selected group companies and on auditing the related potential/probable cash flows.

• - In accordance with our professional judgement and risk assessment, we have defined the focus areas of the audit and the audit procedures. These focus areas and audit procedures are set out below in this audit report.

On the duration of the audit

In our view, the duration of the audit has been significantly affected by the considerable delays in the information and answers provided to us by the company. During the audit, we have had to repeatedly remind the company of the requested and lacking information.

We find that it is important to note that, although the audit has taken a long time, we have made every effort to ensure that the audit is carried out efficiently, thoroughly and objectively. We have endeavoured to ensure a sufficiently comprehensive assessment of all areas assessed as significant and the provision of reliable results and findings.

Focus areas of the audit

On the basis of the above-mentioned decision of the RSAA as well as our professional judgement and risk assessment, we have determined the key focus areas for the audit. These focus areas are set out below.

• 1. Identification of the immediate circle

  In order to clarify the business and legal transactions conducted by Danko Koncar with his probable immediate circle, we find it essential to determine Danco Koncar's probable immediate circle.

• 2. Ore sales and other essential transactions related to ore in the following special purpose entities:

  • 2.1 Afarak Trading Ltd ( hereinafter "ATL" )

  • 2.2 Türk Maadin Şirketi A.S ( "TMS" )

  • 2.3 Ilitha Mining (Pty) Ltd ( "Ilitha" )

  • 2.4 Chromex Mining Ltd ( "Chromex" )

On pages 4-5 of the decision of the RSAA, the Applicants for the special audit claim that:

"The first concrete suspicion of malfeasance relates to the operation of Afarak Group Plc's subsidiary ATL in general and to its ore transactions in particular.

As described above, one of Koncar's key actions for concentrating control to himself has been the establishment of ATL and the transfer of one of Afarak Group Plc's key operations, i.e. ore sales, to ATL.

According to Applicants' information, ATL and ore transactions are likely to be used as a means for transferring Afarak Group Plc's assets to companies closely associated with Koncar.

The likely transfer of assets will first take place through the sale of ore by ATL to companies closely associated with Koncar. These companies are either controlled by Koncar or they have made a secret cooperation agreement with Koncar or Aida Djakov.

The selling price of the ore is probably lower than what could be obtained if the ore was sold on the free market. The Applicants are aware that ATL has turned down third parties' purchase offers at a higher price than the price for which ATL sells ore to companies closely associated with Koncar.

The companies closely associated with Koncar apparently then resell the Afarak Group Plc's ore that they have purchased at a low price through ATL. The closely associated companies thus gain the difference between the market price and the price of the purchase from ATL. In practice, this leads to Afarak Group Plc's assets being gradually drained to companies closely associated with Koncar.

Ore has been traded at least with Hino Resources Co. Ltd, which is, according to the Financial Supervisory Authority, a company controlled by Koncar."

In particular, the audit took into account the above-mentioned claims of the Applicants and aimed to determine whether these claims were substantiated.

On the basis of our risk assessment, it has been appropriate to focus the audit not only on ATL, but also on other / the aforementioned group companies.

• 3. Credit notes related to ore trade and payment transactions in ATL

  On page 5 of the above-mentioned decision of the RSAA, the Applicants claim that:

  "Secondly, Afarak Group Plc's assets are probably also being transferred to companies closely associated with Koncar through ATL by other means. After ore transactions, companies closely associated with Koncar often file complaints with ATL, which are not justified according to the Applicants. Yet ATL does not contest the complaints, but instead pays the demanded amounts to companies closely associated with Koncar. Afarak Group Plc has thus at least in this respect neglected its obligation to report transactions with closely associated parties."

  On the basis of a sample-based audit of ATL's sales credit invoices and related payment transactions was sought to determine in particular whether the company has unjustifiably compensated and/or paid for complaints, in particular to companies possibly closely associated with Danko Koncar.

• 4. Balancing of ore production data reports with the inventory calculations

  • 4.1 Ilitha

  • 4.2 Chromex

  • 4.3 TMS

Based on our understanding and risk assessment, it is essential to determine the 'ore flows' of selected ore production sites (stock balances, production, sales and other possible essential events), in particular to identify reported sales volumes and to detect and investigate possible "deviant" ore transfers.

5.

Accounting expenses and payment transactions in the following special purpose entities of the group:

• 5.1 ATL

• 5.2 TMS

• 5.3 Ilitha

• 5.4 Chromex

With reference to the aforementioned decision of the RSAA and in view of the objective of the audit, in order to identify suspected malfeasance (including possible complaints), based on our risk assessment we have considered it appropriate to review, in addition to e.g. sales transactions, selected expenses and payment transactions. This is done also because, based on our risk assessment and professional judgement, in order to identify business and legal transactions conducted by Danko Koncar with his probable/potential immediate circle, it is not appropriate to limit the audit to sales transactions only.

As a risk in terms of selected expense accounts and payments made by companies included in the income statements of the companies was in particular considered that an individual company had been charged, or the company had paid, considerable sums, for example, for consultancy, commissions, or as other administrative expenses, to the potential immediate circle, and had thus transferred assets out of the Group (especially to companies closely associated with Danko Koncar) without proper justification.

Conclusion on the conduced audit

With particular reference to the above-mentioned decision of the RSAA, and the key claims of the Applicants cited therein, the key conclusions on whether grounds for these claims have been established on the basis of the special audit, are set out below. More detailed audit findings and comments on these key conclusions are set out below in this audit report.

• - As a whole, we have not identified any concrete issues on account of which a special audit was ordered due to suspicions.

• - The revenue generated by ore sales is low, especially relative to the Group's revenue as a whole.

• - Ore has not been sold to Hino Resources Co. Ltd

• - Ore has not been sold to parties which are with certainty known or suspected to belong to Danko Koncar's immediate circle. However, the audit does not allow to establish with certainty which companies are definitely closely associated with Danko Koncar.

• - The audit did not reveal any sales where ore would have been sold at a price lower than the world market price. In our view, it is not possible to conduct this review and draw conclusions completely unequivocally, due, inter alia, to the possible freight costs affecting the pricing of the ore and their impact on the selling price.

• - The audit did not reveal payments for unfounded complaints by ATL to the suspected companies closely associated with Danko Koncar or to any other companies.

• - During the 2017 financial period, ATL paid a total of approximately EUR 11 million through various offsetting procedures to the closely associated companies mentioned below. The Company has provided us with explanations regarding the basis and background of these payments, as described below in this audit report from page 32 onwards. Despite these clarifications, we felt that we did not have full clarity as to why such offsetting procedures had been implemented. However, we did not find any wrongdoings in these payments.

  • o To "Brodotrogir D.D.", a company belonging to the Kermas Group, approximately EUR 4.3 million

  • o To "Kermas Energija D.o.o " and "Kermas Istra D.o.o ", companies belonging to the Kermas Group, a total of EUR 2 million

• o To Afarak Holdings Ltd, approximately EUR 5.5 million

Key audit procedures and findings

1. Identification of the immediate circle

1.1

General

The Company has provided us with information on the related party transactions reported by the Company in the financial statements for financial periods 2015-2018. On the basis of the above information, the following were treated as closely associated companies:

• • Kermas Limited

• • Synergy Africa Ltd

• • LL-Resources Ltd

In addition, the following were treated as potential closely associated companies in the audit:

• o Hino Resources Co. Ltd (the Applicants of the special audit have suggested that the company belongs to the immediate circle and that, for example, according to the 2017 annual report of the Company, the said company owns 14.1% of Afarak Group Plc

In addition, on the basis of the special audit (focus area 5 findings), we further assumed that the following companies belong to the immediate circle:

• - Kermas Energija D.O.O.

• - Kermas Istra D.O.O.

• - Prodotrogir D.D.

In our view, the three companies mentioned above are part of the Kermas Ltd group which has been named in Afarak Plc's financial statements as a company closely associated with Danco Koncar. More on the transactions between the assumed associated companies and companies belonging to the Afarak Group is disclosed below in this audit report.

1.2

as clients in ore transactions or in transactions involving included several companies on whose owners there was no expenses and significant payments. The said review (= information in the said register. We could, therefore, not could a company closely associated with Danko Koncar fully ascertain whether Danko Koncar or his immediate be concerned) did not include companies belonging to

2. Ore sales and other essential transactions related to ore

General

The audit was based on the notion that the term 'ore' refers to chrome ore, a raw material obtained from a mine and which has not undergone any other processing operations than separation from the rest of the soil. Ore comes in different forms (chrome ore, lumpy ore), but these are all treated in the same way under the generic term 'ore'. Thus, when reviewing ore sales, products processed from ore are excluded from the scope of the review.

According to our understanding, as ore is exclusively considered to be a raw material obtained from a mine and which has not undergone any other processing operations than separation from the rest of the soil.

In addition, based on our risk assessment, in the audit has been considered that intra-group transactions do not involve significant risks from the point of view of the objective of the audit since intra-group transactions (between 100% group-owned companies) cannot involve transfer of assets out of Afarak Group. In transactions between affiliated companies and subsidiaries, there is a risk that some of the assets are transferred out of the Group to other owners of the affiliated companies (underpriced sale from a subsidiary to an affiliated company or overpriced purchase by a subsidiary from an affiliate), but in this respect the risk has been considered to be clearly lower than in transactions with parties completely outside the Group.

The audit was begun by first auditing financial period 2017, the more comprehensive information from which was utilized, where applicable, in auditing financial periods 1.1.-31.12.2015 and 1.1-31.12.2016 as well as the period 1.1.-30.4.2018.

Audit procedures

The sample-based audit of ore sales included the following elements:

• - How much ore was sold.

• - Has ore been sold to parties suspected of possibly belonging to Danko Koncar's immediate circle.

• - Have the selling prices of the ore corresponded to the world market prices. If the selling prices of ore have not corresponded to the world market prices of ore, what are the main reasons for the price deviations (for example delivery terms, etc.).

In order to carry out the audit, we requested and were given access to:

• a) Account-specific income statements and balance sheets.

• b) General accounting ledgers

• c) In-house reports on ore sales

• d) Quality certificates, that is, measurements of, inter alia, the products' Cr203, i.e. chromium contents, and H2O, i.e. water contents, carried out by an external assessor.

• e) Sales invoices

• f) Bank statements

2.1 ATL

2.1.1 How much ore was sold

The aim of the audit was to determine the amount of ore sold. Based on the determination of the amount of ore sold, the aim was in particular to estimate the proportion of ore sales in the volume of other sales.

Financial periods 1.1.-31.12.2015, 1.1.-31.12.2016 and 1.1.-31.12.2017 as well as the period 1.1.-30.4.2018.

Audit procedures

Findings:

The amount of ore sold was determined on the basis of Financial period 1.1.-31.12.2015:various sales and other reports provided by the company.

In order to verify the reported amount of ore sold (see the column "Findings" above), the audit reviewed sales invoices on a sample basis (as a whole per financialExternal ore sales amounted to approximately USD 2.3 million. By comparison, the Company's revenue totalled USD 178 million..

Financial period 1.1.-31.12.2016:

External ore sales amounted to approximately USD 74 thousand. By comparison, the Company's revenue totalled approximately USD 146 million.

Financial period 1.1.-31.12.2017:

External ore sales amounted to approximately USD 5.9 million. By comparison, the Company's revenue totalled USD 223 million..

Period 1.1.-30.4.2018:

External ore sales amounted to approximately USD 5.6 million. By comparison, the Company's revenue totalled USD 88 million.

As a whole, there was nothing to comment in this regard.

The sample-based review of the sales invoices confirmedperiod/period: 100, of which 50 of the largest and 50 by the previously formed notion that the proportion of ore sales random sampling) for other than ore sales to verify on a of total sales is in our opinion very low (especially when set

sample-basis that the products sold according to the sales invoices were the same as the ones entered in the accounts.

in proportion to the company's revenue as a whole).

2.1.2 Has ore been sold to parties suspected of possibly belonging to Danko Koncar's immediate circle

General

The Applicants for the special audit state that "Ore transactions have been made at least with Hino Resources Co. Ltd, which is, according to the Financial Supervisory Authority, a company controlled by Koncar."

According to the Company, none of the ore transactions have involved a company closely associated with Danko Koncar.

According to the Company, no ore sales have taken place with Hino Resources Co. Ltd. Neither does the Company have any information to the effect that Hino Resources Co. Ltd is a company controlled by Danko Koncar.

Financial periods 1.1.-31.12.2015, 1.1.-31.12.2016 and 1.1.-31.12.2017 as well as the period 1.1.-30.4.2018.

Audit procedures

On the basis of the Company's general accounting ledger and other sales and accounting reporting

Findings:

Ore sales were divided by financial period / period (excluding 2016 ) regarding the most significant clients, byobtained, we have analysed the most significant clients client (anonymised), as follows: regarding ore sales.

The audit reviewed sales invoices on a sample basis (as a whole per financial period/period: 100, of which

Financial period 1.1.-31.12.2015: Client A: USD 1.9m

Financial period 1.1.-31.12.2017:

Client A: $3.7m

Client B: $1.5m

Client C: $0.4m

Client D: $0.3m

Period 1.1.-30.4.2018:

Client A: $3.3m

Client B: $2.1m

According to the Company, none of these clients (clients

"A" to "D") is a company closely associated with Danko

Koncar.

According to our understanding or the information confirmed by the Company (referring to the aforementioned listing of 18 companies), the companies referred to above did not include companies closely associated with Danko Koncar.

The reviewed sales invoices did not reveal Hino Resources Co. Ltd or any companies closely associated with Danko

50 of the largest and 50 by random sampling) for other Koncar's immediate circle. than ore sales.

The clients in the reviewed invoices are the same as the clients according to the accounts.

The companies that have made the payments are the same as those that are clients in the accounts and in sales invoices.

In conclusion, there is no indication in the audit that ore or any other of the Company's products were sold to Hino Resources Co. Ltd or any companies closely associated with Danko Koncar.

2.1.3 Have the selling prices of the ore corresponded to the world market prices

General:

According to the Company

• • ATL has sold South African ore with the US dollar as the trading currency and the clients buying ore on CIF terms, that is, with cost, insurance and freight included in the selling price.

• • In ore sales, the final selling price is always based on the analytical findings of the chromite and moisture contents of the product at the port of destination. The invoices prepared for shipment are always conditional and based on findings made at the production plant regarding the product. It is standard practice that the final selling price is adjusted through credit/debit notes.

According to our understanding, the selling price is in principle based on the world market price at the time of conclusion of the contract. Of the bases for the selling price could be mentioned the DMT amount (i.e. the amount from which H2O (water) has been excluded), and a specific Cr203 / chromium oxide content, which is the so-called "basis". The sales contract specifies a certain chromium oxide content, under which the buyer has the right to reject the consignment.

Since the actual transactions will not take place until some time after the date of the contract (the difference in the audited cases was approximately 1 to 4 months), it is highly likely that the world market prices on the date of sale may differ considerably from the price at which the transaction actually takes place on the day in question. If the finally determined chromium oxide content differs from the "basis" chromium oxide content in the contract, the final selling price is determined so that a chromium oxide content above the "basis" content increases the price and a lower content decreases the price.

In conducting the audit, we have established default prices (to which the actual prices are compared) as follows:

•

•

Contracts concluded under CIF terms use directly the world market price of the product in question. Contracts concluded under FOB terms deduct from the CIF world market price freight costs, which areestimated at approximately USD 60-80.

Financial period 1.1.-31.12.2015

Audit procedures

Findings:

We found out the world market prices of ore by using a To give an example, the world market price of an individual

public source (www.ferroalloynet.com ).

ore grade (South African chromite concentrate, 40%-42% content) remained stable for a long time in 2015, at approximately 160 $/tonne, and decreased since September fairly steadily, ending at approximately 110$/tonne at year end.

A graph based on the above-mentioned public sourcewww.ferroalloynet.comdepicting the development ofthe world market prices of ore during 2015 is shown at the end of this table.

Regarding sales transactions audited on a sample basis:

• • We compared, among others, sales volumes, chromite and moisture contents and dollar sales with quality certificates issued by external quality assessors, and also with the sales invoices.

• • We compared the world market prices with the price at the time of conclusion of the contract.

Sales during this financial period were made with the US dollar as the trading currency and on CIF terms.

The sales volumes, chromite and moisture contents and dollar sales tallied with the quality certificates issued by external quality assessors, and also with the sales invoices.

As regards the comparison between the world market prices and the prices at the time of conclusion of the contract, we note the following key findings:

• • Compared against the above-mentioned reference points (in particular the delivery terms), the unit selling prices examined are in line with the world market prices.

• • The CR203 contents of the ore concentrate sold were significantly higher, approximately 45-50. According to our understanding, there is no quoted world market price for CR203 content 50, and thus it was not possible to verify the accuracy of such selling prices. The total value of the conditional sales invoices of these sales was approximately EUR 1 million.

Source:www.ferroalloynet.com

Financial period 1.1.-31.12.2016

Findings:

In relation to the scope of the audit, ore sales during the financial period were small-scale (ore sales totalling approximately 74 thousand dollars), and we did not, therefore, consider the correctness of the selling prices to besignificant for the purposes of the audit. Thus, the selling prices of ore during the financial period were not audited in greater detail.

Financial period 1.1.-31.12.2017

Audit procedures Findings:

We investigated the world market prices of ore by using To give an example, the world market price of an individual a public source ( ore grade (chromite concentrate, 40%-42% content) waswww.ferroalloynet.comwww.ferroalloynet.com). high (approximately 350-400 $/tonne) in January to March 2017, but during April to May, the price began to fall significantly (for example, in May to approximately 130 $-140 $/tonne), after which (since June), the price has varied between approximately 160 $-250 $/tonne.

Regarding the sales transactions audited:

• • We compared the world market prices with the price at the time of conclusion of the contract.

• • We compared, among others, sales volumes, chromite and moisture contents and dollar sales with quality certificates issued by external quality assessors, and also with the sales invoices.

• • We ensured that the payments according to the sales invoices had been paid to the company's bank account.

A graph based on the above-mentioned public source

www.ferroalloynet.com depicting the development of the

world market prices of ore during 2017 is shown at the end

of this table.

Sales during this financial period were made with the US dollar as the trading currency and on CIF terms, on FOB terms with the US dollar as the trading currency as well as on FOB terms with ZAR as the trading currency.

The unit selling prices examined against the above-mentioned reference points (in particular the delivery terms) are in line with the world market prices.

The sales volumes, chromite and moisture contents and dollar sales tallied with the quality certificates issued by external quality assessors, and also with the sales invoices.

The total amounts according to the audited sales invoices have been paid to the company's bank account.

In conclusion, there are no significant differences in this respect, i.e.: selling prices can be derived (with the assumptions stated above) from sales contracts that are in line with the world market price (taking into account the freight costs in the market price according to CIF) and the quality certificates for the actual chromium contents.

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Afarak Group SE published this content on 25 March 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 25 March 2024 13:21:01 UTC.