2 GrantThornton ecen Pilot Audit Report — Mopani Copper Mines Ple International Expart Team Report to the Commissioner Domestic Taxes. Zambia Revenve Authonties Re: the pilot tex audit of Mopani Copper Mines Plemae Contents HaaeENa 2 Nese a pei TSE wi. prosh é a peeve linge , & GrantThornton Grant ‘Thoratba 2016 © ea Psiny 2010Page? Executive Summary The Plot Audit af Mopani Copper Mines Ple saw in its fest phase (Febisiaey 2008) significantly delays on the hurds of Mopani, but in The secon! phase (Cetober 2008) the management of Mapani wis much more coopecattveand seaposied!aalequately 19 she cequests from the auling team. However, there are sll issues left to be documonted aad still final conttolato he utd by the ZRA before ZRA can Gale suggested assessment. ‘The seope of wouk i the Pat ued Mopani has been a fll review of () operational costs, (2) revenues, @) transfer pricing, (1) eaployce eapesices andl (5) overheads, In order to have maximum benefit of doing pilot audits of several miniog sompaies, a velection af documents was audited off-site ind oaly alle intial audit actions were finished and comparative an pstly done wis on-site visits conducted foe cladtication purposes, Most of the canfications were eccivest uring the aulit ip October November 2009 "he comparative wnaiysts, which has been finalize ove 2 aumiber pf months in onder to get a best possible picture of the mining, iudusty, demonstrates in the view of the international jaa team thatthe existence ‘of Mopan: expences are ia doubt ox the following items Even u significant inerense in the spectiic index lasve to the general Lbour index of Zambia ‘eteaot explain the increase inthe labour cost when we have alzcady taken in ‘nctexsein the pregaction volume bour cost has been teated as «vatible cost thit vanes ‘with production). Ar least USD 5 millon of the USD) 90 malion is thus unexplainable Fuels have more Han doubled during the period, and since ancrease in productien volume hae already been taken into account and ful i ceased asa fully vartble cost th tunexplatl andheste Mining cost fs increased ovtr exponcatially, al the difference # out sessed wrexponcatalle and the dil given the steady state ore treatment rhe, spares and admin has increase over esppnentiall, and the diffexcace i outside the otside boundities of the cos: analysis, ven the stexdy stu ox realment ‘The guncral edger dau was provaled by Nopani nubile tics ssisconsiteies weve found he orignal ancl multuple fllow up éatases. No explanation could be provided by the Mopars emploveas amend dig The dia procugcment paucess, Unenmatey the ral Jedger and tcl alance dts could nat be completly matched, despite the numerous sitcmprs with mulnple general gee daasers, This teduces sues sneonading the ‘aldaton of dn. whch complerted the audit tens” analysand secs acore is eluaigig froin charges reaztion charges} bus on fixe cm This ever Tough the anual shipments ae-mc 1 other ports, fabs Net DTS ss a an alle wh eet cages bkave Jn some cases the documentation ofthe expenses was mot omganal mreaces, we als ote that 1 seems lke the company uy be using neorree disposal proceeds fortes purposes. Thece ts accountiag net book value in ealedation babning allowsnces stead of wring the ncome & GrantThornton ecen P Geis Thormton 2010 FeoPages The completeness of Mopan's revenies icin denon the following items: We believe dat the rebated pasty e ind pricing mechanisms ave no in accordance with the ggcement disclosed ye he ass eng print This should ive impact om the ts = Weave idenied diferent hecaes in bor gokl ard sv FEOTEREEHT ANAHEE HOF OT separate moun ac wit clin 01 been able soxenfy the cml volame of devi re Hanlon the accounts, ~ Anufjsison production volumes hay dented signifies deviations on both eoppee and cobuk. We believe that Lather investigations shoold he made to ver the wnnecrnes ofthe production figures and rhe consttexey with what hes been seconded in the accounts Vine pilot audit has shown thar theee is high need fora determined effort st collecting dhe taxes that are assessed undcr the Liws insplemnented by the Zambia pasiament. The pilot audit has further shown that ZARA neds the Ministry of Mines to fellow up production vohames fiom cre tested ya peoduecd wohimes so sold snetals om @ mote consistent and comprehensive basis in order for te calculation of royalty to be relighle Last, hut aot leas, the pilot audit hat chown that these isa high need for implementing pursive measures against + companies that do not pay their taxes oa tame ~ Supe tht des oreo wh the ZRA ab ke suis ore expanse ad tit a GrantThornton ee Taha 301 © Heo Perry 2010reve 1 Mandate and purpose of assignment {ne Zambus Revenue Authanty (ZRA) has engaged an innecnaticnal rae sult ‘ein, consitting oF experts From Geant Thornton and Leon Posey, assist in 2 plot review of select mining companies. Mopani ising Company Plc has heen selected fra lined tevin the pilot aucke The proatized goals for the renew of Mapas att 1 Basis ar Windfall x (and ot a Production levels bb. Cost levels the industry 2 Problems areas in the ilastey 2. Completeness of revenues b. Validity of costs ‘The focal point ofthe review is 0 audit sgniticant and representative past of Yke mining mndustey ancl to caver significant problem areas idestfied ducing the ital phase of changing the Zambia seal syste In addition 10 the verification work on revsnie# and enst it part of tke audit to eontirn the validity of tx caleniations for the companies the exteat thar iis possle (vindfall tax 0 be included uncer all ‘The ZRA ws responsible for ensuring that the sud team got secess to the company’s zerounting records sind selevaae supporting documentation, while the anternarional audit reams has beea responsible for the smajonty of the meetings with the company togethee with the Assistant Director Peter Phis ZRA. In order for the agreed scape t0 be achieved, the suit tear newdedl physieal ascesc 10 the accounting material both within and outside of office hors, Purcher, or the optimal use ofthe att team mesomrces, the accountings snuttesial forthe differear companies needed 19 be in the same location. ‘The aur was performed atthe PRA olfice in Katee, combined with field visits to Mepan's offices in Kirwes The mmieraavonal aut wears has bees zespoasbie for the team composition, the act methodotory apphed, the-audir echosques ative anc daftng the report forthe pil tax aud. 2. Scope of work “The following aucas have been selecred for cont! production volumes = pricing of produers bi-peodues and other nevenes deratives snd hedging = walihty of costs oat cebates/ discounts = rainsferpreing ‘overiead expenses = depreciation ‘employment costs RY GrantThornton Cen © Grant Thoeston 301 © Feua PoyPages 3. Approach Companies selected tor audit Nopuat has been selected due to (1) sie of ts operations andl (2) the high cont eve 2) Tea selected for the audie and omganization of team {Foon Piipry was approached bythe Goverment of the Repubke of Zambia (GRZ) to perform a pilot uct tof the muring vampanies, due 0 38 former experience with the mining companies through the fiscal Sigpnement process: Econ Pavey did not have enough axel capacity to pesiozm the audits alone, and also Jaded local presence and therefore partneced with the intemationd audit ium Grant Thomton te complete the team Ader the iil aneht visit in Febronry/ March 2009 it was agreed to ssitch project lendershup from Room Payry to Grant Therion 2 Auditapproach he audit approach as been to do sh analytical, compirative and document based off-site (“dest”) nud, to be followed np wilh on-site clasficatons and followup. ‘The following: sequest was sent to the companies'on 22 December 2 “ae wish r6 infor you that we wall he conducting a'camprehensive income tay aust commencing the first week of Jasuaty, The aut all cover the tax years 2006/2007 snd 2007/2008 De ta the compeehensier nanuce of this audit twill he dane from ous offices and nor sour remies. However, officers from the mizing uit ofthe Dosnestic Tsnes Division wil be visting Jou to callectall the relevant tecants and documents, As far ast possible we would prefer to collect electronic cocords ane! documents Porsuant so section 48 oF the Income Tas Act this texves at a tnice for request of the followie, inforruaner ‘© general Ledgers anil sil hilsnves © accounts recesraile and payable ledgers © cnnplete cash and! bak beulners f= Siupment documentanons ¢allsales wrreives/ vouch # llcost mses! vouchers inching expenses and overheads alldocamensacinn pertaining to eolated pasty panies ansuetionsancliting a Ist OF al related f@ poucies and procedans reiting to incercompany and other trinefer pricing ti Aerivative reausienions tomtesets and documentation 12 any other doco sv that the auivots may require ro wnderabe sbercwork Se rgards ern 1 00 ts quest Teal Balinces forthe sears 2005/4, 24/3 and 20 fat, however, need the ful General Le 5/6, We do foe these yeas 2 GrantThornton ecen © Geant Thommen, m0 © Peon Peery 2000)Pages Your cooperation ia avaling this formation wil of uimiost importance in ensuring 4 speedy and smooth sad, Following paotests feoun the eanipanies cegading the volume of documentiaion required the audit ream accepred thar oniginal cos: mvcices Le reduoed to one mont (une) due co rhe bul oF these invoices 4. Process and challenges The auc sa Lup was possponed severdl simes in order for the companies to deliver and ZA to collect all the lewantitems-on the list. Prior to 9 Febuary 20019 the intestinal team received information that ceversthing was ready tb sit with the auulit, and the teu a¥serabled on 9 Februny 2009 10 scat the uaa, “At the fire: meeting tt became clear thatthe companies had non delivered the requested matcnal ae the team moved office from Fausala to Kirwe to proceed with the process of collecting the snaterial Fem the ‘comipanies. The project leadees and she assistant directors from ZILA strted a sesies of meetangs with she companies dung the First weed, to extract de requuted iafosmatioa, It-should he nosed dat the snteruadional scam leaders have not expericaced suck # lack of eomplianes ia any other country, and Grant ‘Tomion Zambia confirmed that this amitade w also not typcal for other industries companies in Zann, ‘On Thucsday 26 Jiebeuary, it was decided 1 dissolve the entice audit team due tothe lack of comple records and to have the ssstaat directors from the /RA follow up wath the mining companies, ro secuce the remaining delivers. ‘Oxtober 2009, after several delays it was once spain decided to proceed with the auit."The companies had stil or delivezeal all dhe sequined! documeataboa, but itwas decided that the RA, sth suppor from the sntemational scam, shonld use one week 19 collect the remaining mates. In week 2 the aut teams went ‘our © the companies 10 do the seraining aud oa-sive, The ovo reams sui seccede ia finishing most of the ne Knnsinshi and Mop wit daring the next 3 weeks & GrantThornton ecen © Grane Thorton 20401 @ Keon Pagry NO5, Pilot audit results - Mopani 51 Legal basis basis for the aoditeis very cleat inthe Zsimbia Tax Act ZRA ean ack fot any documentation, i copy or onigina, st “any place ans acy me thatthe ZRA finds sutuhie-"Thete was thus no basts tor the companies to delay delivernag upon the request in elation 10 the tnx audi The compasies have thetefore been neplectful of their duties under the Zambia Tex ct and flue to comply with the ssques-o prove fall information under the ait should, in oar epntn, be parsaed = incividually iowanis the companies to the extent thet penalty mecharisns are avalable = eallectvely by ineonanemaliring penalty meckanisms, if such are ast avatable in the cuerent Jegslation 5.2 Tarroduction w Mopani a. Shorr deseription of company Mopant Copper Mines Pie i mining eatmpany operating in the Republic nf Zambin wth is registered office at Nkana Cental Offices in Kinwe, cis une of the major producers of copper and cobulc und provides processing facies to otter copper snd cobal: producers on che copperbele The company alee produces Sulphore acid “The company opeestes neo mine sites comping: Mafulia, which includes the Mafales Mae, Malu Concentrator, Salter, Refinery anda Solvent Exteaction and Llecteo Wianing plants ape Nina. which incomorates the South Ce Body ( SOB"), Cents, Mindolo Sub Sou Shtts, Nina Consssior a Cobat plac ase aS Eatution nl Eke» Wining, Mt The cormpany’s metals ares Ge lnteraddnal Ag. Glencore Aa 1 nar save holder forthe campany, through Canis loveseat Crp they oun 7319) ofthe shares Fist Quunrim Minerals Ftd wnins 169%, while 2CCM os 1, extical and Mindolo bd. Taxassessmens overview 1. Revenue sccognition We tree ta tes the overall pmduction volumes of Mepant agains the reported production fo the ‘Nbaisiy of mines, but the eposting wth s eaptuced consistent. The eondusion ‘that the Msusiey nesde to toll ip pmigkieton reparing.on more consistent snd ‘comprehensive basis the Future We thea tested the inmer comisteney in the vompany’s own produciion valames atl have found invimsistencis, The incdasistencies have not heen explained by the company and sosde to be pursued ‘Minimum follins=up at tig aftee the piloc = Mlimsiry of Minos need to keep monehl up-to-date provluction overviews for the ZR use = Kot ap on prodution anfireraion aot revere froma The compass & GrantThornton ecenPage “Transfer pricing in revenues Most of the overall production 1s sold to Gilencore Marketing and OFF take Sgicement”. The agreement mentioned i 30 fact an age stg alee operte ae the ane land mareng agent ff ‘Mopini. [he We have peetorened procedieos to test if the goods told to Glencowe ace compieable to any similar ses to thud parties, The trade termsané conditions granted have heen compared to those granted to thin! partic: The Company has nat heen able to provide us with evidence that the Comipany sales, which most se relates pari should consider wnether thy should have impact on the Us assessment differen! hecges in both gold and silver. These have mot been reconled in de accounts in 4 ts ate accounts or with disdinctive ident icetion murks ‘ofthis we live act been able to veafy the actual Volime of denvative transactions, nor the mensetary effects this have hal on the accounts. The Mopani Management have been given sevatal opportanines 1a resort so us with their responses tour formal letters, hut have as Liras we are aware aot reverted ita proper of timely manne. Based on the above consideration should be matte as how to proceed to be able 10 conclude on “whether the information sharwesn fas have been given s eozreet and any monetary effets his have ltd on the assesses taxable prof, The lack of cooperation should at any Groumstance be sven consequences for the company Operational Costs Trscime cases sme eases they a - expenses was nor eriganl supporting documentation Minimum follow-up eetion afier dhe pilot aval ‘The 2RA chould consider whether they Bind a necessary to seduce the tax deduce costs ie to this Gileneores gs (ization charges) based cn fv es fon devon CH ehedaa teal ships ane made ta other port, often closer» qeoursph. We do therefore assume that Mopaai ovetalled weh feag Charges, but have not Tien able wo calcite) monetary effcas di to ek of documentation. Ir seems ke he company any be usin wsorcec aspossl proceeds fox as purposes "These isan sncoaiseat peolieoss on disposal of Fined awets: The exmpany al scanty WTO VATE wr CaTERIONT swritten down value palinct allowances instead f using the income ta Minimum follow-up astion after dh pilot audit = -ZRA shonld go threnigh the gamas and losses dspossiions 10 the correct disposal proceeds ce sure that the company wses “& GrantThornton ecen © Grint TPhommenn 2m00 © Een Poyry 2010Paco 6 Consegu aces for em iauest that the ZRLA doesn new tax assoscenent based on the results of the atk, the result of the iF findings would be that the lovs earned forward Gould he maretially lower. wall also have an impact on the slic should nave bea higher sax payments and tax sys (Consequences for the tax system and the tax administration from the sui: thay here is a great need fora determined effort at collecting the tases that se assossod under the laws implarsented by the Zambian parhament. + the pilot an has sherwn thar ZRA needs the Ministry of Mines to tallow’ np production ‘yohunies fom ore tested via produced volumes to sold metals on 4 moze consistent and = the pilot audit bas so compechensive basts 1m oer far the caleulation of wally t0 be rekable + the pilot anekt has shevwn thas there 54 high need for implementing punitive messes against © companies that do not pay their tases on time 1 does not cooperate with the ZIRA and make audits more expensive and lengthier than ncoded 53 Comparative Analysis The comparative analysis has shown thar = The sales revenve of Mopantis progressively devising Irom the LME exoss-years = ‘Tho siles zevenve of Mopantis consistently lower than for the eompantes compared with = ‘Thecosts of Mopint is eomastemty higher than for the compari: ceapaned with here are clear indications from the comparve aralyses thot rhexe are major probleme with both the revenues and the costs of Mopum. Revenues are adequately handles in otbes pasts of Hts separ. ® GrantThornton ecen Grant Thorton 2010 © Peon Popry 2010Paget0 Cost analysis “The mining, eounpacics in Zarulia hive a significa higher coat base in 2007 shan ia 2005, We have analraed the mpvemnt from 2005 10 2X7 based on Yo-age of tied cost, changes in Volumes and indexes fue dilfererw cost extegories, The seit for Mopaai is how in the table below Actual Indexed Actual Difference Category FC Units 2005 20972007 _2007 Tar 1%) Mil tS W039 RTs “ass aa 8% MSD ants 458531 Ze Fuels 0% Mi USD 1412, 29.75, 13.00 GE pmains om MUS 63 «gs. 2s ms 0% Mi, USD 318 ay 093 GR Loses e Wace Oo MUS 229 a0 229 SZ evelopment cast 0% MLUSD 400 00 009 EE tecncedtannner 2h MUS an nar 106 Ee Ming Ca, Mil Usb sans 9.08 BE trsonme, seat eles Mi 699 Be cunsparauni i 3508 | Comamnting si ou Seating Refeig & Teaigoit ov i “34 dl Cone 0%, i nats Tepeation Miusb_ofv 90 aon Goo Toul axe _snoN) Sia Based on the analysts, the cast an 2007 ss USD 381.21 million higher than one woul expect only based ox les indexes ued and the changes in pecdaction volume in the Mopar mune. Mepani ia me rat as hacen an continued operatians through the years 2005 t0 2107. There are nin mayor developments that have been commussioned chring the period that should gwe majat structusal changes to the cost basis during the period 2015-2007. The production has bees st approximately the same level through the estite perio, excep Zor the Muslin mane that has wncrease finished procitction from °U thoxsagd tonnes sn 20015 10 N13 theanand tonnes in 21007, an inceease of 43 milion tonnes ‘This is equal ta an iieeenee in eeveaves of apprusimately US 23° milion ar USD 2,9 per Ib, mains based on increasing purchases of copper caticentrate ad copper séeup since thi Gre teatante in dt Nulla mine has nen inesemed ducing the period. Any developments 1) inc ase Maya's owen ere resources should therefore he eaprtlized and ter the cost base Harough iaancal amvstizatens and depreciations re] GrantThornton ecen © Grant horton 200) © Econ Pagry 2010Page 1 Based on she aut and our understanding of the mining operation the result of the cost analvts i Gu to the tollowing factors 1. ‘he labourindex wed isthe general labousiwlex for Zambia The labour index Far the Coppesbol ss higher, bur we do not have w specitic mex oaiy for the Coppertet. ioweves, even a significant sneease in the speciic index relative ty she general labour index of Zana anaot expla the sncrease tn the laboue cost when vee have alteady taken into account the increas ‘ete (aon cot abies eal a vaccinia wi proc): Sea SD. ogy ion of the USD 90 million & thus unexplainable: One explanation could he that costs thats, ( Ua ar sliguld ave Feet capitalize have been taken ay expense a 2. Fhketnety usages within the waceesainty lite oft vont analysis and is ressonably kd 10 smelnng and refining meee copyer concenteate of coppet scx. rapa 2. 3, Fuclk hace moge chan doubled dusing the period, and since incre fa the produetien production volume has — already been taken into account and fuel i treated asa fully vanable cos, tus increase is unexplainable evea if we take ints account higher fuel prices than the Guclinslen should unticae, ‘One explaniton may be thal copper concentrates nil copper scrap his demanded! an extriordinacy amiunt trinsport distance and thit Mopar has uscd own trucks fo move it, This is at consistent wath the penetal picruve in Zambia, where most othe camper proshice i hauled Jong distance by exterual runs. Aaother explanation could be that casts that shonle hare beee ceapralized have hesn taken as expense, 4, Eaplosves have been analysed almost spot on, which is expected based om that there has not been ‘ny sigificanr changes ia own ore reared ehurng the penod ech and mainienance bas increased and the difference is wathin the limts of the cost analysts anat sealeo ia ine wth developments ia Tech ancl Maintenance an the other companies, (6. Mimung cos has increased over exponentially, and! the dffexence is outside the houndarses of the sven the steady-state ore treateneat. One explanation could ke that costs it shoul have lagen taken as expense, Tasusunce, seusity and salety has increase over exponent, and te difference is outside the sys, gven the steady-state ore treatment, One explanation enuld he that costs hur should have been capialized have heen caken 28 expense, (Other, spares and adimiey has increase aver exponentially, and the dilfeence ie ouside the Ddoundaries ofthe cost analysis, given she sleady state ore rreatmeny, Cne explanation could be that costs that showid have heen capialized have been talen ap expense Concentrating has uncreased anc te chtference is within dhe lenis OF the east analysts given that final produce has acreased without ote teatment having increased. This comistent vith purchasing aud teatmg more concentrate Selon fefining enil teanspoct had increased lay than dhe analyse indicates, but rhe diflexcace i shen te limits of the cos analysts 11. Resdial cost has mereased by USD 205 anil a cambmatioa ofa net werease m metal stock purchase of copper sap 1S not ectinarsea es ha Ipof the sneseased puoducian Sf eomecnteste, which se inconstert wath the test oF the cost analy) ieee upper scrap should 4 fiom 2005 to Thus change ts almost entiely hon andl an increase ‘hata siguficant poniion ken to expense The ores erst: ave oaly whitey minor changes ox ace mince i thet nature: "To the best of the rnalros tems Knowledse, ive beieve that the Nopan cost staactat Ihe Mppasi sing operation, and tht uncavered sneonsteiencies 1a mote determined manne sted 1 represent the fallow up the tue nance of the cuts & GrantThornton ecen © Gaunt Photon 2 © Eeon Pigey 2010Page 12 General Ledger analysis ‘The peneral ledger dats was paomded by Mopant mutiple times,as consistencies were found in the onginal andl meltiple follow-up datasers, Primary, errs were encountered whea developing a compressive database using she fist cata provided. It should be noted that the general ledges summanes lyesed on the fast version of daa differed fvom thar provided in the second version nnd Liter versions unting tor the errars, No explisniton could be provided by the ‘Mopaai employers interviewed during te daca procurement process verte the seennd version, even when i The Mopani general ledger data was analyzed witl A focus on matching financial staternents anu a tule sursaaries. However this samamary isa meee foemaliry aad ie usualy only he fist step in understanding the cost picure. Liniostunately, the general ledger and tnal balance data could aot be completely nutched, despite the nusierous atcenpts with wmulple general ledger datasets, This in rds Ssttus sirscinding the validation of dts, which complicated the audit teams analysts and resus, On-site consutation with Mopan staff produced aioze questem than answeces wih aespect tothe general llger, ‘The most interesting of these instinces involve che Mopani system being unable to in the financhaf sistem Cucing geceral iting of general ledger daia vali, (cshonld be woced that staf Pia Ta¥e Fayed ome role wm dhe lack of information surtounding some of those ses. hat teang sat emus a serious tse that the anit team has been unable co link the general ledger with the taal Flac, which saggosta that there aus be of the general ledger that aay have to be taker into account in onder tose at the tal Balance Mops’ stall has not Voluntaniy promoted such stems a5 ‘Rplinaiois forthe Usapuncice ‘Wghuwona general ledger checks auppored the hypothesis of high catince tons the ene which wat at Ca ARENA: pareuil Wa espe! to ha The wi feam does use seem ta have the ful ata population bailing up to dhe tal balan ‘Phe general ledger data was Further analyzed using bork a macro- ane mcro-level procens, whereby disceepancies were solated within the context oF total costs, exteponzed costs and individual line teens Such anairis e computational rensive, aed requites sgaificane input thoughout the process, These types ‘of analyses were wilized because intial summary showed either vatiance 9 eajor cost estegones that could not be generally expla ned by eather exogenous price levels or proxtucuon volume), The main teehnigue employed was. standin deviation outlier calculiton, wheteby the general ledger wes timer zaat amon Tevel-OTScrratOnS levels and production volumes. Observations shat wete two standart deviations or more from the sample mean were flagged for review by ZA avid Grant Thornton sialf, Month level accounts included: labour such <5 han cxpeacd tas torso secenant Foe pace costs, sich as employee terminal pay provisions and general coatnictor payments: processing np ss sulphuric acid, fuel cos's, ancuding heasy fuel oll diesel and petzol kay linked to hedging operitiens I seabativon cha Rebire analyses were also ynbiaed, where the general ledger rebate observations were matched wath an on costs, Thus analysis tolated some labour, oh 1) ility charges thar were farther investigated by the various aude tous, It should again be aoted thi ‘zeditors to ascertain the extent of suck sein ‘such analysis 1 computational antemsive, aud addinonal me and resources may yield peneral ledget bbsersanous sequinag Tullos up brurthee general ledger analysis wns peowled on aa ad-boc basis to asict rhe audit ceam, inelaing the investyritinn af hedging practices, smelting seul cefining practices, sad setting-up template ealelations to aggregate data for the tic team x GrantThornton ecen © Grant Thorn 2010 > Bios |Page 13 Trial Balance analysis ‘The Mopiin tril balance dat wa used to ations ming cost categories prienally i the content of the eon Popry muniny model, 4 customized! ang highly evolved mang miedel. Uhe taal palance data was clavefiee! using sttemated techniques, and then cach item was reviewed by hava to ensuite vonsisteney, ‘oth for the mode calcuton and cos category cassification. ‘The resulnng 15 cost eategones were He spit imo fixed and variable costs and exposed to vasiows cost indices, specific w Zambia's mining indisty, to obtatn estimated mining costs by category. The mining model esleutaion engine contams musty sdiosynenatic elements to ensure accuracy with de coraplicatel mining cost picture, cluding tolling, cesploration. development, snd smelting /zefaing epecnfic customizations “The completion of the mining model inputs necessitated « very deep inveetigation of production amounts, including toting agreements which futher aided the audi tam by standonug and callecson of relevant dita, Additional areas of cooperation yielded exchange sate projections, eketrcity indices and uthet ‘outputs of Zambix macro economernc mdel useftl to the audkt staff, This ouside informanion was incorporated within the miniag model co prodace very wxaiced qostcstimates based on tral balance est dduts. ‘This analysis 8 moze thoroughly explored in the cost analysis abo. Financial Modelling Various financial modeling execcses was pexfurmed that vielded insight into specific data, inchuting Interest nite caleulitions aod forciga exchange. Some of this analysis was grounded in gentcral lle bobsereations, and the resuling invoices procused (0 assess outlies observations. This support was primatily ainsed at understanding hedaang practices, Supplies Data Additional suppor wee provide to the ZA suit stalf via the compilation of a suppliers database, ‘Comprised of data provid by the mining campsity, The specie original file chaencterstics m analysis peoblemane, and it wax ascensary to provide the data in a moce user-feendlly fonnat fox bor ZRA and Grant Thornton aust teams, This data was ultimately taken the the ZRA for deeper investigation ‘vere specifically eatified by analyses expenses th e& GrantThornton ecen © Gea Thaten 2000 Beeon Pagey 2000Pager 54 Revenue analysis The palor auclts were organized! manly due to nau different observations; (1) sharply inereasing cost leils 1 the mining companies und 2) « widening gap a reazed copper price relative to LME prices. This the ‘nitial analysis for Mopant en copper paces: Copper price US $ per Ib 4,00 -— - _ Mopani —=LME price 3.00 250 200 18 1.00 050 SESS SLES SK SES LS The analysis sa companson of realized prices relative to average J_ME. paces inthe production quettes, However, the analysis is Gaidy accusate siuce Mopani is for the most part sling cathodes (and not concentrate) which aotmally fs seld ar MHL prices The quaccer LME prices ate this just Sighrly off feom what we would expect Mopani prices to be "ye analysis indicates that there is» synaficant pricing problem for eopper effort Febevaey 2007 widierrd That Merensor for tar Tong em Glencone (ova Caries Incestments; woth Bxed prices: There ae a Spans is not normal The ilusteition beTow lustraces OPT CORTT VERE Truc hedging: A company that only ‘Mapai. The inital act that the hedging pater in dying” paFGms for moving tasible revenue ot canis to move taxable reveque oul of the couatry veil waat to “hedge” or enter snte a Tong term contract a the most favonible LOW pont, euch a “hedge” jpaes tract i usualy esteblched ar the bottom of the price evel. Budoine This way, 3 compen ai wanis j ofa aie that it aes lotses Hoth when prices ace ane eo she Tlasreadon!. \ company Waatiag 10 lock ia high prices on the othe fnnad, whil i aoranully dhe case for rae hedges, vill nanny want to captase die tncreasing prices on the way up, 36 close to the top of the price eycls ae pile Sach a enempaay wall want te hedge whet they-feel thar they are closiag in on the top par of the price eyce (see 2 im the dlustnition, “Thy say love fanthie seveniae te pices continue to elanb, bur they will eam enoney when prices startto fall and all he way down stu pee eyele. The hedginy pattern of Mopani is more equal wo moving usable recsnue out of the countay than reve hedgang. me GrantThornton eceén © Grane Thorntoe 2011 © Lovin Payey 200Page 18 Gitememety me EEEEREEEPEEEEERRS Weta ave man a more comprehensive analysis of the copper revenue alon for concentiate sales an the musing model sing MPI for eathnde sales and Categos Unive 20042008 2006 2007 2008. Copper in the'miaing medal NG USD. HHSG0 50556 87571 UBD 109; Coppee resem inthe riatbslance —-MILUSD 23836 39140 ap70 Texan ReTAD—TOD,T7 Ditforence 1935417 10486 11380 153488 Excep! for the year 2017 then isa progressive problem wita copper ceveniae in the Mopsant financial srarement. The problem is significant since in the years 2003-2008 thers ins cumulated ifferc events of afproN mately USD ToTmailion in copper wevenues only With almost all de eopy iagemnally there i-zesson To seasea the sevouct of Nopant aval in IME. poccstess waizasen charg spd have the company come up with reasons foe ecees sale hat the prices shonld deine sipnsienaely) fog this Ths sures stoned by the fa thar Mopani hus esd he ior ac at every tage, an bas enopered avest unwillingly wi the auch or ot cooperated at all Thss has licen a significant past of ‘why the audi has taken much longer time than aceded andl cost muuch moze than aecessan Thete is further eason co recogeize the “hese” of Mopant (Gone with tn intemal pasty or om volames thot cold inteanly) as moving taxable revenue out of Zambia, and this there i reason to disallow the “hednng" /use of denvatves as aor being arm's length tmdor the OECL) waist pai I Jy line iudelines ring is reste sep YY GrantThornton ecEen i GranyTHasin9n 2010 © Reon Parr 2000)Pege 16 “There i ako season t0 believe Hiese ane simular problems swith the cobil sewenuss ia the company. Below ilustrarion Ic the reaizel eabalt sevenues compared wath LMIE prices on cabal Sales price cobalt - USS per Ib 36,00 — Mopar — = LM 30,00 26,00 gb aS ah oh ahead * SE EE SLES SS . Fake eres Ablhough not a wedging putteen at fr copper, cobalt prices are consistently eli the LME prtcas and there may be rexson to reassess cobalt sevenurs 10 LME pniecs less realization charges. However, turther ta be deine before the audit toa can fry secemmens a course of action work a6 We have tested the inner consistency inthe company’s oxen praduction volumes end Ive foal inconsistencies in the eopper production, The inuoasistencies have arise in the lst pluse of the alt ‘upon finalimucn of the productica overview de to the delays caused by the company. The inconsistencies se telted to source of prndaced volumes — ore treated, concentnte purchased or copper semp purduased Awe sue from the tuble the company is prduomy much more copnce than there is copperin the ore fot recewed detailed enough taformaton on the sxtteing of the metal porns into the final product (copper sane coppers sold underan “old” coneract between Mopani and Glencare (in one instance only 25M of LME price) ~ pices scemn to bee determined by the parent company, te. the purchaser AS fara we have Mlenuiied, no ink exist borween the provisional invoice and final cetlemeot in the accounting maresi disclosed, This lack of aut inl meas tht we have aot heen able to dereremine whether ‘+ ll provisional iavoiees have been closed thtenigh final setlements the final settlements ate calculated in accordance with the aetual delivery, the period's netaal market prize and provisional invoice The Company hus not been able 1o proside us with evidence thet the Company sales, which manstby are related potty trnsienons, have heen entered inte accosdg to the atms fengtt prinkig:. ZA should consider shetber ths should have impact on the tax assessmicat. Work relating to the commodity premiun and discounts have been performed by Z ‘conclusions from their work is 201 mcluded tn this eeport, Glencore i charging freight charges (ccalzation charges) based on Ged fees for deliveries CP Roeadan, ‘This even thongh the actual shipments are mide to other ports, often closer in yeogeaphy. We dda therefore assume thai Mopani is overbilled with eight charges, bur have not boca able to calculate any monetary effects du to lack of documentation, The citfecent issues addsessed ave been rough: ro the management attention through formal leters and diseussinas They have howev RA seiffand anp ot rewerted to us with eaustsctory responses To our questions Conclusion: The Compinyy Mananement his bien given aufilcent ne aad opportuaiy to revert € ous Foie! gues ‘he fcr dit ther have nor revected ins timely and proper manner 1 taken as evalence ta they hve mst taken the aucke seesously and in fet not ver concerned of any sanetions dat cht eae We believe thin the related panty salestnd presag mechanisms ice nota aecordaace with the agreement disclosed, or theasms length prep: This should have napaet on ie us assessments foe the penod under review: However, due to hck of documentation disclosed and eauperation from the Campany, we hhave not hoea able verify any monetary effeets due to lack of wnformation. Consideration should be sscssing: the company’s taxable ineaine for the peti unde evnesy as well a 60 reknomledge the realavon chayges as tas dedvenble Pricing of copes, cobalt Wd precios metals WW have selected the Lust safes triacaetions frors the eyereut years sylesyournal and rhe subsequent yexe’s and traced 10 shiprarg documents, to see ifthe reveniues ane recorded at the actual dace of shppment Furth analyzed whether reveiies sn The fast month of the next yeas are sorpasingl: high which could indicate ve have selected revenue sousee devarnents and traced them 10 the reconted transaction, anu hat they ane relted 19 pi Most of rie esppen, cubalt-ang precios metas site sold toa related party (Glencome AG) see sectinn © GrantThornton ecenFage2t Derivatives and hedging ‘Mopars management have informed us that the histonéally amount of hedging activities have beon very limited. Asa face they have informed us that they themselses do not enter into any postions instruments are that any decision in tis maiter is token by Gilencors Any financing, ensre chinges andl margin requlscments have supposedly been taken by Glencore, ‘By sampling a number of invetces and testing therm for different parameters, we have idenifie different hedges n both gold aad silver. These have not heen ecorded in the accounts ia 4 consistent nuasnics, aor fon separate accounts or with distincnve identification marks. Even though we hare cor idaniiied evidence that the umber of contsucts i lage in volume or amouats, this does aot add up wih the consents xo the management Ava reault of the shove see have not been able to verify she actual vokime of desivative transactions, noe the moaecary effects this have had om the accounts The Mopant Management have been gaven several ‘opportunities to revert to 95 with thew zesponses to our formal letere but haves Far as ave ans aware not reverted in a proper or tively mancwt Based on the above consideration should be made as how to procied to b the information that we in fe! have beet given i cooree: anal auy ano thle 1 conclude on whether ceffcets this have had on the assessed taxable profit. The lack of cooperation shotkd at any cizcurastancs be given consequences for the company & GrantThorntonPago 21 Operational coses We have reconciled suppliers led fe: wilh the gence ledger and trced sample tens from supple ledger to ver spt, Cut off procedures have aso heen performed. vhs expenses was not orginal invnices, wwe ako noted that Ja sone ccises they accually di not Bind the supporning documentation of ¢transacton The cost ledgers provided thd nos agece © the finanetal statements 30 that ou saanple ey 10} give a ake ‘reflection 2s the population s incomplete ‘sanvoices ot evidence of te Transfer pricing Before sunny the audivwe asked the company of alist of eelaredl patties, ransictions andl tsinster-peice dacumemtation/ agreements: We hace compaeed tressevions with telited pasties with OECD. guidelines We di not ecewe a ist of eled partes and transactions with relared partes. We hive not been able to give due attention to transactions with related parties whon careying out our work Wedd though find that costsare being infsted by peice participation changes. There ts price pasticipation being charged on ealee to Gleacore. Our seview of the contracts docs not show any price participation 2s part of the terms See transter-priang under revenues for further imformatian an this Depreciation We hve obtained a sunmaty of dhe capil asseceapitahvation and deprecistion policies aed compased tem with the taclaw. We havealso identified sigoificant capital aeat additions and xarniaed appropmete suppordug documents, Further we have reviewed conscauction in progesss records and ether fixes assets aulktions forthe lst few business days of the year to determine whether capital adigens have been recorted in the proper period. We have looked at gains and losses chspositions and investigated the supporang documentation that explains the sales price, We have aleo agreed gains and losses to the profit sand loss sccount anc compared this wath the pobcics specified im the tay ln I scems like the company may be using ticozreet dieposil peoceeds for tan puepowes, Thete isan Inconsistent profit/loss on disposal of xed assets, The company also seems to be using accounting et book value i: calculation balancing allowances stead of using dhe income tax watien down vale Other operational costs [1 was also the intention that ZRA should have performed the following procedures on personel! cots , LRA reconis ete compare samples af employment cerords with salaries anu wages chagged to the accounts uples of personell costs charged to the accounts back to employee records check sf eosts Fm otler parts of the group vompate records ftom the company with public rocons, like immigration recor onible and well documented The prrpiove of these prscedure's ta make sue that allows do white to work acwally perfamed personal employed be the company and sf hes are in secordance with amounts paid. Further to see if the [personel coste are eelevant and proportionate to the business aeivitien Mespans hae 2 of approx 9.000 employees eae month, so to be abe to perform auctt precedes tnt wil ree usa reasonable asstranoe of the employee costs, theres a need for a special ten tho is Tore Gedicated io this The tne frame and budget on this audi did aoe support sacha st ob, S018 8 recammendel thar the ZR follow wp on this on their es 2 GrantThornton ecen 2 Chant “vacant 2610, © Peon Povey 201Page 22 By our tod of overheads we ddl howevee sample come employee eosts and found that the following should be reported or Followed up on The tompany ay be aeder declaring PAYT = Gomntract staff ic envitled to one sip army for the family fiom their phos of recruitment This ssin addition to repaienton at the end af the contract. We found t allocation is no used and is drawn as cash isi xed = Shi isverens sat only when the travel paid co cenracr staf was not taxed an the sample se Some employees on contact sce accominodared by the company ad até chinged! a ootinal fee ‘The choeger ate nor seonomic i: com caves. There may be housing benefits that ace nor being, tised —this shovld he followed up on since we were not able to sexch a conchasin. = Long service bonuses are paid olf paseo, Coadinons oF service provide for long service cash bonus depending on the number of years served, Need 10 obnain schedule of payment and proof bf PAYE dedurion and payment PAVE on Flousing Tax cebef in 2007 om the siayples picked scom to be under ducted, though PAYEE caleleted haved in annul base sceme ok Need to got the remning paystips of the sample picked and probably broaden the sample to another month as well 56 Tax calculation Winesall canes or the periods under auch this ts not un itu, Bat feom Apel 2008 aa Eneoese Tae famendinent) Bill svasinteoduce. Royalties ZARA to finalize soyaley ealealation Vased on the resule from the audit Conporate tanes ror 20016 and 2007 Mopant had basses cared forward that they wee nor subjeet te corporate taxes ogetlicr with Roakela Copper Mines (KCN) and Kansanshi they have an income tax of 25% and not Sie asthe ea Tegslation states Mopan’s Insc carsied Foard i for Ul years. A significant part of the loss is due ro th allowance on manag espeneitire prospectmg and exploration Which for the 2 yearein question have been (SID 264 rmilion and USD 371 millon. -As per march 2008 the oldest loss carted forwaed was fram 2001 which Was USi272 muon Ihe consequeaces of the above mentioned tindings would be that the loss canted forward should five Trecn mutesully bes: We suggest that the 2R.\ dows a aew tax arsesemient based on the eesulls of the audit. a GrantThornton ecen © Grunt Thonn 200 © Leon PBpry 2080 = i |. 7