Archipelago Resources PLC : Final Results for the Year Ended 31 December 2012

11 March 2013

AIM: AR.

Archipelago Resources plc

("Archipelago" or "the Company")

PRELIMINARY FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2012

Archipelago is pleased to release its preliminary results for the 12 months ended 31 December 2012 ("FY 2012").

HIGHLIGHTS

·      In its first full year of production, Archipelago met initial guidance with output of 139,012 Au Eq oz and cash costs of $635 per Au oz (net of silver credits).

·      Revenues more than doubled to $225m (FY 2011: $93m), driven by higher production, despite relatively flat Au prices. 

·      The Company sustained strong cash generation, with cash from operating activities of $94m, up $76m (FY 2011: $18m), and the closing cash balance more than doubling to close at $51m (FY 2011: $22m).

·      Strong profit growth was reported, with EBIT & NPAT at $84m & $48m respectively (FY 2011: $31m & $13m respectively).

·      Archipelago strengthened its balance sheet position, with debt gearing reduced to 5% (FY11: 31%).

·      Operations were sustained in line with expectations, with the Company reporting a FY 2012 strip ratio of 5.64:1, average head grade of 2.79 g/t Au and plant throughput of 1,738,197t (exceeding nameplate capacity).

·      The Company maintained its strong safety record, with no "lost-time injuries" reported for FY 2012.

·      Impressive exploration results were reported throughout FY 2012, including the publication of a revised JORC compliant Resource & Reserve, supporting an extension of the life of mine to 9 years (plus 7 years of stockpiles). 

DIVIDEND

In recognition of Archipelago's strong cash generating profile, the Company announced the adoption of a dividend policy on 4 March 2013, targeting payment of dividends equivalent to at least 10% of operating cash flows. 

Subject to the matters referred to below, Archipelago anticipates paying:

·      an inaugural "interim dividend" of 1.25p per ordinary share, representing approximately 12% of the Company's FY 2012 operating cash flows; and

·      a further one-off "special dividend" of 1p per ordinary share, as recognition of shareholder support during the development and commissioning phases of the Toka Tindung Gold Mine. 

Resolutions will be proposed at the upcoming Annual General Meeting ("AGM"), which is provisionally scheduled for 30 May 2013, seeking approval of (i) the dividend payments as required under the Company's constitution, and (ii) a reduction of the Company's share premium account to create distributable reserves (as the parent company itself does not currently have distributable reserves to allow for these payments).  Reduction of the share premium account is also subject to a court approval process, which is expected to be completed by the end of June 2013. The Company anticipates that following (and subject to) completion of these approvals the record date will be in mid to late July 2013 with payment following soon after. The Company will inform shareholders of the precise record date and payment date as soon as it is able to do so. 

COMMENT

Commenting on the result, Marcus Engelbrecht, Managing Director and CEO, said:

"In our first full year of production, Archipelago achieved some impressive results; reporting EBIT of $84m, profit after tax of $48m and earnings per share of 7.8 cents (up from 2.2 cents in 2011).  Our ability to generate strong cash returns was reflected in a year end cash balance of $51m and a strong balance sheet, with net gearing down from 31% to 5%.  Consequently, I am pleased to announce our intention to pay an inaugural interim dividend of 1.25p and a special dividend of 1p per share.

2012 was a successful year for Archipelago, with the Company emerging as a credible gold producer, focused on delivering returns for shareholders.  Archipelago remains committed to this objective with our strong production and cash generating profile continuing throughout 2013." 

CONFERENCE CALL

A presentation on Archipelago's FY 2012 results will be held for analysts and investors today, Monday 11 March 2013, at 9:30am (London time) at the office of Buchanan, 107 Cheapside, London, EC2V 6DN. 

The presentation will be webcasted and can be viewed at the above time via the following link:

http://mediaserve.buchanan.uk.com/2013/archipelago110313/registration.asp

Participation by way of conference call will be possible. Participant dial-in numbers are as follows:

UK:                           0800 694 5728 

Alternative number:    +44 (0) 1452 321 569

Conference ID#          16508434

A recording of the webcast will also be made available on the Company's website later on the same day.

FURTHER INFORMATION

COMPETENT PERSON STATEMENT

The information in this release that relates to mineral exploration results, together with any related assessments and interpretations, have been verified by and approved for release by Mr. Graeme Fleming B App Sc (Geol), MAusIMM, a qualified geologist and full-time consultant for PT. Tambang Tondano Nusajaya, a subsidiary of Archipelago.  Mr. Fleming has sufficient experience which is relevant to the style of mineralisation and type of deposit under consideration and to the activity which he is undertaking to qualify as a Competent Person as defined by JORC.

GLOSSARY OF TERMS

ABOUT ARCHIPELAGO

Archipelago is a producing mining company listed on the AIM market of the London Stock Exchange. Archipelago's vision is to grow into a respected and regionally dominant mid-cap gold producer, managing a portfolio of gold mines and delivering significant value and returns for shareholders. Archipelago's principal activities are gold mining and exploration in Indonesia (as the 95% owner of the producing Toka Tindung Gold Mine in North Sulawesi, Indonesia). In 2013, Archipelago expects to produce between 140,000 and 155,000 Au Eq oz at a cash cost of between US$620 and US$680 per ounce (net of silver credits). 

CHAIRMAN'S STATEMENT

To our shareholders, I am pleased to report on Archipelago's affairs during 2012, in what was a transformational year for our Company.  The Company achieved strong operational results at our Toka Tindung mine and grew the asset with material increases to our Resource and Reserve base.  Our financial results demonstrate our robust performance, with solid cash generation and profits maintained throughout the period.  We also made significant progress in increasing the profile of Archipelago in key capital markets. 

With our core operation in North Sulawesi, Indonesia, Archipelago is clearly leveraged to one of the most dynamic business environments on the globe.  With a population of 230 million people and GDP of greater than $3,700 per capita, Indonesia continues to benefit from a period of sustained and strong economic growth; centred on internal development and an increasingly prevalent middle class. 

This trend is expected to continue over the next 10 years, which in turn will support further economic expansion and international investment in Indonesia - in particular in the resource sector, including precious metals.  An increasingly educated and urbanized population will provide a strategic labour force in centres of investment, with mining regarded as a key industry in this context.  Throughout the current growth phase, Indonesia's national government continues to play a guiding role in ensuring that economic expansion occurs in a sustained and systematic manner.   

The Indonesian people also continue to embrace democratic principles and governance.  Presidential elections are scheduled for 2014 and this is already impacting on national policy and the political debate.  Moving into 2013, Archipelago remains optimistic in respect of the country's prospects and stability as it approaches the forthcoming election cycle.

This is of particular relevance to the mining sector, which remains a core source of economic benefit for Indonesia.  In 2012, the national government issued a number of policy pronouncements for the sector, which caused uncertainty for some industry participants.  One particular issue was a pronouncement in early 2012 requiring foreign owned IUP holders to divest some of their interests in Indonesian mineral projects after five years of commercial production. 

It is important to note that this new divestment regime will not apply to Archipelago's mining concessions, which are based on two pre-existing Contract of Work arrangements, negotiated directly with the Indonesian national government.  Notwithstanding this, Archipelago was able to respond in a pro-active way to the changing policy landscape by working in close dialogue with government stakeholders at regional and national levels.  We will continue to take this approach in 2013. 

It is important to reflect on the broader policy rationale underlying the changes to Indonesian mining law, which emphasises greater transparency, improved regulation of mining practices and a greater sharing of the benefits of mining for the Indonesian community.  In this regard, Archipelago acknowledges the paradigm shift in Indonesian mining policy since the adoption of new laws in 2009.  In conjunction with our core Indonesian stakeholders, Archipelago continues to work in a co-operative manner with government to advance commercial outcomes for Toka Tindung, consistent with the direction of national policy. 

Moving into 2013, Archipelago will build on the achievements of the last year as we look to increase our production profile.  We will pursue our targeted exploration programme, enabling us to expand our resource and asset base, which provides the rationale for further capital expansion.  Building on our reputation for delivering results, we will also continue to assess value accretive options for broader corporate expansion. 

As we continue to implement these strategies, Archipelago will remain a strong cash generator.  In this context, it was pleasing to announce a formal dividend policy subsequent to year end, with the Board committed to paying to shareholders at least 10% of operating cash flows by way of dividends.  Clearly, this outcome aligns with our corporate vision of delivering significant value and returns for our shareholders. 

On behalf of the Board, I would like to thank our shareholders for their on-going support throughout 2012. 

Stephen K. Sulistyo

Non Executive Chairman

11 March 2013

CHIEF EXECUTIVE OFFICER'S STATEMENT

I am pleased to report that Archipelago generated exceptional results in FY2012, our first full year of production at our Toka Tindung gold mine. 

In line with our focus on shareholder value, we successfully delivered on our goals and milestones.  We met our initial production targets set at the beginning of 2012 at a competitive cash cost, demonstrating our ability to deliver consistent results from our operating activities.  These positive outcomes resulted in the Company posting a robust profit and generating strong cash flows.

Our most important objective is ensuring that our employees work within a safe and healthy environment.  During 2012, the Company had no lost-time injuries.  We intend to build on this positive outcome and maintain our focus on safety and health as a management priority.

We continue to achieve encouraging exploration results from our highly prospective Toka Tindung gold mine, with a material increase to our JORC compliant mineral Resource and Reserve reported in Q1 2012.  In addition, our low risk brownfields exploration programme generated impressive intersections, adjacent and 'down-dip', to our high grade southern deposits and at our main Toka pit.  We will continue to invest capital on a targeted near-mine exploration programme, with the aim of delivering further increases to the mine life.  

The ability to expand the mineral reserve and achieve consistent operating results at Toka Tindung provides the foundation for our organic growth strategy and we are assessing mining and plant expansion options to increase production.  We have already commenced the process of expanding our CIL tank capability and will be finalising a review of other options in the near future.

The outlook for our industry remains a positive one and the fundamentals relating to a rapidly expanding money supply and increasing physical demand will drive a higher gold price.  Despite global economic volatility, we see significant opportunity for Archipelago in the near term and we continually review opportunities for collaboration and consolidation in what can only be described as a fragmented gold sector.  We adopt a prudent approach to all corporate activity, with the focus being on quality and on transactions that are clearly accretive from a shareholder perspective. 

In the context of our delivery against our 2012 objectives, I am now pleased to provide a further detailed review of our business and direction.     

Social Licence

The Toka Tindung gold mine, Archipelago's core operating asset, is located on the northern tip of the island of Sulawesi, Indonesia.  It is approximately 35km northeast of the regional capital of Manado.  Covering an area of 400km2, the mine comprises two Contract of Work arrangements and five open pits - the main Toka Tindung pit and the four satellite deposits of Araren, Pajajaran, Kopra and Blambangan.

As a growing economic entity and the largest employer in the region, Archipelago makes a significant contribution to local communities from an employment, procurement, investment and cultural perspective.  There are 11 villages within the vicinity of Toka Tindung and a population of over 10,000 people live in locations surrounding our operations. 

In support of these communities, Archipelago continued to make significant investments in infrastructure, schools, medical services and fresh water supply systems during 2012.  In this regard, Archipelago has excellent relations with local community leaders and the regional government.  Maintaining our strong social licence remains a cornerstone of our success as a gold producer in South East Asia. 

Throughout 2012, Archipelago maintained its adherence to best practice environmental standards.  Given the high rainfall location in which we operate, Archipelago is focused on maintaining superior water management and treatment systems; ensuring the quality of supply to downstream communities.    

Operational performance

In 2012, Toka Tindung recorded production of 139,012 Au Eq oz.  The following provides a summary of key performance indicators:

Over the full year, the average head grade for Au Eq oz was 2.79 g/t. 

Throughout 2012, Archipelago continued to mine from the main Toka pit.  Ore was also accessed from the higher grade satellite deposits, initially at Araren and Pajajaran; with mining commencing at Kopra towards the end of the year.  By accessing these high grade deposits with ore near the surface, Archipelago achieved a decline in the strip ratio as the year progressed (reporting a full year strip ratio of 5.64:1). 

Drier seasonal conditions towards the end of 2012, coupled with the sourcing of higher grade ore, meant that our production profile was skewed towards greater output rates in the second half of the year.  This is a trend which I expect to be repeated in future years, given the historically high levels of rainfall during the January to March wet season at Toka Tindung (and the flow on impact of this on mining activities). 

In 2012, our processing plant operated in line with nameplate capacity of 1.7mtpa.  Recovery rates also remained relatively constant throughout the year at 90.3%. 

Meeting production targets and maintaining a strong focus on input costs were key contributors in Archipelago achieving industry low cash costs of $635 per oz (net of silver credits).  Cost management remains a key focus for Archipelago, as we explore continuous improvement initiatives aimed at increasing productivity and cash margins.  

In 2013, Archipelago anticipates production of 140,000 to 155,000 Au Eq oz, as we continue to mine at Toka, in addition to the high grade deposits of Kopra and Pajajaran; with ore also planned to be sourced from a newly opened pit at the Blambangan deposit later in the year.  2013 cash cost guidance is $620 to $680 per Au oz.  

Financial performance

Revenue

Revenue from gold sales for the year was $225 million (2011: $93 million) with 129,305 (2011: 60,367) ounces sold at an average price of $1,676 (2011: $1,675) per ounce.

Gross Profit

Gross profit in 2012 was $102 million (2011: $45 million), reflecting increased volumes and strong management of operating costs.

Earnings before Interest & Tax (EBIT)

EBIT was $84 million ($2011: 31 million), after accounting for $18 million (2011: $14 million) in administrative & other costs. The increase, namely for administrative costs, has been due to higher employment costs associated with increased head count.

Profit before Tax

The Group reported a profit before tax of US$76 million in the year ended 31 December 2012, compared with a profit of US$26 million in the year ended 31 December 2011. 2012 was our first year of full production.

Taxation

The Group's taxation charge amounted to US$28 million in 2012 (2011: $13 million), analysed as follows:

The higher income tax expense is reflective of increased profitability; however the Group's effective tax rate for 2012 declined to 37% (2011: 51%), favourably impacting income tax expense.

Exploration

The Toka Tindung mine is highly prospective and remains open at depth and along strike.  In 2011, Archipelago conducted a targeted exploration programme which, in early 2012, led to the announcement of a material increase to our Resource (up 52%) to 2.58M Au oz and Reserve (up 60%) to 1.47M Au oz.  Based on the expanded Reserve, Archipelago was also able to justify extending the life of mine to sixteen years; being nine years mining plus seven years of stockpile processing. 

Building on the successes of 2011, Archipelago's 2012 exploration programme focused on further targeted drilling activities at depth along known deposits and adjacent mineralised zones.  Our aim was to increase the level of confidence of the Resource, thereby allowing further conversion of additional ounces to the Reserve category.  Concurrent to this, testing for further mineralisation at depth and along strike was aimed at expanding the overall Resource base. 

For a spend of $12 million over the 2012 year, Archipelago drilled 581 reverse circulation and diamond drill holes for 82,391m at Toka Tindung.  A series of exceptional results were released throughout the year.  For prospects at or adjacent to the southern deposits, results included:

·        Kopra

·    27m at 5.56g/t Au (KIP020,169-196m)

·    9m at 5.32g/t Au (KIP012, 135-144m)

·        Blambangan

·    1m at 152g/t Au (BPD042, 208-209m)

·    24m at 5.64g/t Au (BP020, 16-20m)

·    14m at 8.03g/t Au (BP015, 0-14m)

·        Jipang

·    10m at 16.6g/t Au (JIP89A, 52-62m)

·    7m at 10.00g/t Au (JIP102, 46-52m)

·        Pajajaran

·    13m at 9.44g/t Au (PJJ032, 173-186m)

·    8m at 8.8g/t Au (PJJ003, 143-151m)

·        Semut

·    2m at 11.70g/t Au (SMB038, 145-147m)

At Toka East, adjacent to the Toka main pit, further impressive results were released, including:

·        25m at 2.45g/t (TITO058, 106-131m)

·        12m at 4.96g/t (TITO078, 87-99m)

·        14m at 3.34g/t (TITO015A, 101-115m)

The results demonstrate the prospective nature of Toka Tindung and the high likelihood that we will further expand the Resource and Reserve.  In 2013, Archipelago will also continue to invest in targeted near site exploration, with further drilling to occur at Toka East, Toka North and the southern high grade deposits.  In addition, Archipelago expects to commence drilling the nearby Marawuwung prospect during the course of the year. 

Dividend

A key objective of note is Archipelago's enduring focus on strong cash generation.  Our capacity to generate strong cash flows provides an opportunity for Archipelago to pursue a number of corporate initiatives.  It is also our belief that, when cash flows allow, a portion of the Company's earnings should be returned to shareholders in the form of a dividend. 

Further to this objective and subsequent to year end, we announced the adoption of a dividend policy with the intention to pay shareholders interim and final dividends of at least 10% of operating cash flows.  This provides our shareholders with exposure to the upside of an increase to the gold price and significant leverage on cash operating margins.  Where appropriate, the Company may also pay special dividends from time to time. 

In recognition of Archipelago's first full year of production, I am pleased to confirm our intention to pay a dividend for the 2012 financial year, subject to shareholder approval and completing a court approved reduction of the share premium account.  Specifically, Archipelago anticipates paying an "interim dividend" of 1.25p per ordinary share and a further one-off "special dividend" of 1p per ordinary share. 

The proposed payment of an inaugural dividend demonstrates the transformation of Archipelago from an explorer/developer to an emergent stable cash producer, generating healthy cash flows and providing real returns for shareholders. 

Outlook and strategy

In 2013, Archipelago's focus remains on delivering production and operational outcomes in line with our guidance and performance expectations.  We will continue exploration initiatives to expand our Resource and Reserve, which will support plant expansion and the ability to increase production rates in the foreseeable future.  Archipelago will also pursue opportunities for collaboration in the gold sector, with particular emphasis on the Asia-Pacific region. 

In this regard, I am grateful for the on-going support of our major shareholder, PT Rajawali Corporation ("Rajawali"), which is held in high esteem for its leadership role across the region, fostering a culture of transparency and strong corporate governance in South East Asia.  Archipelago continues to benefit from the association with Rajawali and the network this brings.  This collaboration is a key point of differentiation for Archipelago relative to other miners operating in the region.

In conclusion, I take this opportunity to thank our employees and shareholder for their contribution to our success. 

Marcus Engelbrecht

Managing Director & CEO

11 March 2013

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2012

There were no recognised gains or losses other than those shown above.  All the Group's activities consist of continuing operations.

STATEMENTS OF FINANCIAL POSITION

At 31 December 2012

STATEMENTS OF CASH FLOW

For the year ended 31 December 2012

Basis of preparation

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union at 31 December 2012 and therefore the group financial statements comply with Article 4 of the EU IAS regulation and comply with the UK Companies Act 2006.  The financial statements are prepared under the historical cost convention except for share based payments that are fair valued at the date of grant and other financial assets and liabilities that are measured at fair value.  The financial statements are presented in US dollars which is the group functional currency and all values are rounded to the nearest thousand ($000), except when otherwise indicated. The company is incorporated in the United Kingdom and the principal places of business are Singapore and Indonesia.